FINANCIAL MARKETS INFRASTRUCTURE DIVISION

FINANCIAL ANALYSIS OF MONEY SERVICE BUSINESSES

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• UNIT 1: FINANCIAL ANALYSIS

➢ Maxim Remittance Company (MRC) made a profit of $40m for the year ended 31
December 2021.
➢ Hanover Remittance Company (HRC) made a profit of $60m for the year ended 31
December 2021.
➢ The CEO of HRC remarked that “HRC has out performed its rival MRC by 50% in
terms of earnings”

➢ Assess the comments of the CEO !!!

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➢ADDITIONAL FINANCIAL INFORMATION:

➢ Maxim Remittance Company (MRC) made a profit of $40m for the year ended 31
December 2021. Total Assets $500m
➢ Hanover Remittance Company (HRC) made a profit of $60m for the year ended 31
December 2021. Total Assets $900m
➢ Return on assets (ROA):
MRC = 8%
HRC= 6.67%
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➢CONCLUSION:
✓MRC is more profitable than HRC
✓There is a difference between profit and profitability
✓Profit is an absolute value
✓Profitability is a rate of performance

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UNIT OBJECTIVES:
At the end of this training unit , participants will be able to:
1. State the use of each financial statement in assessing performance or financial health
2. Analyze the financial statements of money service businesses to determine health
and performance and inherent risks
3. Use appropriate ratios to enhance the assessment of financial statements
4. Determine risk exposures by assessing financial statements
.

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FINANCIAL ANALYSIS-AS A SOURCE FOR ASSESSING RISKS

• Financial statement analysis for the purpose of this training intervention is the
process of analyzing the financial statements of MSBs to determine financial
performance, financial health and liquidity condition to aid the regulatory process.

• In addition, the analysis of financial statements of MSBs aid in the quantification

(monetization) of the risks faced by individual entities and the system as a whole.

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RISK BASED SUPERVISION & FINANCIAL ANALYSIS

• Analyzing the financial statements can enhance the process of risk identification and
risks profiling the MSBs
• The Income Statement can give key insights into the efficiency of operations
• Analysis of the statement of financial Position can indicate structural risks, the level of
credit risk, market risk and liquidity risk exposures.
• Analysis of the Statement of cash flows can assist in determining liquidity issues as it
relates to the cash generating capacity of the business.

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• UNIT 1: FINANCIAL ANALYSIS

RISK INDENTIFIED FROM STATEMENT OF FINANCIAL POSITION
Race Course Cambio Limited
Statement of Financial Position as at 31 December 2020
$'000 $'000
Current Assets
Stocks 860
Loans to subsidiary 3,000
Accounts receivable loans 32,100
Cash & Cash Equivalents 22,040 58,000
Non Current Assets
Property,Plant and Equipment 1,300
Investments: Company 1 9,000
Company 2 4,000
40% in Salon 3,500 17,800
75,800
Equity and Liabilities
Share Capital 5,600
Retained Earnings 57,000
Non Current liabilities
Preference shares 7,000
Directors loans 6,200 13,200
75800

Examine the Statement of financial position of Race Course Cambio Limited. Are there any concerns?
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CRITICAL POINTS-CONCERNS & RISK INDENTIFIED FROM STATEMENT OF FINANCIAL POSITION
1. Investments in Company 1 & Company 2 (In which industry are these companies?)
2. Loans to subsidiary company- details required
2. High level of retained earnings of $57M in relation to relatively small share capital
3. Directors loans-more details required
4. Preference shares-what is the interest rate?
5. Account receivable loans represent 42.3% of total assets, therefore credit risk is significant-an assessment
of the quality of this asset category is required.
6. Loans to subsidiary-are the terms and conditions for these loans favourable to the subsidiary but
unfavourable to the parent?
7. The company has significant investments in other companies-$16.5M (how are these entities performing?)
8. Is the structure of the company geared towards operational efficiency?
.

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CRITICAL POINTS-CONCERNS & RISK INDENTIFIED FROM INCOME STATEMENT
Race Course Cambio Limited
Income Statement for the year ended 31 December 2020
$'000 $'000
Loan interest 15,600
FX Gains 56,214
Gains on Equity Trading 300
Fees 156
Remittance Commissions Received 1,554 73,824

Administration Expenses
Electricity 610
Telephone and internet 553
Water 44
Rental 1740
Professional fees -Cambio 3900
Licensing fees 364
Salaries,ER contributions and comission 29000
Repairs and maintenance 25
Promotion and advertising 300
Interest Expense 840
Fuel 30
Stationery 100
Depreciation 130
Bad debts and provision for bad debts 2000
Security 237 39,873
Profit before taxation 33,951

Examine the Income Statement of Race Course Cambio Limited. Are there any concerns?

