Project Analysis for Super Furnishing Company - Math Problem Example

The paper  “Project Analysis for Super Furnishing Company”  is a helpful example of a finance & accounting math problem. Trend Analysis: Sales have grown by more than one and a half times from 2004 to 2010 and are up by 160.81%, Gross profits have grown but very little in comparison to sales and stand at 112%.

Reason:
- Increase in cost of raw materials
- Increase in production cost i.e. rise indirect expenses which have grown by 84%

Net profits have decreased and are less than half and stand at 40%

Reason:
- Increase in interest income which has grown by 144%
- Increase in operating expenses which has increased by 171.43% in 2010 over 2004
The increase in operating expenses and interest expense is a serious consideration that needs to be dealt with seriously.

Balance Sheet
Inventory has grown over the years by 681.67% which shows poor management of inventories and resulting in cash to idle. This has resulted in poor stock turnover rates and poor management. This could have been justified with growth in sales but it stands at a 160.81% growth rate for the same period highlighting inefficiency.

Accounts receivable has grown by 135.29% whereas payable has grown by 252% over the same period. The growth is justified by the increase in sales but debt collection seems to be a problem increasing the risk associated with bad debts.

Long-term liability has also grown significantly and has grown by 201% highlighting lots of investment from outside sources.

Ratios
Profitability Ratios

• The industry gross margin stands at 30%
• Super Furnishing Company has a poor average in comparison to the industry average for 2005 to 2010 and in 2004 the company had a slightly better average
• This is further been substantiated by a decrease in net profits which has seen a dip to 40% in comparison to 2004 highlighting the rising operating cost
• Return on assets has decreased significantly from 14.96% in 2004 to 2.43% in 2010 highlighting inefficiency in using assets and having more assets than warranted.

Liquidity Ratios

• The industry average for the current ratio is 2:1 and for the quick ratio is 1:1
• Super Furnishing Company has been able to maintain consistency in current assets ratio whereas quick ratio has shown a significant dip which is attributed to large inventories which have grown by 681.67%
• The ratios are a concern for Super Furnishing Company as it is far below the industry standards
• This falls in line with the account receivable and accounts payable statement highlighted in the trend analysis which has shown poor performance

Efficiency Ratios

• The industry average for accounts receivable is 30 days and inventory turnover is 60 days
• The account receivable in days has grown significantly for Super Furnishing Company from 2005 to 2010 and is well beyond the industry standard. It was sound in 2004 when it was meeting the standards. This highlights poor efficiency in collecting money from debtors showing poor debt management and increasing the likelihood of bad debts
• The inventory turnover in days has grown significantly for Super Furnishing Company from 2005 to 2010 and is well beyond the industry standard. It was sound in 2004 when it was meeting the standards. This is supported by the growth in inventory by 681.67% as shown in the trend analysis

Problems
Improve the inventory management policy through

• Just in time technology
• Better management
• Reviewing of stock

Debt Management

• Credit Policy
• Collection of debt

Dividend Policy

• Dividend paid per share has improved over the years and has been consistent in declaring a dividend
• The debt payout ratio has improved and stands at 0.92% in 2010 and is 170.37% of the earnings per share for the same period

Part B
Strength
The strength of the company has been the growth in sales. This has ensured that the business doesn’t suffer from the downturn of the economy.

The above graph highlights the growth in sales which Super Furnishing Company has been able to generate despite the global economic slowdown. This highlights the efficiency of the marketing department and the ability of the company to target their customers correctly and satisfy them.

Weakness
The weakness demonstrated by the company has been the decrease in gross profit margins. This is highlighted below

The dip in gross profit margin has been significant as highlighted in the above graph. The magnitude of this multiplies when we consider the increase in sales which hasn’t been matched by the increase in gross profits highlights inefficiency to maintain the direct cost.

Another weakness demonstrated by the company is the large decrease in liquidity position due to large inventories in hand. This is shown below

The above graph shows poor liquidity conditions which increase the risk associated with short-term stability. This also increases the risk for creditors and lenders who might refrain from lending money to the company. This is a serious issue and needs to be dealt with quickly.

The third weakness identified in the company is poor management policy about inventory levels. This is highlighted below

The above graph shows that the company was inefficient in maintaining the inventory to the desired level. This has resulted in idle cash being parked in stock and increases the likelihood of becoming obsolete in the long run. This also increases the risk associated with the fluctuation in the value of inventory and makes the company risky.

Part 3
Recommendations

• Super Furnishing Company needs to look to devise a mechanism which helps them to reduce the cost associated with direct factors leading towards production. The company needs to ensure efficient management to cut down cost
• Super Furnishing Company needs to reduce the inventory level as it has exceeded the limit. They need to see measures like just in time to ensure that the availability of inventories at the right time and no excess inventorySuper Furnishing Company needs to bring down the inventory turnover rates which will be taken care of by reducing the inventories and using the above recommendation will help
• Super Furnishing Company needs to ensure efficient management and needs to bring about a change in policies.