NOTRE DAME OF DADIANGAS UNIVERSITY

Advanced Financial Management with Managerial Accounting and Control

Course Paper for Fanvill Hardware Incorporated

Submitted by:

ROSALIE MAE GOMERI

Submitted to:

Dr. Joanne J. Java, CPA

 EXECUTIVE SUMMARY

The Construction Materials Industry has been a large part in the progress of an

economy. It is one of the major players that contribute to a country’s economy . Fanvill

Hardware Incorporated has been part of this industry . Last 2018 was the full

implementation of the current administrations’ “Build, Build, Build” program, upon

which the government will build public infrastructures. Since the implementation of the

project, Fanvill Hardware sales steadily grew . However, as the sales increased, the

operating expenses increased to a very large amount. Another problem found with the

business was that they were using an obsolete system in recording the daily attendance of

the employees. Upon closer observation and analysis, the researcher recommended to

have a budget that will be at par with the profitability ratio of the industry and to

purchase a biometric system to aid the new system in payroll and monitoring.
I. COMPANY BACKGROUND

Fanvill Hardware Inc. “FANVILL” is a corporation, registered with securities and

exchange commission (SEC) with Registration No. CS201219970 whose primary

purpose is to engage in trading of hardware and general construction supplies . Fanvill

operates in five (5) branches in General Santos City, South Cotabato and 1 in Tacloban

City.

FANVILL, propelled by its important assets, people are motivated to excel in every

field and create name in the industry of General Hardware and Supplies . Fanvill is one of

the awardee of 10th Yaman Awards 2018 General Santos City. Yaman Gensan is a

survey of successful business conducted by the City Economic Management and

Cooperative Development Office.(CEMCDO) and they are also a supporter of DEPED

Brigada Eskwela Projects.

Fanvill whose primary business is General Construction Supplies/Materials and

Contractors and Developer also in the General Santos City, South Cotabato and

Sarangani Province as well, a construction supplier of the following contractors:

1. Agan Land Subdivision - developer of almost five subdivisions in Gensan

2. Orlando Mirabueno a GenCon of Windsor Heights Subdivision ., Mira Prime

Development, Stonewood Hotel and T/boli Hotel

3. Greatriser Construction Corporation - a GenCon of Jollibee in Lagao, Mang Inasal in

Gaisano, Pendatun Avenue and Purok Malakas.

Fanvill also donated hospital beds and other hospital facilities in Norala District

Hospital, South Cotabato. Fanvill is also a developer and contractor, Technically and

Professionally company along with its fully skilled, trained and experienced

Engineer/Technician dedicated to a single goal by providing the best possible Service to

our Country. Fanvill offer its supplier and customers with superior services in trading

supplies and provide manpower services and peace and order of the areas for safe and

sound operations.

The Company’s Mission Statement

We will strive to be the best in our business, offer quality and value to our investors and

provide quality products that are safe and economical and strive to meet the highest

standards of integrity. We will strive to be successful by perfecting the market and

management to consistently exceed investors and clients expectation. We will strive to

attain growth though innovation and excellence, constantly seeks to understand and

fulfill our investor’s needs, deliver products on time and strive to maintain a high level of

after sales report. We sill strive to provide a respectful work environment, promote

teamwork, accomplishment and self-respect, practice condor, openness and honesty. We

will strive to conserve natural resources, operate our facilities safely and minimize the

negative environment impact of our activities.

The Company’s Corporate Vision and Mission

Vision

To develop a professional team of disciplined, well-trained and highly motivated

employees committed to sustain the growth of our business while maintaining a strong

sense of social responsibility with the commitment to actively participate on nation

building.

Mission

To meet the expectations and fulfill the aspirations of our stakeholders through profitable

and highly efficient operations globally. To nurture a working environment that provides

financial compensation and promotes opportunities for enrichment and advancement.

II. IDENTIFICATION AND DISCUSSION OF THE PROBLEM

With the number of previously stalled infrastructure projects kick-started under the

administration of President Duterte, the demand for construction materials has reached

new heights. Driven by the Build, Build, Build, (BBB) programme, the wholesale price

of construction materials reached a five-year high during the last quarter of 2017 .

