To : Mrs.

Zarine Ghandy - Managing Director

Thr : Mr. W.G.G.A.S. Gurusinghe - Chief Internal Auditor

From : Mr. S.J. Fernando - Audit Executive

Ms. W.A.P. Siromala - Audit Executive

Cc : Mrs. A. Pestonjee - Chairperson

Subject : Financial & Operational Review of Auto & Metal Craft (Pvt) Ltd

Date : 27th July 2011.

As per the instructions of the Management, we have reviewed Financial & Operational
performance of Auto & Metal Craft (Pvt) Ltd for that we considered audited financial
Statements (2009/10) and Unaudited Financial Statements (2010/11) to evaluate the
financial performance. Also we consider the Operational procedure and the internal controls
of the company.
This report covers the following areas.
1. Profitability Analysis.
2. Income Analysis.
3. Expense Analysis.
4. Balance Sheet Analysis.
5. Business Structure and the operation.
Please feel free to contact us for further information.
Thank you,

…………………….. …………………….
Mr. S.J. Fernando Ms W.A. P. Siromala
(Audit Executive) (Audit Executive)

Financial Statement Analysis of Auto & Metal Craft (Pvt) Ltd

1. Profit Analysis

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 Profit is a result of the Revenue and the Cost. When analyzing the profit, there are
different categories such as Gross Profit, Net Profit, and Net Operating Profit.
We have analyzed the profit behavior of the company for the last six years and
identified its pattern.

a. Gross Profit Analysis

Gross Profit or Sales Profit is the difference between Revenue and the Cost of
making a product or providing a service, before deducting overhead, payroll,
taxation, and interest payments. Gross profit is found by deducting the cost of goods
sold:

Gross profit = Net sales – Cost of goods sold.

According to our verification the gross profit of the company distribute as follows.

Profit Analysis For the year ended March 31

Year 2006 2007 2008 2009 2010 2011
Total sales/Revenue 53,564,640.00 36,233,361.86 33,158,016.00 28,886,128.96 26,923,410.23 33,213,416.59
Gross Profit 14,219,695.76 9,522,849.34 10,258,423.00 7,134,555.50 6,219,577.45 9,911,757.20
GP Margin (GP/Sales)*100 26.55 26.28 30.94 24.70 23.10 29.84

When compare with 2006 data, the gross profit in 2007 has been declined, but the G/P
Margin remains as it was. This result is due to the deduction in Sales. In 2008, Gross Profit
has been increased marginally and thereafter up to 2010 G/P has reduced gradually. In the

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 last year, it was increased again by nearly 3.7 Million. And the margin shows an increase
from 23% to 29.8% respectively.
We observed that the reason for this improvement is mainly because of the increase in the
Closing Inventories. In 2010, the Closing Inventory valued at Rs.10,748,022.38. But, in
2011 that was valued at Rs.21,632,262.80. It included the Working Progress inventory of
Rs.17,431,064.66 and it represents 80% of the Closing Inventories.. Therefore the GP has
increased not because of the increase in sales, but because of the increase in working
progress.

b. Net Profit Analysis

Net Profit is a measure of the profitability of a venture after accounting for all costs. Net
Profit is equal to the Gross Profit minus Other Expenses (Administration, Distribution,
Finance Expenses) for a given time period.
According to the financial statement of this company, they continuously incurred losses
other than in 2006. The Net losses they incurred in the year 2007, had further increased up
to Rs.999,313.00 in 2008. Thereafter in the year 2011, the loss has been reduced by
Rs.2,805,787.04. As per Our observation almost all the Expenses (Administration,
Financial) relevant to Net Profit Calculation had increased. But the N/P shows a favorable
progress. For this favorable result there is an impact from closing inventories that we
mentioned earlier.

