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Learner Name: Emad Omar Shan
Unit 5: Business Accounting
Assignment 5.1: Final Accounts
Date Issued:
Submission date Deadline:
3
rd
February
28
th
February
To achieve the criteria, the evidence must show that the learner is
able to:
(as per the current specification)
Task No.
Describe the purpose of accounting for an organisation
1
Explain the difference between capital and revenue items of expenditure and income
2
Prepare a 12-month cash flow forecast to enable an organisation to manage its cash
3
Prepare a profit and loss account and balance sheet for a given organisation
4
Perform ratio analysis to measure the profitability, liquidity and efficiency of a given
organisation
5
Analyse the cash flow problems a business might experience
6
Analyse the performance of a business using suitable ratios.
7
Justify actions a business might take when experiencing cash flow problems
8
Evaluate the financial performance and position of a business using ratio analysis.
9
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Unit 5 Assignment 1
Final Accounts
In this Assignment, I will describe the purpose of accounting in an organization, explain the
difference between capital and revenue items of
expenditure and income, prepare a 12-month
cash flow forecast to enable an organization to
manage its cash, prepare a profit and loss
account, and balance sheet for Coca Cola,
perform ratio analysis to measure the
profitability, liquidity, and efficiency of Coca Cola,
analyze any cash flow problems the business
might have, analyze the performance of a
business using suitable ratios, justify actions a
business might take when experiencing cash flow
problems and finally evaluate the financial
performance and position of a business using
ratio analysis.
Done By: Emad Omar Shan
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P1/Task 1:
The purpose of accounting for an organization:
Record transactions: It is important that businesses like Coca-Cola record their
business transactions every day as It will assist in making knowledgeable, efficient, and precise
decisions at any time. Well-kept accounting records act as a reminder of a business’s deductible
credits and expenses. When a transaction needs to be recorded, it can be recorded in a number
of ways. The most basic method used to record a transaction is the journal entry, where the
accountant manually enters the account numbers and debits, and credits for each
individual transaction. It is important this is done correctly or else it would cause confusion
within the business as to what bills need to be paid or what payments the business needs to
receive and more seriously, they would get into problems with the HM Revenue and Customs
who will fine your business.
Monitor Activity: Monitor activity is basically monitoring the activity of the business and
looking at how well or not the business is doing. It is used to monitor the fluctuations in the
sales revenue, how well is cash flow in the business and how the business is doing in terms of
paying their expenses. It also looks into the bank balance to ensure there is a sufficient amount
of working capital for the business and to make sure the businesses day to day expenses are
not higher than its income. Just like other businesses, this is also needed in Coca-Cola in order
for it to prosper.
Control: Control is needed to make sure that actions can be taken (if needed) in order to
control the cash inflows and outflows of the business. This is important as cash is the most
liquid of assets any business can have so it is important that they try to maximize their cash
inflows and minimize their cash outflows. If control is not implemented the cash outflows may
become higher than the inflows of the business.
Management of the business: Managing a business is quite important as otherwise it would
become disorganized which would affect the levels of efficiency of the business which would
lead to lower sales and therefore profit. It is important that managers of a business plan,
monitor and control the resources they are responsible for a business to do well. Managing a
business requires careful co-ordination of resources including staff, materials, stock and money.
The manager has to make sure there are sufficient funds for paying wages, ordering new
inventory and pay other bills. Management of a business is important to ensure that the cash
outflows are balancing with the money that is coming in through sales.
Measurement of financial performance: Measurement of financial performance is basically
measuring how well the business is doing by looking at the sales, profits, expenses incurred,
etc. Having financial records are essential in order to know how much profit or loss a company
is making and whether the company owes or is owed by others. It is used to know the gross
profit (the total profit before expenses are deducted), net profit (the total profit after expenses
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are deducted). The financial records also record the debtors (people or organizations that owe
you money) and creditors (people or organizations that you owe) so you know who owes what
amount.
P2/Task 2:
The differences between capital and revenue expenditure and income:
Capital Expenditure: Capital expenditure is an expense in which the money spent is to buy,
maintain, or improve fixed assets, such as buildings, vehicles, equipment, or land which will
usually stay in the business medium to long term. In accounting, a capital expenditure is added
to an asset account, thus increasing the level of assets. Capital Expenditure is important for
businesses as it is used to maintain existing property, plant & equipment and invest in new
technology and other assets for the business to grow.
