This essay analyzes several indices such as management, business, cash flow and profit and loss index on a business for 18 periods. The management index is determined by profitability performance of the business through the profitability index. Under this profitability performance, several financial ratios are used to determine the performance status of the business. To start with, the business current ratio that seeks to find the stability of current assets and liabilities of a business.
This data indicates that the current ratio starts in the period 4 and continues to increase up to the period 8. At this point, there is a decline that fluctuates between high and lows of 45.27 to 371.06. After which the growth of current ratio picks in the period 12 and continues to rise. This current ratio is not recorded for the first 3 periods because of no growth or negative impacts of income. For example, at some point illustrates negative figures for net income position to equity held by shareholders. The total asset turnover of this business displays a fluctuating pattern over the used periods and can be attributed to low equity turnover and lack of investments in current and fixed assets. The growth of sales for this business is not impressive over the periods with some periods registering zero growth in sales amount. Inventory management is another notable feature of the business whereby this has an influence over sales sold each period. Over time, there has been no inventory maintained within the business leading to lose of clients who need products on the spot (William 23). Improvement in maintaining inventory can be seen to improve with the growth in sales.
Using the cash flow figures, it is evident the business has lots of its cash out the business leading to a need to evaluate credit policy used by this firm. For example, there is consistency in figures representing the cash flows gained from operating activities and the amount received from accounts receivable. Using the figures on expenses incurred from market research explains the reason for less recorded growth in the sales amount. The situation of inability to grow company sales is compounded by management not emphasizing on growing the market share through advertisements. The company has inconsistent in amount allocated to promote business awareness on advertising platforms. However, the management has a strategy aimed at improving sale staff motivation either through increased salaries or amounts of commission. To add to this scenario of the employee, at certain periods, the company has allocated figures intended to improve its sales through recruiting experienced sales staff (Frino 56). This can be one of the management faults in treating recruitment of experienced sales staff as extraordinary yet the company is not strong financially.
The company maintains a constant dividend policy of 1500 over the 18 periods. However, the company starts paying dividends on 7th period. 15th and 18th period dividends are not paid and it is intriguing to analyze the reasons for not paying dividends in those two periods. Firstly, it can be as a result of management and shareholders’ resolution of not paying dividends and invest the amount allocated for this purpose as reinvestment through plough profit back to the business.
Despite the shareholder efforts to try, and improve company efficiency and performance the firm does not exploit advantages around it. For example, using tax shield generated through sourcing for credit through debt borrowing. This has the advantage of increasing capital for business; therefore, it is possible to undertake expansion projects. In addition through use of debt financing moderately the business will be able to reduce the amount of income set for taxation purposes and as well as increase its leverage (Brealey 11). The amount of loans that is both long term and short term for the business is not satisfactory more so, the short term borrowing the company has undertaken over the periods. High rates of short term borrowing tend to reduce company liquidity from the fast maturity of dates for honoring the loan repayments reducing the amount of cash readily available for business. Worse still the amount generated in terms of cash flows generated from activities of financing the business. For example, in the period 4 there are 800 Yens in thousands as amount generated from these activities.
The company is prompt in refinancing its debt facilities which is very beneficial in the event of future borrowing as prompt payment reduces default risks. However, this has the chance of reducing company liquidity if the creditor’s policy is repaid in advance and denying the company availability of the cash amount that could be used for other business daily operations (Hillier 04). The amount of cash available to the company at the beginning of the first period is 50,000,000 yens and ending period 1 amount is 9800 thousand yens. This means that the amount spent in this period 1 totaling to 40,200,000 was spent as the initial capital outlay for the business. Over the periods, the company has considerable liquidity with the 18th period recording growth in cash amounts for this period ending. For instance, in period 18 the company has almost doubled its ending period amount of cash compared to 1st period ending amount.
Using the figures illustrated in the profit and loss index worksheet, it is evident that the amount of sales in the period 18 has grown in reaps compared to the 1st or 2nd period. In fact, the break even point is achieved during the 3rd period of financial reporting for this company. The cost of operations as highlighted by operating expense is increasing over the 18 periods. In this scenario, two cases are eminent; firstly, the company is experiencing growth and expansion leading to increased costs of operation. This may be explained or illustrated to be true in the event that company sales are increasing because of the expansion. The amount of sales has increased over the period leading to conclusive evidence that the increasing operating expenses are as a result of an expansion in operation. The other case for the increased cost is that the business is experiencing high prices for its inputs of production (Woelfel 34).
However, this can be analyzed in detail in the event we are comparing profitability performance of this organization with competing firms. Interesting is the management approach to maintaining a constant dividend policy and contributes towards retained earnings forwarded for the next operating year. For instance, starting with period 1 the company has a negative amount of retained earnings up to 5th period where it records a positive amount of retained earnings moved to next financial year. The 5th period retained earnings come just after the breakeven point in the 3rd period of the business. Through this form of capital injections, the company has the capability of performing better if it controls its expenses (Woelfel 67). In addition, revising its credit policy will lead to moderate holding of the business cash by debtors and the firm using more debt to grow its expansion.
Brealey, Richard A, Stewart C Myers and Alan J Marcus. Fundamentals of corporate finance. Boston, Mass.: McGraw-Hill Irwin, 2004. Print.
Bruns, William J, David F Hawkins, Paul M Healy, Julie Huffman Hertenstein, Robert S Kaplan and Sharon M Mckinnon. Reading financial reports. Boston, MA: Harvard Business School Pub., 2002. Print.
Frino, Alex. Introduction to corporate finance. Frenchs Forest, NSW: Pearson Education Australia, 2004. Print.
Hillier, David. Corporate finance. London: McGraw-Hill Higher Education, 2010. Print.
Woelfel, Charles. Financial Statement Analysis. Los Angeles: Probus Pub. Co., 2004. Print