Good Example Of Bank Of America Case Study
Businesses operate in a cutthroat market whereby financial intelligence is integral to success and operational sustainability. With such a competitive environment, it is prudent to have information regarding to the sources of finance before starting the business intended. As such, through proper financing, the business performance strategies are drawn out effectively. Further, budgeting instills proper financial planning in the running of the business. Through proper planning, the business emerges as formidable forces in the market through budgeting and cost control measures. Hence, in this paper, I will look at financial analysis and recommendations at Bank of America.
First and foremost, in accordance to Ackerman (2013) financial planning is a dynamic process in which the business management can determine the specific amount of finances or money required for the accomplishment of the strategies and targets set. Accordingly, financial planning is inclusive of generating financial aims which are significant for the management aspect of the business. Moreover, through financial planning, the business creates the proper calculations in terms of their procurement needs. Through financial planning, a blue print of the various financial needs is created which leads to a further access to more funds for the business and analysis of the finances in an organization (Goetz 2010). As such, an increased access to funds sustains the investment requirements of the business. Furthermore, an injection of funds to the business through financial planning creates a stable cash flow of capital in the business through proper gauging of the injections and withdrawals made. Therefore, a healthy financial planning system in the business creates a safe ground in which the business can grow and expand in a commendable manner. Ackerman (2013) further asserts that a healthy financial planning is an important aspect to the business since it eradicates the cloud of financial uncertainties that may exists within the business. Through a certain financial environment, businesses ensure sustainable and profitable operations generated by sound financial planning. Through financial planning, decision making becomes an essential aspect to the growth and sustenance of Bank of America. Admittedly, through decision making, a proper path is laid out for the business to make the right operational actions. Admittedly, the different aspects of an organization require proper information to make the right choices. As such, the size of a business is of quite significance in terms of the various decision makers that require the right information. Admittedly, in a less complex business like the sole proprietorship, the business owner forms the key decision maker of the business. As the key decision maker, a sole proprietor requires information in form of the organizational performance through the books of accounts which are readily available. As such, in the less complex business enterprises, the information need is usually minimal since the owners have an easy access to the information required. On the other hand, a more complex business enterprise like public limited company has a more complex structure of information need in respect to the various decision makers. Accordingly, in the more complex businesses, shareholders, managers, board of directors and so forth require information in terms of performance, investment decisions, management decisions and so forth. Accordingly, in the aforementioned stakeholders of complex businesses, the information need is dynamic in terms of needs of the various decision makers as compared to the less complex businesses. Furthermore, through effective decision making, different forms of sources of financing have disparities in terms of their impacts on the financial statements. For smaller businesses, the loans and the financing acquired individually has a major impact on the balance sheet for proper analysis as compared to the larger and complex businesses. Accordingly, in a complex business like a public company, it is worth to note that the source of financing has impacts on the three main financial statements. In accordance to Barney (2011), the cash flow statement must include the shareholder capital in the financing activities part of the statement. Accordingly, through the inculcation of the investing activities on the cash flow statement, Bank of America requires proper inclusion of the share capital in the balance sheet statement through incorporation of the sourced finances on the capital side. Finally, in the final statement, the income statement must be inclusive of the dividend pay-outs, allowances and salary that are paid out to the various directors and shareholders needs to be inculcated to the expense side. Thus, an in-depth financial analysis of Bank of America is as follows:
Stock price analysis
The bank of America stock price reached the lowest recorded level in 2008 as evident from its trading price of less than $10 (Goetz 2010). However, finance at the aforesaid time, the stock price has been on a plausible rise. Evident rise in stock was associated to the evident aggressive expansionary approach in Bank of America. The expansionary approach in the operational facet of Bank of America was mainly focused on the catapulting of profitability, market reach and so forth. As such, its reputation pertaining to conservative operational approach was a main aspect of concern coupled to the reduced exposure to credit risk highly paved way for the expansionary approach. In reference to the diverse pundits, the organizations price to earnings ratio that denotes an imperative measure of market analysis was at x29.08 as per the stock price of $28 as at April 2010. The plausible level of stock price was also a major aspect of plausible concern at Bank of America with the organization maintaining the position as the most formidable player in the banking industry. The consumer market maintained a formidable confidence on the organization due to effective banking mandate.
