ANALYSIS AND INTERPRETATION OF FINANCIAL REPORTS
losses due to deterioration of inventory or the need to sell at a lower margin in order to move inventory.
RECOMMENDATIONS
After analysing the 2003 and 2004 Profit and Loss Statements and Balance Sheets for the two-year period, it appears that the business is moving in the right direction, but not without problems and dangers.
Attention must be given to halting the trend in the indicators of the businesses short-term financial stability. Further increase in sales activity is necessary, in particular cash sales so that the business is able to generate better cash flow and turnover of inventories. The most important aspect that Mr Lee should investigate is increasing the current ratio, otherwise the business will have to obtain finance from outside sources or liquidate some non-current assets.
The credit policy of Robert Lee Enterprises should also be investigated in order to strengthen the procedures currently in place. The turnover of accounts receivable and cash flow and to minimise bad debts should also be a priority.
To enhance future performance, Robert Lee Enterprises should consider expanding their distributive area, either expanding to cover a larger area in Queensland or look at inter-state selling. The sales team should consider a mail-out of the brochures to cover more area in a smaller amount of time. This would reduce the deterioration on the vehicles and allow more time to be spent on taking orders. Follow-up calls and weekly/fortnightly mail outs would have to make, but this will save time that would otherwise be spent on travelling, depreciation on vehicles and general expenses such as fuel. A web-site may be another way of reaching a larger market.
It is evident that Mr Lee is a very intelligent businessman. The sales figure for 2003 was $52000, and this increased in 1-year to $720000. This $200,000 increase however, was not followed through to the net profit. Mr Lee has purchased motor vehicles (the account increased by $20000), as well as Buildings and Land (totalling $210,000). In the beginning of 2004, there was an extraordinary expense, fire damage, but this $18000 can be expected to appear the following year, as an insurance claim should have been claimed, and the insurance company should cover the fire damage.
The management of Robert Lee Enterprises has done well with improvements in most areas although it still has some challenging tasks ahead of it.