Snead’s Financial Analysis based on the qualitative and quantitative information addressed.
Experience and expertise
Sheldon having worked with his uncle in the dry cleaning business during the summers while he was in high school places him in the best position to manage the business as there is a lot of knowledge, expertise and experience he has acquired. He knows the business operations, its challenges and the best strategies to put in place to remedy every situation occurring in its undertakings. In addition, he is currently retrenched from his work in which who was in the management position, such job-related experiences are of positive contribution in running the Snead’s Dry-Cleaning Company.
Expansion and efficiency
Sheldon recognizes that the dry-cleaning business has to be expanded, and thus he identifies a small retail space at the office he was previously working. The lease of the retail space would be fair enough in terms of cost ($3500 monthly) in which the receiving operations will be set up.The expansion is most necessary as there is need to capture a market that is likely to be captured by the rival discount establishment nearby. The operation efficiency of the business would be ensured if Sheldon ensures that he replaces the dry-cleaning equipment which is at the end of its useful life. Acquisition of modern equipment would make the operations of the Snead’s business more efficient.
Sheldon needs to capture its market niche strategically. The business is currently facing competition from the newly opened major dry cleaning chain. The facility has put a modern establishment which could impose a lot of challenges if Sheldon has not replaced its previous equipment. The new establishment further, charges rates which are lower that of Snead’s with 5% to 20% rating. A strategic pricing mechanism should be formulated by Sheldon to make his customer feel fairly charged and get value of their money from the services the business render.
Customer service and retention
Though, the business has captured some potential customers and a given market niche but there is still much to be done with respect to scaling to the highest bar the customer services in order to retain the potential customers and at the same time capture new customers as well. This becomes critical as the business is destined to a competitive market as new establishments are getting opened nearby.
Snead’s Financial Analysis Based on the Review of the Financial Data Provided.
From the review of the Snead’s Dry-Cleaning Company financial data, this paper finds the relevance of a number of financial ratios in which the company’s financial analysis would find appropriate. These ratios range from Solvency ratios, Efficiency ratios to Profitability ratios.
The Solvency Ratios
With regards to giving emphasis on the Company’s measures of financial soundness, the solvency ratios herein are calculated to show how well the Snead’s Company can satisfy its short and long-term obligations.That is, the Snead’s Company capacity to meet its short and long term financial commitments. The ratios would show if Snead’s is a solvent company when it owns more than it owes, that is, the company has a positive net worth and a manageable debt load.
The solvency ratios as could be applicable to the case of the Snead’s Dry-Cleaning Company are:
Debt to equity = Total debt / Total equity
= 30,000 / 223,500
The debt to equity ratio shows the degree of financial leverage being used by the company and it includes both the short-term and long-term debt. An increasing debt-to-equity ratio depicts higher interest expenses, and if it gets beyond a particular point it may create some effects on the company’s credit rating, and therefore raising more debt becomes expensive.
Quick Ratio “Acid Test” or “Liquid’ Ratio
This ratio measures the company’s ability to cover its short-term obligations with its most liquid assets, and thus in exclusion of inventories from its current assets. The quick ratio specifies on the fact whether the company’s assets can be quickly converted into cash are sufficient enough to cover for the current liabilities (Vandyck, 2012).
Quick ratio = (Current assets – Inventories) / Current liabilities
= (Cash and equivalents + Marketable securities + Accounts receivable) / Current liabilities
= (10,000 + 5,000) / (30,000 + 24,000 + 7,500)
= 15,000 / 61,500
The Snead’s company is not in its exact liquid condition though. This is because the ideal quick ratio should be 1:1, and since it has a lower quick ratio than the ideal one, it indicates that the company relies too much on inventory or other assets in paying its short–term liabilities.
The current ratio give the measurement of the company’s ability to pay off its current liabilities (those payable within a year) with its current assets, for instance, cash, inventory and accounts receivable (Tamari, 2008). A higher current ratio shows that the company is in a better liquidity position.
Current ratio = current assets / current liabilities
= (10,000 + 5,000) / (30,000 + 24,000 + 7,500)
= 15,000 / 61,500
The Snead’s current ratio calculation gives a ratio which is less than 1. This would suggest that the company is not well placed in ensuring meeting its debts. The company might be required to raise additional finance or extend the time it’s takes in paying its creditors. Even though low current ratio values do not show a critical problem in the organization but it should concern the Snead’s management.
Current Liabilities to Net worth Ratio (%)
This ratio shows the amount due of creditors in a period of one year as a percentage of the owners’ or the stockholders’ investment. It measures the funds being risked by creditors with the business temporarily against the permanently invested funds by the company owners.
Current liabilities to net worth ratio (%) = Current Liabilities * 100 / Current Net Worth
= (Current Liabilities / (Total Assets- Total Liabilities)) *100
= (61, 500 / (285,000 –61,500)) *100
= (61,500 / 223,500)100
Total liabilities to Net worth Ratio (%)
This is the debt-to-net-worth ratio, also called the debt-to-equity ratio. It measures how the company’s debt relates to the equity of the owner or the stockholders (Riahi-Belkaoui, 2008).
Total liabilities to Net worth Ratio (%) = Total Liabilities / Net Worth
= (61,500 / 223,500) * 100
= .2752 * 100
Since the Snead’s Company’s calculation for the Total liabilities to Net worth Ratio (%) depicts a lower percentage of 27.52%, the higher protection there is for the company’s creditors.
Fixed Assets to Net worth (%)
This ratio measures the percentage of the fixed assets in relation to the company’s total equity.
Fixed Assets to Net Worth (%) = Fixed Assets / Net Worth
= [(20,000 + 250, 000) / 223,500]* 100
= (270,000 /223,500) * 100
This higher percentage of the ratio of Fixed Assets to Net Worth, make the Snead’s Company more vulnerable on the concerns of unexpected hazards and changes in business climate. The company’s capital is frozen in the form of machinery and its margin for operating funds is narrow towards supporting day-to-day operations.
The Efficiency Ratios
These ratios give an assessment of how effectively the company is managing its assets and liabilities internally. The efficiency ratios calculate the repayment of liabilities, turnover of receivables, general use of machinery and inventory and the quantity and usage of equity (Palmer, 2013).
Different efficiency ratios would be appropriate in the case of the Snead’s Company:
Collection period ratio (Days)
This ratio calculates the collectability of the accounts receivable, or rather how fast the company is capable of increasing its cash supply.
Collection period ratio (Days) = (Accounts receivable / Sales) *365 days
= (5,000 / 580,000) *365
= 3.15 days
This ratio gives the approximate amount of time which it takes for the company to receive payments owed, in the form of receivables, from its clients and customers. Since the calculation of the collection period ratio for the Snead’s Company has shown approximately 3 to 4 days in order to receive its payment owed by the customers.The shorter the collection period, the prompt the collection and better management of the accounts receivable. When the collection period is longer it can negatively impact on the short-term debt paying ability of the company (Ketz, Doogar & Jensen, 2000).
Assets to Sales ratio (%)
The assets to sales ratio measures sales to the total investment which is used in generating those sales.
Assets to Sales ratio (%) = Total Assets / Net Sales
= (285,000 / 580,000) *100
This relatively lower percentage of the Assets to Sales ratio shows that the company is aggressive in its efforts on sales, or it means its assets are being utilized fully.
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