Capital Income: This is the money that is initially used by owners or investors to start up a
business and buy additional equipment. Capital income is income generated from an asset
which usually medium to long term assets. buying property and then selling it at a higher price
a year later is an example of a capital income. Capital income is important as it helps in a
business starting out and things like opening inventory and other needed items for the business
can be bought with capital income.
Revenue Expenditure: Revenue expense are expenses that constantly reoccur, and which do
not improve or extend the life of an asset. An example of revenue expenditure could be
repairing a motor vehicle. Revenue expenditure is what is used to take care of the operational
costs of the business. Other examples of revenue expenditure would include rent, insurance,
commission, advertisement,
Revenue Income: Revenue Income is the money received from the business by providing their
good or service. The three main sources a business gains its revenue income is either from the
sales of their good or service, receiving rent from any property they would own and thirdly is
the commission received (Commission is payment you get depending on how much of the good
or service you have sold).
P3/Task 3:
12-month cash flow forecast of Coca Cola done on Excel
P4/Task 4:
An income statement or profit and loss account is one of the financial statements for a
company and it shows the company’s revenues and expenses during a particular period usually
being a year. It shows what value of net profit comes from the revenue. While a balance sheet
or statement of financial position (SOFP) is used to record all the assets, liabilities and capital of
and make sure that all the assets are equal to the liabilities and capitals of a business.
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Profit and Loss account and balance sheet for Coca Cola:
Profit and Loss account
Detail
$
$
Revenue
30955
Cost of goods sold
(17500)
Gross Profit
13455
Expenses
Salaries and Wages
1200
General expenses
1500
Advertising expense
3840
Vehicle expense
100
Insurance
240
Rent
1700
Interest paid
120
Tax expense
1602
(10302)
Net Profit
3153
In millions of USD
Balance Sheet
Details
$
$
Non-Current Assets
Vehicles
300
Land and buildings
9000
Machinery
5500
Investments
8700
Goodwill
17270
40870
Current Assets
Inventory
3000
Debtors/Account receivables
3200
Bank and Cash
2500
Prepaid insurance
50
Petty cash
10
8760
Total Assets
49630
Current Liabilities
Creditors/Account payables
5000
Wages and Salary payable
1100
Interest payable
1430
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Tax payable
1000
Unearned revenue
600
9130
Non-Current Liabilities
Long term loan
20000
Bonds payable
13300
33300
Total Liabilities
42430
Equity
Capital stock
4047
Net profit
3153
Total Assets and Liabilities
49630
In millions of USD
P5/Task 5:
Ratio analysis to measure the profitability, liquidity and efficiency of Coca Cola:
Profitability ratios:
Gross Profit Ratio: Gross Profit/Sales Revenue X 100
13455/30955 X 100 = 43.46%
Net Profit Ratio: Net Profit/Sales Revenue X 100
3153/30955 X 100 = 10.18%
Return on Capital Employed Ratio: Net Profit/Capital Employed (Current liabilities minus Total
Assets) X 100
3153/40500 X 100 = 7.78%
Liquidity ratios:
Current Ratio: Current Assets/Current Liabilities
8760/9130 = 0.95
Acid Test Ratio: Current Assets Inventory/Current Liabilities
8760 3000/9130 = 0.63
Debtors payment period: Debtors/Sales Revenue X 365
3200/30955 X 365 = 37.73 days
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Creditor payment period: Creditors/Cost of goods sold X 365
5000/17500 X 365 = 104.28 days
Rate of stock turnover ratio: Average stock (opening stock + closing stock/2) /Cost of goods
sold X 365
3000/2 = 1500 1500/17500 X 365 = 31.28
M1/ Task 6:
Analyzing the cash flow problems, a business might experience:
Cash flow management:
1. Problems within the cash flow forecast:
Some of the most common problems within the cash flow forecast would have to be:
High overhead expenses: Overhead expenses are the costs endured in order to run a
business that are not related directly to selling a specific product or service. Examples of
this could include rent, insurance, utilities, etc.
Slow-paying invoices: Slow-paying invoices is receiving payment from your client slowly
and this is bad because it reduces the level of cash inflows to the business. This
especially affects smaller companies as small companies can’t always afford to wait this
long for payment. They need money sooner and if they can’t it will cause financial
problems that can seriously affect their business.
