TABLE OF CONTENTS Page

EXECUTIVE SUMMARY 2

1. INTRODUCTION 3

2. ANALYSIS 4

3. RESULT/FINDINGS 8

4. CONCLUSION 9

5. RECOMMENDATIONS 9

6. APPENDICES 10

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7. REFERENCES 10

Executive Summary:
This report was undertaken to identify the reason for unprofitability in the months of July
and August . The aging receivables and decreased sales due to slow downare identified as
probable causes why Wonderous Wildflowers has not achieved its objectives of a positive
cash balance and maintenance of its profitability level. This information has prompted
possible course of action that can be implemented:

 Improve the average collection period for accounts receivable.

 Do not extend credit to slow payers.
 Reduce credit terms.
 Improve efforts to collect debts, have a proper follow up by sending
reminders.
 Offer discounts to early payers in order to improve cash inflow
 Use of advertising and promotions to increase sales
 Knowing the costs involved and tracking them closely
 Researching suppliers thoroughly and improve terms of business

The financial analysis using various ratios has been used to determine the
strengths and weaknesses of Wonderous Wildflowers. The fundamental test of a sound
financial position is solvency which is closely related to profitability since only profitable
business can be expected to pay their way. Solvency is first priority since it’s a precondition
for survival of the firm.
The objective of this report is to come forward with views on how to improve the
operation of Wonderous Wildflowers so that it can provide the owner with a substantial
return on the capital he has invested. This can be achieved through the identification of
the shortcomings in product costing, customer terms of credit and increase in sales of

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the business enterprise. The purpose is to aim at simplifying the business environment
for Wonderous Wildflowers and reducing administrative burdens.

Solvency is not concerned with the past but with the future cash inflows and outflows, To
forecast ahead Wonderous Wildflower will need a substantially high investment in
inventories and debtors in order to cover up for the losses incurred in the months of July and
August in the face of rising input costs and selling prices. It is clear that Wonderous
Wildflowers was operating up to if not beyond safe debt limits until June but the rising
receivables and payables beyond terms set has led to low cash inflows in July and August.
Often a business cannot reduce its operating assets when it is experiencing losses;
Furthermore it is difficult to increase its operating liabilities. Its creditors get nervous when
they see the business reporting a loss.

Thus an analysis is made of operating performance including sales and trends in sales,
liquidity position and judging the efficiency of the business to make profit and promote itself
during the slowdown. It is suggested that Wonderous Wildflowers regularly review debtors,
chase up late payments and monitor their financial performance

1.Introduction:
Wonderous Wild flowers is a small business owned by Aden Powell( Sole proprietor), buying
and selling Australian native plants to a variety of customers. The business is registered with
the ATO for goods and service tax (GST) and ABN No 16 295 278 175.

Accounting System:
Wonderous Wildflowers uses the accrual basis of accounting. It has a chart of accounts as
well as the standard accounting journals and subsidiary ledgers. In addition the usual
customer invoices and vendor bills are there source documents. Bad debts are rare and
when they occur the direct write-off method is used, Prepayments such as prepaid insurance
are recorded using asset method, Reversing entries for end of month accrual of wages is
made. Payments apart from petty cash are made by handwritten cheques.

Inventory:
Wonderous Wildflowers uses perpetual inventory system, because the trees and shrubs are
expensive and highly perishable, the firm has to keep a precise record the quantity and the
amount which should be in inventory to facilitate reordering and the calculation of shortages
and losses. This system is continuous- perpetually – shows that inventory should be at hand
for every item.

Suppliers:

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Wonderous Wildflowers purchases native plants from four suppliers namely:

 Freemans Nursery (Terms Net 30days)

 Green’s Wildflower Nursery (Terms Net 30days)
 WA Native Nursery (Terms 5%10/Net 30days)
 Waratah Nursery (Terms Net30 days)
Only WA native Nursery is offering prompt payment discount.

Customers:
The sale of native plants are recorded on individual invoices, this enables Wonderous
Wildfowers to maintain a perpetual inventory system, customer terms are net 30 days and
no prompt payment discounts are being offered to induce customers to make early
payments.
The customers of Wonderous Wildflowers are:
 Albany Nursery
 Bundy’s Garden Centres
 Colour Drop Group
 Franklins Garden Centre
 Waldings Ltd
 Freesia Garden Centre(new customer ,offered terms of 5%10/net30)

Employees:
Wonderous Wildflowers employs just one employee- Bradley Jackson, paid on fortnightly
basis and with accordance with the law tax is deducted from the employee’s wages (PAYG
withholding tax) and remitted to Australian Taxation office on quarterly basis.
The accounting are maintained by Kathy Green, but is not an employee of the business.

