Written Assignment Essay Example

Horizontal Analysis

The analysis of the financials especially the income statement and the balance sheet highlight the different changes and adjustments which has been accounted in 2013 over 2012 due to different factors giving rise to different risks for the business.

Risk highlighted from the income statement

The revenues for the business has decreased by 15% which is a bad sign and shows the inefficiency of the marketers to be able to determine the manner in which future sales will be ensured. The reduction in the revenues has been matched by the decrease in cost of goods sold by 12.17%. It shows inefficiency in controlling the direct cost as the decrease in revenue should have matched the decrease in cost of goods sold. This is not the case which signifies that the revenues have decreased but costs haven’t decreased and is a worrying sign for the business. This means that the business is not working optimally and is thereby making the overall profits for the business to decrease (Eljelly, 2004). The other area of concern in the decreasing profits which will keep investors away as the fear that the organization will keep on underperforming will force people to refrain from investing and will thereby have an impact on the future performance of the organization.

Risk highlighted from the balance sheet

A look at the current assets and current liabilities shows that current assets have increased whereas current liabilities have decreased which is a good sign and strengthens the point that the business will be able to maintain better liquidity. A break up of the current assets highlights the different risk which the business might face despite having improvement in the ratio. One of the biggest concern is the fact that the cash has fallen drastically and has reduced by 66.67%. This is a major concern as it will hinder the normal working and will create situations where the business won’t be able to ensure sufficient financing to carry out the daily operations. This is matched by the fact that inventories have increased by 20% which results in multiplying the risk of the asset becoming obsolete. In a similar manner receivables have increased by 20% which increases the market risks as if the business won’t be able to collect the required cash will result in impacting their performance and make it difficult to carry out their future operations.

A look at the non-current assets and liabilities highlights that non-current assets have decreased by 6.3% whereas non-current liabilities have increased by 72%. This is a worrying situation as it will have an impact on the capital structure and will make it difficult for the business to raise future loans from the market. The situation also unfolds as one where the borrowings have increased by 66.67% despite a decrease in revenues showing that the business has raised more finance than required and is an additional cost for the business which is impacting their profitability (Deloof, 2003). This is an area of concern which needs to be analyzed and looked at so that the business is able to develop the required fundamentals through which better control can be exercised over the working and the business is able to strengthen their position in the future.

Four areas of inherent high risk

The four inherent areas highlighting high risk for the business are as

Decrease in revenues: The revenues for the business have decreased which is an area of concern as it will hamper the profits and the overall growth that the business is able to drive from it. The decrease in revenues will result in impacting the liquidity and have a direct impact on inventories as the business is unable to sell the goods as planned and will thereby result in complicating the matter in the future (Antony, 2004)

Increase in direct cost: The direct cost for the business is continuing to increase despite the decrease in revenues which is a worrying sign. This shows the ineffectiveness of the business in controlling the direct cost and needs to be addressed and worked on. This would otherwise results in lesser profits and will have an impact on the final profits which the business makes

Decrease in liquidity: The business liquid position has been impacted as the cash for the business has reduced drastically. This is a worrying sign and unfolds to the fact that business might get entangled in a liquidity crunch (Antony, 2004). This will also result in creating a situation where the business might not be able to carry out the normal operation and will have an impact on future performance

Change in capital structure: The business is witnessing an increase in noncurrent liabilities and a decrease in noncurrent assets which will impact the capital structure as the business will find it difficult to raise further finance in the future. This will also thereby have an impact on the future operations and will make it difficult for the business to raise money from the market thereby having an impact on their performance.

References

Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57

Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587.

Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 — 61