04_Example of Completed - TASK 1 - C928
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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
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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
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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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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%
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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%
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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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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:
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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.
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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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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%
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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%
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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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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
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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
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