Finance

Salient Information to Evaluate Synthasia Electronics
In evaluating this business decision, the bank should look at two important factors, which encompass the return potential of the loan and the financial risks pertinent to such loan.  The return is mainly in the form of interest.  In order to be able to meet the interest commitments on a timely basis, Synthasia Electronics should have a sound liquidity, namely a good cash flow.  Thus ratios pertinent to such area should be complied.  Risk is evaluated by looking also at the profitability of the organisation and its long-term solvency.  Without profits a company cannot operate in the long-term and in its absence the cash flow will be depleted.  Solvency ratios also challenge the going concern assumption by looking at capital structure of the organisation and the ability of profits and cash to meet financial commitments (McKenzie 2003).  Therefore, ratios pertinent to profitability, liquidity and financial stability will be computed and examined in the forthcoming sections.  These will be accompanied by a Statement of Cash Flows for 2009, which is a key ingredient in the computation of some ratios and in the financial analysis.

Profitability of Synthasia Electronics
Overall the utilisation of resources of the company are less effective over the years examined sustaining the AED 10 million decline in the net profit during such time frame.  The utilisation of the firms resources yielded lower profits over the years by a decline in the return on capital employed.  A high percentage in such financial ratio is always desirable, because it implies that the profitability of the company is substantially safe from unseen changes in the external business environment, like new competitive measures, economic slowdown and more (Randall 1999).  Hence a decline in the return o capital employed ratio cases doubts about the profitability of the organisation and indicates a weakening in the financial health of the firm.

The asset turnover, which outlines the effectiveness of sales revenue generated from the assets employed, increased slightly during the period (Randall 1999).  This means that management are using the resources more effectively to generate sales revenue and should be applauded for that.  Sales revenue is an important element for profitability.  However, it is important to stress out that profitability is not solely made of sales.  Costs are another important element that will be examined closely with the proceeding ratio.

The net profit margin decreased significantly for the company by 5.06.  This implies that the net profit generated from every 100 of sales is lower for Synthasia Electronics (Randall 1999).  A decline in the net profit margin is normally the result of either declining sales revenue andor decreasing cost efficiency.  A rise of 35.82 in sales revenue is noted during the period, thus removing the first possibility.  The problem rests on cost efficiency as highlighted by the cost of sales and administrative expenses that increased sharply during such period by 61.39 and 53.45.

Liquidity of Synthasia Electronics
Liquidity ratios as already hinted in the introductory section are adopted to measure the companys ability to meet its financial obligations.  The two main liquidity ratios are the current ratio and quick ratio.  The current ratio, which points the ability of the current assets to cover the current liabilities, has decreased significantly over the years considered for Synthasia Electronics indicating declining working capital management. In addition, the capabilities of the most liquid assets to cover the current liabilities also diminished (McKenzie 2003).  Therefore, from a generic point of view one can contend that the working capital management of the company is falling leading to a weaker liquidity.

The above ratios portray a generic picture, which one needs to further amplify by computing other ratios in order to portray the reasons behind such a working capital management.  In this respect, the inventory turnover is determined above to outline the inventory management of the company in terms of the ability to turn over inventory (Randall 1999).  This ratio also declined slightly from 2008 to 2009.  Therefore, inventory management deteriorated and the risk of stock obsolescence and holding costs are rising.  Further more, the money tied up in inventory is higher weakening the ability of the company to pay interest expenditure on a timely basis (Randall 1999).

The last but not least important variable under the financial position section is the cash of the company.  Attention is devoted to the Statement of Cash Flows, which outlines the cash movements of the organisation classified under operating, investing and financing activities (Randall 1999).  A first glance at the statement of cash flows of 2009 shows worrying figures, particularly the decrease in cash and cash equivalents of AED 161 million leading to an overdraft of AED 10 million.  Before rushing into any conclusions one ought to examine meticulously the statement of cash flows paying attention to the three sections noted above.  Indeed, if one looks at the operating activities one can notice a 45.45 increase in the cash generated from operations.  This is a very positive variable since it implies that the cash generated from the day-to-day activities is increasing (Randall 1999).  The problem for the aforesaid decline in cash balance stems from the investing activities.  The company is investing heavily as highlighted by the AED 270 million increases in money spent on acquiring non-current assets.  This is a very risky approach especially in light of the falling profitability and working capital.

Financial Stability of Synthasia Electronics
The Balance Sheet of the company reveals that Synthasia Electronics is solely financed by equity.  Indeed, the company holds no long-term obligations.  This means that the company is less risky, because the financial commitments stemming from debt finance are nil (Randall 1999).

The financial stability of the company is further examined by the cash debt coverage ratio, which outlines the ability of operating cash flow to cover liabilities (Randall 1999).  A decline is noted in such a ratio despite the operating cash flow of the organisation improved as noted in the previous section.  Such decline results from the drastic increase in current liabilities.   This thus decreases the strength of the financial stability of the company.

Key Strengths and Weaknesses
From the financial analysis conducted above one can outline the salient financial strengths of the company, which are the following

Effectiveness in cash flow was noted, where the operations of the company are yielding higher cash from operations.

Greater effectiveness in generated sales revenue from the companys assets.

The company is fully financed by equity.

The financial weaknesses of the organisation, which outweigh the financial strengths, are the following
Efficiency of management in profit generation is declining.

Lower cost efficiency is leading towards a decline in net profit.

The working capital management is deteriorating, where current liabilities are increasing at a faster pace than current assets.

