Bobs Bikes' Perspectives - Essay Example

Bob’s Bikes and Café case study The main problem Bob’s Bikes In the shop “Bob’s Bikes”, the owner Bob Brown sells new and reconditioned second hand bikes. A part time assistant has been appointed to help Bob with the business. The business has been moderately profitable. However Bob is extremely worried regarding the possibility of decline in sales which may lead to declining profits. The local parking restrictions near Bob’s shop have increased. As a result car owners began parking their vehicles at the other end of town. Before the restrictions were imposed, cars were parked at the free car park in the next street of the shop. As a result a number of car owners would pass by Bob’s shop which facilitated in increasing the popularity of the shop. However since this parking system was stopped, Bob felt that his business was losing popularity. Bob also noticed that the general sales of children’s bicycles had dropped considerably. Bob suspects that a large amount of sales of his shop has shifted to the bicycle and car maintenance retailing chain located at the town’s main shopping centre. The Christmas sale of the shop was also much lower than expected. The shop was clammed with cheaper bikes clearly depicting that the shops had declining number of customers. The recent recession also had a negative impact upon the business (Cowen and Hoffer, 1985). Bob’s Café Bob’s café is run by Bob’s wife Sophie. Apart from providing internet services, the shop also provides services such as computer and software upgrade, computer repair, software installation, cleaning and configuration of computers. Sophie is concerned regarding the cash flow of the business rather than profitability. The bank overdraft of the business has been continuously rising since the last two years. Sophie could not understand the reasons behind such an increase. Sophie although provides services on credit in order to increase her sales, but she has not come across any bad debts (Brigham and Houston, 2011). Information required for making decision The information required for taking decision in respect of Bob’s Bikes is obtained through the different rations computed from the business’s annual financial statements. The financial ratios of 2012 and 2013 were taken into consideration for taking the required decisions. Bob’s main issue is to analyze the profitability of the business. Financial ratios are considered as a suitable measure for analyzing business performance. Evaluating the progress of any business is vital and financial ratios are a suitable tool in examining the same. Financial ratios facilitate comparison of the performance of the company with other firms as well as the performance of the business in the previous years. Financial ratios help in measuring the overall performance of the firm and facilitate the management to determine the area of improvement. Since Bob is mainly worried regarding the profitability of the firm, profitability ratios such as gross profit margin, operation profit margin, net profit percentile and return on capital employed would be helpful (Burns, Sale and Stephan, 2008). In case of Bob’s cafe, the main objective is to understand the cause of increase in bank overdraft. The reasons behind such an increase can be obtained through the company’s financial statements and cash flow statement. Sophie is mainly concerned regarding the cash flow of the organization. Hence analyzing the cash flow statement and the financial statements can be considered most helpful (Heaton, 2002). Assumptions Bob has considered analyzing the financial ratios based on the assumption that his business policies undertaken to improve sales will have a considerable impact upon the level of sales and profitability. These policies are; providing discounts to consumers who introduce new clients, offering special promotions for loyal customers and sponsoring school projects which are based on the benefits of cycling. These offers and strategies undertaken by Bob are assumed to have a considerable impact upon the sales and profit levels of the business. Bob mainly considers that when sales increase, the profits of the business are bound to rise. Accordingly the analysis of the financial ratios is required to be conducted (Ross, Westerfield and Jordan, 2008). Sophie considers that her strategy of expanding the business such as by selling stationery items and computer parts will increase sales and henceforth improve the cash flow position of the business. She also assumes that her strategy of allowing short term credit sales in respect of different types of goods and services would increase the overall level of the sales. This is considered to have an impact on the cash position of the firm. Moreover such credit facilities are only provided to her loyal customers. Hence the chances of bad debt are also assumed to non-existent (Arnold, 2008). Possible solutions From the ratio analysis conducted, it can be seen that few of the profitability ratios of Bob’s Bikes have increased from the previous year, which are gross profit margin and operating profit margin. However the net profit margin and the return on capital have declined. Additionally it is also observed from the efficiency ratios that the receivable days and payable days have increased considerably. This shows that the financial resources of the firm remains trapped in inventories for longer durations. It has also been observed that inventory turnover days have also risen. All these factors lead to the understanding that