Year 2006 2007 2008 2009 2010 2011

Total sales/Revenue 53,564,640.00 36,233,361.86 33,158,016.00 28,886,128.96 26,923,410.23 33,213,416.59
Net Profit 2,722,058.60 -290,540.70 -999,313.00 -3,123,053.99 -4,513,986.07 -1,708,199.03
NP Margin (NP/Sales)*100 5.08 -0.80 -3.01 -10.81 -16.77 -5.14

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 c. Net Operating Profit

Year 2006 2007 2008 2009 2010 2011

Total sales/Revenue 53,564,640.00 36,233,361.86 33,158,016.00 28,886,128.96 26,923,410.23 33,213,416.59
Net operating Profit 4,167,219.17 -459,736.28 -991,583.00 -3,234,027.34 -3,868,929.73 -1,032,577.86
Operating Profit Margin
(Op.Profit/sales)*100 7.78 -1.27 -2.99 -11.20 -14.37 -3.11

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For any kind of an organization needs to generate Operating Profit for the continuation of
the business smoothly. When analyzing the Net Operating Profit of this company, they are
unable to generate adequate Operating Profit. Continuously they are generating losses since
2007. It reflects that this company funded money to their operation by some other sources.
(Example: Bank O/Ds, Other Loans).

2. Revenue Analysis

Year 2005 2006 2007 2008 2009 2010

Revenu 45,005,765. 53,564,640 36,233,362. 33,158,016. 28,886,129. 26,923,410. 33
e 50 .00 00 00 00 00
% of
Revenu
e
Increas
e - 19.02 -32.36 -8.49 -12.88 -6.80

Revenue is income that a company receives from its normal business activities, usually
from the sale of goods and services to customers. Revenues from a business’s primary
activities are reported as sales, sales revenue or net sales. This includes product returns and
discounts for early payment of invoices.. Sales revenue does not include sales tax collected
by the business. Other revenue (non-operating revenue) is revenue from peripheral (non-
core) operations.

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Revenue is the most impotant part of the income statement. According to the Data, the
revenue of this company shows a declining trend from the year 2006 to 2010. And this
decreasing trend has been changed in 2011.

Sales Revenue
As a % of Sales
Description 2010/11 2009/10(Audited) Change % 2010/11 2009/10
MATERIAL SALES -
VAT 43,303.57 233,859.72 -81.48 0.13 0.87
JOB SALES - FOR VAT 33,170,113.02 26,689,550.51 24.28 99.87 99.13
Total Sales 33,213,416.59 26,923,410.23 23.36 100.00 100.00

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 The main revenue of this company generates through the income from the projects( almost
all the sales) . In 2011 the revenue increased due to the 24.28% improvement in the income
from the project.

3. Cost of Sales

COGS is the costs that go into creating the products that a company sells; therefore, the
only costs included in the measure are those that are directly tied to the production of the
products. There are several ways to calculate COGS but one of the more basic ways is to
start with the beginning inventory for the period and add the total amount of purchases
made during the period, then deducting the ending inventory. This calculation gives the
total amount of inventory or, more specifically, the cost of this inventory, sold by the
company during the period.

Cost
of Sales

Year 2006 2007 2008 2009 2010 2011

Cost of Sales 39,344,944.00 26,710,513.00 22,899,593.00 21,751,573.00 20,703,833.00 23,301,659.00

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The Cost of Sale is the direct expenses which occur to generate the Revenue of the
company. So, it is important to consider which cost are highly impacts on the direct cost.

When consider the direct cost we noticed that the costs relating to Job Purchases, Over
Time, Direct Job expenses, consumable Tools, Contract Charges and Closing Stock are
highly influenced by the cost of sales.

Year 2011 2010

Job Purchase 22,087,084.77 8,576,039.31
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 Total Sales 33,213,416.59 26,923,410.20
As % of Total Sales 66.50% 31.85%
 In 2011 the Job purchase cost has been increased by 157.54% comparing to
the previous year. These are the purchases done directly to the Job. These purchases are
decided by operation manager according to the specific Jobs. In 2010 out of total sales
31.85% represent Job purchases. In 2011 this has been increase up to 66.50% out of total
sales.

This is very significant and directly attributable to the loss making situation of the
company.

 Over time expenses has been increased by huge amount in the year of 2010/11. In
2010 over time cost was Rs.332,954.45. But, this amount increased up to
Rs.1,363,380.66 in the year of 2011. (Increase amount of Rs. 1,030,426.17). This
amount is representing 309.48% of change compare to the year 2010.