2.Analysis:

-Management Performance Ratios

 Asset Turnover: Sales/Total assets

Measures the efficiency of a company's use of its assets in generating sales revenue or sales
income

July: 12007.05/74147.32= 0.161 August: 9490.91/69294.32= 0.137

 Return on Assets : Net profit/Total assets

ROA shows the amount of income for every dollar tied up in assets. Generally, a higher ratio
is better, since it indicates the business has less money tied up in - assets for each dollar of
sales revenue.

-11155.62/69294.32= -16%

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  Gross Profit Margin = Gross profit/ Net Sale

Indicator of how much profit is earned on your products without consideration of selling and
administration costs.

July: 4348.02/ 12007.05 = 36% August: 3151.96/9490.91= 33%

 Net profit margin: Net profit before tax and interest/Sales

The net profit margin ratio shows the proportion of every dollar of sales that is left after all
expenses have been paid, and remains as net profit .

July: -5528.58/12007.05= -0.46 = -46% August : -5627.04/9490.91= -0.59 = -59%

( Wonderous Wildflowers is showing losses in both July and August)

SG&A to Sales : Percentage of selling, general and administrative costs to sales.

(Selling, General & Administrative Expenses) / (Sales)

18716.50/21497.96 =87.06%

-Financial Strength Ratios: Short term Liquidity & Solvency

Liquidity Ratios measure how liquid a business is. Bankers and suppliers may use these to
determine creditworthiness and identify potential threats to a company's financial viability.

 Current Ratio: Current Assets/Current Liabilities

(Rule of thumb= 2:1)

The current ratio is a test of the make-up of working capital. It measures in a crude way the
relationship between assets which will shortly mature into cash, and liabilities which will
require cash settlement.

July: 32445.32/11760.90 = 2.76:1 August: 27478.32/13334.94 = 2.06:1

 Acid Test ratio (Quick Ratio): Current Assets-Inventory-Prepaid Insurance/Current

Liabilities

(Rule of thumb = 1:1)

July: 21202.35/11760.90= 1.80:1 August: 21231.85/13334.94 = 1.59:1

 Efficiency Ratios:

Efficiency Ratios measure how quickly products and services sell, and effectively collections
policies are implemented.

 Debt Ratio: Total Liabilities/ Total Assets

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July: 11760.90/74147.32= 0.159 = 15.9% August: 13334.94/69294.32= 0.192 = 19.2%

 Inventory Turnover Ratio = Inventory/Cost of Sales*365

There are two ways to increase your Inventory Turnover Ratio:

1.      Reduce your inventory level

2.      Increase your sales

A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product
line or marketing effort.

July: 8074.97/8195.53*365/31 =12 Days August: 3366.47/6528.95*365/31 = 6 Days

 Debtors Turnover Ratio: Net credit sales revenue/ Average receivables

July: 9373.05/9074.397= 1.0329 August: 8937.50/11496.375= 0.77

 Average collection period: 365/Receivables turnover ratio.

The approximate amount of time that it takes for a business to receive payments owed, in
terms of receivables, from its customers and clients.

July: 61/1.0329= 59.05 days August: 62/0.77= 80.51 days

July August

Sales 12007.05 9490.91 -20.9%

Profit /Loss -5528.58 -5627.04 1.78%

Sales Composition
The sales of Wonderous Wildflowers are broken down into two main revenue streams: the cash sales,
and credit sales. Of the Total sales of $12007.05 in July 2010 only $2634 was in cash and $9373.05
was credit sales.

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14000

12000

10000

8000 9373.05
Credit Sales
Cash sales
6000

4000

2000 2634

0
Sales of July 2010

Aged Receivables:July

0-30
33% 31-60
61-90
90+
67%

Aged Receivables: August

34% 0-30
31-60
61-90
90+

66%

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 Aged Payables:July

8%

0-30
31-60
61-90
90+

92%

Aged Payables: August

4%

0-30
31-60
61-90
43% 53% 90+

3.Result/findings
The analysis of financial statements such as P&L a/c, Trial Balance, Balance sheet show
relationships aimed at testing the financial structure for strengths and weaknesses. The
fundamental test of a sound financial position is solvency which is closely related to
profitability since only profitable business can be expected to pay their way. Solvency is first
priority since it’s a precondition for survival of the firm.

