Employing more than five hundred and fifty individuals, Riordan Manufacturing is by any measure a market leader as far as the manufacture of plastics is concerned. With San Jose, California acting as the company’s headquarters, Riordan has established facilities around the world. The mission of the company is to continue being a market leader as far as the manufacture of plastics is concerned while at the same time availing superior services to its existing client base.
In this text, I concern n myself with Riordan Manufacturing financial state. I also discuss what should be included in accounting systems as well as the systems that should be connected to the accounting system. It is important to note that for a comprehensive financial as well as business performance analysis of Riordan manufacturing, we shall have to look into Riordan’s aspects of profitability including but not in any way limited to operating expenses, sales, assets as well as liabilities. This shall be reinforced by some ratio analysis.
A brief history
In 1991, a company by the name Riordan Plastics was founded by Dr. Riordan and since then, that company now known as Riordan has built a name for itself as a leading manufacturer of plastics. Initially, Riordan was primarily concerned with patent invention as well as examination but as time went on, the company become involved in the production of plastics especially after a manufacturing plant acquisition. This acquisition is what informed the change of name from Riordan Plastics to Riordan manufacturing.
The company has since grown its range of products to include plastic fan components and parts as well as plastic containers for beverages. Currently, a fortune 1000 firm, Riordan industries, exercises full ownership of the firm. It is important to note that the main clients of Riordan are appliance manufacturers, bottlers and makers of beverages, the Defense Department, manufacturers of aircraft and aircraft parts as well as manufacturers of automotive parts.
It is important to note that Riordan in the year 2000 undertook major expansions most notably in china where it established some of its operations. It is at around this period that we had the company transferring to china the whole operation concerned with the manufacture of fans. The function was earlier on based in Michigan. Withy the recent global economic recovery, it is projected that the firm will continue its expansion to enhance its bottom line.
Riordan financial state: an analysis of financial statements
It is important to note that the firm’s sources of funds are primarily brought out by both the net worth as well as liabilities. These two items are made up of investors (both individual and institutional) and creditors who in the past have availed to the company cash and cash equivalents. It is also important to keep in mind that in this text, as far as the balance sheet is concerned, assets shall be taken to be the various items the Riordan owns or is owed by the outsiders. In the same breath, liabilities shall be taken to be Riordan’s obligations to the outsiders. When it comes to the net worth, we shall use the term to refer to the investment made into the firm by its owners.
To begin with, it shall be important to compute the net worth of Riordan and compare it the company’s net worth in the previous year(s). In this case, we shall concern ourselves to two financial years, i.e. the year ended September 30th 2009 and the year ended September 30th 2010. The net worth of a firm can be computed by subtracting liabilities from assets. In the case of Riordan, we have its net worth as;
As at 30th September 2009
Net worth = total assets – total liabilities
$34,592,182 - 12, 476,927 = 22,052,255
As at 30th September 2010
Net worth = total assets – total liabilities
$33,856,256- 12,160,256 = 21,696,000
Looking at the above, it is clear that the company’s registered a downturn in 2010 as compared to 2009. In percentage terms, the decrease registered in those two years in terms of the net worth stands at 1.6%. This could be as a result of a number of things including but not in any way limited to a decrease in the amount of total assets.
When it comes to the reported earnings of the company within the two years period, we have sales totaling to about $50,823,685 for the year ended September 31st 2010. In the same period the previous year (2009), we had the sales figure standing at $46,044,288. This is indeed an impressive performance as the company basically registers a 10.3% increase in sales in the period under consideration. This increase in sales can be attributed to a number of factors including but not limited to an enhanced economic performance in the global markets as well as increased demand for plastic components i.e. automotive components.
It is important to note that the global demand for vehicles registered an increase in the period under consideration. Hence it can reliably be said that the demand for automotives drove up the demand for automotive components and parts. Hence going by the 10% increase in sales in the two years under consideration, it can reliably be said that the company is on a sound financial footing. However, to get a better picture of the financial position as well as performance of the company, it would also be reasonable to look at the net profit. As per the income statement figures, we have a $1,956,371 net profit in 2010 and a $1,990,495 net profit in 2009. Though not a significant increase in profitability, it is important to note that if the trend continues, Riordan’s financial performance in the future may be further enhanced.
