04_Example of Completed - TASK 1 - C928

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Running head: TASK 1 1 DyingGasp Financial Management for IT Professionals – C928 – Task 1 Western Governors University I have chosen to analysis Walmart, by selecting to work towards improving analytics to ensure inventory levels are well aligned with consumer demands. By developing and implementing or subscribing to a cloud-based inventory control management system, the strategic goal will be met by offering more convenience, data integrity, scalability, and low maintenance and operating costs (Finale Inventory, n.d.a). A cloud-based inventory management system aligns with the strategic goal by allowing instant updates on stock levels, lowering error
TASK 1 2 rates, and building in reporting and analytics (TradeGecko, 2018). Walmart stands to benefit by improving it inventory management through a software as a service (SaaS. If Walmart developed their own database “to track sales, manage inventory, review trends, and communicate with suppliers, among other tasks (Feng, S., McElhenney, D., Parke, B., & Tran, N. as sited in Jose, 2010),” it would benefit the. The SaaS solution would eliminate portions of Walmart’s database, allowing the corporation to reevaluate and redistribute their labor force. Software as a Service is a technological model where customers subscribe to applications through a third-party provider (Rouse, 2020). SaaS providers such as Finale Inventory, Boxstorm and Fishbowl provide the inventory software through the internet. The customer (Walmart) subscribes to the service and accesses the amenities through an internet browser, while the provider (Finale Inventory) maintains servers and storage devices (Turner, 2019). Walmart stands to benefit from a SaaS because it will improve the current inventory management system. Using a SaaS to utilize a cloud-based inventory management system. Software as a service is provided through the internet and the SaaS provider takes the responsibility for security updates, data backups, physical infrastructure, storage requirements, and personnel (Turner, 2019). Walmart will be able to have multiple internet service providers to insure a steady and reliable connection via backups. To understand how Walmart can fund the cloud based inventory management system, it is best to know where Walmart stands financially. Net profit is defined as having more revenue than expenses. Walmart made a net profit of $6,439 million during its quarter ending July 31, 2020. This is $2,759 more than its net profit a year previous. Retained earnings is the amount of net profit left over after Walmart pays its dividends to shareholders. Walmart’s retained earnings
TASK 1 3 for Quarter ending July 31st, 2020 is $87,614 million. Both of these figures show Walmart is capable of funding the IT project. The two liquidity ratios I chose to analyze for Walmart are the Current Ratio and the Quick Ratio. Liquidity analysis evaluates the ability of a company to convert current assets into cash (Besley et al., 2020). The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year (Kenton, 2020d). The Quick Ratio is the ability for the company to “instantly” pay its debts. Limitations of the ratios include the Current Ratio formula not accounting for the assets the company can easily turn into cash while the Quick Ratio excludes inventories and pre-paid assets. A current ratio under 1 indicates a company has more debt than assets due within the year. The higher the ratio, the more capable that company is at paying its debts. Having a current ratio over 3% would indicate that the company is capable of paying its debt easily, but it also indicates the company is not managing its assets efficiently (Kenton, 2020d). From the example provided, Walmart is managing its assets well and efficiently. It stands that Walmart is within good parameters to fund this project. A quick ratio resulting in 1 is normal and indicates the company is equipped with exactly enough assets to instantly liquidate to pay off its current liabilities (Kenton, 2020c). Walmart has a quick ratio of 2.4% which means it has more in quick assets than liabilities. This means Walmart Current Ratio = Current Assets = $237,382 Current Liabilities = $81,957 Current Ratio = Current Ratio = 2.896 = 2.9% Quick Ratio = Quick Assets = Total Assets – Inventories Quick Assets = $237,382 - $41,084 Quick Assets = $196,298 Current Liabilities = $81,957 Quick Ratio = Quick Ratio = 2.395 = 2.4% Current Ratio = 2.896 = 2.9%
