Financial Analysis of Sneads Dry Cleaning Company - Case Study Example

Sneads Dry Cleaning Company affiliation Sneads Dry Cleaning Company Analysis of the company is crucial in companies and for investors in analyzing an organization. This is especially crucial when an investor wants to buy a company. It looks at the internal and the external environments of a company, and also the strategies that companies take in maintaining their competitive advantage company. Sneads Dry Cleaning Company is a dry cleaning business that has been operating in a residential area for 30 years. Before taking over the business, it is crucial for Sheldon to analyze the financial health of the company. This information will help Sheldon make informed information (Lumby, 2003). Depending on the results of the financial analysis, he will be able to come up with strategies which will improve the performance of the company. Body Before taking over the business, it is crucial for Sheldon to analyze the financial health of the company. It looks at the internal and the external environments of a company, and also the strategies that companies take in maintaining their competitive advantage company. Depending on the results of the financial analysis, he will be able to come up with strategies which will improve the performance of the company. Financial Position Ratio analysis is the primary technique used in analyzing the financial position of companies. This will be crucial for Sheldon in making informed decision on whether to buy the business from his uncle. This analysis will help in determining the competitive advantage of the company, which determines its ability to survive in the market (Brigham, 2012). This also determines the company’s ability to maintain its market share, enjoy profits, and growth. Solvency Ratio Looking at the current the rule of thumb is that the current ratio should be 2:1. This is where the proportion of the current assets to the current liabilities should not be too high or too low when compared to the rule of thumb (Lumby, 2003). This means that the company’s current is good. Current ratio= Current Assets ÷ Current Liabilities 2013 = 15,000÷ 30,000 = 2:1 Efficiency Ratio Collection Period Ratio (Days) Account Receivable ÷ Sales * 365 5000÷ 580,000 * 365 3.1 days The company collectability of the account receivable is efficient because it is only 3 days, which assures the company that it can increase its cash supply fast. Assets to Sale Ratio Total Assets ÷ Net Sales 2013 = 285,000÷ 78,500 = 3.631 =363.1% The percentage of assets to sales ratio is abnormally high which indicates that the company is not fully utilizing its assets. This also shows that the company’s sales efforts are not aggressive. Sales to Net Working Capital Ratio Net sales ÷ (Current Assets-Current Liabilities) 2013 = 78,500÷ (15000-30,000) = -5.2 This ratio is high meaning that the company is currently overtrading. Its sales level is higher than its investment. Profitability Ratios Asset Turnover Net profit (after tax) ÷ Total Assets 2013 = 78,500÷ 285,000 = 27.5% Opinion on the Financial Position Currently this company is facing a number of challenges seen in the asset to sale ratio that is abnormally high which indicates that the company is not fully utilizing its assets. This also shows that the company’s sales efforts are not aggressive (Griffin, 2012). The company has the opportunity to fully utilize its assets in order to improve its performance. There are challenges in the company’s sales to net working capital ratio, which is high meaning that the company is currently overtrading. Its sales level is higher than its investment. The current asset turnover of the company is 27.5%, which is fair. However, the company needs to increase its return on its assets to increase this percentage. This is crucial because the company has the opportunity to utilize its assets to increase its profits (Glynn, 2008). This will help cover extra the expenses expected after the business has been sold. Some of these expenses include renovation costs, costs of buying new equipments and the extra costs that will be incurred when new employees are hired. This is especially crucial because the company is not qualified for a loan. The asset to sale ratio of the company is 363.1%, which is abnormally high. This indicates that the company’s sales effort is not aggressive. This is a big challenge to the company and is also a big risk. Currently the company enjoys between 400 and 600 regular customers, and also has approximately 800 names in its computer listing. However, a new competitor has just entered into this market. This is a well known dry cleaning Chain that has modern establishment. It has an aggressive sales strategy aimed at attracting customers that include lowering its rates by between 5% and 20% as compared to Sneads Dry Cleaning. The company is expected to face major challenges in retaining its customers because aggressive efforts are not put on sales and if it does not buy new infrastructure. The company is also experiencing some operating risks, the most obvious one being related to the business model used by the company (Ryan, 2004). The case study indicates that this company is owned and run by Sheldon Snead’s. This indicates that the company is dependent on one person as seen in a sole