Aspects for concentration
- Cost of Sales
- Use of Assets
- Efficient Cash Management
Cost of Sales - must know and keep informed of changes in
- Unit cost of production - direct and indirect and sales volume
break-event point at optimum plant utilization levels
- Consumer price perception - what % will stop buying or turn
to competitor if price increased by 5,10% and vice versa
- Necessary actions - must act to ensure
- S. P.'s set at level to achieve optimum balance between
unit margin and total volume
- That no erosion of margin takes place
- That an ongoing value engineering program is setup
- Where range of products is sold that high margin
products are optimized and low margin products minimized or phased out
Use of Assets
The higher the stock turn the higher the profits.
Impact on Fixed Asset Utilization - key factors: Level of sales
plant will service and cost of achieving them. Improve or
discontinue a line or replace it to make better utilization of
plant and buildings.
Impact on Current Asset Utilization - Debtors and Stocks.
Debtors can be affected by:
- Selling policies which allow major customers too long a
period of credit
- Opening up small accounts whose financial liability is
suspect - Lack of discipline in this area is cost.
Basic and Imperative actions to be taken
- Must be firm in resisting demands for extended credit
- Have strict credit control procedures to investigate new
accounts and to withhold deliveries from late payers
- Debt collection is a necessary part of a salesman's
- Level of customer service - 48 hour via 14 day
- Accuracy of sales forecasts
- Product range
Efficient Cash Management
Need to spend money to make money - will the money be
available from the bank manager
Credit facilities - Economic uncertainty makes bankers less
willing to underwrite 'risky' investments. If sales rise rapidly
payments from last months sales may be insufficient to cover
cost of raw materials required for today's product. Could lead
Effects of reduced borrowing - Short term - delaying
advertising and promotional campaigns, factoring debtors,
looking for alternative distribution channels e.g. direct mail to
raise instant cash. Longer term - adjusting product and pricing
Marketing Analysis and Decisions
Both quantitive and qualative information must be taken into
account before a decision can be made.
Ratios can be compared
However company A has a return on capital of 15% and
company B 10% but company B is better managed. How this is
possible - Companies may be operating in different industries.
Companies may be of vastly different size.
Criteria for meaningful comparison
- Concerns should be of approx the same size and
- Operate in similar industries also
- Accounts should be drawn up using same accounting
Ratio Analysis Technique
Return on Capital Employed
Net Profit after Taxation and Interest / Net Assets
This is judged to be the most important ratio to calculate. The
higher the return on capital the better the performance.
Gross Profit Ratio
Gross Profit / Sales * 100
The higher the % the higher the mark up, the greater the
margin. This in itself does not prove that the mark up is wrong
Net Profit Ratio
Net Profit / Sales * 100
This can help highlight expense variations
Stock Turnover Rate
Cost of Sales (Op Stock + Purch - Cl Stock) / Average Stock
The higher the rate the better. Low rate indicates high amount
of finance 'tied up' in stocks.
Current Assets / Current Liabilities
If less that 1.0 business is in trouble. High ratio represents
finance tied up in stock and debtors. Rule of thumb for most
industries 1.5 - 2.5.
Current Assets - Stock / Current Liabilities
A better test of a business's ability to pay its way. Reason -
stock can be overvalued and not represent the 'salvage' value.
Also stock may be difficult to clear quickly. This ratio should be
above 1.0 Marginally less than 1.0 would not portend imminent
Debtors and Creditors Ratio
Average Debtors / Credit Sales = Debtors Ratio
Average Creditors / Credit Purchases = Creditors Ratio
First step is to convert ratios to days, weeks or months.
Comparison will tell if you are a net receiver of trade credit or
a net giver. By comparing with stock turnover rate you can
calculate number of days you are a net receiver or giver eg
stock turnover = every 87 days. Pays creditors after 35 days.
Is where there is insufficient working capital to finance
increased debtors and stock.
Providing a contract gives a positive contribution it is worth
accepting as long as it does not cause the displacement or
rejection of an alternative contract which gives a higher