Wonderous Wildflowers Overall Performance - Essay Example

Wonderous Wildflowers’ Overall Performance Executive Summary Wonderous Wildflowers’ overall performance is not satisfactory during the period of July and August. It needs to consider and contemplate upon the various potential reasons which may be causing the decline in the sales of the firm. The overall profitability is also on decline which may be indicating towards higher cost of doing the business as well as low competitiveness of the firm’s products. It is critical that the firm must look into the possibility of further curtailing the operating expenses of the firm.

Introduction Financial analysis of the firm’s financial position provides a very clear and concise picture of the overall performance of a firm and its ability to perform better in future also. A good owner/manager of the business should therefore always take the time and opportunity to properly analyze and evaluate the performance of the business as well as set the future direction in order to overcome potential challenges that a firm can face in the future. The operating performance of Wonderous Wildflowers over the past two months has not been as satisfactory as the firm was not able to earn profits.

As such this situation demands that a clear and concise analysis of the various accounts heads and financial ratios should be performed in order to assess the weaker areas so that clear identification of the different areas which may require further attention of the management can be done. The overall purpose of this report therefore is to prepare and perform the financial analysis of Wonderous Wildflowers as at 31st August 2010. In order to achieve this objective a trend analysis will be performed wherein the performance of two months i.e. July and August will be assessed to provide a clear understanding to the management regarding the potential areas wherein the overall improvement can be achieved.

Profitability Analysis Profitability analysis of any firm actually indicates as to how much the firm has been able to earn against its sales. Thus this analysis provides a deeper insight into the margins offered by the firm and the overall cost trends in comparison with sales. Some of the figures during the period are: There are two important trends which can be ascertained from the above calculations i.e. changes in sales as well as changes in the profitability of the business. On month on month basis, the sales have declined by almost 23% i.e. from July to August whereas Gross profit margin has also declined substantially by more than 6%.

Similarly, the operating profit margin as well as the net profit margin has declined too during the period. This trend might indicate two important managerial considerations i.e. what is causing the decline in sales and whether costs are increasing or not? What is also significant to understand is the need to probe further into the importance of managing the various efforts in such a manner which can allow the management to generate more sales. The declining level of sales may be attributed to the lack of effective marketing efforts on the part of the owners/managers as well as the stiff competition faced by the firm.

Pricing can also be an important issue which management must look into as higher prices offered by the firm may not be suitable enough for most of the customers to purchase the products offered by the firm. This means that a revision in the pricing should also be considered because the gross profit margin is relatively on the higher side i.e. over 30% which should be trimmed down in order to make the products of the firm more competitive in the market. Working Capital Management Working capital management generally indicates as to how the firm manages its current assets and current liabilities.

The management of both the accounting heads is critical because an effective working capital management policy will help the business to remain liquid and also ensure that they it can meet the demands of their customers with reasonable assurance. A closer analysis of the ageing of receivables will indicate that the most of the receivables fall into the time bracket of 0 to 30 days i.e. 66%, indicating that the overall credit extension policy of the firm may be relatively strict. Since there are no industry figures available, a comparison with August will indicate that there is an actual increase in the receivables falling between 31 to 60 days during the month of August.

This increase in accounts receivables days therefore is a clear indication of the fact that firm is willing to extend the credit more than its usual period in order to boost the sales. However, it is critical that the firm must ensure that its receivables remain within an acceptable range. Similarly, ageing schedule of payables, in July, indicates that firm pays to its creditors mostly within 30 days however this trend drastically changed during August wherein 43% of the accounts payables now fall into this bracket.

There is an increase of more than 30% in days accounts payable in single month which can be an indication that the firm’s creditors may not like this position and would demand a quick payables turnover. From the perspective of market reputation, this may not be a healthy sign as creditors usually do not like their money being repaid late. It also seems that firm is holding relatively higher amount of cash which may not be desirable given the fact that the overall supplies are made on credit.

Managers must need to look into finding out optimum level of cash which can fulfill the day to day needs of the firm and invest rest of the amount so that firm’s resources are optimally used. Conclusion The above analysis indicates that the firm’s financial position is not satisfactory during these two months and it is critical that the management must look into the ways of improving the performance of the firm. Sales and profitability is on decline whereas the working capital management of the firm is not satisfactory too.

It is important for the manager/owner to reconsider the pricing strategies of the firm as well as re-think its credit extension policy in order to boost the sales.