Deficit Company Investment (Accountng & Finance Analysis)

Good morning my lovely firends...

 

Hi…this time I want to share about something that may happen in the company, some companies have financial activities that may not directly related to the main transaction (operational activity) but have a big influence on company’s financial that can disrupt the main transaction operations.

A few years ago, I had experience where the manufacture and distribution company I’ve been working on had done some "Investment" activities which resulted in the company's financial condition become not good or not health.

At that time, the company used Working Capital from Bank Loans (affected on loan interests in Profit & Loss Statement), then next year the company invest on fixed asset purchase and for Promotion & Branding activities funding also. The purpose of the investment is to increase the sales capacity both directly and indirectly, and make a good profitability also.

How do I  make an analysis that this investment is still fair and healthy?

Here are some points (base on my company case)

1.     Sources of funds are from bank loans, which give impact in the interest expenses and principal installments. Unpaid interest will become the principal for the next period (the debt will be greater due to the larger debt principal).

2.     The proper time for the company to invest is having a look first in the retained earnings that have been collected (accumulated). So, if the Retained Earnings still minus (loss), then the company is not necessary doing an investment, because it’s better for the company to improve profitability first than make an investment.

3.     Second point may be disregarded (ignore) if the Investment fund is from the Owners Equity and with the aim of improving Profitability. Working Capital of the Owner does not incur any interest and installment charges.

4.     The main purpose of a company should be to increase sales & profit capacity.

5.     Sales in this kind of business may have credit sales whose composition can reach 50:50 with cash  sales, or even more than 50% from over all company’s sales.

The steps to make the financial analysis are:

1.     Collect all use of investment funds from the Bank Loan

2.     Group the allocation of its use into 3 (three) groups, called:
a. Procurement of Fixed Assets (tangible and intangible),
b. Financing for expenses (operational activities),
c. Bank Installment & Loan Payment (when there’s not enough money form company cash to pay loans liabilities)

3.     Calculate the retained earnings (non-interest rate of the bank, non-depreciation of the asset from the investment proceeds of that period, and non 2B point) up to the same period with the Bank's use of Working Capital (consistent in the cut off period).

4.     Subtract the amount of the Retained Earnings from third point with the Total Value from the Use of Bank Loan

The results of the analysis are:

1.     If the Result is minus (when Retained Earnings are Less Than Bank Loans), then deficit investment may occurs. That is the condition where the value of investments exceeds eligibility and poses a big risk to financial for the future.

2.     If the result is plus, then this side of Profitability can still be accepted (safe).

Is the problem over? Not yet guys ... .Company financial are still not healthy.
Then what are the other causes?

My last analysis is referring to the point of "Sales in this line of business have credit sales characteristics whose composition can reach 50:50 with cash sales". This means that the company's cash flow is not always the same as the profitability of the company. Because there are still funds that suspended in the customer as Account Receivable (AR). When non-performing funds and available funds are only sufficient for operational financing, the Bank will conduct an auto debit for Installment and indirectly the bank interest will increase for the next month.

Moreover, if there any bad debt or non-current receivables happened, then the real amount of income (cash in) is not appropriate with the value of sales that occur within the accrual basis system. If this is not immediately addressed then finally from the profitability side we’ll be Loss and from the operational cash flow side will be deficit.

In this case the Financial Manager or CFO will be dizzy from head to toe guys ... it’s dangerous…
For the tricks and tips to get over this will be discussed in next time..... See you soon