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TASK 1 4 has $2.40 in liquid assets to every $1 in liabilities. This means Walmart is within good standing to cover the cost of implementing the new cloud based inventory management system. The two solvency ratios I chose to analyze for Walmart are the Ratio of Fixed Assets to Long-Term Liabilities and the Ratio of Liabilities to Stockholder’s Equity. Solvency ratios evaluate the ability of a company to pay its long-term debts (Besley et al., 2020). The Ratio of Fixed Assets to Long-Term Liabilities measures a company's ability to repay the face amount of debt at maturity (Besley et al., 2020). The Ratio of Liabilities to Stockholder’s Equity measures how much of the company is financed by debt and equity (Besley et al., 2020). In short, the solvency ratios measure a company’s cash flows to evaluate the company’s long-term health (Kenton, 2020e). The Ratio of Fixed Assets to Long-Term Liabilities is also known as the total debt to total assets ratio and reflects how financial stable the company is. A ratio higher than 1 indicates the company has more liabilities than assets and is at risk of defaulting on long-term loans. This quarter, Walmart has a Ratio of Fixed Assets to Long- Term Liabilities of 1.4%, while this would indicate the company has more debt than assets, the Ratio of Fixed Assets to Long-Term Liabilities does not provide any indication of asset quality since it companies all assets together (Kenton, 2020e). Ratio of Fixed Assets to Long-Term Liabilities = Fixed Assets = $101,182 Long-Term Liabilities = Total Liabilities – Current Liabilities Long-Term Liabilities = $156,185 – $81,957 Long-Term Liabilities = $74,228 Ratio of Fixed Assets to Long-Term Liabilities = Ratio of Fixed Assets to Long-Term Liabilities = 1.363 = 1.4%
TASK 1 5 The Ratio of Liabilities to Stockholder’s Equity, also known as the Debt to Equity Ratio, is used to compare the company’s total liabilities to its shareholder equity. A high ratio indicates a company is a risk to shareholders but it is difficult to company across industry groups. Walmart has a 1.1% ratio which is close to a 1 to 1 ratio of debt to equity. This means Walmart has been aggressive with its financial growth but this ratio would be best compared to Walmart’s competitors (Kenton, 2020e). Assuming Walmart is average within its market, this means the company is within good standing and capable of funding this project. The two profitability ratios I chose to analyze for Walmart are Asset Turnover and Return on Stockholder Equity. Profitability ratios evaluate the ability of a company to generate revenue (Besley et al., 2020). Asset Turnover measures how effectively a company uses its assets (book 4.5). Return on Stockholder Equity measures income to stockholder investments. A limitation to both ratios is that they are best used in comparisons to Walmart’s competitors to gauge how effectively the company is doing in its market. Asset Turnover is used to understand how a company is performing as higher ratios indicate the company is generating more revenue per dollar of assets (Hayes, 2020). This quarter, Walmart has an asset turnover of 1.0%. Walmart has Ratio of Liabilities to Stockholder’s Equity = Total Current Liabilities = $81,957 Total Stockholder’s Equity = $75,310 Ratio of Liabilities to Stockholder’s Equity = Ratio of Liabilities to Stockholder’s Equity = 1.088 = 1.1% Asset Turnover = Sales = $136,824 Average Total Assets = Total Assets – Property & Equipment Assets Average Total Assets = $237,382 - $101,182 Average Total Assets = $136,200 Asset Turnover = Asset Turnover = 1.005 = 1.0%
TASK 1 6 generated a one to one ratio of assets to revenue. Normally asset turnover is calculated on a yearly basis but knowing Walmart has kept a one to one ratio means it has generated revenue which means it is in good standing to fund the project. Return on Stockholder Equity is a ratio that measures a company’s earnings by comparing the net income to the amount invested by the stockholders. This ratio is used to indicate if a company is good at using its assets to generating earnings (Kenton, 2020b). The Return on Total Assets allows the company to see the relationship between its resources and its income (Kenton, 2020b). Walmart has a Return on Stockerholder Equity ratio of 0.9%. A higher Return on Stockholder Equity means the company is effectively generating money from each dollar invested by the stockholders. This ratio is limited as it is best when used in comparison to competitors, but a positive percentage means Walmart is generating income about equal to the amount stockholders are investing and are in a good position to fund the cloud based inventory management system project. Overall, it has been found that Walmart is financially sound and capable of funding the cloud based inventory management system. This project will benefit Walmart and how the company Return on Stockholder Equity = Net Income = $6,439 Average Total Stockholder’s Equity = Average Total Stockholder’s Equity = Average Total Stockholder’s Equity = $74,989.5 Return on Stockholder Equity = Return on Stockholder Equity = 0.086 = 0.09%
