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 summary of this report discloses that Bertie has lacked 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 investment project can be acceptable 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.
1.1.1 Sales Revenue.
1.1.2 Cost of sales.
2.2 Market Segment Analysis.
2.3 Statement of Cash Flows.
3.0 Investment appraisal
3.1 Management forecast.
3.2 Payback periods.
3.3 Accounting rate of return ARR.
3.4 Net present value (NPV).
4.0 Sources Of Internal Finance.
4.1 Reducing Inventory days.
4.2 Extending Supplier Payment terms.
Part 1: Business performance analysis
1. Interpretation of the Statement of Profit or Loss
1.1.1 Sales Revenue
The SOPOL of Bertie discloses that sales revenue increased by 1.4% in 2015, from £639,000 in 2014 to £648,000 in 2015. Two key reasons were found against this revenue growth. First, the fluctuation of the sales prices, which is given the volatile nature of input price as well as inflation level of the international market. Second, the fluctuation of sales quantity, which provides a true change in business operation. Therefore, if Bertie wants to gain sustainable growth, it must improve sales revenue by improving sales figures. Bertie’s Chairman disclosed that Bertie gained a satisfactory level of sales revenue in 2015 by increasing sales units, rather than improving sales prices. The summary of Bertie’s sales revenue in 2014 and 2015 are shown in the following chart 1.1:
Chart: Contribution to group sales (£’000) Source: Bertie case study
The sales figures in different market segments of Bertie show that Bertie is gaining the majority of sales revenue from its UK market, which was about 72% in 2015 and 75% in 2014. Bertie’s market segment in the rest of the world gained the same level of sales revenue (23% of total group sales) in both 2014 and 2015. The US market segment of Bertie contributed 2% in 2015 which increased to 5% in 2015. The summary of sales revenue contributed by different market segments of Bertie is shown in the following charts 1.2 and chart 1.3:
Chart 1.2: sales contribution in 2015 Chart 1.2: sales contribution in 2014
1.1.2 Cost of sales
Total costs of sales of Bertie increased by about 3.8% from £585000 in 2014 to £607000 in 2015. Although the cost of sales of Bertie was expected to grow with increased sales revenue, 3.8% of the cost of sales increased would not be justified against only 1.4% of sales revenue growth. However, the contribution of group cost of sales in different Bertie’s market segments was in line with their group sales revenue in both 2014 and 2015, which figures are summarised in the following chart 1.4 and chart 1.5:
Chart 1.4: Group Cost of Sales 2015 Chart 1.5: Group Cost of Sales 2014
The overhead cost of Bertie is mainly outlined as the administrative expenses in the SOCI. The overhead cost of Bertie (administrative expenses) increased by about 23% from £1.3 million in 2014 to £1.6 million in 2015. This means Bertie is facing increased pressure of cast bases. Bertie has identified the reasons for this increased cost base, which mainly the increased in fuel prices and other factor prices because of the global recession which pushed up both overhead costs and cost of sales. As the key overhead cost of Bertie is administration costs, a significant increase of overhead cost could be in the increase of staff salary and wages.
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.
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 the 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.
2.2 Market Segment Analysis
Conducting an effective market segment analysis is an important issue for organizations to focus on the potential and target customers. Market segmentation analysis on Bertie discloses that the gross profit in the US market was less (only 3.16%) than in the UK (7.99%) and the rest of the world (10.39%) in 2014. The same trend was seen in 2015, where the US market gained only 3.53% compared to the UK market (5.59%) and the rest of the world (9.09%). Although all of the market segments gained less gross profit in 2015 compared to 2014, the success rate of the US market is totally unexpected.
Chart: Gross profit margin of Bertie in US market compared to other market segments
Chart: Net profit margin of Bertie in US market compared to other market segments
On the other hand, the net profit margin in the US market was seen a negative outcome with -7.76% in 2014, where the UK market and the rest of the world gained a positive outcome with 6.66% and 8.41% respectively. The same trend was seen in 2015, where the US market gained negative results with 6.69% but the UK and the rest of the world gained positive results with 4.11% and 6.12% respectively. However, the net profit in the US market increased by 1.07% from -7.76% in 2014 to -6.69% in 2015, but the net profit in the UK and the rest of the world decreased from 6.66% and 8.41% in 2014 to 4.11% and 6.12% in 2015 respectively………………………