Analysis of the Present Business Situation - Book Report/Review Example

? Company Analyses Executive summary The study has been prepared in order to understand the present business situation of Rita’s business and Charlie’s business. Both the businesses financial data was presented in the income statement. The study focussed on preparation of cash flows for both the businesses followed by the analysing their monthly operating cash flow patterns. The ratio analysis has been done for both the businesses in order to understand their business situation in terms of profitability. The next part of the study would be highlighting the promotional plans adapted by each business. It would be reflected by means of a forecasted profit and loss statement for both the businesses. It would help in analysing the strengths as well as weaknesses associated with the promotional plans. Finally the study would be concluding with an insight into how the promotional plans can be made much more effective in order to achieve success in the target market. Table of Contents Executive summary 2 Question 1 4 Question 2 7 Question 3 9 Question 4 10 Reference List 11 Appendices 12 Question 1 This portion of the project would be reflecting the present financial performance of Rita’s and Charlie’s business by means of their financial ratio analysis and cash flows. The cash flow statement of Rita’s business has been computed by taking into account the profit and loss statement. It has been shown in appendix 1. The performance is impressive as almost in the entire year, the cash in hand figure has been positive which implies that the expenses have been controlled in a proper manner in order to increase the revenue gradually (Barker, 2011; Gildersleeve, 1999). The cash flow statement of Charlie has been shown below in Appendix 2. It has been computed based on the profit and loss statement of the business. The table below shows that the company could not maintain positive figures for the cash in hand every month (Ingram and Albright, 2006; Mulford and Comiskey, 2002). It requires controlling the expenditure more effectively in order to increase the revenue every month. The analysis related to the financial performance of an organization is analysed by means of evaluation of the accounting information using different tools. It is described as the procedure of evaluation of relationship in between different components in the financial statement for gaining a proper understanding related to the performance and position of the organization. The analysis as well as evaluation of the financial performance of any business helps its management to frame an effective decision. Any decision taken on the basis of intuitions always increases the possibility of flaws in it. In order to avoid such faulty decisions, it is very important to analyse and interpret the results in highly systematic manner on the basis of the quantitative data. The decisions that are taken on the basis of systematic analysis do not give misleading results. The financial statements that are present in raw manner cannot be used by individuals who have less knowledge or experience in this field. When the financial statement is analysed with the help of effective tools or techniques and then interpreted, such an interpretation is easily comprehensible or understandable to any individual even if he/she does not have any knowledge on that subject. Moreover the analysis and interpretation would help in the verification of the accuracy or correctness of the decision (Thukaram, 2007). The income statement of Rita’s Business has been given below: Jan ? Feb ? March ? April ? May ? June ? July ? August ? Sept ? Oct ? Nov ? Dec ? Total ? Revenue VAT inc 18000 14400 15600 16200 16440 16800 18000 15600 14400 14400 13200 173040 Revenue VAT ex 15000 12000 13000 13500 13700 14000 15000 13000 12000 12000 11000 144200 Cost of Sales 6000 5250 5500 5720 5850 5830 6300 5740 5550 5150 4650 61540 Gross Profit 9000 6750 7500 7780 7850 8170 8700 7260 6450 6850 6350 82660 Labour 2200 1680 1755 1958 2055 2110 1950 2200 2100 1600 1900 21508 Utilities 1000 748 700 650 540 500 600 600 650 690 740 7418 Marketing activity 650 160 170 210 190 180 170 170 140 110 90 2240 Other costs 2900 2500 2450 2700 2750 2600 2750 2600 2550 2200 2450 28450 Net profit 2250 1662 2425 2262 2315 2780 3230 1690 1010 2250 1170 23044 The net profit figures help in inferring that the business is not consistent in generating net profit by increasing the sales revenue. In the month of November, the net profit figure was has been very low as compared to the profit figures in January, March or April. The business should make efforts for bringing a consistency in its