the sales frequency of the business has declined considerably. Therefore the sales promotion strategies which were undertaken by Bob had very little effect on increasing the businesses profits. However Bob is required to ensure that the profitability ratios do not become negative as the efficiency ratios rise. It is also expected that in given time, the locality people would find buying products from Bob’s shop more convenient than travelling to the town’s main shopping centre. It is also suggested that Bob must consider providing services at cheaper rates than competitors, for increasing sales. Price decrease may have greater impacts upon attracting consumers than other strategies (Bierman and Smidt, 2012). The financial statements of Bob’s cafe reveal that a significant portion of the finance of the business remains trapped in the form of inventories. The inventories level of the business has risen in the year 2013 as compared with the previous year. It can be understood that Sophie is not managing her inventory cycle in proper manner. Since there is no rapid conversion of stock into cash, Sophie is required to depend upon bank overdraft facilities for meeting her day to expenses. As a result the bank overdraft levels have gone up significantly in the year 2013 as compared to 2012. Another negative implication of increase in bank overdraft is the rise in periodical interest rates which reduces the excess cash availability of the firm. It is also observed from the cash flow statement that the expansion plans of Bob’s cafe have increased the overall day to day operational expenses of the business. All such aspects have had a negative impact upon the profitability of the firm. It is suggested that Sophie should reduce the period of credit she allows to her customers (Braun and Larrain, 2005). Implication of solutions By decreasing the price of goods and services, Bob’s Bikes may be successful in attracting a large number of customers. Bob’s prime motive is to draw customers from the shopping centre. Bob’s strategy of expanding the services provided and offering discounts might not be successful if consumers are not attracted in the first place. Bob must also indulge in promoting the shop through advertising. When individuals frequently notice the business’s brand name, it gains rapid popularity. Price decrease clubbed with advertising and promotional offers facilitates increasing the sales of the business. As sales rises, it would be possible for Bob to raise the business’s profit levels. As the level of retained earnings are also expected to rise significantly. However it is essential that the business does not increase its internal operating costs. If operating costs increase highly or in the same proportion as the sales rise, it would become difficult for the business to earn higher profits. Decreasing the costs of operations would also facilitate Bob to sell products at cheaper rates (Shapiro, 2005). Bob’s Cafe’s main issue is in respect of cash flow. To improve the cash flow position of the business, it is suggested that the business concentrates upon improving the cycle of operations. By reducing the lead time allowed to debtors, Sophie can meet its credit requirements easily without having to depend on the loan taken from banks. As a result the level of bank overdraft would significantly reduce and also cause a rise in the liquidity position of the business. Sophie may also consider reducing prices of the services offered by her so as to increase the popularity of her business and raising sales levels (Shapiro, 2005). Real life examples H&M, a Swedish retailing company had efficiently managed its credit cycle by lowering the lead time allowed to debtors. The company in the year 2000 had faced significant issues relating to liquidity and cash flows. Managing the operating cycle was considered to be a suitable solution. This facilitated the company to easily meet the creditor’s payment requirements without delay. Less dependency was created upon the banks for achieving higher liquidity. The company was seen to face immense completion from other big retail brands in the market. To counter the issue, the firm decided reducing the price of its services and maintaining high sales volume. An increased sale level is essential for raising the profits of the firm (Hayes and Jones, 2006). Reference list Arnold, G., 2008. Corporate financial management. New Jersey: Pearson Education. Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. London: Routledge. Braun, M. and Larrain, B., 2005. Finance and the Business Cycle: International, Inter‐Industry Evidence. The Journal of Finance, 60(3), pp. 1097-1128. Brigham, E. and Houston, J., 2011. Fundamentals of financial management. Connecticut: Cengage Learning. Burns, D. C., Sale, J. T. and Stephan, J. A., 2008. A better way to gauge profitability: systematic ratio analysis using the advanced DuPont model. Journal of Accountancy, 206(2), pp. 38. Cowen, S. S. and Hoffer, J. A., 1985. Usefulness of financial ratios in single industry. Journal of Business Research, 1(1), pp. 80-89. Hayes, S. G. and Jones, N., 2006. Fast fashion: a financial snapshot. Journal of Fashion Marketing and Management, 10(3), pp. 282-300. Heaton, J. B., 2002. Managerial optimism and corporate finance. Financial management, 1(1), pp. 33-45. Ross, S. A., Westerfield, R. and Jordan, B. D., 2008. Fundamentals of corporate finance. New Delhi: Tata McGraw-Hill Education. Shapiro, A. C., 2005. Capital budgeting and investment analysis. New Jersey: Prentice Hall. Read More