We further observed that there was a difference between Approved Overtime Schedule
prepared by supervising person and with the Time cards.
Eg:-

EPF No. As per Salary As per daily OT Difference

Schedule Approved Schedule
279 69 62.5 6.5
256 43.5 40.5 3
74 63 62 1

Overtime was calculated based on the time card. We randomly checked the OT calculation
for some workers and found them in order as per the time card.
 We did some analysis of this company OT behavior for the last 12 months. As per
their information, OT is paid only for the workshop staff.

April'10 May'10 June'10 July'10 Augest'10 September'10

No of Employees -
Workshop 29 29 29 32 30 30

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Wages - Workshop 279,000.00 284,533.33 268,762.50 300,953.37 325,200.96 318,821.15
Ave Wages Workshop 9,620.69 9,811.49 9,267.67 9,404.79 10,840.03 10,627.37
Total OT Payment 43,961.88 43,029.22 64,168.83 98,522.44 101,312.82 105,962.25
Avg OT Payment 1,515.93 1,483.77 2,212.72 3,078.83 3,377.09 3,532.08

October'10 November'10 December'10 January'11 February'11 March'11

No of Employees -
Workshop 32 32 33 33 33 33
Wages - Workshop 338,878.89 340,061.50 349,638.46 383,975.00 389,079.17 377,176.92
Ave Wages Workshop 10,589.97 10,626.92 10,595.10 11,635.61 11,790.28 11,429.60
Total OT Payment 161,415.12 182,709.60 132,570.94 120,544.31 113,437.88 181,698.56
Avg OT Payment 5,044.22 5,709.68 4,017.30 3, 652.86 3,437.51 5,506.02

 Workshop Wages has been increase because of the increment of No of workers. The
highest increment of the wages are representing during the last three months of 2011
financial year.
 Along with the increase in No of workers, OT payment also decreased. (Usually
when there is an increase in No of workers OT payment should be reduced). But,
when it comes to last month (March ’11), OT payment has increased drastically.
Company needs more attention when paying OT to the workers.

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  Another specific amount has been allocated to purchase consumable tools. In 2011
they spent lot of money to purchase consumable tools (Drill Machines, Other
Machines used for welding, cutting etc.) This occurs as a result of purchasing new
Jobs.

 According to the expenses spent relating to the contract charges, they spent
Rs.101,200.00 in 2009/10 and it has been increased up to Rs.601,319.36 in 2011.
The company gives contracts to the outsiders to complete some purchase jobs. With
this increment it was noted that they outsourcing the jobs.

 We noted that management of Auto & Metal Craft (Pvt) Ltd has given inside
contracts to its employee whenever a customer requested the job to be completed
immediately. Employees are accepting inside contracts and they are finishing the
work with a short duration than the time they spending normally for the same work.
Also company has paid higher contract fees to its employees.

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 At the time being doing the inside contracts, employees of Auto & Metal Craft (Pvt)
Ltd has performed high employee efficiency level. But, they have not shown a high
efficiency level in their normal hour duties.

 As we mentioned earlier, closing working progress make a considerable impact on

Cost of Sales.

4. Administrative Expenses

Administrative Expenses are part of the operating expenses (along with selling
expenses). Administrative expenses include expenses associated with the general
administration of the business.

When converting the gross profit into the net profit of a company, it is needed to
identify the expenses relating to profit calculation. One of the major expense relating
to the net profit calculation is that Administrative Expenses. In this Auto & Metal
Craft Company, there are large amount of travelling & transport expense deal with
administrative expenses. And also the staff vehicle maintenance cost.

Travelling &
Transport
2006 2007 2008 2009 2010 2011
278,930. 488,513. 736,234.0 719,330.0 961,228.
TRAVELLING & TRANSPORT 50 50 0 0 00 1,160,172.00

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  As we can see in the above graph, the travelling & transport expenses are showing
an increasing trend within past years. The increment of the travelling & transport
expenses within last year was 20.7%. Company must have a control on the travelling
& transport expenses as early as possible.

