Guidelines to the Management Control Report
From the income statements and balance sheets available determine the usual budgeting assumption:
Cost of Merchandise
Other variable costs
Cost of Labour
Credit to customers, days
Credit from suppliers, days
– look at the 2015 and 2016 data and see if each point increased, decreased or remained constant
– search into the firm’s annual report to see if their future plans and market expectations.
– Having all the information, make the assumption for 2017 (reasonable forecast for 2017)
Once you have determined those data use them to produce a tentative budget for the next year
The budget to construct is relative to:
- Income statement
- Balance Sheet
- Cash flow statement
- Net working capital (trade receivables, inventory, trade payables)
Explain why it could increase or decrease:
- Build new financial statements (Cashflow , balance sheet, income statement) for 2017 through assumptions. Obviously the aim of your assumptions should be proving that company will increase revenue and decrease costs (hence increase net profit)
- CHECK YOUR FINANCIAL FORMULAS FOR 2017
COMPARE THEM WITH 2016 TO PROVE YOUR ACHIEVED BETTER SCORES
REMEMBER FOR 2017 YOU ARE MAKING A FORECAST, SO OBVIOUSLY THERE ARE ALL NUMBERS YOU FORECAST BUT AS LONG AS YOU JUSTIFY WHY YOU ARE CHANGING NUMBER YOU ARE GIVING A “CORRECT” ANSWER
- Rate of Change:
(Sales – Old Sales/ Old Sales )x 100
- Variable Costs:
- Depreciation Rate:
Depreciation Rate = Depreciation Cost/ Gross Fixed Assets
- Interest Rates:
Interest Rate = Interests/Borrowings
- Tax Rate:
*Pre–tax Profit= Operating income – Interests
- Credit to Customers (days):
Daily Sales x Payment Terms (Days)
*Daily Sales= Sales (Annual)/360
*Payment Terms= 30 days agreement with CUSTOMERS
- Credit for Suppliers (days)
Daily Purchase x Payment Terms (Days)
*Daily Purchase= Total Cost – Cost of Labour – Depreciation (that gives you the ANNUAL PURCHASE, THEN YOU DIVIDE IT WITH 360 TO GET THE DAILY RESULTS)
*Payment Terms= 30 days agreement with suppliers
*Total cost about operating profits: so, you take cost of sales + distribution + administration
*Subtract cost of labor and Cost of Depreciation (they are in the notes) and you have the total cost
What I need:
Daily = Annual/360
- Inventory (days):
- Payment (days):
*Revenue = Sales
- Operating Costs:
COGS (Cost Of Goods Sold)/Sales = %
(Sales in Budget/COGS (Budget)) x %
*% is the same
THE POINTS THAT ARE IN BOLD ARE THE THINGS I DONT UNDERSTAND HOW TO EXPLAIN AND GET THE DATA FROM THE ANNUAL REPORT. THE OTHER POINTS THAT ARE NOT IN BOLD ARE THE ONES I HAVE MADE BUT I DONT KNOW IF THEY ARE CORRECT AS WELL.
- Budget Assumptions (in terms of millions £)
|2015||2016||Variation 15-16||2017||Variation 16-17|
Assumption of 50% increase in sales for 2017 is equal to £ 2,063.439 million.
From the income statement of the company, it shows that they have an excess of 12 million active clients worldwide with a critical extent of these in the UK. Evidently, any brand that increases those amounts of clients, will increase their sales and active clients per year.
We can realistically assume that sales will increase by 47% in 2017, even though ASOS says that they will increase by 57%, because ASOS is reaching more countries with their popularity, quality, variety of clothing and delivery methods (they are entering to South America’s market this year) making less the time to satisfy the clients; for example, in Europe, the delivery time for 2017 is expected to be 1 day, in America 3 – 5 days which was Europe’s delivery time and in UK the same day but only if they have in stock the item and depending of the hour of purchase.
Another factor could be that they are adapting their price range to each continent (‘Great Fashion, Great Price’ motto), for example they decrease the US prices and this generated that consumers buy more than before and it did not affected the company’s earnings. Also, the release of the exclusive ASOS A- LIST, a selection of the best items and relevant brands with special prices for loyal clients makes the ‘rest’ wanting to belong.
