Immuron Ltd – Economic Profit

Economic profit is opportunity cost of the capital invested. To calculate economic profit, I considered cost of capital (WACC) as 10%. Below is the Economic Profit calculated for Immuron Ltd.

years 2016 2015 2014 2013
Economic Profit (4,606,415.7) (3,562,840.1) (2,259,905.9) (3,352,425.8)
CI after Tax (4,380,821) (3,460,532) (2,544,550) (3,539,117)

This Economic Loss of Immuron is increasing from year 2013 to 2016. And to my surprise these figures are approx. same as the loss reported each year. RNOA, cost of capital and NOA are the key drivers for Economic Profit. RNOA is determined by profit margin and asset turn over.

Key driving Factors for Economic Profit:

2016 2015 2014 2013
RNOA -90.97% -1499.67% -334.71% 2246.29%
Profit Margin -359.16% -314.96% -210.16% -2248.62%
NOA 4,561,992 236,001 655,596 (149,910)

RNOA is negative and much less than cost of capital. To generate Economic profit, RNOA should be greater than cost of capital. NOA and RNOA are getting better in 2016 but not more than cost of capital. In my opinion, negative profit margin (loss margin) is driving economic profit to negative numbers. From financial statements, it can be noticed that expenses are much larger in amounts than the sales revenue and generating negative income each year. From the calculations, it can be noticed that lower the asset turnover, lower the economic profit.

In 2013, poor sales figures (AUD 149,755) has resulted in the lowest profit margin. On the other hand, in 2013, there are net operating liabilities rather than net operating assets. Therefore, RNOA is not reflecting real financial picture for the year 2013.

I surprised to see the largest net operating assets in 2016, still the reported losses are in large amounts. In 2016, NOAs are significantly high, though these operating assets are not helping to improve economic loss because of larger inventories held that year. Immuron needs to accelerate its sale, as larger inventories are not helping to achieve better economic growth. Immuron Ltd desperately needs to control its expenses as well, to gain increase in the revenue.

(Note: as RNOA, cost of capital and NOA are key factors driving economic profit and Profit Margin and ATO are key accounting drivers for RNOA. For Immuron Ltd, with large figured economic losses, it is difficult to draw a graph with key driving factors. Therefore, I decided to compare economic loss with NOA and net losses reported each year).


I compared economic profit for Immuron Ltd with Economic Profit of Dods PLC and Medical Development INC.

2016 2015 2014 2013
Immuron EP (4,606,415.7) (3,562,840.1) (2,259,905.9) (3,352,425.8)
Dods EP -£583.4 -£6,583.0 -£3,695.0 -£12,567.8
MDI EP 62.33 -214.51 -991.97 499.27

MDI is showing better economic profit than other two firms. When RNOA is compared of three firms,

2016 2015 2014 2013
Immuron RNOA -90.97% -1499.67% -334.71% 2246.29%
Dods RNOA 6.54% -24.89% -5.25% -42.87%
MDI RNOA 10.44% 8.79% 4.46% 13.02%

Medical Development is showing the most return on operating assets than the other two firms which leading to better economic profit figures. For 2016 and 2013, MDI’s RNOA is greater than cost of capital. Dod’s group is having negative RNOA but shows significant improvement in 2016.


In comparison with other two firms, Immuron management needs to manage the assets more efficiently which will result to positive economic profit. Low sales figures, low revenue and huge corporate and R&D expenses are obstacles to Immuron’s financial growth. Immuron is  trying to launch the medicine IMM124E which is effective in treatment of type 2 Diabetes; hopefully its successful launch in the market will help to boost the sales and earn more revenue leading to positive economic profit.

There is recent announcement on Australian Stock Exchange website that Immuron has completed manufacturing of IMM-529 (C-diff) medicine’ clinical supply for treatment of colostridium difficile infection (CDI).  Further, Immruon has secured AUD1.5MN loan in form of a cash advance against 2017 R&D tax concession refund which will help the firm to carry on clinical trials for type 2 Diabetes drug. Hope, Immuron Ltd will achieve better economic growth in future.




