Business, Other Year 2 Entrepreneurship-Business Plans

Who can figure bankers?" Pehr Weisengraf mumbled as he returned to the office of his small candy manufacturing business, Professional Confectioners. "They're willing to lend money only to those business owners who don't really need it. If you can prove you don't need it, theyll throw it at your feet. Unfortunately, we need it, and we need it fast." Pehr called Robert Peltzman, the company's part-time bookkeeper, to see if he could explain what the banker had been talking about when he rejected Pehr's request for $80,000 to purchase new candy-making equipment and to boost the company's working capital base. "They turned down my loan request," Pehr explained to Peltzman. "The banker had those copies of our financial statements that you've been sending her. She said that many of our financial ratios were way off what they should be. Ive never even taken a business course much less an accounting course. I have no idea what she was talking about, but she did give me this," Pehr said, thrusting a piece of paper at Peltzman. "I dont know. It's all Greek to me." Peltzman looked at the page and saw that the banker had calculated several financial ratios based on Professional Confectioner's most recent financial statements and had compared them to the industry average. Here's what he saw: Ratio Last Year This Year Industry Average Current Ratio 2.3:1 1.7:1 2.4:1 Quick Ratio 0.7:1 0.4:1 0.8:1 Debt Ratio 0.81:1 0.89:1 0.65:1 Debt to Net Worth Ratio 2.6:1 2.9:1 1.9:1 Inventory Turnover Ratio 4.9 times/year 4.3 times/year 7.1 times/year Average Collection Period 36 days 43 days 34 days Net Sales to Working Capital Ratio 10.4:1 9.7:1 12.6:1 Net Profit on Sales Ratio 4.1% 3.8% 9.4% Net Profit to Equity Ratio 17.6% 18.3% 13.4% "Can you tell me what this means, and more importantly, what we can do to improve our ratios so we can qualify for a loan?" Pehr said to Robert. 1. Answer Pehr's question to Robert.

No files attached.

Bid Credits: 1

Deadline: July 24, 2006, 7:26 pm EDT

Soln.

From all the ratios it is evident that Pehr Company is much below the industrial average. It is also clear that as compared to last year, the current year has shown a negative trend that is it is lower than last year. And if the company continues to work like this then company will finally be much more below the industrial average. Last Year This Year 1) Current Ratio = 2.3:1 1.7:1 Current Ratio=Current Assets/Current liabilities Industry Average 2 .4:1

2) Quick Ratio = 0.7:1 0.4:1 0.8:1 Quick Ratio- (Current Assets-Inventories)/Current liability 3) Debt Ratio = 0.81:1 0.89:1 Debt Ratio- Total Debt Capital/Total Assets 0.65:1

4) Debt to Net Worth Ratio 2.6:1 2.9:1 1.9:1 Debt-to-equity (leverage) ratio = (total liabilities) / (net worth) 5) Inventory Turnover Ratio 4.9 times/year 4.3 times/year 7.1 times/year Inventory Turnover Ratio: -Cost of Good sold/Average inventory 6) Collection Period 36 days 43 days Collection Period: - Accounts Receivable X 365 days 34 days

7) Net Sales to Working Capital Ratio 10.4:1 9.7:1 12.6:1 Sales divided by Net Working Capital (current assets minus current liabilities). Ratios higher than industry norms may indicate a strain on available liquid assets, while low ratios may suggest too much liquidity. 8) Net Profit on Sales Ratio 4.1% 3.8% Net Profit on Sales Ratio: -Profit after tax/Sales 9) Net Profit to Equity Ratio 17.6% 18.3% Net Profit to Equity Ratio: -Profit after tax/Equity 9.4% 13.4%

Recommendations This means Pehr Company is not as per the industry average and his current assets is reducing from the last year and to the industry average or current liabilities are on an upward trend, which is a negative effect on company. So, he should 1st try to improve his current assets. There should be minimum required stock in his factory and he should maintain a proper communication between the suppliers and customers that is he should maintain proper justing time approach.

 He should invest money of his own rather than taking from elsewhere to minimize the after effects of loan.