Solvency is an ongoing condition and current obligations including wages and expenses are
met from available cash and cash inflows in normal course of Wondrous Wildflowers
business operations.

Working capital = Current asset – Current liabilities

July: 32445.32- 11760.90=20684.42 August: 27478.32-13334.94=14143.38

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The figures show that the working capital of Wonderous Wildflowers has decreased by $
6541.04 or 31.6% . To evaluate the significance of amount of working capital in the two
months a variable such as sales can be used on the assumption that a higher level of working
capital would be required to service a higher level of sales.

While Working capital decreased by $ 6541.04, one notes that there has been a decrease of
$ 4708.50 in Inventory and an increase of $ 1574.04 in Current liabilities thus such a decrease
in Working capital is far from optimal.

In using the current ratio as a measure of solvency, July: 2.76:1 August: 2.06:1 in
comparison shows that ratio in July shows more solvency than in August and a downward
trend is depicted. What is a good current ratio would depend on the nature and
circumstances surrounding the business and in this case since the credit sales are more then
on cash and since there is a time lag between making the sale and collection of cash from
debtors effects the cash inflow available. The use of acid test ratio also shows that the firm
although can meet its current liabilities the rate is not stable and shows a falling trend by
which the firm may find itself in liquidity difficulties.The Cash Mgmt Account is down by
$4967.10 thus proving liquidity position is deteriorating .

In the same way that stock control is a vital aspect of working capital management, so too is
debtors' control. Wonderous Wildfowers to sell on credit, otherwise it might find it difficult
to survive if their competitors provide such credit facilities; this could mean losing customers
to the opposition.

Nevertheless, since credit is provided, it should be done optimally as possible. Why is credit
control so important? For Wonderous Wildflowers, the total amount owing by debtors was
£13269 at the end of 31 August 2010, which as a percentage of total assets, is 19.67%
compared to 12.62% in July. That's a lot of money in absolute terms and relatively. So,
they've given an additional $4265.40 worth of credit to their customers over the month.
What we need to know, though, is whether they are controlling these debtors.

A complicating factor in analysis of expenses when relating them to volume of sales is that
most expenses are fixed in relation to sales. Thus the decrease in total expenses can be
related to the fall in sales figures. Debtor Turnover ratio has also slipped, suggesting that
Wonderous Wildflowers may be chasing sales with credit offers. Gross profit has also slipped
from $ 4348.02 in July to $ 3151.96 in August.

Overall it looks like Wonderous Wildflowers which set out on a relatively ambitious plan has
hit some difficulties with the slowdown in demand resulting in consecutively two months in
loss this has resulted in aged payables in the 31-60 days slot increasing from 8.2% to 43.3%
an 3.9% in 61-90 days slot. It is also interpreted that its customers are similarly hit by the
slowdown as the they have exceed the credit period provided to them as aged receivables
increased from 33.2% in the 31-60 days slot to 34.4%.

Results of data analysed show that comparative performance is poor in the areas of profit
margins, liquidity, credit control, and inventory management.
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4. Conclusion:
Warning Signals:

The report finds the prospects of Wonderous Wildflowers in its current position are not
positive. The major areas of weakness require further investigation and remedial action by
the proprietor.

5.Recommendations:
 Improve the average collection period for accounts receivable.
 Do not extend credit to slow payers and should run credit checks on their
customers.
 Reduce credit terms, focus on profit growth rather then sales growth .
 Improve efforts to collect debts, have a proper follow up by sending
reminders.
 Offer discounts to early payers in order to improve cash inflow
 Use of advertising and promotions to increase sales
 Marketing to be done by an experienced sales person.
 It is also suggested to add ornamental plants to the product mix as there is
a potential market for them and there will be no start-up costs involved.
 Talk to lenders, government agencies who assist in small business startups and
potential investors to see if you can develop a financing structure which can help
expand the business.

6. Appendices:
 Trial Balance as at 31st July 2010
 Profit and Loss for period ended 31st July 2010
 Balance Sheet as at 31st July 2010
 Aged payables and receivables summary 31st July 2010
 Session reports

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7. References
-Perrin, W. P. B. (2010). Wonderous Wildflowers, John Wiley & Sons, Australia Ltd.

-Walton, P. (2000). Financial Statement Analysis, Business Press.

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