Analysis of Financial Ratios – Immuron Ltd

When I calculated financial ratios for my firm Immuron Ltd, I was not sure if these ratios making any sense. Immuron Limited is not making any profits and I can see the loss calculated in the financial statements and huge expense amounts separated as operating expense in restated financial statements. Most of the ratios are negative. Initially I was confused if I keep the ratios with negative sign or should I change the title of rows e.g. ‘net profit margin’ to ‘net loss margin’, ‘return on assets’ to ‘loss on assets’, ‘economic profit’ to ‘economic loss’ and so on. On the website stated below: it is mentioned that it is irrelevant to calculate the profit margin calculations for loss making firms. On the other hand, we can find out the reasons for losses by looking at the ratio analysis.

Profitability Ratios:

Net Profit Margin

2016 2015 2014 2013
-379.9% -306.8% -243.7% -2363.3%

Net profit margin ratio shows how much of dollars earned for sales of each dollar. Both profitability ratios, for Immuron Ltd are negative and this negative percentage is larger in number. This clearly indicates that there are more expenses than revenue. In 2013, Net loss margin was the highest as the amount of sales was merely AUD149,755. Though, there is increase in sales from 2014 to 2016, the total losses too are increasing.

Comparison with Profit Margin

Profit Margin

-359.16% -314.96% -210.16% -2248.62%

When Net profit margin is compared with Profit margin ratio both are showing similar trend from 2013 to 2106. Both ratios show increasing losses, though negative operating income was the highest in 2013 with minimal sales.

Return on Assets

-45.6% -75.8% -33.3% -140.1%

Return on Assets ratio indicates how efficiently management using the assets of the firm. Total assets contain financial as well as operational assets. The cash in the banks is the key asset for Immuron. In 2014, Immuron Ltd bought Hadasit Medical Research and Development Centre as part of their intellectual property. In 2014, Immuron has better net profit margin and return on assets (though negative) as compared to other time periods.

Comparison with Return on Net Operating Assets

Return on Net Operating Assets:

-90.97% -1499.67% -334.71% 2246.29%

RNOA is much larger and negative as compared to ROA. While calculating RNOA, financial assets like cash are separated. This is clear indication that Immuron’s operating activities are not generating any revenue. In 2013, Immuron is reporting Net operating Liabilities therefore, I am not sure RNOA for 2013 is reflecting any true picture of financial position. It is actually mathematical calculation where negative operating income divided by negative NOA resulting in positive RNOA which is totally unrealistic.

Efficiency (or Asset Management) Ratios

Days of Inventory

1035.65 527.88 267.26 1197.08

Days of Inventory ratio indicates for how many days the firm is holding inventory in hand before it gets sold. Inventory costs represents opportunity costs; therefore, inventory days indicate how good inventory is managed. In the case of Immuron here, inventory days are too high. For 2013 and 2016, days of inventory are almost more than 1000 days. In income statement of 2013, there is revenue by sales AUD149,755 which is very low and there was no cost for sales and marketing or freight charges. I was curious why days of inventory so high in 2013 and asset turnover ratio so low? I found the answer in Annual report 2013 as the company terminated the Nycomed license and distribution agreement which resulted in poor sales. In 2014, inventory performance is better because of company’s implementation of strategy of direct sales to wholesaler distribution and sales model.

Total Asset Turnover Ratio

0.12 0.25 0.14 0.06

Asset Turnover ratio indicates number of dollars generated by one dollar of asset. In 2013 and 2016, ATO ratio is very poor due to low sales. I don’t understand why Asset turnover ratio is too low in 2014 though there are better sales results and inventory days.  Is this because of purchase of Hadasit Medical Research Centre? For this purchase, Immuron spent most of its cash assets and borrowed the funds with issuance of rights.

Comparison with Asset Turnover Ratio

Asset Turnover Ratio:

0.25 4.76 1.59 (1.00)

Asset Turnover ratio is moving in similar way as that of TATO ratio from 2013 to 2106. For 2013, there are no Net Operating assets but Net operating liabilities. There is better ATO in 2015, due to better sales though lesser Net Operating assets.