According to the data from the Philippine Statistic Authority (PSA), the construction

materials wholesale price index (CMWPI) in the National Capital Region rose by 4.7%

year-on-year in November 2017, the highest annual growth rate since March 2012 when

the index grew by 5.2%. As a variant of the general wholesale price index, the CMWPI
measures changes in the average wholesale price of 108 construction materials used in

various government projects.

In terms of contribution, concrete products ranked highest on the index as of

November 2017 (43.87%), followed by reinforcing steel (12.13%), fuels and lubricants

(9.09%) UPWARD TREND: Despite the rising cost of materials, high levels of demand

are driving the construction pipeline forward. In the first quarter of 2018, 44 of 75

planned priority infrastructure projects under the BBB programme were already under

construction, with another 15 big-ticket projects in the pre-construction stage . As of

January 2018 the primary contributors to CMWPI growth were the cost of fuels, which

increased by 19.8%; structural steel, up 7.3%; concrete products (5.2%); hardware

(4.1%); and sand and gravel (2.3%). At the same time, plywood, GI sheet, tile works,

electrical works and plumbing fixtures and accessories all had an annual increase within

1-2% range.

Figure 1

2 YEAR SALES AND COST OF SALES REPORT

70,000,000.00
60,000,000.00
50,000,000.00
40,000,000.00
30,000,000.00
20,000,000.00
10,000,000.00
-
 Despite the progress in the construction materials industry, where Fanvill Hardware

belongs, like any other businesses, they also encounter difficulties . Fanvill Hardware

has been doing good despite the competition in the market . Based on their financial

performance, their sales increased by 15% from 2017 which tells that the business is

doing well. However, working to be a large company always accompanies difficulties

during the process.

Figure 2

OPERATING EXPENSES
5,000,000.00
4,500,000.00
4,000,000.00
3,500,000.00
3,000,000.00
2,500,000.00
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00
-
2018 2017

Based from the figures given by the owners their operating expenses increased by

18,000,000 which represents a staggering 66% in 2018. One reason for that problem is

that problem is that they do not have a fix budget plan every year. They tend to just

estimate a fix amount intended for the use of all various expenses such as fuel and

utilities. No allocation has been done for these various accounts . Lack of budgeting in a
business can cause problems such as inability to effectively price and poor cash flow . A

proper budget divides your expenses into overhead and other costs. Overhead cost are

operating expenses such as fuel, utilities and rent. If the business is not well informed

about the overhead and other cost for each account or service the business can not set

optimal prices for its products. Also lack of planning in budget might lead the business

to be short on cash and to pay for the bills . Other problems also arises from this kind of

situation such as their lack of timekeeping and proper payroll system . They pay their

employees on a weekly basis and the basis for their wages is the employees Daily Time

Record which is manually written by the employee. The checking if the DTR is validated

with the security on guard that day. The lack of timekeeping and payroll system, can

present several problems for a business including high risk of data loss or corruption,

disorganized payroll processing, tendency for errors and limited capabilities . Given the

increase of sales in 2018 the business is clearly doing well however the staggering

increase of overhead expenses cannot be also ignored . If not addressed in there right

time, other problems with the financial aspect of the business might arise.
III. PROPOSED FINANCIAL MANAGEMENT MODEL

Given that the problem of the business is the lack of planning in Budgeting, the

proposed financial management model will be about budgeting . Budgeting is the basis

for all business success (Banks,2018). It helps with both planning and control of finances

of the business. If there is no control over spending, planning is futile and if there is no

planning there are no business objective to achieve. There are different kinds of

budgeting. There is Zero-based budgeting, Static budget, continuous budgeting and

flexible budget but there is the main budget called master budget which is comprised of

two parts: Operating budget and the financial budget . The Operating Budget states the

company’s revenue and expenses from the income statement. The Financial Budget

states the company’s cash receipts and cash disbursements from previous time period’s

Statement of Cash Flow. Budget method used in businesses are different in every

industry. For this research, the budget method will focus on the business’ Operating

Budget. Since the business is struggling with their Overhead cost, the budget method

propose for this research will be Static Budget. An advantage of static budget is that it is

easy and it allows management to place spending limits on each line item in the budget .

