Abstract
As the manager of Microsoft I am required to prepare the company’s budget for the next financial year. In the budget, I am expected to project the income statement and the balance sheet of the company for the coming financial year. I will then have to present them to the general meeting for approval. For that to happen, I must calculate various financial ratios and defend them in the general meeting.
Description of the Company
The company at hand is called Microsoft. It is an American company that sells its products across the world. The company deals in the production and selling of software, hardware and electronics. Microsoft has been in operations since 1975 when it was co-founded by Bill Gates. Currently, the company is performing well but it is facing stiff competition from the competitors from the likes of Salesforce, IBM, and Oracle among others, in the production of business intelligence software ( Delen et al., 2013) .
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The Balance Sheet
Based on the balance sheet, Microsoft will have a huge net worth of $375,319,000 in the next financial year. Although, it will incur some depreciation in its fixed assets, still the company’s fixed assets will be worth as high as $246,674,000. All these figures indicate an expected better performance for the next financial year ( Delen et al., 2013).
Income Statement
Based on the income statement, Microsoft’s cost of revenue will be less than its total revenue. As a result, it will make gross profits worth $88,186,000. Also, its operating expenses will not exceed the gross profit. Consequently, it will make a net income worth $48,351,000. The two figures imply that Microsoft will be profitable in the next financial year.
Financial Ratios
I will use multiple financial ratios to support my budget at the meeting. However, they will be classified into three main categories: profitability ratios, solvency ratios, and liquidity ratios.
Liquidity ratios
Liquidity ratios are used to estimate the financial capability of a company to convert its assets into cash. I will use the Current Ratio and Quick Ratio in my analysis.
Current Ratio. Current Ratio is estimated by dividing a company’s current assets by current liability. The higher the value the better, since it means that the firm is more capable of settling its current liabilities using the available assets
Current ratio= current assets ÷ current liabilities
Microsoft’s current assets 128645000
Microsoft’s current liabilities 100814000
Therefore, Microsoft’s current ratio = 128645000÷ 100814000
=1.28
This implies that Microsoft will be 1.28 times more able to use its current assets to settle its current liabilities. Thus, the shareholders will be assured of their money irrespective of the time when short-term creditors will demand to be settled.
Quick ratio. Quick ratio is estimated by dividing total current assets (less inventories and prepayments) by the current liability. The higher the value the better since it implies the company can use its most liquid assets to settle its current liabilities.
Current ratio = (Current Assets − Inventories – Prepayments) ÷ current liability
Microsoft’s current assets 128645000
Microsoft’s inventories 4855000
Microsoft’s prepayments 0
Microsoft’s current liabilities 100814000
Therefore, Microsoft’s quick ratio = (128645000 – 4855000) ÷ 100814000
=1.23
This implies that Microsoft will be 1.23 times more able to use its most liquid current assets to settle its current liabilities. Thus, the shareholders will be assured of their money irrespective of the time when short-term creditors will demand to be settled.
Solvency Ratios
Solvency is used to test the firms' ability to meet its financial obligations. I will use Total Liabilities to net worth ratio and Current debts to net worth ratio.
Liabilities to Net worth Ratio. Liabilities to net worth ratio is estimated by dividing the debts of a company by its net worth. The lower better. Therefore, the company with the least ratio is the best (Avkiran, 2011).
Total Liabilities to net worth ratio of Microsoft
Total liabilities =$241272000
Net worth =$375,319,000
Therefore, Total Liabilities to net worth ratio = 241272000 ÷ 375,319,000
=0.64
This means that Microsoft liabilities will be 0.64 lower than its net worth, hence it will be possible to settle them in case of solvency (Avkiran, 2011).
Current Debts to Net worth Ratio. This is estimated by dividing Current liabilities by the net worth. The lower the value the better because it implies the company’s net worth outweighs the current debts by far.
Current liabilities ÷ the net worth
Microsoft’s current liabilities 100814000
Net worth =$375,319,000
Therefore, Current debts to inventory ratio = 100814000 ÷ 375,319,000
=0.27
This means that Microsoft liabilities will be 0.64 lower than its net worth, hence it will be very easy to settle them in case of solvency.
Profitability
Profitability ratios are used to find how profitable a company is. I will use the operating margin and Return on Assets in the presentation.
Operating Margin. Operating margin is estimated by dividing operating margin by net sales (Avkiran, 2011). The higher the value the better because it implies the company is gaining a lot from the sales.
Operating margin = operating profit ÷ net sales
Operating profit = $61344000
Net sales $88186000
Therefore operating margin= $88186000 ÷ 61344000
=0.14
Based on this analysis, Microsoft will retain $0.14 from every dollar it earns in sales, which is an indication of good performance (high profitability).
Return on Assets. Return on Assets is estimated by net income by total assets. The higher the value the better as it implies the company is gaining a lot from its assets.
Return on Assets = net income ÷ total assets
Microsoft’s net income= 48351000
Microsoft’s total assets= 375319000
Therefore, Return on Assets = 48351000 ÷ 375319000
=0.13
The analysis implies that Microsoft will make $0.13 in profits from every asset worth $1. This is a positive indication of profitability come next financial year.
Ethical Issue in Budget Preparation
Some of the ethical issues experienced in preparing this budget include honest books and responsibility. Under honesty, the preparation of the budget was clear and transparent with the sole aim to benefit all stakeholders. Then under responsibility, the budget has ensured that all funds will be accounted for ( Delen et al., 2013) .
References
Avkiran, N. K. (2011). Association of DEA super-efficiency estimates with financial ratios: Investigating the case for Chinese banks. Omega , 39 (3), 323-334.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications , 40 (10), 3970-3983.