business performance. The income statement of Charlie’s business would help in evaluating its financial performance to some extent. The income statement of Charlie has been shown below:   Jan ? Feb ? March ? April ? May ? June ? July ? August ? Sept ? Oct ? Nov ? Dec ? Total ? Revenue VAT inc 12000 12600 13200 14400 14400 14640 16800 14400 13200 12000 10800   148440 Revenue VAT ex 10000 10500 11000 12000 12000 12200 14000 12000 11000 10000 9000   123700 Cost of Sales 5000 5350 5650 6100 6100 6550 7400 6400 5800 5250 4750   64350 Gross Profit 5000 5150 5350 5900 5900 5650 6600 5600 5200 4750 4250   59350 Labour 1660 1780 1810 1890 1910 1910 2010 1960 1810 1760 1660   20160 Utilities 630 630 590 590 535 540 495 543 587 640 640   6420 Marketing activity 210 245 250 240 250 240 220 220 200 160 140   2375 Other costs 500 600 700 600 650 620 700 600 500 500 450   6420 Net profit 2000 1895 2000 2580 2555 2340 3175 2277 2103 1690 1360   23975 The net profit figure of Charlie shows that the business was generating good profit till September but it deteriorated from the month of October. The company should plan for increasing the revenue significantly in order to restrain the adverse effects on the profitability. Ratio Analysis For conducting an assessment of the financial performance of an organization, ratio analysis is performed (Gallagher and Andrew, 2007; Kuppapally, 2008). Ratio analysis reflects the procedure by means of which the financial performance of the organization is assessed and presented in a systematic as well as summarised manner. The ratio analysis helps in analysing the financial soundness, profitability and efficacy associated with the business. In a comprehensive manner, the ratio analysis determines or establishes relation between different financial factors (Siddiqui, 2006). The ability of a business in earning profit is assessed by means of the profitability ratios. This ratio is very significant as it helps in the evaluation of the financial reliability of an organization (Sinha, 2009). The performance of Rita’s business and Charlie’s business would be analysed on the basis of the profitability ratios obtained from the income statement. Ratios of Rita Net Profit Ratio Jan ? Feb ? March ? April ? May ? June ? July ? August ? Sept ? Oct ? Nov ? Dec ? Total ? Net Profit 2000 1895 2000 2580 2555 2340 3175 2277 2103 1690 1360   23975 Sales 12000 12600 13200 14400 14400 14640 16800 14400 13200 12000 10800   148440 Net Profit ratio 16.67 15.04 15.15 17.92 17.74 15.98 18.90 15.81 15.93 14.08 12.59   16.15 The net profit ratio of an organization shows its ability to generate net profit for the business by the effective utilisation of the sales (Schmidgall, Hayes and Ninemeier, 2003). The net profit ratio of Rita’s business shows an inconsistent performance. This means that the business could not maintain consistency in generating net profit every month by increasing the sales value. The business requires maintain consistency in generation of net profit and increase it gradually in order to achieve competitive advantage. Gross Profit Ratio Jan ? Feb ? March ? April ? May ? June ? July ? August ? Sept ? Oct ? Nov ? Dec ? Total ? Gross Profit 5000 5150 5350 5900 5900 5650 6600 5600 5200 4750 4250   59350 Sales 12000 12600 13200 14400 14400 14640 16800 14400 13200 12000 10800   148440 Gross Profit Ratio 41.67 40.87 40.53 40.97 40.97 38.59 39.29 38.89 39.39 39.58 39.35   39.98 The gross profit ratio of an organization helps in determining its ability to earn gross profit for the business by means of minimizing the cost structure involved in the operational activities. The gross profit ratio of the business has been almost consistent from January 2013 to November 2013. This implies that the business has tried to maintain consistency in the minimization of the cost structure involved in the operational activities. Ratios of Charlie Gross Profit ratio Jan ? Feb ? March ? April ? May ? June ? July ? August ? Sept ? Oct ? Nov ? Dec ? Total ? Gross Profit 9000 6750 7500 7780 7850 8170 8700 7260 6450 6850 6350   82660 Sales 18000 14400 15600 16200 16440 16800 18000 15600 14400 14400 13200   173040 Gross Profit Ratio 50.00 46.88 48.08 48.02 47.75 48.63 48.33 46.54 44.79 47.57 48.11   47.77 The gross profit ratio of Charlie’s business shows that it failed to maintain consistency in the generation of gross earnings by means of its operational activities. The business requires maintaining consistency in the generation of gross earnings in order to ensure the efficacy of the business operations. Net Profit ratio Jan ? Feb ? March ? April ? May ? June ? July ? August ? Sept ? Oct ? Nov ? Dec ? Total ? Net Profit 2250 1662 2425 2262 2315 2780 