Also since overhead cost almost has the same kind of expenses . Another problem that

needs to be addressed is the lack of timekeeping and payroll system . The proposed
system for this problem is the business should integrate a biometric fingerprint scanner

for timekeeping.

IV. RATIONALE

The proposed financial models are Operating budget model and a biometric system

model. The Budget model will ensure that the money allocated for certain expenditures

will be fully utilized and restricts spending that is not part of the plan . The proposed

Biometric Fingerprint system will run through a computer for payroll record . It contains

the automation for timekeeping of every employee and generate payroll transaction . It

can update employee information, bonuses, and other benefits.

V. DISCUSSION OF THE SOLUTION

The proposed solution for the budget and payroll problems of the business was to

create a Budget to allow management to place spending limits on each line of the budget

and a Biometric System model that will contain automation for timekeeping of every

employee and generate payroll transaction.

Given the limited information that the business has disclosed, the following analysis

is based on assumptions and intellectual deductions . Based on the given data of the

business, the sales from the year 2017 to 2018 has increased by 15%, cost of sales

increased by 12%, operating expenses increased by 66%.

FANVILL HARDWARE, INC

INCOME STATEMENT
For the year ended December 31, 2018
(with comparative figures year ended December 31, 2017)

%
2018 2017 increase/de
crease
REVENUE 61,000,000.00 53,000,000.00 15.09%
COST OF SALES 56,000,000.00 50,000,000.00 12.00%
GROSS INCOME 5,000,000.00 3,000,000.00
OPERATING EXPENSES 4,500,000.00 2,700,000.00 66.67%
EBIT 500,000.00 300,000.00
INCOME TAX 150,000.00 90,000.00
NET INCOME 350,000.00 210,000.00

The increase in the revenue of the business indicates that it is doing well however,

the increase of 66% for the operating increase for a business might be alarming in this
case. In the analysis of the breakdown of the operating expenses, the largest portion of

the operating expenses belongs to the salaries and wages account which comprised

27.32% of the expenses for 2017 and 43.9% for 2018.

Figure 3

2017 Operating Expenses

communications Depreciation
Inusrance Light and power
office supplies fuel and oil
prof fee Rent expense
Repair and maintenace representation
salaries and wages Permits and Licenses
permits taxs travel and transpo
micsellaneous

Figure 4

2018 Operating Expenses

communications Depreciation
Inusrance Light and power
office supplies fuel and oil
prof fee Rent expense
Repair and maintenace representation
salaries and wages Permits and Licenses
permits taxs travel and transpo
micsellaneous
 Upon comparison of the two (2) years, there was an increased of 167% in which it

might be too much in a span of one (1) year followed by the office supplies and permits

and licenses by 63% and 61% respectively . According to the owners, they have

increased the number of their employees and absorbed some of their contract employees

both in their General Santos City and Tacloban City branch to match the demand of the

“Build, Build, Build” project of the current administration.

FANVILL HARDWARE, INC

Operating Expense Breakdown
(with comparative figures for year 2018 and 2017)