Liquidity Ratios:

Current Ratio

2.27 3.75 9.01 1.49

Here again, Current ratio is too high in 2014. From balance sheet of 2014, it can be noticed that there are no financial liabilities and cash asset is too high (AUD 6,141,789). And in the same year, Medical research centre form Israel was purchased by the company. The current ratio indicates that Immuron has enough assets to sell out to pay back its short-term liabilities.

Financial Structure Ratios:

Debt/Equity Ratio:

67.7% 36.2% 12.5% 1642.7%

Equity Ratio:

59.6% 73.4% 88.9% 5.7%

Debt Ratio:

40.37% 26.55% 11.08% 94.26%

When I looked at the figures of debt/equity ratio which indicates how much loan the firm is having as compared to owners’ equity, I got surprised to see 1642.7% of debt/equity in 2013. There are large amount of trade payable and financial liabilities while total equity is just 144,986 in 2013. Few key personnel and management members of Immuron resigned or got retired in 2013. This might be the reason for the lowest equity ratio in 2013. Debt ratio is also the highest in 2013.

With the appointment of new key personnel and issue of share rights, the equity ratio is almost 89% in 2014, representing more investment from the owners as equity investors. In 2014, the total number of issued ordinary shares are 2,995,662,120; the largest number of all. From the website:

Equity financing in general is much cheaper than debt financing because of the interest expenses related to debt financing. Companies with higher equity ratios should have less financing and debt service costs than companies with lower ratios.

This might be the reason Immuron is issuing more and more equities to the value of borrowings and most of the time issued rights’ price is much more than current market price.

Market Ratios:

Earning Per Price:

-$0.055 -$0.046 -$0.00085 -$0.0034

Dividends Per Share:

n/a n/a n/a n/a

Price Earning p/e Ratio:

(4.56) (5.00) (5.89) (1.17)

Earnings per share (EPS) shows net income per share. In the case of Immuron, it is loss per share as there is no income. for years 2016 and 2015, the calculations for loss per share are matching to that of financial reports of the company. On the other hand, for year 2013 and 2014, loss per share is different: (0.698 Cents) and (0.152 cents) respectively. When I checked the notes of annual reports, number of equity issued used for loss per calculation is different than the actual total issued capital (Note 18). I don’t understand why this adjustment is done. Share prices are too low in 2013 and 2014: AUD 0.004 and AUD0.005 respectively. There is huge movement in rights or equity issuance due to borrowings and resignation of key management staff in 2013.

Immuron is not paying any dividends.

Price to Earnings Ratio is negative and indicates the poor performance of the firm. Also shows the growing amount of losses from year 2013 to 2016 that means company is losing the money. Though Immuron’s share price is too low, it is risky to buy these shares since management is not doing good job in managing the company, i.e. no dividends and no income for many years.

Ratios based on Reformulated Financial Statements:

Return on Equity

-76.31% -103.58% -37.49% -2441.01%

Return on Equity ratio indicates how efficiently equity investors’ funds are utilised to generate the revenue. For Immuron Ltd, ROE is the lowest in 2013, with equity ratio just 5.7%.  there are net losses reported by Immuron from 2013 to 2016, and cannot expect any positive return on equity.

Net Borrowing Costs

-19.57% 2.54% -5.71% -58.22%

In my opinion, this ratio is not reflecting the real financial picture of Immuron’s borrowings or net liabilities. Immuron is holding larger amounts of cash as financial assets in banks. In restated financial statements, there are net Financial assets not financial obligations. In annual reports 2013, it is clearly stated that there are borrowings of AUD1.4M which may be converted into equity at higher price per share (AUD4.73) and interest is payable on borrowings at a fixed rate 10% per annum (note 16).  NBC is not reflecting this info here. I guess, Immuron management would like to broadcast larger cash holdings as strong financial assets of the firm to attract more investment despite of ongoing losses.