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CRITICAL POINTS-CONCERNS & RISK INDENTIFIED FROM THE INCOME STATEMENT
1. There is a link between the SOFP and the Income Statement
2. For financial institutions the quality of assets on the SOFP will determine the quality revenues in the
income statement
3. Foreign exchange gains account for 76.15% of total revenue, this means a significant foreign
exchange risks is faced by the company if the Jamaican dollar strengthens against the foreign
currencies.
4. Loan interest accounts for 21.13% of total revenue, highlighting the significant credit and interest rate
risks faced by the company.
5. The overhead efficiency rate is 45.9% (administrative expenses/total income) and seems relatively
good.

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• UNIT 1: FINANCIAL ANALYSIS

CRITICAL POINTS-CONCERNS & RISK INDENTIFIED FROM THE STATEMENT OF CASHFLOWS
THE RED FLAMINGO CAMBIO LIMITED
Statement of Cash Flows for the year ended 31 December 2021
$ $
Cash flow from operating activities:
Net profit before Tax and interest (325,000+3700) 68,700
Adjustments for :
Depreciation 27,000
Profit on disposal of Fixed asset (35,000)
Impairment of Goodwill 45,000
Decrease in inventory 7,000
increase in receivables (4,000)
Increase in creditors 5,000
Interest paid (13,700)
Taxation paid (140,000)
Net Cash flow from operating activities (40,000)

Cash flow from investing activities:

Purchase of Non Current Asset (70,000)
Sale of Non-current Assets 83,000
Net cash flow from investing activities 13,000

Cash flow from financing activities:

Issue of of shares 20,000
Repayment of Loans (165,000)
Dividends Paid on ordinary shares (59,000)
Net cash flow from financing activities (204,000)
Net cash flow during the year (231,000)

Cash and Cash eqivalents at start of year 37,000

Net cash flow during the year (231,000)
Cash and Cash eqivalents at end of year (194,000)

Examine the Statement of Cash flows for Red Flamingo Limited. Are there any concerns?

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CRITICAL POINTS-CONCERNS & RISK INDENTIFIED FROM THE STATEMENT OF CASH FLOWS
1. The negative cash flow of $40,000 generated from operating activities
2. Positive cash flows from operating activities should be the main source of funds to sustain the business
3. The timing of the loan repayment is questionable given the serious liquidity risks the company is facing.
4. More alarming however is that the company made a dividend payment of $59,000 in this current weak financial
environment. The payment of ordinary dividend is not obligatory.
5. The company should consider discussing the possible rescheduling to tax payments
6. The company had $34,000 in cash at the start of the year and closed the year with a deficit of $194,000.

7. The current position of the company indicates poor cash management, indicating the inability the company
appropriately anticipate the timing of cash flows.

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THE STATEMENT OF CHANGES IN EQUITY

Ocho Rios Cambio

Statement of Changes in Equity for the year ended 31 December 2021

Number of Preference Ordinary General Retained Total
Shares Shares Shares Reserves Earnings
$ $ $ $ $
Balances at 31 December 1995 (Retained Earnings restated) 11,000 100,000 250,000 200,000 356,580 906,580
Issue of ordinary shares 2000 50,000 50,000
Net profit after tax (0.6 x $55,000) 33,000 33,000
Dividends paid (30000) (30000)
Balances at 31 December 1996 13,000 100,000 300,000 200,000 359,580 959,580

The statement of changes in equity shows changes in the components of equity over a year

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THE PRIMARY FINANCIAL STATEMENTS ARE:

There are four primary financial statements:

(1) Statement of Financial Position
(2) Income statements;
(3) Statements of cash flows; and
(4) Statements of changes in equity.

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THE PRIMARY FINANCIAL STATEMENTS- Continued:

1. The statement of financial position shows the assets, liabilities and equity of an entity at a
fixed point in time.
2. The income statements(statement of profit or losses and other comprehensive income)
shows revenues earned and expenses incurred over a period of time.
3. The statement of cashflows show the exchange of money between a company and the
external market environment ,also over a period of time.
4. The statement of changes equity, shows changes in the stake of the company’s
shareholders in the company over time.
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ELEMENTS OF ACCOUNTING
According to the conceptual framework of financial reporting, there are five elements of financial
statements. These are:
1. Asset
2. Liability
3. Equity
4. Income (or gain)
5. Expense (or loss).

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DEFINITION OF ELEMENTS OF ACCOUNTING
The definitions are as follows:
➢ Asset Definition: A present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits. This definition clarifies
that it is the resource that is the asset, not the probability of future economic benefit.
➢ Liability Definition: A present obligation of the entity to transfer an economic resource as a result of
past events. An obligation is a duty or responsibility that the entity has no practical ability to avoid.
Similarly, to assets, it is the obligation that is the liability, not the economic resources that may be
required to be transferred. Again, the liability and its valuation are two separate concepts.
➢ Equity is defined as assets less liabilities.

