Managing a company’s finance and making financial decisions with effective methods and processes are the key part of business success. The aims of this report are to analyze and evaluate the current position of Bertie Plc and to recommend it for improving its business performance. The key finding of this report comes from the case study of Bertie Plc, several books, journals and company websites. The book named ‘Accounting and Finance for Non-Specialists’ authored by Peter Atrill and Eddie McLaney contributed a lot to this report writing.
The summary of this report discloses that Bertie has a lack of experience in the US market segment because it is still now in the beginning stage with only about 2 years life-long. Thus, the revenue and profit margins are less than the UK and rest of the world market segments. Although the US market segment has a negative performance, the overall performance of Bertie can be considered satisfactory. However, Bertie is facing several challenges including severe competition, global recession, fluctuation of fuel prices in both domestic and international markets. The study found that the proposed investment project can be accentual for Bertie. This is because the investment methods of ARR and NPV applied to show positive outcomes. However, the method of NPV indicates a significant level of risk, which should be under deep consideration of Bertie.
Table of Contents
Part 1: Business performance analysis.
- Interpretation of the Statement of Profit or Loss.
2.2 Market Segment Analysis.
2.3 Statement of Cash Flows.
3.0 Investment appraisal
Accounting rate of return ARR.
Net present value (NPV).
4.0 Sources Of Internal Finance.
Reducing Inventory days.
Extending Supplier Payment terms.
Part 1: Business performance analysis
1. Interpretation of the Statement of Profit or Loss
According to Bertie plc case study, the gross profit of Bertie Plc declined by 24.24% from £5397 in 2014 to £4089 in 2015. The gross profit margin ratio shows that it degraded from 8.44% in 2014 to 6.31% in 2015. In a similar manner, the operating profit of Bertie declined by 38.84% from £4317 in 2014 to £2647 in 2015. The operating profit ratio shows that it declined by 2.65% from 6.75% in 2014 to 4.1% in 2015. Textbooks disclose that 25% operating profit or greater is a green light, 10% to 25% is a yellow light, and less than 10% is a red light. As Bertie gained less than 10% in both 2014 and 2015, it is under red light. Then, net profit declined by 56.2% from 4.95% in 2014 to 2.18% in 2015. The summary of profitability of Bertie plc in 2015 in comparison with 2014 is shown in chart 1.1.
Chart: Bertie’s profitability in 2015 in comparison with 2014 Source: Bertie Plc Case Study
The study shows that the key reasons for declining Bertie’s profitability are: a) Cost of sales increased more than sales revenue in 2015 in comparison with 2014. Sales revenue increased only 1.42% from £63916,000 in 2014 to £64826000 in 2015, where cost of sales increased by 3.79% from £58519000 in 2014 to £60,727000 in 2015; b) Other operating income decreased by 151.67% from £302,000 in 2014 to £120,000 in 2015; c) Financial cost (Bertie’s debt cost) increased by 146.26% from £279,000 in 2014 to £687,000 in 2015.
According to Bertie’s case study, asset turnover times decreased in 2015 in comparison with 2014. Inventory days also decreased from 22.44 in 2014 to 17.40 in 2015. The textbook shows that the average inventory days in retail are 30 days. This means that Bertie has decreased the number of days it takes in converting its inventories to sales and in this way, improved inventory management efficiency. This will obviously help the company to maintain its production without delays and it will reduce the cost related to inventory management.
|Asset Turnover||1.73 times||2.19 time|
|Inventory Turnover||17.40 days||22.44 days|
|Trade payable||78.20 days||77.75 days|
Table 2.1: Efficiency of Bertie in 2015 in comparison with 2014 Source: Bertie Plc Case Study
The payable payment period of Bertie is maintained to 78 days in both 2014 and 2015. That is more than two and half months. This is a positive sign of Bertie’s working capital management as they have an adequate period for settling its payables. This will ensure long-term relationships with its suppliers and other creditors. Thus, it can be stated that the working capital management efficiency of Bertie exhibits an increasing trend. The analysis further reveals that this trend is in accordance with industry standards.
The most common measure of liquidity is the current ratio, which is calculated by dividing current assets by current liabilities. The current ratio of Bertie decreased from 0.46 in 2014 to 0.39 in 2015. Generally, a ratio greater than 1.50 is considered a green light, between 1.00 and 1.50 a yellow light, and less than 1.00 a red light. As Bertie’s current ratio is less than 1.00 in both 2014 and 2015, it is considered the worse performance of Bertie. However, several factors, including the type of operation, can impact the current ratio of Bertie. Other factors impacting the current ratio of Bertie include loan repayment terms, credit card usage, and accounts payable. Thus, Bertie attempting to improve the current ratio should start by analyzing the loan structure. It should repay debt too quickly. This increases current obligations and hinders repayment ability. A second strategy is to evaluate the marketing plan to better time cash inflows and outflows. However, a very high current ratio is not necessarily good. It could indicate that a company is too liquid. Cash is often described as an ’idle asset‘ because it earns no return, and carrying too much cash is considered wasteful. A high ratio could also indicate that the company is not making sufficient use of cheap short-term finance……………………………………….