Excess inventory: This problem can affect companies that produce goods or re-sellers
that keep a warehouse stocked with products. If too much product is made or
purchased by companies like these it ends up sitting on shelves and reducing cash flow.
Too much bad debt: Bad debts or also known as recoverable debts is when you sell a
product or service to a client who is not able to pay. This is more likely to happen when
you extend credit for customers.
Insufficient gross margins: Small businesses sometimes sell their products and services
for such low prices that they have low or sometimes even negative gross margins. This
situation often occurs in quite competitive environments with constant pricing pressure.
It usually affects small business owners as they do not have a clear understanding of
their costs.
Solutions:
The solution to high overhead expenses is actually quite simple, but it is not easy.
Review your expenses and cut back wherever you can. However, be careful not to
cut too much, as this may end up hurting the company. If cutting back doesn’t seem
fit, consider cheaper options.
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The solution to slow paying invoices is to provide clients with an incentive to pay
faster. Offering discounts can motivate clients to pay quickly. An alternative is to
use invoice factoring (Invoice factoring is when u sell your invoice to a third party
such as factoring company for example at a discounted price) to finance slow-paying
invoices. This method improves cash flow immediately and enables you to offer
payment terms with confidence.
The solution to an excess in inventory is to calculate your inventory so that you
stock items for the shortest possible time before being sold or used in the
production process. The amount of a product you keep in stock depends on multiple
factors such as volume, sales forecasts, available cash, and the supplier’s
capabilities. Monitor inventory levels carefully. Having key products out of stock is a
sure way to lose clients and so causing a reduce in cashflow.
The solution to bad debts is to review the commercial credit (commercial credit is a
maintenance and reporting of credit histories and risks for commercial companies)
of your clients before you allow them extended payments. Allow longer payments
only to clients who have a good credit history and a solid payment record and those
who don’t should prepay until they have built a good track record with the company.
This strategy may cost some sales. However, it is worth it as you decrease the
chances for bad debts.
The solution to insufficient gross margins would be to raise the prices of some
products or services that have weak margins. However, if you can’t raise the prices
consider losing those products or services that have weak margins. If one of this is
doable at least try to sell the products or service at a break even so you don’t incur
loss.
M2/Task 7:
Profitability Ratio Analysis
Gross profit margin is a measure of profitability that shows the percentage of revenue that
exceeds the cost of goods sold. It shows how successful a company's management team is in
generating revenue from the costs involved in producing their products and services.
The Net profit margin is the percentage of revenue left after all expenses have been deducted
from sales. The measurement reveals the amount of profit that a business can extract from its
total sales.
Return on capital employed or ROCE is a profitability ratio that measures how efficiently a
company can generate profits from its capital employed by comparing net operating profit to
capital employed.
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Liquidity Analysis
Liquidity ratios are measurements used to examine the ability of an organization to pay off its
short-term obligations. Examples of liquidity ratios are: Current ratio. This ratio compares
current assets to current liabilities.
Acid test ratio is what deducts stock from the current assets as it is the least liquid of assets and
then shows the ration of how many assets can cover the liabilities.
Debtor days shows the average number of days it takes for a company to receive payment for
outstanding invoices. So, the greater the number days an invoice is paid after the payment due
date, the worse it is for a business's cash flow.
Creditor days estimates the average time it takes a business to settle its debts with its
suppliers. The ratio is a useful when it comes to checking the liquidity of a business
The Rate of stock turnover ratio shows how many times a company has sold and
replaced inventory during a given time period. All businesses are different, but in general
a ratio between 4 and 6 usually means that the rate at which you restock items is well balanced
with your sales
D1/Task 8:
Justifying actions, a business might take when it experiences cash flow problems:
One of the actions a business might take when experiencing cash flow problems is taking an
overdraft from the bank and this is justified because as it helps a business through negative
periods of cash flow. However, if this action is taken it should be pre agreed if not it would
become too costly and result in further cash flow problems.
Another action a business might take is laying off workers and as long as there is a valid reason
such as for example not requiring their skills anymore it is justified to do. This will help with the
cash flow of the company; however, they may drop in productivity as they are fewer people
who need to do the same task. This is why it is important to carefully access what the outcome
will be to lay off workers before actually doing it.