 Return on Net Operating Assets (RNOA)

-90.97% -1499.67% -334.71% 2246.29%

Immuron is reporting losses so this ratio is loss on net operating assets as there is operating loss after tax, not operating income. negative percentage of RNOA indicates Immuron’s operating activities are not generating any profits to cover the expenses. In 2013, there are net operating liabilities rather than net operating assets. But it looks like Immuron is managing to lower the losses from 2014 to 2016.

This is my commentary for Immuron’s ratios. I am thankful to those who provided the constructive feedback. I tried to accommodate their suggestions.

The corresponding spreadsheet is:

Immuron Spreadsheet 2017Step3_1tax

If anyone has similar figures like large negative ratios, it will be great to hear from you. I am specially interested to hear if anyone having NFAs not NFOs and having Net Operating L abilities rather than NOAs.

Thanks, Monal.


Hi all,

Attached is the draft assignment 2 step 7 to 10.


Immuron Spreadsheet 2017Step3_1tax

My areas of concern are:

  1. Net borrowing Cost (NBC) – My firm Immuron Ltd is not having any financial obligations therefore it is difficult to calculate NBC ratio.
  2. Days of Inventory – While calculating days of inventory, I added ‘sales and market costs’ as inventory costs along with ‘cost of goods sold’ and ‘freight cost’. I am not sure if ‘sale and market costs’ is inventory expense. Your opinions are welcome.

also attaching here the feedback form for step 10.


Please feel free to visit the link and appreciate your feedback.




We all need to make decisions, which career to choose, which house to buy, should we go overseas for vacation or spend holidays at home. All our decisions are based on the situations and how much money we can spend. The managers too need to make decisions to achieve the set targets which are beneficial to the firm. Managers need to observe and check the costs getting affected by their decisions. There are different types of costs introduced in this chapter such as sunk, incremental, avoidable, unavoidable, replacement etc.

The managers’ decisions affect the firm’s productivity in significant way. I have seen this when I was working as ‘Industrial Chemist’ for dyestuff manufacturing company in India. At that time, Indian market got opened for Chinese products and my company found it difficult to retain the market share by competing with cheap Chinese dyes. Therefore, to roll out cheap dyestuff in the market, lowering the cost of manufacture was prime focus for the managers.  The decisions were taken to lower the administration costs significantly: reduce the use of stationary, recycle and re-use the papers, share the rented cars, no unnecessary foreign travels etc. The more funds made available for R&D dept., so that better and low cost procedures were developed to manufacture the dyes at cheaper value but with same or better quality. Management also decided to look for better business opportunities alternatively and started production of pigments. It helped the company to survive in the highly competitive market.

It is interesting to read how contribution margin helped managers of Robinhood to select the products for manufacturing. It also detailed how the constraints like market and resources can affect managers’ decisions. Management of Robinhood immediately dismissed the product with negative contribution and concentrated on the products with greater contribution margin and requiring less resources. Was it not possible to reduce the variable costs for the product with negative contribution margin to increase its profitability?

‘No sensible decision can be made any longer without taking into account not only the world as it, but the world as it will be.’

This quote  is really interesting and I can relate this to Immuron’s business and its upcoming medicines. While guessing the contribution margin for products or medicines manufactured by my firm Immuron ltd. I find it is comparatively easy to guess the contribution margin for products which are already established in the market. I guessed their contribution margin by checking the revenue and sales volume. On the other hand, it is difficult to determine the contribution margin for the product which is new in the market and do not have any market share yet. Immuron’s drug IMM124E is still under medical trial and available for sale online to specific customers like doctors or research scientists. With increasing costs of clinical trials and patient recruitment costs, I assumed negative contribution margin for this product. Why management of Immuron keep medical trials ongoing IMM124E until they get successful results though it is not contributing towards any revenue? Is it their long-term decision looking at future world where there will be more and more diabetic people who will be key customers for this medicine?  Is it possible to have negative contribution Margin initially when the product is new in the market? Is it possible to change the contribution margin of the same product to positive figure in future when the product is established in the market with significant market share and variable costs lowered because of no more clinical trial costs? Will Immuron increase the selling price of IMM124E after observing its increased demand in future? What decisions will be taken by Immuron’s management to raise funds for clinical trials? How long will be they successful in forecasting bright future of the firm while clinical trials are failing continuously? If clinical trials will be unsuccessful, will the costs attached to research of IMM124E be sunk costs?