Ratio analysis of bank of America
A business is able to gauge its performance using the various ratios available in the accounting process. Admittedly, Ackerman (2013), States that three main ratios play an integral part in the analysis of Bank of America, which are liquidity, profitability and efficiency ratios.
The liquidity ratio is used to show the ability of a business in terms of changing its current assets into liquid cash for the business to ensure its various arising obligations are met while using the balance sheet as the financial statement of analysis. As such, the current ratio is used to compare current assets to current liabilities. The required ratio for a performing company is pegged at 2. As such, the ratio of 2.48 means that a Bank of America can easily convert its assets twice over as compared to the current liabilities (Barney 2011).
Ratios in reference to Ackerman (2013) may be used to depict the effectiveness of the management of any business through the use of the income statement. As such, the efficiency ratio is used for the evaluation of sales and the returns on investment. Admittedly, inventory turnover depicts the degree to which the product is repurchased in a certain period. As such, the higher the inventory turnover the more the efficient the business. Hence, from the examination of Bank of America, it has an efficiency rate of 72% which is highly plausible towards ensuring generation of sales in the business (Barney 2011). An organization that can easily generate sales is critical towards sustenance of performance and revenue yield that is pivotal for the going concern.
The above is an effective ratio for the determination of the sales and returns on investment in a business. As such, the gross profit margin is a proper tool in determining the profitability degree of a business which is calculated through the division of gross profits and cost of goods sold. Thus, from the analyses of Bank of America, it is evident that it has a profitability ratio of 56% (Barney 2011). The heightened profitability ratio denotes that the operational mandate of the organization is within a highly profitable manner with the company accruing plausible outcomes in their performance prospects. Furthermore, the company has a heightened profitability margin due to the evident investment into the conservative operational strategy.
The strategic selection of an organization denotes the incorporation of diverse tools towards plausible policy formulation in an organization. Most fundamental tool towards strategy formulation is the quantitative strategic planning matrix. The quantitative strategic planning matrix (QSPM) is incorporated towards selection of the most plausible strategy that is inclusive of the input coupled with other management strategies towards effective strategy implementation. The quantitative strategic planning matric is incorporated towards the strategic management in regards to the evaluation of the possible strategic options. As such, the QSPM matrix provides an organization with an analytical tool towards comparison of the feasible actions for effective outcomes. Thus, a plausible QSPM matrix for an organization is obtained through the analysis of the bank of America, a plausible QSPM matrix is as follows:
Strategy alternative analysis
Commercial real estate risk increase thus effective research and choice policy
Defaults that banks have to grapple with emanating from commercial real estate loans are highly expected to increase due to the economic environment coupled with the deterioration of CRE operational fundamentals. In regards to the banking oversight committee, developed by the SEC, the level of increase in unemployment rate in 2010, despite the rise in GDP is an aspect of concern. Heightened increase in unemployment entails that consumer spending is on the dwindling side that corresponds to the decrease in demand for CRE use that is inclusive of retail store space coupled with lodging space. Moreover, many pundits assert that commercial real estate loans that were given under loosened underwriting standards in the bubble period of 2002-2007 have had a detrimental effect on diverse organizations (Barney 2011). In the current economic environment, the retail prices have increased due to the leases geld by the numerous commercial properties. Nonetheless, in the instance that the leases expire, the vacancy rate is bound to increase hence pushing the rental price to a lower level. All in all, the actual and the approximated cash flows will fall thus impacting on the ability of CRE loaned to make the payments in a prior manner to the maturity date.