 Staff Vehicle Maintenance

2011 2010
Insurance - staff vehicle 148,104.77 112,222.12
Staff veh.maint.251-6873 90,848.16 89,689.40
Staff vehical maintenance pa-7789 0.00 34,153.71
Staff veh.maint.hw-8184 126,673.00 36,388.80
Staff veh.maint.wpmf-5645 0.00 4,646.75
Staff veh.maint.wp lb-2649 86,529.40 32,945.77
Staff veh.maint.vo-8105 10,092.86 0.00
Staff veh.maint.pp-6486 51,403.07 0.00
Staff veh.maint.ka 8502 80,213.15 34,995.24

Total 593,864.41 345,041.79

As a % of total admin cost 6.66 4.33

In last year company has used six vehicles. They spent considerable amount of
money to maintain those vehicles. They have purchased two vehicles (VO 8805-
Motor bike/ PP 6486-Cab) and sold two vehicles (PA 7789/ WPMF 5645). As a
result of these vehicles, Insurance Charges, Motor Vehicle License Fee, Vehicle
Maintenance cost etc has been increased.

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  Motor bike was purchased for the usage of sales person. But, this sales person was
not currently working in the company. Therefore the expense incurred in this vehicle
became useless expense.

5. Balance Sheet
 Inventories

The raw materials, work-in-process goods and completely finished goods that are
considered to be the portion of a business’s assets those are ready or will be
ready for sale. Inventory represents one of the most important assets that most
businesses possess, because the turnover of inventory represents one of the primary
sources of revenue generation and subsequent earnings for the company's
shareholders/owners.

As a % of Total
C/A
Year 2011 2010 2011 2010

Inventories 21,632,262.80 10,748,022.38 70.96 66.33

Total CA 30,486,860.59 16,202,728.66

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As per the above table it represent that the inventories of the company has tied up as
current assets. Comparing to the previous year, this amount has been increased nearly by
100%. And also more than 70% of the Current Assets represents in inventories.

 Current & Quick Ratio Analysis

An indication of a company's ability to meet short-term debt obligations; the higher the
ratio, the more liquid the company is. Current ratio is equal to current assets divided by
current liabilities. If the current assets of a company are more than twice the current
liabilities, then that company is generally considered to have good short-term financial
strength. If current liabilities exceed current assets, then the company may have problems
meeting its short-term obligations.

Year 2011 2010

Current Ratio(CA/CL) 0.99 0.95
Quick Ratio (CA-
Inventories)/CL 0.29 0.32

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  When it analyze the current ratio of the company, current assets are not sufficient to
settle its’ current liabilities.
 If this company have a great cash conversion cycle the lower current ratio might
not badly influence. Since, Auto & Metal Craft (Pvt) Ltd does not have a great cash
conversion cycle this low current ratio affects badly.
 Quick ratio is viewed as a sign of company's financial strength or weakness (higher
number means stronger, lower number means weaker).

 And the quick ratio of the company represents 0.32 in the year 2010 and it reduced
up to 0.29 in 2011. This is not a favorable trend.

 Trade Receivable & Payables

As a% of Total CA or CL

Year 2011 2010 2011 2010

Trade & Other Receivables 4,143,647.83 2,145,210.36 13.59 13.24

Trade & Other Payables 17,118,414.50 6,277,330.49 55.46 36.61

Trade Receivables

The Trade& Other Receivables include the debtors’ amount and other receivables in their
operation.
When we compare the total CA of the company out of that 13.59% represents Trade &
Other receivables.
As per our analysis, we observed that company’s debt collection is not at satisfactory level.
The debt collection efficiency is depending on the job completion efficiency. After the
completion of job, the person who brought the job into the company is responsible to
collect the balance amount of invoice value. We noted that, some debtors in the debtors’
ledger which exceeded 90 days.

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 Trade Payables
Out of total current liabilities 55.46% represents trade & other payables.

For the purchases of inventory items which used for jobs, most of the time company
issued 30days “dated cheques” to the suppliers. So, Creditors settlement period becomes to
30 days.

In the company balance sheet more than 55% represent as trade & other creditors (2010/11)
As per the above creditors settlement period those have to settled in the following month.
But if the jobs are not completed within one month period company will face liquidity
issues continuously. So the company should pay more attention to increase the Creditors
settlement period by negotiating with the suppliers.