2018 2017 % % increase/decrease

Communications 31,500.00 0.70% 23,220.00 0.86% 35.66%

Depreciation 450,000.00 10.00% 390,960.00 14.48% 15.10%
Insurance 27,000.00 0.60% 17,280.00 0.64% 56.25%
Light and power 161,000.00 3.60% 101,790.00 3.77% 58.17%
Office supplies 22,500.00 0.50% 13,770.00 0.51% 63.40%
Fuel and oil 648,000.00 14.40% 494,370.00 18.31% 31.08%
Prof fee 4,500.00 0.10% 2,970.00 0.11% 51.52%
Rent expense 535,500.00 11.90% 476,550.00 17.65% 12.37%
Repair and maintenance 207,000.00 4.60% 146,680.00 5.43% 41.12%
Representation 5,500.00 0.13% 4,320.00 0.16% 27.31%
Salaries and wages 1,975,500.00 43.90% 737,840.00 27.32% 167.74%
Permits and Licenses 130,500.00 2.90% 81,000.00 3.00% 61.11%
Permits taxes 225,000.00 5.00% 157,410.00 5.83% 42.94%
Travel and transportation 45,000.00 1.00% 30,510.00 1.13% 47.49%
Miscellaneous 31,500.00 0.70% 21,330.00 0.79% 47.68%
GRAND TOTAL 4,500,000.00 2,700,000.00
 Figure 5
permits taxs

salaries and wages

Rent expense
2017
fuel and oil 2018

Light and power

Depreciation

- 500,000.00 1,000,000.00 1,500,000.00 2,000,000.00 2,500,000.00

.
Note: Fig 5 shows the account with figures more than 100,000

Figure 6

micsellaneous

travel and transpo

representation
2017
prof fee 2018

Inusrance

communications

- 10,000.00 20,000.00 30,000.00 40,000.00 50,000.00

.
Note: Fig 6 shows the account with figures not more than 100,000

According to the CSIMarket 2018 in the Construction Materials Industry, the

industry ratio for the Annual Average Operating Margin in 2018 is at 7 .64% and Annual

Average Net Profit Margin at 4.25% while the business has both Operating Margin in

2018 at 0.656% and Net Profit Margin at 0.415% in 2017.

 PROFITABILITY RATIO
Average Industry
2018 2017 Ratio

Operating Margin 0.656% 0.4150% 7.64%

Net Profot Margin 0.6560% 0.4150% 4.25%

The results shows that the Operating Margin is far too low compared to the industry

ratio of 7.64%. The analysis suggest that the business is not efficiently converting

revenue into profit. A factor that might have caused this situation was the increased in

operating expenses particularly the salaries and expenses account and cost of sales.

To attain the average industry ratio for the Operating Margin of 7 .64% and Net

Profit Margin of 4.25%, following the conservative approach, we will assume that the

Revenue for the following years will steadily increase by 15% as it was the increase from

the previous Annual Sales of the business compared to the Philippine Statistics

Authority(PSA) research growth of businesses in the Construction Materials Industry

which resulted to 16.3%. The Cost of Sales assumed at 8% increase which is lower by

4% than the previous years’ increase. The operating expenses will assume to increase by

5% of the prior year. The business can achieve an increase of 15% of sales in the

following years due to the current administration’s projects. The Tacloban branch have

partnered with private companies and different government agencies therefore sales will

steadily increase. The Cost of Sales is one of the key elements that influences the gross
profit of an organization. The cost of goods sold for a particular service or product refers

to the direct cost associated with its production. Hence, an increase in the Cost of sales

can decrease the gross profit. Since the gross profit comes after the reduction of variable

costs from the total revenue, increases in the variable costs can decrease the margin of

gross profit. Therefore, the greater the cost, the lesser the gross profit. In this business,

the decrease of Cost of Sales is essential in maximize profit and it can be achieved by

directly purchasing their products from the manufacturer rather than local retail stores in

the area in which the business has been doing for three (3) years. The increase in the

operating expenses has been assumed to be at 5% based on the previous year. The

business will increase the manpower by hiring additional workers to meet the demand of

the clients. The new computations with the given assumptions, the new Net Profit

Margin and Operating Margin will help maximize the the profit of the business . Since

Cost of Sales and Operating Expenses are both expenditures for the business, lowering

these can increase the profit of the business. With the given budget, the business will

limit and find other solutions to efficiently manage their sales. Given that the current

administrations’ “Build, Build, Build Project, sales of this industry will increase

however, with poor management of its sales, profits will not be fully utilize.

FANVILL HARDWARE INC.