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TASK 1 7 will manage its inventory asset. Based on the ratios provided and derived from the attached 10-Q document, Walmart is in good standing to fund the IT project. The Budgeted Income Statement, below, derives the revenue from sales by multiplying the desired units to be sold by the average product sale per item. It then receives the cost of goods sold by multiplying the total units to be produced by the direct materials cost. With these two figures determines it can be concluded that Walmart can reflect a gross profit of $342,610 million after subtracting the cost of goods sold from the revenue from sales. This means just this product alone has gathered profit. The income from the operations is calculated by subtracting the overhead and cost of selling from the gross profit. This income from operations is then added with other revenue and expenses to total the income before taxes. Once the income is taxed at 25%, the net income is $252,520 million. The net income can be increased by funding this IT project as it will lower the direct materials cost by lowering the labor and administrative costs. Walmart, Incorporated Budgeted Income Statement For the Quarter Ending Month Day, Year Everything in this section is in millions     Revenue from sales $616,000  Cost of goods sold $273,390  Gross profit $342,610  Total cost for all overhead $2,737  Total cost for all selling & administrative budget 4 $4,750  Income from operations $335,123  Other revenue & expense:    
TASK 1 8 Interest revenue $845  Interest expense $725  Income before income tax $336,693  Income tax $84,173.25  Net income $252,520  Production Budget Everything in this section is in millions   Desired units to be sold 56,000 Desired ending inventory 34,000 Estimated units in beginning inventory 44,435 Total units to be produced 45,565 Data from Walmart Financial Fact Sheet Average Product Sale per item $11 Direct Materials Cost including labor (per item) $6 Interest Revenue $845 Interest Expense $725 Total cost for all overhead $2,737 Total cost for all selling & administrative budget $4,750 Tax rate 25% Walmart could develop and maintain its own cloud based inventory system or it can subscribe to a provider like Finale Inventory. Should Walmart elect to simply subscribe to a cloud based inventory management system, it would cost Walmart $2,570,580.83 every month.
TASK 1 9 This number is derived from the 4,753 Walmart stores located in the United States multiplied by Finale Inventories $6490 annually for 12 users equals $30,846,970 a year (Walmart, n.d.; Finale Inventory Pricing Plans, n.d.b). This number is may seem costly at first, but Walmart could re- coop this cost by removing unnecessary labor while making the Walmart website easier to maintain driving customer spending and increasing net profits. If Walmart elected to subscribe to this SaaS, the resources such as software and hardware would be provided by the SaaS provider. Finale Inventory would provide advanced training to all necessary employees and support would be handled by Finale Inventory. Walmart also has the opportunity to lower this yearly cost by requesting customer pricing from Finale Inventory. Should Walmart elect to research and develop its own cloud based inventory system, Walmart would need to provide all of the hardware, software, and personnel. This would expand the current IT department and equipment. This would cost Walmart greatly in not only upfront costs in development, but also maintaining the servers and equipment locations. A benefit to developing its own SaaS, is that Walmart could mold the service to best benefit itself rather than using an already designed platform. It would make modifications leisurely and potentially patent the specific software and branch out into selling the SaaS as a provider themselves. This is why it would be best to reach out to Finale Inventory for special pricing regarding a cloud based inventory management system. The SaaS cloud based inventory management system has the potential to be funded by Walmart’s equity, debt capability, and stockholders. Weighted average cost of capital is used to assess the values of investments to determine which projects to pursue (Hargrave, 2020). By balancing the percentages of how much funding comes from each source, Walmart can maximize the rate of return on its investment. Preferred stock is the most expensive way for Walmart to
