Analysis of Business Failure Occurred to ABC PLC-

N.Mohamed Nidhal HS/DIP/2012/2013/136 PGD in Acc.& Fin 2012/2013 University 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 Products 14 Employees

Strategy Analysis Set Lower price than other Wholesalers Located in walking distance of area shoppers Point of Sales (POS) Facility Accounting Practices through Computerized Accounting

SUMMARY OF RATIO ANALYSIS OF CFC

PROFITABLITY

Return on Capital employed Return on Equity Gross Profit Margin Net Profit Margin
LIQUIDITY

2011 19.20% 12.6 14.8 9.6 0.90 to 1 0.5 to 1 0.98 7 1Days 90 Days 36 Days

2010 31.2 31.3 26.8 15.8 1.8 to 1 1.1 to 1 1.73 55 Days 61 Days 54 Days

Current Ratio Quick Assets Ratio Efficiency Asset turnover Inventory Holding Period Trade Receivable Collection Period Trade Payable Payment Period

2. DISCUSSION OF ACCOUNTING/BUSINESS ISSUES LEAD TO COLLAPSE

Profitability Analysis Risk 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 TODs, 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!