I totally agree with the statement that the dollar now in our hand is much more valuable than the same dollar in the future. Here again, I would like to give example of my neighbour who bought home for AUD 35,000 almost 30 years ago. This indicates that thirty years ago the value of AUD 35,000 was much more than the same amount (AUD 35,000) today. But this depreciation of money with time is not considered while calculating accounting rate of return. Account rate of return is ratio of average net profit to initial investment. But how would I calculate accounting rate of return for my firm Immuron Ltd? My firm is not making any profits. Is it possible to calculate accounting rate of return (ARR) for loss making companies? Or ARR can be calculated only for profit making firms? What if there are more than one initial investments in the year? Immuron received R&D tax rebate of AUD1,469,763 which was invested for clinical trials. In the same month, Immuron received AUD1.7 M from New York based investment fund.

When I read about ‘payback period’, I assumed that the purpose of calculating payback period is same as that of break-even point. I read this paragraph many times to understand the difference between payback period and break-even point. Break-even point is the volume of sales needed to earn initial investment while payback period is how long will it take to get back the initial investment. In payback period, there is some positive income after certain period but for break-even point, there is no income and no loss. Initially, it was confusing for me to separate payback period concept from breakeven point concept as breakeven point too can be achieved after certain period. Both concepts help managers to understand the level of risk of an investment.

The concept of Discounted Cash Flow (DCF) which is discussed in earlier chapters is same as that of Time Value of Money. There are new accounting concepts such as Internal rate of return (IRR) and Net Present Value (NPV). It is stated that IRR and NPV are more useful concepts for managers to check investment opportunities as these concepts consider future value of cash flow. I watched the video uploaded on moodle explaining NPV and IRR. ( After watching this video, I clearly understood how to use excel to calculate IRR and NPV. I did not understand the concept of IRR, which is described as the percentage return on potential investment opportunity when NPV is zero. The only thing, I understand is if there is positive NPV, business is profitable, and if there is negative NPV, business will be making losses. And these concepts help managers to choose better investment opportunities.  I checked my firm’s Immuron’s latest financials on the report below:

To my surprise, I found Immuron has positive NPV for its medicine Travelan (0.256MN in 2016 and 4.525MN in 2025) though Immuron is loss making company.  In March this year, Immuron’s share price was AUD0.30 and now it is AUD0.60 (almost 100% increase). The reason of this may be there are some positive news regarding launching new medicines and ongoing medical trial. I don’t understand why WACC is 10% while calculating the revenue with sales of Travelan. On the other hand, WACC is considered 15% for the revenue calculated for IMM124E.

In conclusion, managers need to take decisions to achieve targets for the firm, taking control of cost and available funds. This chapter explains many new concepts like ARR, IRR and NPV which help managers to take decisions for choosing better investment options. The concepts of ARR and payback period are easy to understand but these concepts do not consider future value of dollar. The concepts of IRR and NPV are used to determine better investment options which will add value to the firm and therefore, beneficiary to equity investors. Still, managers should use these concepts thoughtfully while taking decisions. It is interesting to study these concepts, but I feel like coming across pieces of puzzles which I don’t know how to assemble yet to get the clear picture.







Contribution Margin – Assignment 2 Step 7

Immuron Ltd is bio-pharmaceutical company working in medical research, developing new medicines, drugs and health supplements. Currently, there are only two products launched successfully in the market. One is Travelan which is natural product used for treatment of diarrhea and the other is Protectyn which is health supplement for healthy stomach. There are many more medicines under development and clinical trial phase.


  1. Travelan


Selling price per unit AUD 28.49 at Chemist Warehouse.