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TASK 1 10 fund a project, but is necessary. Due to this expense, the project is going to be funded by preferred stock by 20%. To even out the number, it has been found that by equally funding the project with 40% equity and 40% debt, Walmart can achieve a 7.2% weighted average cost of capital. A WACC of 7.2% is within the required rate of return Walmart has advised of and is within parameters to be funded. As long as all of the parameters of the WACC stay the same, the MCC also remains 7.2%. Marginal Cost of Capital is the cost of adding an additional unit, or the average amount of money it costs Walmart to add one more unit of debt (Kenton, 2020a). Lower MCCs have higher rates of return (Kenton, 2020a). The Average Rate of Return is used by investors to assess the risk level of a project. Based on the calculations for the ARR, the average rate of return is 47.8%. Since WACC is 7.2%, the table has been rounded up to 8% NPV table. WACC = (Equity % * Cost of Equity %) + (Debt % * (Cost of Debt % * (1- Tax Rate))) + (Stock % * Cost of Stock %) WACC = (Equity % * 9%) + (Debt % * (5% * (1- 40%))) + (Stock % * 12 %) WACC = (40% * 9%) + (40% * (5% * (1- 40%))) + (20% * 12 %) WACC = 0.036 + 0.012 + 0.024 WACC = 0.072 = 7.2%
TASK 1 11 Year 8% Present Value of $1 at Compound Interest Expected Cash Flows from Project NPV 1 .926 $8,325,000 $7,708,950 2 .857 $6,000,000 $5,142,000 3 .794 $5,500,000 $4,367,000 4 .735 $2,000,000 $1,470,000 5 .681 $1,500,000 $1,021,500 Average Rate of Return = Average Annual Income = Average Annual Income = Average Annual Income = $4,665 Average Investment = Average Investment = Average Investment = $9,750 Average Rate of Return = Average Rate of Return = 0.478 = 47.8%
TASK 1 12 In conclusion, Walmart has the financial stabilities to fund this new IT project. The project would decrease future overhead costs by eliminating unnecessary labor, equipment, and datacenter space through subscribing to the SaaS or Walmart can develop its own and expand its technological prowess and move into a new market. Walmart looks to improve analytics to ensure inventory levels are well aligned with customer demands by having a cloud based inventory management system that will be updated live and through the internet allowing all staff and customers to see what is in stock at each Walmart location.
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TASK 1 13 References Besley, S., Brigham, E., Blackstaff, M., Dayananda, D., Irons, R., Harrison, S., . . . Choi, T. (2020). Financial Management for IT Professionals . UCertify. Finale Inventory. (n.d.a). Cloud Based Inventory Order Management System Software . Retrieved September 16, 2020, from https://www.finaleinventory.com/cloud-inventory- management-2 Finale Inventory. (n.d.b). Pricing Plans. Retrieved October 13, 2020, from https://www.finaleinventory.com/pricing-signup Feng, S., McElhenney, D., Parke, B., & Tran, N. (2013, September 22). Walmart’s Inventory Management System . Prezi.Com. https://prezi.com/qefihcomutia/walmarts-inventory- management-system/ TradeGecko. (2018, December 13). How cloud-based inventory management could benefit your business . https://www.tradegecko.com/blog/inventory-management/web-based- inventory-management-business-benefits Turner, B. (2019, December 15). What is SaaS? Everything you need to know about Software as a Service . TechRadar. https://www.techradar.com/news/what-is-saas Kenton, W. (2020a, August 25). Marginal Cost Of Funds. Retrieved October 13, 2020, from https://www.investopedia.com/terms/m/marginal-cost-of-funds.asp Kenton, W. (2020b, August 28). Return on Total Assets (ROTA) Definition. Retrieved October 13, 2020, from https://www.investopedia.com/terms/r/return_on_total_assets.asp Hargrave, M. (2020, August 29). How to Calculate the Weighted Average Cost of Capital – WACC. Retrieved October 13, 2020, from https://www.investopedia.com/terms/w/wacc.asp Hayes, A. (2020, September 11). Asset Turnover Ratio. Retrieved October 13, 2020, from https://www.investopedia.com/terms/a/assetturnover.asp Kenton, W. (2020c, September 12). Quick Ratio. Retrieved October 13, 2020, from https://www.investopedia.com/terms/q/quickratio.asp
TASK 1 14 Kenton, W. (2020d, September 16). Current Ratio. Retrieved October 13, 2020, from https://www.investopedia.com/terms/c/currentratio.asp Kenton, W. (2020e, September 16). How to Use the Solvency Ratio. Retrieved October 13, 2020, from https://www.investopedia.com/terms/s/solvencyratio.asp Walmart. (n.d.). Location Facts. Retrieved October 13, 2020, from https://corporate.walmart.com/our-story/our-locations