Businesses might need to act on lowering the amount of inventory as well they have as if they
have excess inventory it is just increasing the cash outflow for the business and not really
benefiting them as it stays in the warehouse and this is why it is justified for them to lower
their levels of inventory to an amount where they can sell off.
Another justified action would be to lease an item of capital equipment rather than
purchasing it, although this may prove more costly in the long run it does allow the comfort for
the business to pay on a monthly basis and ordering it when needed. This could work well if the
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business rarely or only occasional needs the equipment and it will help with the cash flow
problems
Businesses could also try postponing anything they were to planning to purchase to reduce
the cash outflow and this action is justified as if a business continues to purchase while facing
cash flow problems the cash flow problems are much more likely to just get worse and even
harder to get out of as instead of reducing the level of cash outflows of the business it is
increasing.
D2/Task 9:
Evaluate the financial performance ad position of a business using ratio analysis:
The gross profit margin of Coca-cola at 43.46% is a good amount as a higher gross profit margin
states that a company can make a good profit on sales, as long as it keeps overhead costs under
control. Investors tend to pay more for a company with a higher gross profit. The net profit
margin of 10.18% is okay as this means the business is okay at controlling its expenses but
there is room for improvement. The return on capital employed of 7.78% is alright as Coca-
Cola's ROCE appears to be slightly less than the 10% average in the Beverage industry.
Generally, a current ratio of 2.0 or higher is considered acceptable; meaning the company
appears to have the financial resources to meet its short-term debt obligations. Coca Colas ratio
of 0.95 is not very good as this means Coca-Cola has 0.95 assets for every 1 liability they have.
Coca-Cola has an acid test ratio of 0.63 which is below what it should be which is at least a 1.
This means the business is not very liquid. The smaller this figure of debtor days is, the better,
as it means that your customers usually pay you quickly. Coca Colas debtor days is 37.73 days.
In general, a business that wants to maximize its cash flow should take as long as possible to
pay its bills. Coca Colas creditor days are at 104.28 days which is quite a good amount. Coca
Colas rate of stock turnover ratio is at 31.28 which is quite great as the higher the inventory
turnover, the better since a high inventory turnover would mean the company is selling goods
very quickly and that demand for their product exists.
References:
https://www.comcapfactoring.com/blog/cash-flow-problems-and-solutions/
https://dwglogo.com/coca-cola/

Unformatted Attachment Preview

1|Page Unit 5 Assignment 1 Learner Name: Emad Omar Shan Unit 5: Business Accounting Assignment 5.1: Final Accounts Date Issued: 3rd February Criteria Reference: P1 P2 P3 P4 P5 M1 Submission date Deadline: 28th February To achieve the criteria, the evidence must show that the learner is able to: (as per the current specification) Describe the purpose of accounting for an organisation Explain the difference between capital and revenue items of expenditure and income Prepare a 12-month cash flow forecast to enable an organisation to manage its cash Prepare a profit and loss account and balance sheet for a given organisation Perform ratio analysis to measure the profitability, liquidity and efficiency of a given organisation Analyse the cash flow problems a business might experience Task No. 1 2 3 4 5 6 M2 Analyse the performance of a business using suitable ratios. 7 D1 Justify actions a business might take when experiencing cash flow problems 8 D2 Evaluate the financial performance and position of a business using ratio analysis. 9 2|Page Unit 5 Assignment 1 Unit 5 Assignment 1 – Final Accounts In this Assignment, I will describe the purpose of accounting in an organization, explain the difference between capital and revenue items of expenditure and income, prepare a 12-month cash flow forecast to enable an organization to manage its cash, prepare a profit and loss account, and balance sheet for Coca Cola, perform ratio analysis to measure the profitability, liquidity, and efficiency of Coca Cola, analyze any cash flow problems the business might have, analyze the performance of a business using suitable ratios, justify actions a business might take when experiencing cash flow problems and finally evaluate the financial performance and position of a business using ratio analysis. Done By: Emad Omar Shan 3|Page Unit 5 Assignment 1 P1/Task 1: The purpose of accounting for an organization: Record transactions: It is important that businesses like Coca-Cola record their business transactions every day as It will assist in making knowledgeable, efficient, and precise decisions at any time. Well-kept accounting records act as a reminder of a business’s deductible credits and expenses. When a transaction needs to be recorded, it can be recorded in a number of ways. The most basic method used to record a transaction is the journal entry, where the accountant manually enters the account numbers and debits, and credits for each individual transaction. It is important