I assumed 90% of selling price as variable cost as it is well established in the market and selling in high volumes nationally and internationally. In the lecture, Maria said, when the product is being sold in high volumes, the margin is small. The firm is trying to increase the sale of Travelan in overseas markets like US, Canada and China. With increasing overseas sales, there will be increasing freight costs. Immuron is tying up with overseas pharmaceutical partners to promote the sales, there should be some portion of the cost payable to these partners depending upon the volume of the sales.

Variable cost = AUD 28.49 x 90% = AUD 25.64

Contribution Margin = Selling price – Variable Cost = 28.49 – 25.64 = AUD 2.85

(According to See ThruEQuity Report ‘IMC AX INITIATION JANUARY 25, 2016 FINAL’ the sales graph of 2016 shows 10,000 units of Travelan sold worldwide and Annual report mentioned increase in sales revenue by AUD31,000 in 2016. Therefore, AUD 2.85 per unit of Travelan is fairly correct margin).

Constraints: –

  1. Travelan is the medicine used for treatment or prevention of travellers’ diarrhoea. The customers are mostly the tourists or the people travelling to the developing countries. The sale of Travelan is limited to travellers and travel clinics. (limited market share).
  2. Immuron has very limited funds available for marketing and promotion.   The firm partners with other pharma retailers to sell the product and therefore, the firm need to share some of its profit with the marketing or selling partners.
  3. Since Travelan is over the counter drug, and does not need any medical prescription, the reimbursement from medicare or other health insurance is not available for the customers.
  4. The company is in competition with other larger pharma companies having better network and more market share for same type of drug.


  1. Protectyn


Selling price per unit: AUD 29.65 .

Protectyn is a health supplement to help digestive function and maintain liver health. This medicine by Immuron is being sold thru naturopaths. Protectyn is not available in open market and still in a launch phase in Australia. This is low cost medicine and derived from colostrum derived from New Zealand dairy cows.

For this drug, I assume 60% of sales price is variable cost. Since this drug is registered as a prescription product and is being sold in national market only through naturopath.

Variable cost = AUD 29.65 X 60% = AUD 17.70 per unit

Contribution Margin = AUD 29.65 – AUD 17.70 = AUD 11.95


  1. Protectyn has very limited consumers and available through naturopaths only.
  2. Though protectyn has larger contribution margin, the sale is not in large volume.
  1. IMM 124E:


Immuron’s upcoming drug IMM124E is still under clinical trials and it is effective in type 2 diabetes and treatment of fatty liver disease (caused by alcoholism, obesity and non-healthy eating lifestyle). Though it is not launched in market yet. I found its price on the website Online selling price per unit is AUD50.00

This medicine is available for medical professionals, research fellows and university scientists by online shopping. This drug first tested in 2011 and still its clinical trials are ongoing. It is not successfully launched in open market yet. With ever increasing costs of medical tests and R&D, I assume 120% of sales price is variable cost.

Variable Cost = AUD 50 X 120% = AUD 60.

Contribution Margin = Sales Price – Variable Cost = AUD 50 – AUD 60 = -10.

The current negative contribution margin for IMM124E may change to positive figure in the future, when the drug will be completing clinical trials successfully and will be launched in the market after getting FDA approval. In annual report, it is stated: this is the unique drug for type 2 diabetes which is growing epidemic. This medicine has growing market of $40BN by 2027.

Constraints: –

  1. Unsuccessful and lengthy clinical trials and availability of funds to continue trials.
  2. Risk of not establishing successfully in the market if consumers prefer to another better alternative. (Market constraints)


Discussion: –

The contribution margin for each product is different as it depends upon many factors like market share, levels of activity involved in manufacturing and capital available. It is not possible for managers to manufacture the medicine only with higher contribution margin because the product is aimed to specific type of consumers and involve various levels of activities to launch in the market successfully. Although Travelan has low contribution margin, it generated revenue of AUD1MN in 2015 due to larger sales volume than any other drug.


