Analysis of Business Failure Occurred to “ABC PLC-”

N.Mohamed NidhalHS/DIP/2012/2013/136

PGD in Acc.& Fin 2012/2013University of Peradeniya

What is Business Failure ?

Business failure refers to a company ceasing operation following its inability to make a profit or bring out enough revenue to cover its expenditures. Profitable business can fail if it does not generate adequate cash flow to meet expenses

Topics to be discussed…..

1. Description of the background to the business

2. Discussion of accounting/business issues lead to collapse

3. Discussion of any lessons learned or issues/ practices to be avoided

1.Description of the background to the business

Established in 2005 as a Sol proprietorship, with Rs.12 Mn which includes a Term Loan of Rs. 7 Mn from XYZ Bank.

Industry Analysis By observation, only few Standardized Multi Shop available in our area

Diversified Consumer Products14 Employees

Strategy AnalysisSet Lower price than other Wholesalers

Located in walking distance of area shoppersPoint of Sales (POS) Facility

Accounting Practices through Computerized Accounting

SUMMARY OF RATIO ANALYSIS OF CFCPROFITABLITY 2011 2010Return on Capital employed 19.20% 31.2Return on Equity 12.6 31.3Gross Profit Margin 14.8 26.8Net Profit Margin 9.6 15.8LIQUIDITY

Current Ratio 0.90 to 1 1.8 to 1

Quick Assets Ratio 0.5 to 1 1.1 to 1

Efficiency Asset turnover 0.98 1.73Inventory Holding Period 7 1Days 55 DaysTrade Receivable Collection Period 90 Days 61 DaysTrade Payable Payment Period 36 Days 54 Days

2. DISCUSSION OF ACCOUNTING/BUSINESS ISSUES LEAD TO COLLAPSE

Profitability AnalysisRisk and Liquidity Analysis

Analysis of Sources of funds and use of funds

Profitability Analysis

-The business is unable to control inventory costs or that prices are set too low.

-Obtain Short Term borrowing to meet operational expenses.

- Declining trend in sales over period due to Market penetration by competitors.

Risk/Liquidity Analysis

• The firm experiencing a low inventory turnover.

• difficulties to meet financial obligations when they were due(settlement of Bank TOD’s, Short term local creditors,)

• The firm found difficulties to meet short term liabilities.

• Inefficient management of debtors or less liquid debtors

Analysis of Sources of Funds and uses of Funds

• The firm is negatively Geared.• Biggest reason for this business failure is cited

as being ‘insufficient cash flow.

3.Discussion of any lessons learned or issues / Practices to be avoided

• The Aggressive financing with DEBT CAPITAL, make a additional Interest payment

• Low inventory turnover make Holding cost• The business needs to re-assess its credit management procedures

to ensure faster collection of debts.• To improve your cash flow.• It is important for businesses to have a good liquidity position • Cost optimization

- Renegotiation with Suppliers- Inventory Management and Managing Overheads

Thank You!