this is done correctly or else it would cause confusion within the business as to what bills need to be paid or what payments the business needs to receive and more seriously, they would get into problems with the HM Revenue and Customs who will fine your business. Monitor Activity: Monitor activity is basically monitoring the activity of the business and looking at how well or not the business is doing. It is used to monitor the fluctuations in the sales revenue, how well is cash flow in the business and how the business is doing in terms of paying their expenses. It also looks into the bank balance to ensure there is a sufficient amount of working capital for the business and to make sure the businesses day to day expenses are not higher than its income. Just like other businesses, this is also needed in Coca-Cola in order for it to prosper. Control: Control is needed to make sure that actions can be taken (if needed) in order to control the cash inflows and outflows of the business. This is important as cash is the most liquid of assets any business can have so it is important that they try to maximize their cash inflows and minimize their cash outflows. If control is not implemented the cash outflows may become higher than the inflows of the business. Management of the business: Managing a business is quite important as otherwise it would become disorganized which would affect the levels of efficiency of the business which would lead to lower sales and therefore profit. It is important that managers of a business plan, monitor and control the resources they are responsible for a business to do well. Managing a business requires careful co-ordination of resources including staff, materials, stock and money. The manager has to make sure there are sufficient funds for paying wages, ordering new inventory and pay other bills. Management of a business is important to ensure that the cash outflows are balancing with the money that is coming in through sales. Measurement of financial performance: Measurement of financial performance is basically measuring how well the business is doing by looking at the sales, profits, expenses incurred, etc. Having financial records are essential in order to know how much profit or loss a company is making and whether the company owes or is owed by others. It is used to know the gross profit (the total profit before expenses are deducted), net profit (the total profit after expenses 4|Page Unit 5 Assignment 1 are deducted). The financial records also record the debtors (people or organizations that owe you money) and creditors (people or organizations that you owe) so you know who owes what amount. P2/Task 2: The differences between capital and revenue expenditure and income: Capital Expenditure: Capital expenditure is an expense in which the money spent is to buy, maintain, or improve fixed assets, such as buildings, vehicles, equipment, or land which will usually stay in the business medium to long term. In accounting, a capital expenditure is added to an asset account, thus increasing the level of assets. Capital Expenditure is important for businesses as it is used to maintain existing property, plant & equipment and invest in new technology and other assets for the business to grow. Capital Income: This is the money that is initially used by owners or investors to start up a business and buy additional equipment. Capital income is income generated from an asset which usually medium to long term assets. buying property and then selling it at a higher price a year later is an example of a capital income. Capital income is important as it helps in a business starting out and things like opening inventory and other needed items for the business can be bought with capital income. Revenue Expenditure: Revenue expense are expenses that constantly reoccur, and which do not improve or extend the life of an asset. An example of revenue expenditure could be repairing a motor vehicle. Revenue expenditure is what is used to take care of the operational costs of the business. Other examples of revenue expenditure would include rent, insurance, commission, advertisement, Revenue Income: Revenue Income is the money received from the business by providing their good or service. The three main sources a business gains its revenue income is either from the sales of their good or service, receiving rent from any property they would own and thirdly is the commission received (Commission is payment you get depending on how much of the good or service you have sold). P3/Task 3: 12-month cash flow forecast of Coca Cola done on Excel P4/Task 4: An income statement or profit and loss account is one of the financial statements for a company and it shows the company’s revenues and expenses during a particular period usually being a year. It shows what value of net profit comes from the revenue. While a balance sheet or statement of financial position (SOFP) is used to record all the assets, liabilities and capital of and make sure that all the assets are equal to the liabilities and capitals of a business. 