Thus, in analyzing the Bank of America treatment of the CRE risk, it is imperative to evaluate the allowance ratio that increased from the normal 40% to 65% as at 2010/ the steep rise in the ratio is a clear indication of the potential that the organization may not report projected losses but maintain a lower loss level. The in-depth implementation of the allowance ratio denotes that the performance mandate of the organization is dependent on effective and plausible strategic management. Furthermore, majority of the pundits assert that the increase in the allowance ratio denotes that the company can accrue a reduction in the credit losses. The wide scale known operational strategy at Bank of America of conservative operational mandate is bound to ensure that it can mitigate the evident CRE risk. Bank of America prides itself as a conservative organization that depends on effective research towards investment into plausible organizational-customer relationship. Thus, the extensive investment into allowance ratio will play a critical role as a core competency mandate towards mitigating the evident losses that may emanate from the risk evaluate above.
Increase in mortgage put-backs and single-line insurers thus heightened focus on conservative in underwriting
Single-line insurers coupled with mortgage insurers operate in expectation of a raise in the level of loan put-backs for the mortgage originators so as to recover their losses that may emanate from the mortgage defaults increase. Thus, since the US residential mortgage economic environment is still on the comeback, financial guarantors have been on the in-depth review of the underwriting practices for the loans that compose of troubled residential mortgage backed securities. In the instance that irregularities are evident, the individuals can recoup their default loans at par that is regardless of the current underwritten value of loans. However, estimates reveal that financial guarantors have been on the downward trend in regards to investment and losses have been on the increase. Thus, it is imperative that Bank of America continues its implementation of the conservative underwriting approach. Through the conservative underwriting approach, the organization has managed to ensure and guarantee a healthy portfolio of mortgages that is plausible towards sustenance of profitability. An extensive or in-depth review of the operational books at Bank of America reveals that the organization can sustain and catapult its profitability through its no-nonsense approach in underwriting (Barney 2011). Maintenance of seriousness in operational mandate is bound to catapult profitability and revenue yield.
Effective policy statement to mitigate the notion of too large to fail mentality
Bank of America is a highly performing organization in US with plausible profitability even after the recent recession. However, the mentality of too much success requires effective policy statement towards mitigating the notion of complacency among the diverse organizations. However, it is highly advisable that the organization invests into more prudent and ethical approach in its expansionary approaches. As such, the company should enhance its image as a consumer centric organization and ensure that the diverse regulators comprehend the transparency approach of the organization. Admittedly, the organization should ensure that it comprehends and implements effective strategy conformity and regulatory mandate statement in their performance mandate, there are consumer protection acts, SEC and banking regulations that the organization needs to implement extensively. Ensuring conformity to the regulatory mandate is bound to align the organization with its consumer’s thus profitable outcomes.
Effectiveness in management of finances is imperative to business success. Admittedly, through proper use of financial sources, a business can perform effectively in the cutthroat market. Through the use of the diverse recommendations, Bank of America can continue its leadership role in the banking sector. Nonetheless, it is worthwhile to know and comprehend the positive and negative effects of the operational strategies in the diverse banks. Further, a business should inculcate financial intelligence to boost its investment strategies. Finally, through the analysis of the various ratios and investment calculations as per Bank of America, it should enable the business to make proper judgment of the performance strategies.
Ackerman, J. (2013). “Co-Governance for Accountability: Beyond ‘Exit’ and ‘Voice.’” World Development Vol. 32, No. 3, pp. 447–463
Barney, J. (2011): Firm Resources and Sustained Competitive Advantage. (In: Journal of Management, 1991, vol. 17, no. 1, pg. 99‐120)
Beck, T., Levine, R., & Loayza, N. (2010). Finance and the Sources of Growth. Journal of financial economics, 58(1), 261-300.
Realey, R. A., Myers, S. C., & Allen, F. (2012). Corporate finance (Vol. 8). McGraw-Hill/Irwin
Goetz, AM and Jenkins, R. (2010). Reinventing Accountability. New York: Palgrave Macmillan.
Hameed, F. (2010.) “Budget Transparency and Financial Markets,” International Budget Project forthcoming book chapter.
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