3230 1690 1010 2250 1170   23044 Sales 18000 14400 15600 16200 16440 16800 18000 15600 14400 14400 13200   173040 Net Profit Ratio 12.50 11.54 15.54 13.96 14.08 16.55 17.94 10.83 7.01 15.63 8.86   13.32 The net profit ratio of Charlie has been highly inconsistent in the consecutive months starting from January 2013 to November 2013. This states that the company is not being able to generate the net earnings in a consistent manner. It is recommended to the business to increase its sales and minimize the expenditure structure in order to bring consistency and increase the earnings gradually. Interpretation: When the performances of both the businesses are confirmed, it has been found that the performance of Rita’s business is better as compared to the performance of Charlie’s business. Charlie requires minimizing its expenditure structure in order to increase its profit figure and perform well from the financial perspective. On the other hand, Rita’s business requires increasing the net earnings monthly for achieving competitive advantage. Question 2 The promotional plans of Rita’s business and Charlie’s business have been done on the basis of the background information provided in the case study. The promotional plan decided by Rita is hiring an open space in front of the shop and conducting a fashion show on the four Saturdays of January. It is expected that this promotional plan would increase the sales by 40 percent. At the same time it would increase the average spending by ? 10. The labour cost of the business would increase by 30 hours @ ? 7/hour. The promotional plan of Rita’s business has been shown with the help of a budgeted profit and loss account as shown below: Budgeted Profit and Loss Account Sales 10000.40 (-)Additional Labour costs 210 (-) Cost of Sales 5000.2 Gross Profit 4790.20 (-) Expenses for conducting fashion shows 1500 Public liability insurance charge 100 Other Costs 1190.12 Net Profit 2000.08     Average Spending 30 The forecasted gross profit ratio of Rita’s business have been computed and shown below: Computation of gross profit ratio of Rita's Business   Gross profit 4790.20 Sales 10000.40 Gross Profit Ratio 47.90 The promotional plan of Charlie’s business is introduction of loyalty cards. It is expected by Charlie that such a plan would increase his cost of sales figure by 45 percent. It would reduce the average spending to ? 4.80. The labour cost would be increased by 100 hours @ ?6/hr. The promotional plan of Charlie’s business has been shown below with the help of a budgeted profit and loss account. Sales 15000.10 (-) Additional labour costs 600 Cost of goods sold (excluding additional labour cost) 6750.05 Gross Profit 7650.06 (-) expenses related to introduction of models (2*10*4*6) 480 Design and production expenses 150 Other Costs 4020.04 Net Profit 3000.02     Average Spending ? 4.80 The forecasted gross profit ratio of Rita’s business have been computed and shown below: Computation of Gross profit ratio   Gross Profit 7650.06 Sales 15000.10 Gross Profit Ratio 51.00 Question 3 A comparison in between the two promotional plans would be shown in a comparison matrix which would help in determining the strengths and weaknesses of the plans. Particulars Rita's Business Charlie's business Gross Profit Ratio 47.90 51.00 Net Profit Ratio 20% 15% Average Spending ?4.80 (reduced by 0.20) ? 30 (increased by 10) The aforementioned comparison matrix implies that the promotional plan of Charlie would yield it with higher gross profit earnings as compared to the promotional plan of Rita (Wahlen, et al., 2011). However, it is forecasted that Charlie’s business would be increasing its overhead expenditure which would result in the reduced net profit ratio for the company as compared to Rita’s business. The promotional plan of Charlie has also increased its average spending by ? 10. Thus the promotional plan of Charlie should aim at reducing the related overhead costs as well as the average spending in order to increase the net profit ratio. On the other hand, Rita should focus on reducing the costs associated with the operational activities for increasing the gross profit figure. Question 4 The promotional plan would result in an appropriate mix of reduced cost structure and maximum output (Cafferky and Wentworth, 2010). It should be effective in increasing the revenue in a successful manner. A good decision maker should always understand that what they should offer to the customers and how it should be different in achieving competitive advantage over the competitors. The procedure of developing such a business plan with the key benefits of incurring high profit figure would attract and retain the correct type