All of this will be influenced because the trend of this year for social media, including websites of clothing brands, is that it will help increasing revenues for the brands, specially fast fashion leaders by 45% or more according to Business of Fashion and Forbes. This is because the millennials are taking over the market and are the main group of customers for brands, and social media nowadays is everything. If you are successful in your social media platforms, you will be successful in your earnings and reach new clients.
4.2 Cost of Merchandise (material)
|2015||2016||Variation 15-16||2017||Variation 16-17|
In the assumption above, there was an increase in Sales of 47%; regardless it’s an online business, there was increase in the number of sales and in the Cost of Goods Sold, almost parallel but with 1.5% of difference.
26% (Variation of sales 15-16) – 24.5 % (Variation of COGS 15-16) = 1.15%
In 2016, it increased by 24.5%, so we assume that the variation is going to be increasing parallel as well by 45.5% (1.5% of difference between sales and COGS)
Basing on the above assumption of 2017 Sales, the Cost of Merchandise (COGS) will be £ 991.5825 million in 2017.
The business strategy from the suppliers of Fast Fashion leaders brands are that if they see evolution of the total sales of the brand, they will ask them to raise a % of their payment. The brand will negotiate with the suppliers in order to don’t loose them and to increase their payment the less possible. The suppliers can not ask for a big % or raise because they know that the company has a big line of suppliers that are willing to work with them for less, but the company knows that it is difficult to change their suppliers because they know how they work and the time they take to get the garments done.
4.3 Other Variable Costs
variable costs = costs/revenues
Variable Costs = Costs/Revenues
Variable Costs = 1,444.9/659.2
Variable Costs = 2.1919
Net income that can be realized by the company is the assessed offering cost in the standard course of business less appropriate variable offering costs. Cost of procurement involves the price tag including import obligations and different expenses, transport and taking care of expenses and some other straightforwardly inferable costs, less exchange rebates. Other variable costs presumption is accept that aggregate settled expenses don‘t change in the short–keep running inside the significant range. Add up to variable expenses are precisely proportionate to deals volume. In any case, actually, cost conduct may not stay consistent. * CORRECT
4.4 Cost of Labour
|2015||2016||Variation 15-16||2017||Variation 16-17|
|Cost of Labour
The report shows that the headcount increased to 2,664 direct employees by 31 August 2016 (626 more workers = 30%) from 2015, which was 2,038 at the time, and the main reason was an increase in the Retail, Technology and Customer Care teams. With increase in sales and growth of company, the employee remuneration is expected to grow.
In 2017, ASOS is doing in Greater London House – GLH headquarter an ASOS academy to train future workers, a showroom facility, event spaces up to 1,000 people and catering and meeting facilities; so we also assume that they will increase the quantity of workers too approximately by 1,199 more (45%).
With base of the previous year, the cost of labor was £112.6 million and 2017 is expected to be £163.27 million (45% in relation of the total amount of employers).
4.5 Operating Costs
(Sales in Budget/COGS (Budget)) x COGS (Cost of Goods Sold)/Sales
=(1403.7/800 x (722.7/1,444.9)
Working costs diminished by 80bps (basis point) to 4.0% of income due chiefly to the non–repeat of the coincidental £4.9m settled resource benefits in the earlier year. Expelling the effect of this from the comparatives, other working expenses would have enhanced by 30bps (basis point) contrasted with a year ago determined by reserve funds from the consideration of lawful expenses related with the settlement of the trademark question, inside outstanding things.
4.6 Credit to Customers, days
The most extreme introduction to credit risk at the revealing date is the conveying estimation of each class of receivables said above. ASOS does not hold any insurance as security.
Credit to Customers (days) = Daily Sales x Payment Terms (Days)
Daily Sales = Sales (Annual)/360
Daily Sales = 1,703.7/360
Daily Sales = 4,7350
Credit to Customers (days) = 4,7350 x 30 (days)
Credit to Customers (days) = 141,9167
From the annual report, the company’s ‘Payment Terms’ is equal to 30 days agreement with customers. From the above assumption the company has less credit risk and it is a good indicator of business growth.
