Analysis of Fianancial Statements
Answer:
Introduction:
As the management of the company was eager to know about the performance of the company.
The company is earning good profit but still the main purpose of the report is to advice the management on the steps which it can take for further improvement For advising the company we will make analysis of the profit of the company by seeing the gross profit and net Profit ratio.
We will also do some sales analysis.
Report on Profitability of the Company:
The Profit earning capacity of the company is very good because if the company is earning good Gross Profit of and Net Profit. Approx. 50% Net profit ratio would be very good for any industry. These figures show that the company’s product is of superior quality because of which the NP margin is 50% . It means customers are ready to pay higher price for the product just because of the quality because customers can also but similar products for another market but quality would not match.
For more clarity, Lets calculate the following profitability ratios:
- Gross Profit ratio: This ratio defines the gross margin of the company. In other words Sales- Cost of Sales. The formula for the same is Gross Profit/ Net sales: 47290/74450= 63.52%
- Net Profit ratio: This ratio defines the Net profit earning capacity of the company. This can be calculated with formula Net Profit/ Net Sales: 36790/74450= 49.42%.
We can also see that the expenses of the company are also very less which is on the one hand good but for larger companies it is not good. Company should try to expand its business by increasing the sales, with this proportionate expenses will also increase but not in the same proportion as sales will increase.
Comments: The company’ s earning good profit but it should not be satisfied with this earning because sales figure is lower. There would be many opportunities to increase the sales. So, it should try to increase the sales and also the profit of the company.
Recommendations for Increasing the Profitability:
- The company can add variety to the products if the already products which company is manufacturing are already fully established in the market because with the addition of the new products the company can enter new markets through it can increase its sales and also the profits.
- The company can also train their sales team on periodical intervals and train them about new technological techniques of sales. With this if the sales team are updated with the technology they can grasp the timely opportunities.
- The company can increase the production of the products with the introduction of new machines, if the company is not having installed capacity. Initially there will be outflow of cash but later on company will earn higher profits and can cover up the cost in few years.
Following are the Reports which can be Introduced to Improve the Efficiency of the Company:
1 Cash Flow statement: This statement shows the Funds movement of the company. The company will be able to know regularly whether the company is generating the cash flow from operating, investing, financing activities or using cash flow from above activities.
2 Daily production reports with variance, if any: The management should see t the daily production reports from production department and most importantly the variance if any generated from the report and the same should be carried forward to the next day.
3. Budgets of every department: Company should along with the departmental heads frame the budgets of every department. Then after every month the management should compare the actual results with the budgets prepared. After comparing with the budgets the management should analyse the variance/ favorable conditions and discuss the same for reasons with the departmental heads.
References:
Selling Power, 10 Tips to improve your sales performance, viewed on 16th Aug, 2016, https://www.sellingpower.com/content/article/?a=10089/10-tips-to-improve-your-sales-performance.
Brain Tracy, 14 proven Strategies to increase sales of your product, viewed on 16th Aug, 2016https://www.briantracy.com/blog/sales-success/proven-strategies-to-increase-sales-of-your-product/.
Entrepreneur India, 10 ways to improve Profiability, viewed on 16th Aug, https://www.entrepreneur.com/article/184240.
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