of customers. One of the most significant components in the promotional plan is carrying out an industry analysis for segmenting the target market to which the promotional plan should be communicated (Ace, 2012). It would also help in understanding the present business scenario of such firm. Rita and Charlie must conduct an in-depth analysis to understand whether the chosen promotional plan is the most effective one or not. They should determine that the entire process is cost effective thereby providing maximum output (Centre for Professional Development, 1984). Reference List Ace, C., 2012. Effective promotional planning for e-business. London: Routledge. Barker, R., 2011. Short introduction to accounting. Cambridge: Cambridge University Press. Cafferky, M. and Wentworth, J., 2010. Breakeven analysis: The definitive guide to cost-volume-profit analysis. New York: Business Expert Press. Centre for Professional Development, 1984. How to design and implement an effective promotional plan for your accountancy practice: Transcript of seminar. Melbourne: Centre for Professional Development. Gallagher, T.J. and Andrew, J.D., 2007. Financial management: principles and practice. New York: Freeload Press, Inc. Gildersleeve, R., 1999. Winning business: How to use financial analysis and benchmarks to outscore your competition. Houston: Gulf Professional Publishing. Ingram, R. W. and Albright, T. L., 2006. Financial accounting: Information for decisions. Connecticut: Cengage Learning. Kuppapally, J.J., 2008. Accounting for managers. New Delhi: PHI Learning Pvt. Ltd.  Mulford, C. W. and Comiskey, E. E., 2002. The financial numbers game: Detecting creative accounting practices. New Jersey: John Wiley & Sons. Schmidgall, R.S., Hayes, D.K. and Ninemeier, J.D., 2003. Restaurant financial basics. New Jersey: John Wiley & Sons. Siddiqui, S.A., 2006. Managerial economics and financial analysis. New Delhi: New Age International. Sinha, G., 2009. Financial statement analysis. New Delhi: PHI Learning Pvt. Ltd. Thukaram, R. M. E., 2007. Management accounting. New Delhi: New Age International. Wahlen, J.M., Stickney, C.P., Baginski, S.P. and Bradshaw, M.T., 2011. Financial reporting, financial statement analysis and valuation: a strategic perspective: a strategic perspective. Connecticut: Cengage Learning. Appendices Appendix 1: Cash Flow of Rita Cash flow Rita 2013 Jan ? Feb ? March ? April ? May ? June ? July ? Aug ? Sept ? Oct ? Nov ? Dec ? Cross balance Opening Balance 13700 9510 14620 19410 16830 22320 27640 30815 36035 40925 42615 46415 274420   P&L cash in 12000 12600 13200 14400 14400 14640 16800 14400 13200 12000 10800 148440 Capital in                         Total Cash in 12000 12600 13200 14400 14400 14640 16800 14400 13200 12000 10800 148440 Cost of goods 6000 5000 5650 6100 6100 6550 7400 6400 5800 5250 4750 65000 Labour 1660 1780 1810 1890 1910 1910 2010 1960 1810 1760 1660 20160 Utilities 1700     1850     495     640   4685 Marketing 230 210 250 240 250 240 220 220 200 160 140 2360 Other costs 500 500 700 600 650 620 700 600 500 500 450 6320 Capital costs   Interest   VAT 6100 6300 2800     2000 17200 Tax 4200 4200 Total cash out 16190 7490 8410 16980 8910 9320 13625 9180 8310 10310 7000 115725     Net cash in month -4190 5110 4790 -2580 5490 5320 3175 5220 4890 1690 3800 32715 Closing balance 9510 14620 19410 16830 22320 27640 30815 36035 40925 42615 46415 307135 Appendix 2: Cash Flow of Charlie   Jan ? Feb ? March ? April ? May ? June ? July ? Aug ? Sept ? Oct ? Nov ? Dec ? Cross balance Opening Balance 2130 -2230 -1060 3665 -2171 2424 7504 9734 12124 11184 12434 15544 71282                             P&L cash in 18000 14400 15600 16200 16440 16800 18000 15600 14400 14400 13200   173040 Capital in                           Total Cash in 18000 14400 15600 16200 16440 16800 18000 15600 14400 14400 13200   173040 Cost of goods 6400 6000 5500 5720 5850 5830 6300 5740 5550 5150 4650   62690 Labour 2200 1680 1755 1958 2055 2110 1950 2200 2100 1600 1900   21508 Utilities 2110     2448     600     690     5848 Marketing 150 650 170 210 190 180 170 170 140 110 90   2230 Other costs 2600 2900 2450 2700 2750 2600 2750 2600 2550 2200 2450   28550 Capital costs   1000           1500         2500 Interest on loan 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000   11000 VAT 7900     8000     3000     2400     21300 Tax                 4000       4000 Total cash out 22360 13230 10875 22036 11845 11720 15770 13210 15340 13150 10090   159626                             Net cash in month -4360 1170 4725 -5836 4595 5080 2230 2390 -940 1250 3110   13414 Closing balance -2230 -1060 3665 -2171 2424 7504 9734 12124 11184 12434 15544   69152 Read More