How to Use Financial Ratios to Maximise Value and Success for Business - Assignment Example

Finance and accounting Introduction Excellency clothing company is a global company that was established in the late 1980’s. It was economically developed with the sole purpose of producing high-quality products that are tailor-made to satisfy consumers’ needs and demands (Robinson, 2009). Excellency clothing company is not one to either brag or even bombards you with multi- billions of dollars of advertising. Since ever the establishment of the enterprise, they coined the phrase, “Nobody without wear”, their approach have been simple: to overwhelm their customers with the best goods of high quality and durability. In short, they let the customers do talk. The company is currently ranked as the largest global lifestyle brand offering company. It offers menswear, women swear, and other vital accessories over 100 retail stores in more than 30 countries. Today, Excellency clothing company fulfills its commitment to customers by providing commercial fashion and offering quality designs. The company has a vision of multi- channeling distribution and looking forward to the expansion of the brand in new and existing international markets. Discussion Despite the fact that the company has a vision of expanding its market size to gain competitive advantage over other competitors, it has experienced a setback of decrease in the profitability in recent years mainly due to the stiff competition in the market and economic recession and financial crisis (Ketz et al., 2005). The company’s financial statement show road to economic depression is skyrocketing. Based on the data from the income statement provided in the annual report, it is clearly seen that there is a decline in the company performance. At the beginning of 2014, the company reported revenue of £215,623,000, a drop of about (39440/255063)*100 = 15.46% from the year 2013. The decrease in the income was caused by unfavorable movements in the foreign currency rates in the respective countries (White et al., 2011). Another crucial factor was the stiff global competition that scaled up in the retail industry. The next item to be analyzed is the cost of sales that increased from (96800/255063)*100 = 37.95% in the year 2013 to (84500/215623) = 39.19%. The increase in the value f sales was due to the inventory damage which is inexcusable forcing the company to purchase more stocks, manufacture more wares and to cover additional costs that are associated with repackaging and finally storing replacement finished goods. Other factors that led to an increase in the cost of sales were the warehouse management and manufacturing overtime where the company pays to receive, try to inspect, manufacture and consequently distribute the products to the customers. Another essential item on the financial statement was that the company experienced a decline in the profit generation. The total profit generation decreased from 158,263,000 in the year 2013 to 131,123,000 showing a 17.15% drop. Overall, the decline in the net revenue and a consequent increase in cost of sales led to a significant low profit as compared with the previous year. Nevertheless, the company did not incur a rise in the expenses. The profit margin increased from (14746000/255063000)*100 = 5.78% in 2013 to (13176000/215623000)*100 = 6.11%. This increase by 0.33% is insignificant and almost non- existent. This shows the company’s difficulty in generating profit. The expenses such as administrative, selling and distribution and finance all decreased. This was because the company improved its utilization of both human and financial resources from the previous year. Balance sheet reveals the solvency concerns of Excellency clothing company (Bragg, 2010). Both the total assets and liabilities of the company increased from the year 2013 to 2014. Using the balance sheet as the available data, the figures were computed, and the current ratio for the year 2013 was (227042/40243)*100 = 5.64. From the current ratio criteria, any ratio more than one shows that the company has more current assets than liabilities. Therefore, since the enterprise current ratio is 5.64, the company has more assets than liabilities hence able to pay its obligation when they fall due (Rees, 2006). This was because enhanced its investing activities. The company reported 9956000 in cash and cash the year 2014. This is an increase of (1343000/8613000)*100 = 15.59% from the previous year. Although the company had a decline in the aggregate profit generation, an increase in the cash amount gives a signal to the potential investors that Excellency clothing company has protected its unanticipated expenses and therefore, they will be able to invest in the company hence consequently improve its performance in future. Additionally, another notable item from Excellency clothing company is that the issued share capital did not vary from 2013 to 2014 hence able to generate consistent investment from the shareholders and can use to reinvest its business. The fixed assets turnover for the company declined from (255063000/36690000) = 6.95% in 2013 (215623000/46523000) = 4.63 in the year 2014. This reduction shows the difficulty for the company to utilize its assets to generate the sales. The inefficiency to utilize its assets to make the sales is due to lack of training to the employees to enhance the proper use of the assets. Another key problem is