 Bank Over Draft

Company is in a liquidity problem. All over the last 6 years period company runs with the
support of temporary bank overdrafts. Graph shows the trend of the bank over draft of the
company. If this OD not settled, company will be in deep trouble. If any company do not

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 have cash to manage their day today activities, the business will not be able to continue
further.

2006 2007 2008 2009 2010 2011

Bank OD as @31st
March (Rs) 1,319,758.08 1,971,210.35 3,082,974.00 4,872,916.71 4,253,352.02 5,888,785.45

As a result of this bank OD Company has to pay higher amount of interest to the bank as
finance cost. When we look at the finance cost of the company, it shows that the amount of
cash outflow relevant to this OD facilities provided by the banks.

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 Financial Cost
% of total Finance
Cost
2010/1 2009/10(Audi Change 2009/
1 ted) % 2010/11 10
INTEREST ON BANK OVERDRAFT 666,240.60 570,858.38 16.71 73.83 68.82
BANK DEBIT TAX 46,024.39 27,951.09 64.66 5.10 3.37
BANK CHARGES 55,399.63 113,542.67 -51.21 6.14 13.69
HNB - TERM LOAN INTEREST 113,287.67 71,561.27 58.31 12.55 8.63
IMPORT LOAN INTEREST 17,809.96 21,051.62 -15.40 1.97 2.54
INTEREST ON LEASE 3,596.00 24,525.46 -85.34 0.40 2.96
902,358.25 829,490.49 8.78 100 100

6. Business Structure and the Operation

According to our collected information, we noted that there are four companies doing
various kinds of businesses in the same location.

a. Auto & Metal Craft (Pvt) Ltd

b. Auto Craft
c. Reflection
d. A to Z General Trading

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 Based on operation their main income sources can be identified separately. But there is a
complexity in identifying the general expenses separately to the each business entity. As
examples: electricity, water, office maintenance, some salaries & wages etc.

Presently they are doing its accounting part based on the “SYBIZ”. In this system the stock
ledgers were not accurate as per the accountant. Therefore they develop a new accounting
system called “Profit Plus”.

Business Operation of Auto & Metal Crafts (Pvt) Ltd

 Sales Procedure

From the starting point to the end of the sales procedure handled and controlled by the
Director Operations.

I. Customer contract point

II. Job costing
III. Decide the Markup
IV. Acceptation or rejection of the job
V. Collect the advance
VI. Select the suppliers and deciding which items to be purchased
VII. Work shop and site operation
VIII. Invoicing and debt collection

Contracts were taken through the director operation and they do a pre costing for the given
job which including a decided markup rate. As we were informed they put a 40% markup
for each job. However, In 2011 it is less than 30% as reflected in accounts. If the customer
satisfied with the job quotation advanced payment will be taken and the job will start
thereafter.

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 The required raw materials will be purchase by the selected suppliers. Purchasing suppliers
also decided by the Operation Manager and the Store Keeper prepare a purchase order and
request a payment (Cheque) from the authorized person (Cash Controller). Then the
purchaser/store keeper purchases the items and raise MRN for job purchases, GRN for
material purchases. If the items return back MCN (Material Credit Note) will be raised.

After completion of the job it will be invoiced. As we mentioned earlier the person who
bring the job to the company will responsible to collect the balance payment from the
customer.

 Inventory Handling

We have observed that there was no proper inventory procedures followed up by the stores.
Since there was no proper inventory handling system it creates opportunities to misuse the
stocks of the company.

- Stock items of the stores were not arranged methodically.

- BIN card were not updated in timely manner.
(As per the store keeper the time is not enough to update the BIN cards with the work
load.)
- Since the BIN’s were not updated there is a chance to re-purchase the items which already
in the stocks.
- Most of the time returned stocks were not updated to the store keeper and as a result of that
the purchases might done unnecessarily.
- No any records were available to measure the wastages occurring during the site
construction or workshop operation.
- Some stock items were represented minus figures in the system records.
- No proper tool records were available which using in the workshop/ sites.

