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Impact of cash flow in the Turner Technics company happened during in the first half year. Consultancy group planned to control the situation and resume the growth. In this consultancy report, aimed to identify the company’s currently cash flow problem and analyses the previous six months trade issue. And, financial consultant group has designed the action plans to recommend improving the situation in second half year. The informational content to statement of cash inflow and outflow for company business (i.e.: gross margin, net profit margin, return on sales, debtor day, asset turnover and current ratio) have a significant impact in the interpretation of the company situation. It was found that the variable most influential is the variable operating cash flows which reflected negatively on the value of share in those company. Chapter 2 – Introduction
A company of Turner Technics was operating six months business and doing well with good sales recently leading to a healthy financial statement. But, there has a problem on tight cash which made buying stock difficult and expansion the business almost impossible. Our target is to sustain the business on coming six-months without running out of cash. And, formulate the recommendation to achieve the following goals: i) monthly turnover of £10,000.00, ii) monthly profit of £1,000.00 and iii) keep £7,500.00 in the bank.
Chapter 3 – Cash Flow in the company
Cash Flow is the different between cash receipts and cash disbursements. Analysis of the company’s cash flow was based on three major factors: Profitability, Efficiency and Liquidity. Profitability: Measuring the profitability of a company as indication of the business has been in its achievement of objective. i) Gross Margin – It is the difference between net sales the cost of goods sold. And, the percentage is divided by amount of gross margin and net sales (Belverd E. Needles et al, 2008:203). Gross Margin=Sales-Cost of Goods SoldSalesA successful companies must achieve a gross margin sufficient to cover operating expense and provide an adequate net income. In June, the gross margin is 28% which is not very high profit in percentage. ii) Net Profit Margin or Return on Sales, ROS – It is a percentage determined by dividing net profit by total sales value. It measures the company’s overall efficiency in profitability after tax (Eric Tyson & Jim Schell, 2005:240). Net Profit, %= Net Profit Sales Value In town, there is £0 tax. So therefore, ROS is equal to percentage of net profit (=1.8%).
According to data, gross profit value was £1,995 and value of operating expense was £1,866.48. Obviously, the profit was just covered the expense. Company did not generate a great profit value. In fact, it was impacted heavily by investment that the operator decided to take out of the business in the form of wages and other type of expense. Efficiency: Measuring the effective in business transaction converting to cash. i) Debtor Day – Indicate the average time taken to receive payment from credit customer. The currently debtor days in June was 287 days that absolutely unaccepted period. A company might receive the payment after 9 months. Standard credit terms for many industries are in the range of 30-60 days so these period does look unreasonable (Martin Coles, 1997:35). It was a much harmful the company’s cash inflow. Considering the impact of a longer period in debtor days for a relatively company business with monthly sales. ii) Asset Turnover – It indicates efficiently a company’s assets to generate sales. Its mean that how much sales of company can generate for each dollar invested in assets.
The higher asset turnover ratio is preference and becoming more efficiently (Paul D. Kimmel et al, 2011:466). Asset Turnover=SalesTotal AssetThe current value of asset turnover was 0.8 times in June. It generated less than £1.00 in each dollar invested and it was not much efficiency value. Liquidity: Measuring the degree of assets are held in a cash. It is determined by the level of obligations that need to be met by the business. i) Current Ratio – It represents the ability of a company to meet its short-term financial obligations. It is obtained by dividing current assets by current liabilities. Usually, the standard guideline has been a ratio of 2 to 1 (Leo Troy: 2008) In June, the Current ratio was 1.5 times and lower than 2 times. ii) Quick Ratio – It is used to estimate a company’s general cash movement and indicate the ability of company to pay its suppliers/creditors on time. At the end of June, Turner Technics did not have a stock in inventory. So, the currently quick ratio in June is equal to current ratio. As currently quick ratio is 1.5 times, Turner Technics is now much difficult to settle the credit payment with supplier on time. Chapter 4 – Company Issue in Previous 6 months
As your company has extra office equipment, furniture and tools, selling the owned set would get back $1250. Therefore, there would be 1 set of rental resources left in the office. In the Cash flow report, we find that the miscellaneous costs could be reduced. If the maintenance, cleaning and I.T. support could be done by you, a total of $162 could be reduced per month. Also, book keeping should be also done by you as it cost $15 for hiring a bookkeeper per hour. Moreover, due to the cash flow crisis now, you should take more time on running the business and reduce the salary in a short term which means you have to work for 60 hours per week and get $500 per month. iii) Bank funding and loan
The prepared P/L forecast would be ready to submit to bank and ask for a loan for 3 years. Also, try to ask your family for funding as much as possible. Then, please apply for the research and training grants. $1000 of grants could be got for success applying. iv) Changing supplier
Your current supplier Sourceline could only offer 30 credit days and the price $8.75/unit and could offer 10%off for ordering more than 2000 units. However, in this month, only 882 units are needed so the offer cannot be got. Therefore, it is better to choose Pro-supplier as they could offer 60 credits days. Although the unit price is $9.25/unit, they have a 5% offer for purchasing more than 500 units which means only $8.7875/unit. The price is very close to Sourceline. v) Changing price
In order to attract more customers, a cheaper price should be induced and it would be a gimmick of marketing. The price should set to $490 for pricing strategy. The price will be keep for 3-4 months. Sep / October:
As nearly most of the prospects know about the company, it is time to price up a little bit to $500 so as to rise up company’s GP. Chapter
Belverd E. Needles, Marian Powers & Susan V. Crosson (2008) 10th Edition Principles of accounting, 10th edition, Houghton Mifflin Company Eric Tyson & Jim Schell (2005) Small Business for Dummies, 3rd edition, Wiley Publishing, Inc. Paul D. Kimmel, Jerry J. Weygandt & Donald E. Kieso (2011) Accounting: Tools for Business Decision Makers, 4th edition, John Wiley & Sons, Inc. Leo Troy (2008) Almanac of Business and Industrial Financial Ratios, 40th edition, CCH Martin Coles (1997) Financial Management for Higher Awards, Paperback http://www.businessplanninghub.com/cash_flow_crisis.htmlBarnfire Pty Ltd (2010-2012) Appendix 1 – (adapted from Sim Venture – Detailed Profit & Lost Report)