Financial ratios analysis
According to Bull (2008), financial ratios are highly significant when it comes to the analysis of the financial state of an entity as well as its business performance. It is hence imperative for us to carry out a financial analysis of Riordan so as to chart the firm’s performance as well as its current financial health. To effectively carry out the financial ratio analysis, we shall concern ourselves with the information contained in the financial statements of Riordan. It may be noted that the classification of financial statements in the case of Riordan herein is basically based on the information availed by such ratios.
To begin with, let us consider liquidity ratios. In short, liquidity ratios shall help us to chart the ability of Riordan to settle its financial obligations (short term). It this case, we shall concern ourselves with two liquidity ratios namely the quick ratio and the current ratio.
The current ratio = current assets/current liabilities
= $14, 555, 092 / $6, 974, 094 = 2.08
The above computation shows that Riordan has a current ratio of 2.08. This is an acceptable current ratio and it shows that Riordan is in a position to meet its short term obligations as they fall due. However, it should be noted that the appropriate current ratio is dictated by the specific business an entity concerns itself with. When it comes to liquidity ratios, it is always important to carry out several ratios as each limitation has its own shortcomings. For instance, the use of the current ratio as a determinant of liquidity is not in itself self sufficient because this ratio may contain some components which may be difficult to liquidate. Hence in the case of Riordan, it would be appropriate to consider yet another ratio so as to effectively determine its financial state.
Quick ratio = (current assets – inventory) / current liabilities
= (14, 555, 092 – 7, 850, 970) / 6,974, 094 = 0.96
Billed as one of the most efficient liquidity measures, the quick ratio does not include inventories in its analysis and this goes a long way to enhance the analysis of those assets that are really liquid. The quick ratio above can be taken to be satisfactory.
Hence based on the analysis of liquidity ratios above, one may reliably say that Riordan is in a satisfactory financial state and can hence settle its short term obligations as they fall due.
Income statement ratios
Asset turnover ratios
It is important to compote the asset turnover ratios of Riordan essentially because to chart the financial state of firm we need to determine how efficient the firm is as far as asset utilization is concerned. In this case, we shall concern ourselves with two of the most often used efficiency ratios namely the inventory turnover ratio and the receivables turnover ratio.
Inventory turnover = cost of goods sold / average inventory (at cost).
= $42, 037, 624 / 7,850,970 = 5.3
An inventory turnover of 5.3 essentially means that the business is fairly well managed. It means that for every operating cycle, we have the inventory being turned 5.3 times. It hence means that the firm will gain moiré in terms of profitability.
Account receivables turn over ratio
This is basically a measure of the management’s ability to collect accounts receivables. As a mater of fact, if Riordan’s management, through the accounts receivables turnover ratio finds that its receivables collection falls below expectations, then it can reevaluate its policy as far as collection is concerned.
Accounts receivable ratio = accounts receivable / daily credit sales
In our case, the daily credit sales shall be given by; (net sales in credit) / 365 days
= 6, 062, 838 / 365 days = 16, 610
Therefore, accounts receivable ratio = 6,062, 838 / 16, 610 = 967. In this case, it is clear that there is a slow rate in the collection of receivables or conversion of the same to cash. This should hence be checked so that it cannot adversely affect liquidity.
Gross profit margin
Gross profit margin = gross profit/turnover * 100
= $8, 786,061 / $50,823, 685 * 100
A gross profit margin of 17% essentially informs us that for the cost of goods sold, Riordan essentially makes a 17.2 percent profit. So, for every single dollar of turnover, the company makes a 17.2 percent in profits. It is however important to note that in this case, we are concerning ourselves with the gross profit which is essentially the profit Riordan rakes in on before the subtraction of a variety of costs including but not in any way limited to selling costs, administration costs etc.
Net profit margin ratio
Net profit margin ratio = net profit before tax/ net sales
= $3,042, 820/ $50,823, 685 *100
This ratio is excellent for comparison purposes. It is important to note that companies operating in the same industry as Riordan report a net profit ratio of between 4% and 7%. A net profit margin of 5.9% is hence satisfactory. It is important to note that in this case, we have computed the ratio using the net profit before tax essentially because we have tax rates as well as tax liabilities varying between firms. Hence in that regard, making such a computation after taxes could go a long way to complicate maters the more.