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 Recommendations:

1. Recommendation for Cost Controlling

The Management of Auto & Metal Craft (Pvt) Ltd need to control their Expenses in the
following areas:

 Job purchase

This company is purchasing materials for the jobs from the fixed suppliers, they are entitle
to same level of cost basis and having two three choices out of them. Therefore, they need
to collect more details of suppliers and select the low cost suppliers for their purchases.

At the same time they have to maintain proper documents for their purchases. Because we
could see some kind of repeat purchases on same items resulting from bad updates in the
records.

 Over time expenses

 There should be a proper supervising procedure for the workers in the workshop.
(Take a look at the hours the staffs are actually spending in the office or on the
factory or workshop floor.)
 The company can introduce maximum OT duration for their employees based on the
work they done. (Offer alternative incentives such as “job and finish”.)
 Recognize the long-term damage that overtime can do to both employees and
business.
 Ensure that the business is not accidentally incentivizing low productivity and
service through high overtime usage.

 Consumable Tools

Purchasing consumable tool should be monitored by the supervising person and they
should use those tools in proper manner. So, it will help to use those tools for other jobs
also.

 Contract Charges
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 Rather than giving contract to the inside workers of the company, and if it is really
necessary to sub contract, those sub contractors should be found from outside, creating an
internal competition, it is better to assign them to do those job as a part of their day today
work.

 Staff Vehicle Maintenance

The company should take a decision about the vehicles which are not currently used.
Necessary actions should be taken by the company to minimize the staff vehicle
maintenance cost.

 Workshop Wages

 Travelling & Transport

2. Recommendation for Tools

 The company should maintain a tool register to identify the valuable tools which are used in
the workshop / site.
 It is better to have proper cording system for the above tools.
 When the tools were taken for replacement and other purchases, it should be updated in the
records.

3. Recommendation for the duties of the staff

 As an internal control system, the management of Auto Metal & Craft (Pvt) Ltd must
segregate the duties of the workers in the following areas.
o Customer Handling
o Job costing
o Monitoring the job quotations
o Preparing purchase orders
o Purchase of stock items
o Invoicing of project jobs
o Debt Collections
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 Other than the above segregation of duties company should take necessary actions to
improve the efficiency of staff.
o It should be monitor the time taken for the job with the estimated / budgeted time
o Jobs should be completed based on the priorities.
o Worker should be specialized in several tasks/ areas.
o Rather than paying OTs to the workshop employees, it is better to have an incentive
payment based on their performance.

4. Recommendation for Inventories

- Inventory proportionality is the goal of demand-driven inventory management. The primary

optimal outcome is to have the same number of days' worth of inventory on hand across all
products so that the time of run out of all products would be simultaneous.

- In such a situation, there is no "excess inventory," that is, inventory that would be left over
of another product when the first product runs out. Excess inventory is sub-optimal because
the money spent to obtain it could have been utilized better elsewhere.

- In the Auto & Metal Crafts (Pvt) Ltd handling Rs.17 Million closing working progress. So
the cash tied up in the inventory is considerably high. This is not a good situation for the
company. They have to turn them to cash as soon as possible.
- Stock items should be arranged properly for ease of handling & the BIN card should update
by the time. This will helps to eliminate re purchasing of available stock items.
- If the stocks returned to the stores, store keeper should be informed and the documentation
should be done properly. We noted that the returned stocks were not updated to the store
keeper in a proper manner.
- Making the connections and understanding regarding the relationships between purchases
and the purchases to be done and the level of completion that they achieve. This will help
to managing risks within the organization and its activities.

5. Recommendation for the Bank Overdraft

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 Continuously Auto & Metal Craft (Pvt) Ltd running the business depending on the Over
Draft facilities provided by the banks and these facilities already exceeded the limits. So
the company needs to more concentrate on generating fast cash inflows.
 The only way to inject cash into the company is to increase the completion rate of the
prevailing pending jobs. (Completing the current working progress)
 Also need to collect cash from the debtors as soon as possible.
 If this has not happen the company will be exceeding the credit limit. If so company will
suffer from greater liquidity problem thereafter.

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