5|Page Unit 5 Assignment 1 Profit and Loss account and balance sheet for Coca Cola: Profit and Loss account Detail Revenue Cost of goods sold Gross Profit Expenses Salaries and Wages General expenses Advertising expense Vehicle expense Insurance Rent Interest paid Tax expense $ $ 30955 (17500) 13455 1200 1500 3840 100 240 1700 120 1602 (10302) 3153 In millions of USD Net Profit Balance Sheet Details Non-Current Assets Vehicles Land and buildings Machinery Investments Goodwill $ $ 300 9000 5500 8700 17270 40870 Current Assets Inventory Debtors/Account receivables Bank and Cash Prepaid insurance Petty cash Total Assets Current Liabilities Creditors/Account payables Wages and Salary payable Interest payable 3000 3200 2500 50 10 8760 49630 5000 1100 1430 6|Page Unit 5 Assignment 1 Tax payable Unearned revenue 1000 600 9130 Non-Current Liabilities Long term loan Bonds payable 20000 13300 33300 42430 Total Liabilities Equity Capital stock Net profit Total Assets and Liabilities 4047 3153 49630 In millions of USD P5/Task 5: Ratio analysis to measure the profitability, liquidity and efficiency of Coca Cola: Profitability ratios: Gross Profit Ratio: Gross Profit/Sales Revenue X 100 13455/30955 X 100 = 43.46% Net Profit Ratio: Net Profit/Sales Revenue X 100 3153/30955 X 100 = 10.18% Return on Capital Employed Ratio: Net Profit/Capital Employed (Current liabilities minus Total Assets) X 100 3153/40500 X 100 = 7.78% Liquidity ratios: Current Ratio: Current Assets/Current Liabilities 8760/9130 = 0.95 Acid Test Ratio: Current Assets – Inventory/Current Liabilities 8760 – 3000/9130 = 0.63 Debtors payment period: Debtors/Sales Revenue X 365 3200/30955 X 365 = 37.73 days 7|Page Unit 5 Assignment 1 Creditor payment period: Creditors/Cost of goods sold X 365 5000/17500 X 365 = 104.28 days Rate of stock turnover ratio: Average stock (opening stock + closing stock/2) /Cost of goods sold X 365 3000/2 = 1500 1500/17500 X 365 = 31.28 M1/ Task 6: Analyzing the cash flow problems, a business might experience: Cash flow management: 1. Problems within the cash flow forecast: Some of the most common problems within the cash flow forecast would have to be: • High overhead expenses: Overhead expenses are the costs endured in order to run a business that are not related directly to selling a specific product or service. Examples of this could include rent, insurance, utilities, etc. • Slow-paying invoices: Slow-paying invoices is receiving payment from your client slowly and this is bad because it reduces the level of cash inflows to the business. This especially affects smaller companies as small companies can’t always afford to wait this long for payment. They need money sooner and if they can’t it will cause financial problems that can seriously affect their business. • Excess inventory: This problem can affect companies that produce goods or re-sellers that keep a warehouse stocked with products. If too much product is made or purchased by companies like these it ends up sitting on shelves and reducing cash flow. • Too much bad debt: Bad debts or also known as recoverable debts is when you sell a product or service to a client who is not able to pay. This is more likely to happen when you extend credit for customers. • Insufficient gross margins: Small businesses sometimes sell their products and services for such low prices that they have low or sometimes even negative gross margins. This situation often occurs in quite competitive environments with constant pricing pressure. It usually affects small business owners as they do not have a clear understanding of their costs. Solutions: • The solution to high overhead expenses is actually quite simple, but it is not easy. Review your expenses and cut back wherever you can. However, be careful not to cut too much, as this may end up hurting the company. If cutting back doesn’t seem fit, consider cheaper options. 8|Page • Unit 5 Assignment 1 The solution to slow paying invoices is to provide clients with an incentive to pay faster. Offering discounts can motivate clients to pay quickly. An alternative is to use invoice factoring (Invoice factoring is when u sell your invoice to a third party such as factoring company for example at a discounted price) to finance slow-paying invoices. This method improves cash flow immediately and enables you to offer payment terms with confidence. • The solution to an excess in inventory is to calculate your inventory so that you stock items for the shortest possible time before being sold or used in the production process. The amount of a product you keep in stock depends on multiple factors such as volume, sales forecasts, available cash, and the supplier’s capabilities. Monitor inventory levels carefully. Having key products out of stock is a sure way to lose clients and so causing a reduce in cashflow. • • The solution to bad debts is to review the commercial credit (commercial credit is a maintenance and reporting of credit histories and risks for commercial companies) of your clients before you allow them extended payments. Allow longer payments only to clients who have a good credit history and a solid payment record and those who don’t should prepay until they have built a good track record with the company. This strategy may cost some sales. However, it is worth it as you decrease the chances for bad debts. The solution to insufficient gross margins would be to raise the prices of some products or services that have weak margins. However, if you can’t raise the prices consider losing those products or services that have weak margins. If one of this is doable at least try to sell the products or service at a break even so you don’t incur loss. M2/Task 7: Profitability Ratio Analysis Gross profit margin is a measure of profitability that shows the percentage of revenue that exceeds the cost of goods sold. It shows how successful a company's management team is in generating revenue from the costs involved in producing their products and services. The Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales. Return on capital employed or ROCE is a profitability ratio that measures how efficiently a company can generate profits from its capital employed by comparing net operating profit to capital employed. 