Managing the 4 P's in Marketing | Managing the 4 P's in Marketing

EXECUTIVE SUMMAY

As a business consultant for your business Expectations Ltd, a close analytical approach of you revenue statement and balance sheet allowed me to report on the following sections:

1. Liquidity
2. Solvency
3. Profitability
4. Efficiency

(See section 1 written pp.1-11)

Together with the industry averages, the analyzing of theses ratios sets ways of planning to ensure your business will meet if has not the set industry averages. Evaluating the businesses liquidity, solvency, profitability and efficiency saw some major problems, which could put the business into huge financial risk if the situations are not addressed immediately.

Financial issues investigated include:

1. The liquidity of the business, the current ratio in 2000 (0.89:1) was way below industry average (2:1). In 2001 the issue had not been rectified, therefore dropping to (0.79:1).
2. The liquidity quick ratio in 2000 was 1:1, which is acceptable. However in 2001the ratio dropped to 0.59:1, which showed the business almost had DOUBLE the amount of current liabilities when compared with its current assets, which immediately shows the business in huge financial risk in the short term.
3. The solvency ratio for 2000 (197.5%) shows your business is highly geared (Gearing or leverage is the proportion of debt (external finance) and the proportion of equity (internal finance) which is used to finance the activities of the business). In 2001 the ratio improved (183.8%) as the business had increased its internal equity to be more comparable with the debts of 2001. The acceptable ratio is around 100% (equal debt to equity). However these results show that the business is primarily stuck in debt within the long term, showing huge financial risk.
4. The profitability (Return on Owners Equity) in 2000 was 14.5% while the industry average in 25%. From looking at this the business is better off dumping it money into a bank and getting interest on the owners equity invested. However looking at 2001 the return was a huge 39.7% way above the industry average of 25%. This shows that currently the return on owners equity is not an issue, the only issue is on MAINTANING this great ratio.
5. Profitability (Net profit ratio) in 2000 is only 2.9%, while the industry average is 12%. This show the business is not at all managing it fund correctly. The management is not very effective and should aim at being more careful with expenses. In 2001 the ratio increase to 7.5% still not close to the industry average, but seems to have improved its effectiveness since 2000.
6. Profitability (Gross Profit Ratio) in 2000 the ratio was 71% above the industry average of 60% showing the business has no problem in managing its funds in sales compared with gross profit. The ratio evaluates the amount of gross profit as a percentage of sales. The ratio in 2001 increased to 84%, the business has not obvious problem with gross profit comparing with its sale.
7. The efficiency (Total Expense Ratio) in 2000 is 37.5% comparing with the industry average of 28%. The 2001 ratio was 34.5% an improvement, however the business needs to decrease its expenses, to get closer to the industry average. Overall this ratio tells us the business has a lot of expenses when compared with its sales revenue to the industry average.

RECOMMENDATIONS AND STRATEGIES

1. LIQUIDITY

-CURRENT OR WORKING CAPITAL RATIO AND QUICK RATIO

Expectations Ltd has an obvious financial problem with its liquidity. Liquidity is the businesses to have enough current assets to pay off its current liabilities as they fall due. The industry average is 2:1 while the business in 2000 is at 89:1. This means for every 1 in liabilities the business has 0.89cents in current assets. In 2001 (79:1) the business has put itself into more debt without considering its current assets that are currently available. The business is in huge risk, and its financial positions should be reviewed immediately as the business is progressing into bankruptcy, not making a profit but loosing 0.22cents in every $1.

Working capital is vital to liquidity and is the accountants responsibility to ensure that funds are available to meet day to day operating requirements. The aim of working capital is to increase the efficiency with which a business uses its current assets to meet its current liabilities.

It is now important that the business can take the necessary action to ensue this does not get worse but improve. The business has no problem with its current assets, it is the businesses debts being higher than the current assets that is the issue. The action the business can take to resolve the issue include:

1. The business is to firstly realize that debt is to high, and consternate only on paying it off, not increasing debt as was done in 2000-2001. The business should have 2 times the amount of current assets than current liabilities (industry average 2:1). It should be only when this target is reached that the business can have somewhat of an opportunity to increase its current liabilities. Businesses not being liquid enough often fail, and is a common reason for business failure.
2. The receivables from the businesses since 2000-2001 don't seem to have been reduced greatly. Therefore the business should consider factoring these debts, as cash is more readily available that receivables. Factoring is giving your receivables to a company, in which will chase up the money. You have to pay a certain amount of interest to these people, yet you are still getting your money. There is a much greater chance of a factoring company getting your receivables, which would be essential as the business need more cash readily available.
3. Selling some non-current assets (as the business can afford to Non-current assets $251000 compared with only $70000 in non-current liabilities) would allow the business to pay some of its current liabilities off. This would ensure the businesses short term ability to survive would be would be less threatened by current liabilities. Also possible for the business to sale an lease back, an asset sold and then leased back from the new owner.
4. Budgeting expenses, (setting certain amounts of money for certain areas to be spent only no more) which will allow more profit that can be put into paying off current debts. A cash flow budget (a plan that forecasts a businesses estimated cash receipts and cash repayments over short term-within 12 months.
5. Strategically plan a way in which you wish to see your businesses finances in the short term and a way of achieving these goals. E.g. items stated above stated above, use them as goals.
2. SOLVENCY

-SOLVENCY

Solvency is the businesses ability to pay its long and short-term liabilities, with all assets available. The level of debt is important in analyzing the businesses financial risk. External finance is considered more risky internal finance, as external financers have priority to be paid if the business fails, unlike internal equity holders, which are paid last. When a business is in a growth period more debt is preferred, as it will allow the business to reach its full growth.