PROJECTED INCOME STATEMENT
%
2018 2019 2020 increase/d
ecrease
REVENUE 61,000,000.00 70,150,000.00 71,202,250.00 15.0%
COST OF SALES 56,000,000.00 60,480,000.00 61,387,200.00 8.0%
GROSS INCOME 5,000,000.00 9,670,000.00 9,815,050.00
OPERATING EXPENSES 4,500,000.00 4,725,000.00 4,795,875.00 5.0%
EBIT 500,000.00 4,945,000.00 5,019,175.00
INCOME TAX 150,000.00 1,483,500.00 1,505,752.50
NET INCOME 350,000.00 3,461,500.00 3,513,422.50
 Efficient payroll processing is a vital part of any business and since it is directly

associated with employee compensation, system weakness and vulnerabilities could

affect accuracy. It is important to understand that payroll involves more than simply

compensating your employees for the time they have worked and inaccuracies may lead

to unnecessary payroll expenses. That is why many businesses and even government

agencies worldwide are moving to implement biometric technology to establish more

accurate and efficient payroll processing. Biometric can be used to track the attendance

of an employee instead of an obsolete system that rely on time card punching and filling

out the time sheet or Daily Time Record (DTR) in which Fanvill has been using . There

are certain advantages that a biometric contribute to a business . One advantage of this

system is that it increases accuracy because physical attributes are very unique for every

individual, it can not be easily duplicated therefore biometric system can offer the most

accurate system. Biometric technology will help accurately track employee time and

attendance which prevents time theft issues such as early arrivals, early departures and

unauthorized overtime. As a result, when attendance data is transferred into payroll

processing software, staff has access to most accurate and up-to-date data . Biometric

also saves the time required to manually calculate employee hours worked by eliminating

the practice of keeping manual time and attendance records . The system also reduces

costs since a biometric employee authentication saves human resources working hours
by providing data electronically, effectively eliminating the time required to manually

calculate work and overtime hours. Also paperwork is minimized, and the HR

department can allocate employee resources that would otherwise be spent on manual

payroll processing, overtime adjustments and accuracy checking . Lastly, Biometric

system leaves audit trails for efficient payroll processing. Biometric time clocks create

concrete audit trails for employee workforce management time and attendance which

improves responsibility and accountability. Since employees can be accurately identified

and held responsible for late attendance and taking frequent, extended or unscheduled

breaks while processing their payroll, they tend to become more responsible and

accountable for time management.

VI. RECOMMENDATIONS

To attain the the average ratio of Operating Margin the business should focus on two

(2) accounts in the income statement . First is the Cost of Sales in which it is 90-95

percent of the total sales. One factor for this is that the business outsources most their

products from other stores rather than directly outsourcing it in the main factory . This

also includes the business located in Tacloban City. The researcher recommends to the

business that instead they purchase their products from other stores, they should directly

purchase their inventory to the manufacturers . Second is the Operating Expenses . Should

the company maintain they manpower they have they should also upgrade their payroll

system. The business can purchase a Biometric system to improve their payroll system

and remove their obsolete system.

REFERENCE

CSIMARKET. (2018). Construction Raw Materials Industry Profitability by quarter,

Gross, Operating and Net Margin. Retrieved from
https://csimarket.com/Industry/industry_Profitability_Ratios

IFRS. (n.d.). Construction: industry financial ratios benchmarking. Retrieved from

https://www.readyratios.com/sec/industry/C/

PSA. (2019, October 14). Industry: Construction. Retrieved from

https://psa.gov.ph/statistics/survey/data-by-industry/construction

PSA.(2019,July 26).Employment Situation in January 2019.Retrieved from

https://psa.gov.ph/content/employment-situation-january-2019

Shahnewaz, S. (2018, June 3). Do Biometrics Ensure Efficient Payroll Processing (Web
log post). Retrieved from http://www.m2sys.com/blog/workforce-management/do-
biometrics-ensure-efficient-payroll-processing/

PSA.(2019, April 26).Gross Regional Domestic Product.Retrieved from

https://psa.gov.ph/regional-accounts/grdp/highlights