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DEFINITION OF ELEMENTS OF ACCOUNTING-CONTINUED:

➢ Income is defined as increases in assets or decreases in liabilities that result in an increase to equity,
other than those relating to contributions from holders of equity claims.
➢ Expenses are defined as decreases in assets or increases in liabilities that result in a decrease to
equity, other than those relating to distributions to holders of equity claims.

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CRITICAL POINT-ASSET GROWTH
1. ABC Cambio was established five years ago, the assets of the company increase from $170m in 2020
to $250m in 2021.
2. A statement regarding the performance of the company from its finance department states:
“The ABC Cambio experienced significant growth during the year with total assets increasing by $80m or
47.05%, a positive sign of the company’s growth and development. The growth was driven as follows:
• Increase in retained earnings $6m
• Increase in share capital $5m
• Increase in long term loans $69m “
Comment on the appropriateness of the above statement by the finance department

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CRITICAL POINT-ASSET GROWTH-RESPONSE TO ABC ‘s FINANCE DEPARTMENT
1. The growth in assets is not necessarily a positive sign
2. $69m (86.25%) of the growth in asset was driven the acquisition of new loans (27.6% of total assets)
3. Debt is usually cheaper than equity because debt holders are exposed to less risks. Interest is fixed
and is obligatory and is paid before dividends are declared.
4. High debt levels place the company under pressure to perform at a level which ensures interest
payments are certain. The terms of the loan are also critical as they could be onerous.
5. Profit only accounted for 7.5% of the growth in asset
6. Capitalization accounted for 6.25%, hence equity accounted for 13.75% in total asset growth
7. Overall not an impressive performance
.
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UNIQUE FEATURES OF CAMBIOS & REMITTANCE COMPANIES
INCOME STATEMENT-MAIN SOURCES OF INCOME
1. Interest Income
2. Fx Gains
3. Fee Income
4. Remittance Commission
5. Gains of trading of stocks

• The general business model is to maximize the above revenues while minimizing overheads.
• The largest cost is usually salaries and wages
• Where revenues are insufficient to cover cost, they engaged in other commercial activities to generate
additional income to offset overheads.
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UNIQUE FEATURES OF CAMBIOS & REMITTANCE COMPANIES-
STATEMENT OF FINANCIAL POSITION
1. Minimize investment in tangible non current assets (usually a small % of total assets)
2. Maintain high levels of cash,cash equivalents(highly liquid investments)
3. Therefore current assets are primarily made up of receivables, cash, cash eqivalents and
investment securities
• 4. Current liabilities are usually significantly less than current assets
5. Share capital is usually a very small % of total equity
6. Retained earnings balance is usually very significant relative to total equity

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UNIQUE FEATURES OF CAMBIOS & REMITTANCE COMPANIES-INHERENT RISKS

1. Market Risk (Interest and Foreign exchange risk)

2. Credit Risk
3. Liquidity Risk
4. Capital Adequacy risks

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CHALLENGES FOR SUPERVISORS OF CAMBIOS & REMITTANCE COMPANIES

1. Inadequate accounting system and reporting (especially for the smaller money service businesses)
2. The presence of multiple business lines
3. High probability that the cambios or remittance companies could be come cash cows for the other
business lines, thus increasing the liquidity risks for the money service business.
4. Limited investment expertise (investment expertise does not match the types of investment held).

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METHODOLGY OF ANALYSIS
1. HORIZONTAL ANALYSIS: Comparison of a company’s financial condition and performance across time.
2. VERTICAL ANALYSIS Comparison of a company’s financial condition and performance to a base
amount.
3. RATIO ANALYSIS: Measurement of key relations between financial statement items

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HORIZONTAL ANALYSIS

1. Analysis of a single variable is of limited value. Instead much of financial statement analysis
involves identifying and describing relationships between numbers, groups of numbers and
changes in those numbers.
2. Horizontal analysis refers to the comparison of financial data cross time
3. Horizontal analysis is very useful in helping to identify trends

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VERTICAL ANALYSIS

1. Vertical analysis is a tool used to evaluate individual financial statements items or a group of
items in terms of a specific base amount. A key aggregate figure is usually defined as the
base.
2. On the Income Statement the base is usually defined as total revenue(100%).
3. On the balance sheet or statement of financial position the base is usually defined as
total assets(100%).
4. Vertical analysis is derived from the up and down movement of the eyes on the financial
statements.

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RATIO ANALYSIS

Ratios are among the more widely used tools of financial analysis because they provide clues and
symptoms of underlying conditions.

The appropriate categories ratios for the supervisory analysis of money service companies are:
1. LIQUIDITY AND EFFICIENCY
2. SOLVENCY
3. PROFITABILITY

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THE END
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