trader business. This company is experiencing difficulties in its succession planning. This problem is evident from the fact that the owner is finding it hard to get someone who will take over the business after his retirement. Like many other sole trader businesses, this business faces the risk of closure is the owner leaves the business. Best Strategy and Financial Alternatives The best strategy for the company in increasing its sales effort is to come up with a marketing strategy. The company has enjoyed incurring low expenses because most of the employees were family members who are paid lower rate. However, sales need to increase to make sure that profit from this company increase. One marketing strategy that can be applied by this company is television advertisement. This will create awareness of the services provided by the company. Customers will also be able to differentiate the services provided by this company as compared to the new competitor. This will turn help retain the existing customer and will attract new customers who will increase the sales level. Currently, a new competitor has just entered into this market. This is a well known dry cleaning Chain that has modern establishment. It has an aggressive sales strategy aimed at attracting customers that include lowering its rates by between 5% and 20% as compared to Sneads Dry Cleaning. This present huge competition for the business. The business on the other hand, needs to do renovation and replace infrastructure. Even though the business is not qualified to get a loan to support these expenses, the company can take the financial strategy of enlisting it in the stock markets. This will help the company gain finance for expansion and improve the infrastructure so that it can gain a competitive advantage. The company is also experiencing some operating risks, the most obvious one being related to the business model used by the company. The case study indicates that this company is owned and run by Sheldon Snead’s. This indicates that the company is dependent on one person as seen in a sole trader business. This company is experiencing difficulties in its succession planning. This problem is evident from the fact that the owner is finding it hard to get someone who will take over the business after his retirement. Like many other sole trader businesses, this business faces the risk of closure is the owner leaves the business. Implications on Future Financial Position The strategies suggested will have implications in the future financial position of this company. For example, the marketing strategy suggested will increase the expenses of the company in terms of payment to television stations that will be running the advertisement. However, this strategy will also increase the profit level of the company because it will increase awareness of the services provided by the company. This will help to retain the current customers and attract new customers. Enlisting the company in the stock markets will improve the financial position of the company because there will be more cash to help the company expand to more markets. This will also help the company improve its condition. Being a company listed on the stock exchange market, the company will also have the advantage of getting a wide funding option. This strategy will increase the credibility of the company to outside investors because transparency will be increased, which in turn assures them that the accounts published are true and fair accounts. They are assured that what is presented shows the exact situation at the company. Options available will be from both the internal and external sources. Internal sources are from within the business while external sources are from third parties. Some of these options include delaying payments to creditors and bank loans. Conclusion Analysis of the company is crucial in companies and for investors in analyzing an organization. This is especially crucial when an investor wants to buy a company. It looks at the internal and the external environments of a company, and also the strategies that companies take in maintaining their competitive advantage company. Analysis of this company shows that buying Sneads Dry Cleaning Company is a risky investment. This is based on the analysis of this company that shows the company’s sales efforts are not aggressive. The company is also currently overtrading and is expecting to attract expenses that include renovation costs, costs of buying new equipments and the extra costs that will be incurred when new employees are hired. Finally, the company is facing a new competitor has just entered into this market. This is a well known dry cleaning Chain that has modern establishment. It has an aggressive sales strategy aimed at attracting customers that include lowering its rates by between 5% and 20% as compared to Sneads Dry Cleaning. Bibliography Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Mason, Ohio: South-Western Cengage Learning. Glynn, J. J. (2008). Accounting for managers: London: Cengage Learning. Griffin, R. W. (2012). Fundamentals of management. Mason, OH: South-Western Cengage Learning. Lumby, S & Jones, C. (2003): Corporate finance: Theory & practice. London: Thomson. Ryan, B. (2004). Finance and accounting for business. London: Thomson Learning. Read More