- Reasons for and against cash flow analysis
- There are reasons as to why Castle nursing home requires keeping a cash flow analysis. First, cash flow analysis helps in determining imbalances on cash allocation and since it the work of the cash flow to help the management of the organization in maintaining balance in the cash allocation. The other significance for performing cash flow analysis is that it helps in determining whether the resources available in the business can sustain the business in terms of operational costs (Moyer & Moyer, 2012, p.341). Cash flow analysis will also help the organization in tracking payment of employees. Incase the organization has any loan the financial institution will require a cash flow analysis from the business organization.
- Reasons against cash flow analysis
- Although performing a cash flow analysis might be important there also reasons which might be against the forecasting (Moyer & Moyer, 2012, p.341). First, cash flow forecasting is prone to inaccuracies whereby most of the data might be incorrect. In addition, cash flow forecasting is costly and that it consumes a lot of time therefore increasing more expenses to the business.
- Importance of marginal costing and break-even analysis as part of decision making process
- Marginal costing will help the management of Castle healthcare to make future decisions which are effective (Finkler, Ward & Baker, 2007). Marginal costing helps the management of the organization to determine the optimum selling for services or products. Marginal costing will also help the decision making panel in determining the effect or price reduction on services or products and the anticipated profit as well as in establishing an appropriate product mix. Break even analysis facilitates the management in making decisions which will support sales to a level whereby the organization will not suffer from financial loss. Break even analysis is also important since it facilitates the management with the requirements of making decisions upon the price to sell products and services.
- The possible implication of capital investment decisions
- Capital investments decisions entail long term decisions for corporate finance which base on capital structure and fixed assets whereby the decisions follow a certain criteria (Jackson, Sawyers & Jenkins, 2009, p.228). The implication of capital investments decisions is that they help the business in maximizing the firms value through investing in different projects which produce a positive net present vale (NPV)once this is valued using a discounted risk rate. However, the projects require appropriate financing as required by capital investment decisions. The third implication is that the management is required to return the dividends to shareholders if there are no opportunities to invest. Generally, capital investment decision implicates dividend decision, financial decision and investment decision.
- The use of relevant investment appraisal techniques
- Internal Rate of Return (IRR)
- Internal Rate of Return is a widely used measure for facilitating evaluation of investments (Bidgoli, 2003, p.216). Internal Rate of Return is also referred to as the discounted cash flow or rate of Return (ROR). Castle Healthcare needs to use the discounted cash flow of Internal Rate of Return (IRR) to evaluate the strength of the business in terms of financial strength and facilitate in making effective decisions in the business to improve its performance. The Internal Rate of Return (IRR) determines quality, efficiency and investment returns of the business. The Internal Rate of Return works together with another tool which is the Net Present Value (NPV).
- Net Present Value (NPV)
- The Net Present Value (NPR) entails sum of the present values for individual cash flows of a similar entity and it is calculated for both the incoming and the outgoing financial value in a business (Hansen, Mowen & Guan, 2009, p.719). Moreover, the NPV can be expressed as the difference amount between discounted sum of outflows and inflows of cash in a business. Halfords garage can use the NPV in determining the financial stability of the business as well as in making decisions of improving the revenues of the garage. The Net Present Value (NPV) is an important tool which is used in planning for the budget of cost.
- Analyze the following financial information supplied by the director for 2010 and 2011and discuss the trend/findings
- The above information can be analyzed with the help of trend line representation using trend line graphs.
- Trading profit and loss figures trend graph
- The trading profit and loss trend curves indicate that there was no much diffference in the cost aand profits for the two years. Howver, it is easily to conclude that the sales, expenses, gross profit and net profit for year 2010 were higher than in 2011. The year 2011 saw the business record higher cost of sales which might have been contibuted by increase of production costs. Overall, the performance of the business in terms of profits in 2010 was better compared to the year 2011.
- Balance sheet figures trend graph
- The trend lines for balance sheet figures for both years indicate great difference. The business had more fixed assets in 2011 than in 2010. However, the current assets of the business recorded a decrease with a higher difference in 2011 than in 2010. This implies that the business invested more on current assets in 2011 than in fixed assets as recorded in 2010. The stock value was reduced with nearly half in 2011 than in 2010. The business however increased current liabilities and decreased working capital together with net current assets on 2011 than in 2010. This implies that the business has recorded poor performance in the year 2011 as compared to the year 2010 since it should reduce liabilities instead of increasing. Generally, the trend lines indicate that the business is performed poorly in 2011 compared to the performance of 2010.
- References
- Bidgoli, H. 2003. The Internet Encyclopedia. Volume 3, P-Z. Hoboken, NJ, John Wiley & Sons.
- Finkler, S. A., Ward, D. M., & Baker, J. J. 2007. Essentials of cost accounting for health care organizations. Sudbury, Mass, Jones and Bartlett Publishers.
- Hansen, D. R., Mowen, M. M., & Guan, L. 2009. Cost management: accounting and control. Mason, Ohio, South-Western.
- Jackson, S., Sawyers, R., & Jenkins, G. J. 2009. Managerial accounting: a focus on ethical decision making. Mason, OH, South-Western.
- Moyer, R. C., & Moyer, R. C. 2012. Contemporary financial management. Mason, OH, South- Western, Cengage Learning.
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