The Ford Motor Company: Financial Management

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Growth rates

The sales for Ford Motor Company grew from $133,559m in 2012 to $146,917m in 2013, an equivalent of 10% increase. The value dropped to $144,077m in 2014, an equivalent of a 2 % drop. The cost of revenue rose from $113,039m in 2012 to $125,195m in 2013 (Ford Motor Company, 2015). The increase is equivalent to 10.75%. In 2014, the value dropped to $123,516m, an equivalent of 1.3%. Further, the total expenses rose from $127,947m in 2012 to $139,742 in 2013. The percentage growth during this period was 9.22%. The value further rose to $140,891m in 2014 (Ford Motor Company, 2015). The percentage increase was 0.82%. Further, the net income rose from $5,612m in 2012 to $7,182m in 2013, an equivalent of 27.85%. The value dropped to $3,187m in 2014 (Ford Motor Company, 2015). The decline is equivalent to 55.60%. A review of the growth rates shows that the cost of sales takes a larger percentage of the total expenses. This can be attributed to the nature of the business. Further, it can be noted that the expenses continued to increase in 2014, despite the decline in revenue in the same year. Also, expenses grew at a higher rate than sales. Thus, the revenues and expenses are growing at different rates.

The GDP growth rate in the US was 2.23% in 2012. The value dropped to 2.22% in 2013. In 2014, the growth rate rose to 2.39%. It is expected that the value will increase further in 2015. Thus, when the growth rates are compared, it can be observed that the company grew at a higher rate than the growth in the economy (Yahoo Finance, 2015). A close competitor of the company is General Motors. The total sales of the competitor grew by 2.08% between 2012 and 2013. The value of the sales grew further by 0.32% between 2013 and 2014. Further, the overall growth rate in the industry was 4% in 2014 and 21.43% in 2013 (Yahoo Finance, 2015). Thus, the growth rate of the company was lower than that of the competitor and the industry.

The provision for tax dropped from $2,026m in 2012 to ($135m) in 2013. The value rose to $1,156m in 2014 (Ford Motor Company, 2015). In the year 2014, the prevailing interest rate was 3.02%. When preparing the budget, various items in the income statement will grow at different rates. Further, the economic growth rate will be taken into account. The Interest income and expense will grow at the same rate as other expenses while provision for income tax will be made at 35%.

Flexible and static budgets

There is a dissimilarity between the flexible and static budget. The static budget is prepared only once for an entire year. Thus, adjustments are not made during the year. At the end of the year, an assessment is made between the actual results and planned values. This helps the management to ascertain if there are variances. On the other hand, a flexible budget is adjusted on a periodic basis to reflect the actual results.

Role of a budget

The budget plays several roles in an organization. First, it ensures that the actual activities carried out during a given period are consistent with the plan. Thus, as a control tool, a budget minimizes variance. It also ensures that resources are allocated as planned. On the other hand, a budget acts as a planning tool by bringing together the various units in an organization. It synchronizes the various activities that need to be done and the various departments to ensure that the goal of the entity is achieved. Therefore, from a planning perspective, a budget converts a strategic plan of an entity into a period-based guide for the business activities. Finally, a budget is used for performance management because it enables the management to point out the variances by comparing the actual and budgeted results (Brigham & Michael, 2009).

Flexible budget

A flexible budget for the Ford Motor Company will be prepared in this section. The budget will be for the year 2015. The three different growth rates that will be used for sales and cost of sales are 14%, 10%, and 5%. The other expenses will grow at 15%, 11%, and 7% for high, average, and low respectively. These rates are arrived at after taking into account the growth rates that are discussed above. The flexible budget will focus on the budgeted revenue and costs.

Workings

2014 2015
High Average Low
Amount in USDm 14% 10% 5%
Sales 144,077.00 164,247.78 158,484.70 151,280.85
Ending inventory 7,866.00 8,967.24 8,652.60 8,259.30
Total available 173,215.02 167,137.30 159,540.15
Opening stock 7,866.00 8,967.24 8,652.60
Production 165,349.02 158,170.06 150,887.55
Selling price per unit 650 741 715 682.5
Variable cost per unit 285 324.9 357.39 299.25

Ford Motor Company

Flexible budget

For the period ended 31st December, 2015:

2015
(Amount in USDm) High Medium Low
Revenue 164,247.78 158,484.70 151,280.85
Operating expenses
Cost of revenue 140,808.24 135,867.60 129,691.80
Sales, General and administrative 16,234.55 15,669.87 15,105.19
Financial services and interest expense 3,103.85 2,995.89 2,887.93
Financial Services – provision for credit and insurance losses 350.75 338.55 326.35
Total costs and expenses 160,497.39 154,871.91 148,011.27
Automotive interest expense 916.55 884.67 852.79
Automotive interest income and other income 87.40 84.36 81.32
Financial Services – other income 400.20 386.28 372.36
Equity in net income of affiliated companies 1,466.25 1,415.25 1,364.25
Income before income taxes 879.99 842.23 598.86
Provision for income taxes 308.00 294.78 209.60
Net income 571.99 547.45 389.26

References

Brigham, E. & Michael, E. (2009). Financial management theory and practice. USA: South-Western Cengage Learning.

Ford Motor Company. (2015). 2014 annual report. Web.

Yahoo Finance. (2015). General motors company (GM). Web.

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