Analyse the performance of a selected business, using information from its accounting systems, highlighting potential causes for concern
Abscon Ltd owns a large TV and DVD player shop in Scotland. The company also has a servicing and repairs department. The Malcorn family, who own the business, decided to expand and open a new store in Coventry where they would lease premises in the shopping centre. Abscon Ltd would like to obtain a loan worth £100,000 to finance this development. I will write a report, highlighting their improvements made in their financial statements and also if there are any potential causes for concern. Abscon Ltd have made many improvements from 2013 to 2014, the most important improvements include:
Abscon Ltd.’s turnover. I see this as a vast improvement because it has improved by £200,000 from £1.3million in 2013 to £1.5million in 2014. This represents an increase of 15.38%. This shows that they have done very well at increasing their sales.
In addition, another important improvement is, their profit after taxation. This is a big improvement of £90,000 from a loss of £30,000 in 2013 to a profit of £60,000 in 2014. This is a big increase of 300%. This is a clear improvement as they began with a loss yet still made a profit of £60,000. In addition this figure is taken after they paid tax which means this is the profit they have to invest in other things, for example, going towards their expansion in Coventry.
Furthermore, Abscon Ltd has £24,000 more in the bank than they did in the following year (2013). In 2013 they had £51,000 and in 2014 they had £75,000. This improvement means they can use this money to invest in expansion or they could save it for an emergency.
Despite Abscon Ltd making clear improvements there are also some causes of concern. I have identified the following things as causes for concerns:
Firstly, Abscon Ltd stock has increased over the two years by £30,000. In 2013 they had £60,000 worth of stock however in 2014 they had £90,000. This is a concern because they failed to sell their stock to their customers consequently, losing revenue. Furthermore, DVD’s and TV’s become outdated very quickly with new releases therefore it could be a problem to sell the remaining stock.
Another cause of concern is their debtors. Their debtors owe them £13,000 more from £32,000 in 2013 to £45,000 in 2014. If their debtors paid what they owe Abscon Ltd, they would have extra cash to pay for the expansion. In addition, if you add the money made if they sold all their stock with the money their debtor owe them, they wouldn’t need to apply for a loan.
In addition, Abscon Ltd paid out £40,000 of dividends both years. This is a concern in 2013 when they made losses; despite these losses they still paid their shareholders despite having no cash to do so which made them have more losses. I suggest that Abscon shouldn’t pay their shareholders that year because they had no money to give them which makes their situation worse. In addition, giving dividends doesn’t allow the shareholders to know about any concerns and doesn’t give them a fair portrayal of the business success. Also in the year 2014 they still paid out £40,000 in spite of having an increase of profit. They should have increased their dividends slightly to make their shareholders happy and aware of their progress.
Finally, the last cause of concern is their mortgage. Both years their mortgage was at £275,000, this means that they were only paying interest on their mortgage. This is a concern because they haven’t reduced the balance and if at the end of their mortgage year they haven’t paid the full amount they will have to pay it all at once; if they do not have the funds their property will be repossessed.
In conclusion, taking their improvements and causes for concerns, the bank manager should grant Abscon Ltd a loan of £100,000. This is because their improvements outweigh their causes for concern. For instance, they have made vast profits in the year 2014 which means they will be highly able to pay back the loan and other emergencies they may face. However, Abscon Ltd will need to reconsider some things. For instance, they should agree not to pay any dividends to their shareholders if in that year they had made losses; this is because it doesn’t give them a fair portrayal of the business success and puts the business in more danger as they are losing more money. In addition, they should reconsider how much stock they buy.
This is because in both years they failed to sell a large sum of its which therefore leaded them not to gain any profit. Also it may be hard to sell the left over stock as TV’s and DVD’s become outdated and their customers will only want to buy the newest items. Lastly, they should consider their mortgage; because both years their mortgage didn’t reduce because they were only paying for the interest. This is hazardous because if at the end of their mortgage year, they still haven’t paid the full amount their property may get repossessed. Nevertheless, with a loan of £100,000 they will be able to open a store in Coventry which will expectantly allow them to make more profit which will allow Abscon Ltd to reduce their balance of their mortgage and also be able to pay off their loan.