4.7 Inventories, days
The level of retail deals to abroad clients is expanding and in that capacity the business is expanding its stock holding in abroad areas to take care of this demand, which builds the danger of presence. ASOS has three distribution centers, one in Barnsley, one in Ohio and one in Berlin, together with extra return centers, each overseen by outsiders. Stock is conveyed at the lower of cost and net feasible esteem, on a weighted normal cost premise, which requires an estimation of items‘ future offering costs. An arrangement is additionally made to record any moderate moving or old stock to net feasible esteem. The provision is
Inventory (DAYS) = Inventory/ (COGS/360)
4.8 Credit from suppliers, days
At last, ASOS relies on upon the items it offers – having a drawing in, energizing client encounter and a top notch client suggestion is useless if the items don‘t coordinate our clients‘ desires. Our design must make them feel extraordinary. That relies on upon us setting fitting item quality and moral exchanging models, and our providers meeting and clinging to those measures – something which turns out to be increasingly critical the greater our image gets and the more noteworthy our clients‘ desires moved toward becoming, Credit for Suppliers (days) = Daily Purchase x Payment Terms (Days)
*Daily Purchase= Total Cost – Cost of Labor – Depreciation
4.9 Interest Rate
“The Group has determined that at 31 August 2016 and 31 August 2015 there was no significant sensitivity to changes in market interest rates.” [ASOS PLC, 2016 : online]
ASOS has a loan with the bank of £20 million with an overdraft facility of £10 million immediate until October 2018 but they have not used it. If they uses the £10 million facility, they would be exposed to a cash flow interest rate risk on it and with future loans. So for 2017, they might stablished the same but there is a probability of them asking for the loan due to its investments in the ASOS training camp, new employers and they may produce more.
“During the year, the Group had no drawings under its revolving loan credit facility. The Group may draw down periodically on the revolving loan credit facility in the future if required, but no drawdown will be long-term in nature and therefore the Group has not entered into interest rate derivatives to mitigate the interest rate risk.”
4.10 Tax Rate
The successful assessment rate from proceeding with operations before excellent things diminished to 19.3%. This is essentially due to earlier year alterations identifying with revisions to capital stipend cases and R&D reliefs concluded for the years finishing 31 August 2016 and 2017. The powerful assessment rate from proceeding with operations after uncommon things diminished to 18.9%. ASOS’ powerful expense rate (counting ended operations) for it is 25.2%. Going ahead, we expect the viable assessment rate for proceeding with operations to be roughly higher than the predominant rate of UK partnership charge because of for all time disallowable things.
4.11 Depreciation Rate
The company depreciation expanded to 2.2% of income taking after late quickening of interests in our coordination’s and innovation framework. PPE are expressed at cost less amassed deterioration and any arrangement for hindrance in esteem. Taken a toll incorporates the first price tag of the advantage and the costs inferable in conveying the resource for its working condition for its expected utilize. Lingering esteems and valuable lives are evaluated at each detailing date. Devaluation is perceived to discount the cost of things of property, plant and gear to their evaluated leftover esteems, on a straight–line premise as takes after: Fixtures and fittings deteriorated more than five years or over the rest of the rent term where relevant Computer hardware devalued more than three to five years as indicated by the assessed life of the benefit Depreciation is incorporated into authoritative costs in the Statement of Total Comprehensive Income. Resources under development are not deteriorated. At each detailing date, property, plant and gear is looked into for impedance if occasions or changes in conditions show that the conveying sum may not be recoverable. At the point when an audit for debilitation is led, the recoverable sum is evaluated by reference to the net present estimation of expected future pre–impose money streams of the important money creating unit or reasonable esteem, less expenses to offer if higher. Any weakness in esteem is charged to the Statement of Total Comprehensive Income in the period in which it happens.
Depreciation Rate= Depreciation Cost/ Gross Fixed Assets
- Balance Sheet Prediction 2017 (in terms of millions £)
|Cost of Merchandise (materials)||991.5825|
|Other Variable Costs||?|
|Cost of Labour||163.27|
|Credit to Customers, days||141,9167|
|Credit from suppliers, days||?|