Budget is very sensitive issue in households. I usually do monthly budget. In the expenses, we need to pay electricity, utility, rates, phone and data bills. Plus, there is expenditure on groceries. When we make a major decision of buying a house or car, we borrow lump sump money from the banks and the payment of mortgage is another regular expense. When there are increasing expenses with growing family needs, each dollar spent is precious. To manage these expenses, to pay back the loan amount and to save for the future, careful planning of budget become important and we need to follow the budget for strictly avoiding unnecessary expenditure otherwise we will run out of the money.

Managers are too in the same situation. They are responsible for completing tasks which will add benefits to the firm and for this, they need to get people work for them. The managers are using debt investors and/or bank’s money to get the work done. So, they need to be careful in spending the funds and need to control the cost. The short-term budget helps them to check on work progress and keep track on expenditure.

It is interesting to read about the experiment carried at Heathrow airport to improve the efficiency in luggage handling. It made me smile. I thought why this doesn’t happen to me when I travel overseas. At least as an experiment, I should get my luggage as soon as possible after landing and I always travel with only one bag in luggage so there is no need to wait for another bag. It will save 40-45 minutes spent in waiting for luggage to arrive at carousel. While talking about target, I remember when I worked for power project, there used to be target of 1 million hours without LTI (lost time incident). If this target was achieved, everyone on construction site used to get good amount of cash as reward. It is actually allocated in budget from the owner to construction contractor as safety incentive as safety is the utmost priority on construction sites.

Later, when I volunteered as Treasurer of one of the school’s P&C, I used to take care of all cash transaction. At that time, many budgets were prepared for the year like budget for mothers’ day event, sports day stall, quiz night, school disco etc. I can relate them as short term budget planning which later consolidated as main budget of the year. While preparing budgets, the event coordinator was always present to check the fund allotments. The equation ‘production + opening inventory = sales + closing inventory’ is quite familiar, as it was used for the tuckshop revenue calculations. The main aim of P&C was to keep tuckshop in profit as it was the major source of revenue. At that time, I was not at all aware of these key concepts behind cash handling.

It is interesting to see how Purple Chocolate factory is going to start the business by borrowing money from the bank and equity investor. Cash budget for Purple Chocolate factory is straight forward and easy to understand. but cash receipts from sales in cash budget are different from that of sales budget. It is explained why direct materials and overhead costs are more in budged income statement. Does not mean managers consider extra costs or sudden increase in expenditure in advance?

I read the term ‘retained earnings’ in financial statements of Immuron Ltd. While going through financial statements of fellow students, the term ‘retained earnings’ became familiar. While studying balance sheet of Purple Chocolates I understood the meaning of this term and the way, it is used in firm’s budget. Still, I have many questions after going through cash budget, budgeted Income Statement and budgeted balance sheet. Why the cost for purchase of equipment is not included in budgeted income statement while depreciation is added? I agree equipment are assets for the firm, but this equipment have cost some cash. From where the figure for inventory obtained? Does the inventory include unsold chocolates? It is surprising to see cash budget, income statement and budged balance sheet, all three collectively give clear picture of the firm’s business. At one point, I thought that accounting gurus are number genius to structure the reports in this format highlighting or broadcasting the firm’s assets as more valuable which will add future benefit to the firm and attract more investments though there is negative cash balance at the end of June 2018.

I can relate the story of performance by senior managers at Methven to the company my husband works for. This company too has different sub-organizations like oil & gas, mining & metal, infrastructure etc. The performance of each group is evaluated separately. Employees always try to get work or job offer from well performing group as there is better wage offered.

In conclusion, this chapter introduces to funds management through budget planning by managers to achieve the target for the firm. It is interesting going through cash budget and budgeted income statement and how budgeted balance sheet correlate the other two. Short term budget planning helps managers to control the cost and take critical decisions about the firm’s business. I find the budgeted balance sheet most interesting as the way it managed the profit/loss from budgeted income statement as ‘retained earnings’ which is not seen anywhere in cash budget. The accounting world is based on numbers and it is amazing to see how these numbers are managed to reflect the business realities.