Executive summary
This report is mainly focused on identifying the current financial position of the tank factory by making a comparison of all the different financial ratios for the years 2021 and year 2022. This report is also identifying the current business profitability and solvency as well as the liquidity ratio and providing a brief recommendation for the business owner to implement strategies for improving the business scenario. The recommendation or to focus on starting an online business and converting the business from a sole trader business to a partnership business which will improve the profitability and the company will become more secure and allow the current owner to make his retirement in the easiest way.
Table of Contents
Evaluation of alternatives and recommendations. 5
Analysis of profitability
Profitability
In business, profitability is very much important as it identifies how much money the business is making and whether it is generating profit or loss. There are different types of profitability ratio present, such as total asset ratio and profit margin ratio, as well as return on equity ratio and gross profit margin ratio. Inside the business of the tank factory, it has been identified the business made a good profit margin and maintained it at 12% in 2021 and 11% in 2022. The reason behind suggesting this profitability margin as a good margin is because currently, in the industry, the profit margin please, on average 10%. It is very much important to properly identify the expense ratio of the business to properly understand the businesses profitability level it is very much important to properly identify the expense ratio of the business to properly understand the businesses profitability level and from the analysis of expenses ratio it has been identified that the company made a total expense of 2% in 2021 and 3% in 2022 behind the advertisement. The 1% increment in the advertisement the company made did not reflect a high level of incorporation as the company does not generate a good amount of revenue, and exactly opposite, the revenue decreased from 605000 in 2021 to 5,80,000 in the year 2022. The mode of advertisement investment was not so efficient, and it became very much important for John, who is the business owner, to bring someone new to the business who could look after all the marketing of the business and primarily focus on increasing the total sales of the business. The current expense ratio of the business is 14% in the current year, 2022, whereas, in the previous year, it was 8%, as it is directly showing the increase in the rent expense ratio. Due to the increase in this expense ratio, the owner, John, just needs to identify the primary strategies which will be helpful in reducing the rent expenses.
Liquidity
Liquidity is also very much beneficial for every business as it helps to identify how the business is properly managing all the short-term liabilities it has. In the case of the tank factory, there are two different liquidity ratios have been identified, such as the working capital ratio and the quick acid ratio. Yeah, the working capital ratio of this company is currently showing 2.8:8, while on the other hand, the acid ratio of this company is 0.17. Therefore, it can be easily identified that if the acid ratio is below then one, then the company is getting struggle to pay all the liabilities by the due date, and it is important for the business owner to improve the quick acid ratio of the business by considering sales of holding inventory and potentially airing the external financing. While on the other hand, it is also very much important the company is also having a problem with the working capital ratio, and it is important for the business owner to improve business liquidity by selling inventory. Yeah, if the working capital ratio stays between 1.5 to 2.0 be identified that the business is doing very well; however, in the case of the tongue factory, the ratio has been mentioned, which is not followed in the category, which shows the business is facing problems.
Solvency
Solvency directly indicates the ability of the business to properly pay off all the debts the business is currently holding and its current position of different assets with a proper comparison of liabilities. It is very much useful to properly consist some of the solvency ratios, and all these ratios are very much important to properly identify the current business gearing. From the solvency ratio, it can be identified how much the business finance through debt, and it also helps to make a proper comparison to internal equity finance. From the current analyses, the solvency ratio of the company is 20.3%, and as compared to others, it is very good, and anything under the hundred per cent directly indicates that the business is currently Hai India Art, and most of the business finance comes from debts. While on the other hand, the business has all the ability to pay interest on its current income and in 2021, the tank factory had an 11.7% solvency ratio, while the 11.1% solvency ratio was in 2022. It is directly indicating not such a good ratio as most of the interest and from Da Hai ratio directly indicates that the business has a strong ability to cover all the interest that is paid through the debts. On a similar note, it is very much important for the business owner to properly into the ratio as soon as possible so that the business can achieve a lower interest rate on all the debt finance the business has taken in the past.
Evaluation of alternatives and recommendations
The first recommendation that the company could implement to reduce the chances of losses is to close all the physical stores of the company and opt for an online business method. It is one of the best ideas as the company is currently paying a lot of rent for the physical stores it is owned, and from the ratios, it has been identified that the rent expenses will increase continuously. In the year 2021, the total rent expenses for the year of the company were 46,200; however, in the case of 2022, the total rent expenses of the company are 83,000, which is not good and increased by almost double. While on the other hand, having a look at the expense ratio, it is suggested that the company’s expense ratio also increased from 8% to 14% in the year 2021 to 2022. therefore running the business in online circumstances will be beneficial for the business as the company can invest all this money into different promotional activities, and they can also sell the products through different e-commerce channels to make a high level of profit by keeping all these ratios low at the same time. On a similar note, the company could also hire more employees who could do marketing and sales-related experiments, yeah to help all the customers who are purchasing a tank and give a free installation as it will further help the business to save cost and retain the customers for a long time period. It will also help the customer not to come inside the physical store of the business, and the customer can purchase the product by sitting at their home through their mobile devices, and the company can give free demonstration services to the customer, which will save both customers hassle to visit the store by saving the time.
The next thing the business owner can consider is taking a new partner on board and changing the business structure forms sole trader to a partnership business. It is one of the best ideas to change the business structure as it will eliminate all the ongoing pressure from the current owner of the business and it will give a huge chance not only related to the tax relief but also both the partners can share the number of losses the company will make in the future. It also has been identified that making a partnership will also allow the business to get limited liability and at least 30% of the tax bracket. It is one of the simple yet effective decisions the business could take; however, the decision-making power will be divided among both partners, and more than 15 people can also bring inside this business to achieve high Lagao profitability and a good amount of investment. However, in the case of a partnership business, the limitation can be implemented, and it is mainly dependent on the partner’s liability level. Inside the sole trader business structure, it is very much important for one individual to manage all the business aspects like profits and losses as well as a day-to-day business decision like sales and marketing; however, all the decisions undertaken by a single person who makes it more expensive for one business owner to manage. Therefore it will be beneficial for John to make the business a partnership company so that the business could come into lower tax rate and give John R release from a high level of expenses.
Conclusion
It can be concluded that the business of the tank factory is currently a very profitable business as it gives the profit; however, the expenses are too high in the current circumstances. It will be very much important for John to improve the business by making a good amount of changes as identified; it will be important to start an online business and makes it a partnership business not only to reduce the liability but also to increase the profitability and more security.
Appendix of ratios
| 2022 | 2021 | |
| Gross profit margin | 55% | 55% |
| Net profit margin | 12% | 12% |
| COGS to turnover | 20% | 45% |
| Quick asset ratio | 0.07 | NA |
| Debt to equity | 20.3% | NA |
| Profit margin | 11% | 12% |
| Return on equity | 0.13 | 0.17 |
| Expense ratio | 3% | 2% |
| Rent expenses | 14% | 8% |
| Times interest earned | 11.1% | 11.7% |
| Working capital | 2.88 | NA |
| Quick acid ratio | 0.17 | NA |
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