Declining effectiveness in the management of inventory.

Lower potential of operating cash flow to cover liabilities.

Financial Health of Synthasia Electronics
From the financial analysis conducted, the financial health of the organisation is very weak especially on profitability and liquidity.  The financial weaknesses are much higher than the companys financial strengths.  This outlines considerable risks for the bank if the requested loan is provided.  In this respect the management of the bank should think twice before providing the requested loan.

Before reaching any final conclusion it is important to consider certain aspects pertinent to the financial analysis conducted above.  This financial analysis was based on financial statements that reflect the state of affairs of the company in the past.  Therefore it reflects past events and does not consider future possibilities for the organisation (Lewis et al. 1996).  It would be helpful if the management of Synthasia Electronics provides budgetary information to the bank in order to portray their plans.  This will enable the bank to assess more accurately the loan decision, because it would shed light on the firms future.

PART B
Benefits of Preparing a Budget and Performance Measures
Budgeting forms part of the short-term planning of an organisation, where the strategic plan is put into practice.  Budgets are often regarded as a coordinating tool of the different functional areas of an organisation towards a common aim.  Therefore the preparation of annual budgets can aid the management of Synthasia Electronics to coordinate its activities towards goal congruence, which will enhance the effectiveness of the firm to reach its goals (Lucey 2003).  

Budgets also serve as an effective tool to communicate the salient objectives of the organisation in simplified terms.  Budgets act as a yardstick to employees and operational management of the areas that should be emphasized in order to reach the strategic aim.  It is not a rare occasion that ineffectiveness results from the inability of employees to comprehend the main aims of management and act accordingly.  Budgets can mitigate this problem by simplifying such objectives.  Further more, if communication is enhanced through the budgeting system, staff may be motivated to work harder (Lucey 2003).  Such benefit is highly important for Synthasia Electronics especially in light of the fact that a restructuring scheme is envisaged.  In a restructuring fear of job cuts often takes place, which may demotivate staff and hinder smooth operations (Bowman et al. 1993).  Thus it is important that effective communication is present in order to diminish such negative impacts, which may further worsen the efficiency of the organisation.

The way of thinking of management can also be improved via budgeting.  Learning to plan ahead and consider holistically all the divisions within the organisation is a good way of identifying and solving problems before they occur and diminishing their negative impact on the company (Lucey 2003).  The poor financial health that Synthasia Electronics is presently facing may be result of lack of planning, where problems are not identified and solved in a timely manner.

A very important benefit of budgeting is when synergy in the companys operations is reached.  Synergy means that the activities of the company are all in line with a common aim and effective utilisation of resources is taking place.  Such important benefit is normally derived when a participative style of budgeting is put in place.  Under such system, the functional budgets are not devised only by top management.  Instead discussions and negotiations between top management and operational management take place.  This will enable a more practical budget being set especially since operational managers have a better insight of the firms operations since they are more involved in it, rather than top management.  The involvement of operational managers in the budgeting process will also stimulate them to work hard and boost employees under their responsibility to work harder (Lucey 2003).  This will enable the aforesaid synergy benefit.
Evaluation and control is also facilitated through a budgeting system.  One has to keep in mind that budgeting is a planning process and not a control medium.  However, literature contends that the presence of budgets already act as a control element (Lucey 2003).  Such control can be further enhanced if entwined with performance measures.  The above benefits of budgeting can be derived only if the budgets are adopted properly in the organisation.  Otherwise budgets are just a piece of paper of envisaged future events.  In this respect, the need of performance measures is highlighted.  Performance measures are controls enacted in the organisation in order to monitor the performance of the divisions and ensure efficiency, effectiveness and productivity.  A very basic method of performance measures entails the comparison of flexible budgets with actual results, where variances are outlined and material variances are examined to pinpoint the reason for such variance and adopt remedial actions.  Such control medium can be further enhanced if operational managers are evaluated upon such variance reports and bonuses are provided to divisions that meet and exceed budgetary expectations (Lucey 2003).  Therefore, in order to attain the benefits listed above, it is important that Synthasia Electronics adopts budgeting and performance measures together.  As already noted, if they go hand-in-hand improvement in the organisation will occur.

Utility of Budgets and Performance Measures for the Financial Analysis
In the business report above, it was outlined that the present financial health of Synthasia Electronics is very weak especially due to cost inefficiency, declining stock management effectiveness and weak working capital management.  This highlights the need of effective budgets and performance measures.  Since the company has no long-term debt obligations, it may be possible to provide the requested loan.  However, the management of Synthasia Electronics need to outline its future actions.  This will enable the lending officer to evaluate the effect of their projected events on the present financial health of the company.  Such information would be helpful if it encompasses not solely quantitative data, but also qualitative aspects of the organisation.  For instance, if the management of Synthasia Electronics decide to prepare a Value Added Statement, where the value adding activities are highlighted.  This will enable managed to identify non-value adding activities and adopt remedial action to mitigate such cost efficiency problem.  The master budget will also be particularly helpful for the lending officer, since this provides a budgeted Income Statement, Balance Sheet and Cash Budget (Lucey 2003).  Via such information, ratio analysis can be implemented, which would outline the profitability, financial position and financial stability of the organisation on such forecasted figures.  These would be compared with the present ratios computed above and improvements or recurring deficiencies could be highlighted.  Thus, the lending officer would be able to examine the potential financial health of the company and thus will have more information to take the lending decision.