Return on assets ratio
Return on assets = net profit before tax/ total assets
= $3, 042, 820 / $34, 592, 182
= 0.08 or 8%
A return on assets of 8% essentially means that Riordan is efficiently using its assets in the generation of profits. It hence means that the company is effectively or efficiently managing its assets as a return on assets of 8% essentially means that the company earns an 8% relative to its $34,592 investment in total assets.
Return on equity
This is arguably one of the most indicative financial ratios as far as the determination of a firm’s financial state is concerned. It is basically concerned with the amount or portion of return the individuals who are investing in a company i.e. in this case Riordan are getting for every dollar invested in that particular firm.
Return on equity = net income / stockholders equity * 100
= $ 3, 042, 820 / $22, 115,255 *100
= 0.13 or 13%
According to Bull (2008), a healthy company should maintain a return on equity of about 13% to 15%. It is hence laudable that Riordan has a return on equity of 13%. It hence means that the firm is doing a good job as far as utilizing the monies of the investors. This essentially means that for every single dollar an investor invests, then he gets a 13% return from the same. However, it is important to note herein that return on equity must never be used in isolation. This is essentially because it might give a distorted view of the company in question. For instance, the return on equity can be artificially inflated by reducing its issuance of stock and instead seeking to borrow. In this case, we shall have a book value that is basically lower and hence increase the ROE which is in one way or the other artificial. Thus to enhance the return on equity, it is important to carry out an analysis of the same over a period of time i.e. five years. In addition to this, other profitability measures should be used as well.
Suggestions on the Inclusions to the accounting systems of Riordan Manufacturing
it is important to note that as far as the accounting software modules are concerned the firm needs to install the manufacturing cost accounting module. This will essentially allow Riordan to come up with an analysis of costs (actual) and match them with standards which are present. Further, to fully enhance the computation required as far as work orders fulfillment is concerned as well as ensuring that the orders arrival is not delayed, Riordan can consider Materials Requirement Planning Module.
To further ensure that tasks are scheduled efficiently founded on work centre availability, labor as well as equipment, it may be appropriate for the firm to consider the Productions Scheduling Module and the Routings Module to control as well as coordinate the material routes from the very beginning up to the last point within a the plant. Lastly, another module that may be worth looking into is the Supply Chain Management. This Module is essential as far as efficiency and cost effectiveness is concerned because with it, it is impossible to place orders to the suppliers electronically without any form of delay.
When it comes to the systems that should be connected to the accounting system of Riordan, it is important to note that as far as the various entities of operation are concerned, there are distinct finance and accounting systems. This essentially means that Riordan’s operating centers in China, California, Michigan as well as Georgia utilize finance and accounting systems that are essentially separate. However, the San Jose headquarters considers the various inputs produced by each of these units. It is at the headquarter corporate offices that data is transmitted in various forms to the accounting department. The various forms of transmission in this case include hard copy reports as well as data files where individuals working at the department have to key in data manually.
It is important to note that there is an existing need for Riordan to replicate the financial systems which are similar across all its operating centers in China, California, Michigan as well as Georgia. This shall go a long way towards enhancing financial statements consolidation within the firm’s various entities. It is also recommended that Riordan brings onboard a number of financial systems to its system (accounting). This is however appropriate after that firm has embraced similar financial systems in its various centers.
To be connected to these systems includes the Budgeting and forecasting systems, human resources systems, business intelligence systems legal systems, sales and marketing systems, information technology systems and finally operational systems. It is in order to note that the operational systems are concerned with the businesses general operations, customer billing, inventory, Research and development as well as production. On the other hand, the budgeting and forecasting systems come in handy for the budgeting and planning cycle’s participants where they offer the much needed support. Last but not least, the business intelligence systems concern themselves with the technologies utilized in information presentation, analysis as well as extraction from a number of applications i.e. ERP and accounting.
In conclusion, it may be prudent to note that to remain relevant in the increasingly competitive global marketplace, Riordan needs to embrace Kaizen or what is more popularly known as continuous improvement. Though a number of ratios are acceptable, the management of the company should concentrate on the enhancement of receivables collection or conversion of the same to cash. This should hence be checked so that it cannot adversely affect liquidity.
Bull, R (2008): Financial ratios: how to use financial ratios to maximize value and
success for your business: Elsevier Science & Technology