In 2000 the ratio was 197.5% there was no given industry average, however a ratio of 70% to 100% is considered acceptable. Looking at Expectations Ltd revenue statement the business has increased its sales form $600,000 to $700,000, a $100000 increases in profit in 1 year. This shows the business is undergoing a growth spurt and therefore some extra debt may be preferred. This does not excuse the business on their high ratios, there is almost double the amount of debt compared with equity. In 2001 the ratio fell due to increase in owners equity to 183.8%, which made it more comparable to debt. The ratio has decreased, however the Expectations Ltd should aim to still reduce this extremely high ratio

The business is highly geared and the business's assets and activities are primarily faced by DEBT. The business has some options that will assist them to reduce this ratio to a somewhat acceptable ratio. These option include:

1. Minimize expenditure, budget that will allow the additional profits to fund debts.
2. Become more socially responsible (responsibilities that go beyond the enforcement of the law) this will attract investors to invest within you business, thus increasing money with in the business and therefore able to pay debts off, and generate a greater profit rather than having to pay interest. There is less risk also involved with internal finance.
3. In the Liquidity recommendations 1,2,3,4 and 5 can also apply to this section of solvency. The businesses main problem is having too much debt when compared with assets or owners equity. The business should implement these strategies to decreases debts.
3. PROFITABILITY

- RETURN ON OWNERS EQUITY

The Return on Owners Equity ratio provides a measure of how well the firm has been able to record a profit in relation to the amount of capital provided by the shareholders. This ratio is in the interest of shareholders, which provides the long-term profitability compared with the amount of capital invested.

In 2000 Expectations Ltd was making 14.5% return on owner's equity. The industry average is 25%, which shows the business was not making much of a return. The business was better off dumping owner's equity within a bank and receiving interest. However in 2001 the business turned around and made 37.9cents to every $1 in owner equity a return (37.9%). The business has gone past the industry average of 25%. The business is generating a great return and should aim at ensuring the ratio does not fall.

-NET PROFIT RATIO

This ratio measures the effectiveness of management. It calculates the Net profit in terms of the sales recorded, or revenue which produces Net profit. In 2000 the ratio was 2.9%, far from the industry average of 12%, which showed that the business was not at all managing its fund effectively. Though in 2001 the business's ratio increased to 7.5%, this may have been due mainly to the increase in sales for 2000-2001 of $100,000. The businesses expenses have increased, but due to increase in sales the businesses ratio improved.

-GROSS PROFIT RATIO

The gross profit ratio expresses gross profit as a percentage of sales. This ratio is considered more informative than simply stating gross profit in absolute terms, because it expresses gross profit in relation to sales. The industry average is 60% while Expectations Ltd in 2000 ratio was 71% and in 2001 84%. These ratios show that the business is efficient and effective between the businesses gross profit and sales. The business does seem to manage its Cost Of Goods Sold (COGS) effectively and efficiently, the business has no financial problem in this area, however should continue to closely monitor the ratio to be able to act immediately if there is a problem.

Recommendations and strategies the business can use to improve its profitability include:

1. The business should budget and limit expenditure to see a greater increase in net profit. For example budget Marketing and distribution to $90,000, which will see the profitability in all aspects increase.
2. Decrease expenses and control expenses with a budget, don't waste money. For example interest in overdraft is very high. The business should seek other forms other than overdraft to get it money, like factoring receivables would see the interest in the overdraft decreases as the overdraft amount would be smaller.
3. Business could become more socially responsible to see more people investing with in the business, however the business must firstly aim at showing a good return on owners equity E.g. decreasing debts to see a greater return, will see the business not have to use external funs such as an overdraft which are risky, but internal funds which supplied by shareholders.
4. it is also possible to strategically align the business into an area where expenditure are high. Strategic alliances are where two or more businesses join together to benefit from combined knowledge of markets, suppliers, government policies and joint ownership of resources and facilities. The business can use another businesses facilities and expertise in marketing and distribution, while your business Expectations Ltd gives something of value back to the business.
5. As a business consultant it is important that these strategies are implemented, and as time progresses will show debt reduced and an increase in profitability. Consistently reviewing these ratios is a must and essential to ensure the business financial success.
6. A commercial accountant would be helpful to your business in establishing and implementing every possible strategy to decrease debt and remove the business form financial risk.
4. EFFICIENCY

-TOTAL EXPENSES RATIO

The industry average for this ratio is 28% while Expectations Ltd in 2000, the ratio is 37.5% following 2001 on 34.7%. This shows that Expectations Ltd are not very efficient with their funds, but are progressively becoming more efficient with their expenditure. The only thing the business can do to decrease this ratio closer to the industry average is decrease expense within the business. The business should be aiming towards the industry average of 28% by:

1. Expectations Ltd should aim at decreasing its expenses by reviewing its expenses and looking at where the business has spent too much.
2. The business should budget to the industry average. So firstly the business must estimate a gross profit and budget the industry average of 28% of it for expenses only.
3. Implementing these tools will see the business have higher profitability, and therefore use these funds to assist in reducing the current liabilities.
4. Reviewing the strategies with unfreeze/change/refreeze, which allows the business to look at strategies implemented/see if they work/and continually change them to find the be and most effective strategy that can be implemented.

CONCLUSION/REVIEW

Expectations Ltd should aim at addressing its problems of liquidity, solvency, profitability (net profit) and efficiency (total expenses). Once the business has implemented these stated strategies listed above, the business will improve in these areas and be at less financial risk. The businesses main priority should be to implement these strategies to ensure the business is not going have any more financial risk. The business should immediately minimize its expenses as much as possible and pay off its current liabilities. It is important that business does not entrench itself into any more debt, until most of the businesses current liabilities are reduced. Reviewing these ratios is also essential to see if the strategies implemented are working for the business (E.g. unfreeze/change/refreeze change model).