underutilization of the assets that results to sub-optimization of the sales revenue (Tyran, 2006). Recommendations on what needs to be done to improve the company performance or profit in the future. The company is encouraged to introduce technology in the manufacture of its products. The technology increases the efficiency and minimizes the cost of producing the products hence the company realizes an increase in the profit due to the economies of scale (Guthmann, 2013). Technology also plays a role in enhancing the product quality enabling the company to increase its price as it was believed that price connotes quality hence harvesting profits. Additionally, the company should diversify its business operations to reduce the risks such as the interest rates, inflation and fluctuations in the foreign exchange rates (Helfert, 2007). Nevertheless, the company can go to the extent of borrowing some debts to finance its internal activities to increase the number of sales that shall be produced in the future. It should be noted that a rise in the sales will consequently lead to an increase in the aggregate profit. The company should also set aside an adequate amount of marketing and development. The marketing part of it shall improve the business profile and also enable the company to tell the consumers preferences and tastes hence producing high-quality products that are tailor-made to satisfy their respective needs and demands (Troy, 2011). The amount of capital set aside should be used to improve employees’ skills and expertise. This will help the company to reduce the wastage of resources, labor turnover, and absenteeism and enhance job satisfactions that increase production (Tamari, 2007). More so, the company is encouraged to enter into mergers and acquisition to benefit from synergies. From the finance point of view, the value of the combined firm is higher than the two firm’s value added separately. Other benefits of synergy are: increase in the market share of the company, limit the completion from other enterprises in the same industry, establishment of transnational bridgehead without excessive start-up costs to gain access to the foreign market and overcome the problem of the slow growth and profitability in its own industry. The company should select the employees scientifically to suit the available jobs. This will enhance the production of high-quality products that will readily be accepted by consumers hence revenue generation (Muro, 2008). The company human resource manager should comprehensively make an effective plan to minimize future wastage of human and financial resources in the future. The company should set its performance standards that can be used to boost the morale to achieve. The standard performance can be compared to the actual performance and in case of underperformance, the management investigates the route cause and necessary causes of actions taken to remove the mess (Gibson & Frishkoff, 2009). For consistent improvement in the profits, the company should change its operational model by looking at new delivery model, lower the operation cost. This can only be done by considering new channels of distribution to market and other new internal processes that mainly focus on what customers want (Bull, 2008). Finally, the company should drive a ruthless internal efficiency whereby it should not focus on what does not add value to the enterprise. The company should track its inventory by use of tracking software or design its spreadsheets. This will help the company to know how much product it has, how much it needs and know if any vice happens. Conclusion In a nutshell, it can clearly be observed that indeed the Excellency clothing company is one of the largest firms that have a vision of expanding the business operations. However, the company suffers a number of setbacks that leads to the poor performance. The primary causes of this were the decline in the total revenue generation by the company was due to unfavorable economic conditions such conditions includes the inflation, adverse movements in the foreign currency exchange rates, increase in the interest rates and unfavorable rules and regulations that govern the operations of the company (Chartered Institute of Management Accountants, 2007). However, the company can enhance its revenue generation and consequent scale up of the profit by efficient utilization of the assets to generate the sales, introduce the use of technology in manufacturing to increase the sales units and good human relations. Therefore, companies should make financial analysis; determine their strengths and weaknesses then develop effective strategies to improve their performance. References Bragg, S. M. (2010). Financial analysis: A controllers guide (2nd ed.). New York: Wiley. Bull, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Oxford: CIMA. Chartered Institute of Management Accountants. (2007). Financial analysis. London: BPP Learning Media Ltd. Gibson, C. H., & Frishkoff, P. A. (2009). Financial statement analysis. Boston: CBI Pub. Co. Guthmann, H. G. (2013). Analysis of financial statements. New York: Prentice-Hall. Helfert, E. A. (2007). Techniques of financial analysis (3rd ed.). Homewood, IL: Irwin. Ketz, J. E., Doogar, R. K., & Jensen, D. E. (2005). A cross-industry analysis of financial ratios: Comparabilities and corporate performance. New York: Quorum Books. Muro, V. 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