9|Page Unit 5 Assignment 1 Liquidity Analysis Liquidity ratios are measurements used to examine the ability of an organization to pay off its short-term obligations. Examples of liquidity ratios are: Current ratio. This ratio compares current assets to current liabilities. Acid test ratio is what deducts stock from the current assets as it is the least liquid of assets and then shows the ration of how many assets can cover the liabilities. Debtor days shows the average number of days it takes for a company to receive payment for outstanding invoices. So, the greater the number days an invoice is paid after the payment due date, the worse it is for a business's cash flow. Creditor days estimates the average time it takes a business to settle its debts with its suppliers. The ratio is a useful when it comes to checking the liquidity of a business The Rate of stock turnover ratio shows how many times a company has sold and replaced inventory during a given time period. All businesses are different, but in general a ratio between 4 and 6 usually means that the rate at which you restock items is well balanced with your sales D1/Task 8: Justifying actions, a business might take when it experiences cash flow problems: One of the actions a business might take when experiencing cash flow problems is taking an overdraft from the bank and this is justified because as it helps a business through negative periods of cash flow. However, if this action is taken it should be pre agreed if not it would become too costly and result in further cash flow problems. Another action a business might take is laying off workers and as long as there is a valid reason such as for example not requiring their skills anymore it is justified to do. This will help with the cash flow of the company; however, they may drop in productivity as they are fewer people who need to do the same task. This is why it is important to carefully access what the outcome will be to lay off workers before actually doing it. Businesses might need to act on lowering the amount of inventory as well they have as if they have excess inventory it is just increasing the cash outflow for the business and not really benefiting them as it stays in the warehouse and this is why it is justified for them to lower their levels of inventory to an amount where they can sell off. Another justified action would be to lease an item of capital equipment rather than purchasing it, although this may prove more costly in the long run it does allow the comfort for the business to pay on a monthly basis and ordering it when needed. This could work well if the 10 | P a g e Unit 5 Assignment 1 business rarely or only occasional needs the equipment and it will help with the cash flow problems Businesses could also try postponing anything they were to planning to purchase to reduce the cash outflow and this action is justified as if a business continues to purchase while facing cash flow problems the cash flow problems are much more likely to just get worse and even harder to get out of as instead of reducing the level of cash outflows of the business it is increasing. D2/Task 9: Evaluate the financial performance ad position of a business using ratio analysis: The gross profit margin of Coca-cola at 43.46% is a good amount as a higher gross profit margin states that a company can make a good profit on sales, as long as it keeps overhead costs under control. Investors tend to pay more for a company with a higher gross profit. The net profit margin of 10.18% is okay as this means the business is okay at controlling its expenses but there is room for improvement. The return on capital employed of 7.78% is alright as CocaCola's ROCE appears to be slightly less than the 10% average in the Beverage industry. Generally, a current ratio of 2.0 or higher is considered acceptable; meaning the company appears to have the financial resources to meet its short-term debt obligations. Coca Colas ratio of 0.95 is not very good as this means Coca-Cola has 0.95 assets for every 1 liability they have. Coca-Cola has an acid test ratio of 0.63 which is below what it should be which is at least a 1. This means the business is not very liquid. The smaller this figure of debtor days is, the better, as it means that your customers usually pay you quickly. Coca Colas debtor days is 37.73 days. In general, a business that wants to maximize its cash flow should take as long as possible to pay its bills. Coca Colas creditor days are at 104.28 days which is quite a good amount. Coca Colas rate of stock turnover ratio is at 31.28 which is quite great as the higher the inventory turnover, the better since a high inventory turnover would mean the company is selling goods very quickly and that demand for their product exists. References: https://www.comcapfactoring.com/blog/cash-flow-problems-and-solutions/ https://dwglogo.com/coca-cola/ Name: Description: ...
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