Analysis
The proposal appears to be acceptable for purposes of investment based on the financial statements (Studyfinance.com, 2006) provided by the raw data according to case facts:Based on the projected income statement the net income after six months is £80,000 while the original investment was £80,000 or a 100% return on investment (ROI).
When annualized, the 100% return on investment for six months is actually 200% per annum. Based on the projected Profit & Loss Statement, the mark up of on sales is about 15% to 20%; hence the business has still big allowance to recover operating expenses. The net profit margin however is about 7%. Therefore the profitability is not too big and much will depend on the volume of sales.
This is the reason why the business suffered cash deficit for the first two months as reflected on the Cash Flow Statement because of low sales during said early months.However, based on projected Cash Flow Statement, there is a problem in the cash flow for the months of July and August because of the cash deficit.
The deficiency could either be solved by borrowing, additional investment or deferring payment to suppliers if the latter will agree.Based on the balance sheet the business has a very big liability in relation to capitalization, hence its debt to capital ratio is 4. 73:1. This would mean that the business is borrowing £4.73 for every £1 investment made. From an objective point of view, the business is very risky because of high liability.
This is aggravated by the fact that the business did not pay its liabilities on time particularly labour cost. Failure to pay labour cost on time is fatal to business because employees need to survive while working. If they are not paid the business will not run. In addition, the company will face problem about labor laws. The apparent problem is on working capital management because the cash balance at the end of the year is too big.
Conclusions/Recommendations
- The Business is profitable based on ROI; however, the owners must address the following problems:
- Employees/workers must be paid of their salaries on time to avoid labour problem andCompany loss.
- The cash deficit for the months of July an August should be remedied by additionalinvestment or borrowing.
- The excess cash must be used wisely by paying first the employees and reinvest formore profitable than interest to be earned from bank deposit.
- The company needs more effective marketing strategy to be able to increase it salesvolume because the net profit margin is just 7%. And to be able to sustain its workingcapital requirements.
References
- Studyfinance.com, 2006, [www document] URL www.studyfinance.com/lessons/finstmt/index.mv
