Gloss Paints Ltd.

Year 1989 Year 1988

£’000 £’000

Current Ratio Ideal is 2:1

Current Assets 1093 1.18 1195 1.28

Current Liabilities 930 938

Acid Test Ratio = Ideal 1:1

Total of Cur Assets-Stock &Work in prog 1093-210 0.95 1195-209 1.05

Total of Current Liabilities 930 938

Stock Turnover Ratio Speed with which stock is acquired & subsequently resold.

Average stock level *365 210 *365 60 days 209 *365 53 days
Annual Purchase 1270 1441

Efficiency Ratios:

Ideal 45
Period of credit allowed days

Average level of debtors *365 618 *365 99 days 716 *365 103 days
Total sale on credit 2285 2548

Period of credit taken

Average level of Creditors *365 474 *365 136 days 473 *365 120 days
Cost of Purchase 1270 1441
 Gearing Ratio

Long term non current liabilities *100 299 *100 280*100

Share + Reserve+ Non current liabilities 780+299 27.71 853+280 24.71

Profitability:

Gross profit margin = Gross income*100 1015*100 44.42 1107*100 43.44

Sales 2285 2548

Net profit margin = OperatinIncome*100 (84)*100 65*100

Sales 2285 (3.68) 2548 2.55

R.O.S.F

Profit of the year*100 (84)*100 (10.76) 65*100 7.62

Ordinary share+Reserves 780 853

R.O.C.E

Operating profit*100 (84)*100 65*100

Share cap + reserves +non current liab. 780+299 (7.78) 853+280 5.76
 Gloss Paints Ltd.
Financial Ratios

Year 1989 Year 1988

Current Ratio 1.18:1 1.28:1

Acid Test Ratio 0.95:1 1.05:1

Stock Turnover (days) 60days 53days

Credit Given (days) 99days 103days
Credit Taken (days) 136days 120days

Gearing % 27.71 24.71

Gross Profit Margin% 0.44 0.43

Net Profit Margin % (3.68) 2.55

R.O.S.F (10.76) 7.62

R.O.C.E (7.78) 5.76
Explanations of Ratios:

Current Ratio: Current Ratio for the Gloss Paints Ltd. is lower than expected. This is the measure of
liquidity and lack of liquidity is not good for any business. The current ratio for 1988 is 1.28:1 and for 1989
is 1.18:1. For any business ideal current ratio is 2:1. Because current assets should be doubled than liabilities.
To maintain this ratio Gloss Paints ltd. by reducing the long term non current liabilities which is bank
overdraft and trade creditors would provide an ideal current ratios and also control debtors and creditors and
increased their sales growth. On the other hand the gloss paints ltd should keep cash flow at optimum level.

Acid Test Ratio: Acid test ratio is more realistic major of the performance of any business. Because it
takes out of stock & work in progress from the current assets. Because in some type of business stock can take
a long time to turn in to cash. The minimum level of this ratio is offended stated as 1.00 times (1:1). That is
Current Assets excluding Inventories = Current Liabilities.
But here Gloss Paints Ltd. has the 1.05:1 in 1988 and 0.95:1 in 1989. It indicates that Acid Test Ratio is good
for business but it slide some in 1989. So this is not causing any problem in term of liquidity for the business.
In many highly successful business that are regarded as having etiquette liquidity however it is not unusual for
the Acid Test Ratio to be below 1 without causing particular liquidity problems.

Stock Turnover Ratio: This means in 1989 an average the inventories held are being turned over every 60
days. So, paint bought buy the business on a particular day would on an average have been sold about 8 weeks
later. On the other hand the year 1988 average inventories were held every 53 days. Which means that paint
bought by the business on a particular day be an average sold every 7.50 weeks. Gloss Paints Ltd. should
normally prefer shorter inventories turn over period at long run, because holding inventories has a cost.

Period of Credit allowed: Business will normally prefer a shorter average of settlement period to a longer
one, but here in case of Gloss Paints ltd. gives around 3 and half months for both the year. It also caused the
liquidity problem to the company. The company squeezing little bit in 1989 compare to 1988. Where
company is suffering form liquidity problems it may chase credit customers more strongly in order to improve
cash flows. For maintain the liquidity company should tight control on their debtors.

Period of Credit taken: That is good for Gloss Paints Ltd. because goods may purchase & sold before
payment has to be made. And it also improves the liquidity. Ideal credit pay should be somewhere about 60
days. This is beneficial because the business is using free finance around 15 days provided by the suppliers
(ideal debtors pay should be around 45 days).
But it caused some problem because it added the liabilities for the business. And it also shows the
incompetent management behaviour. So Company also squeeze the creditors. However if they do not
maintain credits Gloss Paints would goodwill of the suppliers that could have adverse consequences for the
company.

ROCE: Return of capital is the fundamental measure of business performance. This ratio express its
relationship between O.P.M generated during the period and the average long term capital invested during that
period.
ROSF: Return on ordinary shareholder’s funds compares the amount of profit for the period available to the
available to the owners, with the owner’s average stake during that same period.

Problems for the company:

Falling sales and loss making: Company is focused on only in single business and also loss making from the
profit comparison to last year and it also falling sales around 10% compare to last year and forecasted sales is
also not shows competitive growth for good sales growth for the year. And as we have seen, making loss from
the profit can raises the questions of the effect provide some useful insights to the relationship between fixed
costs, variable costs and the volume of activity. And company does not control for squeezing their
wages/salaries and other overheads.

Short on Liquidity: Liquidity is vital to the survival of any business. But here in case of Gloss Paints ltd the
company have the shortage of liquidity. It caused problems such as exceeding borrowing limits, or slow
repayment of lenders and trade payables and excess paying amount of interest in foam of bank or paying late
of the VAT with penalty. And company almost using excess limit of overdraft facility.

Loose control on debtors: As a result of fall in the value of money (inflation), causing more finance to be
committed to inventories and trade receivable. And the company are unable both to inject further funds in to
the business and cannot persuade others to invest in the business.

The problems must be dealt with if the business is to survive over the longer term.
It can also result in suppliers with holding suppliers, thereby making it difficult to meet customer needs.

Performance of Management: The managers might be forced to direct all their efforts to dealing with
immediate and pressing problems, such as finding cash to meet interest charges and others situations. Longer
term planning becomes difficult and business may spend their time going from crisis to crisis.
At the end business may fail because it cannot meet its maturing obligations.

Low Cash Balance at Bank: The cash balance is bank in 1988 only £10K and in 1989 is £17K and Gloss
Paints Ltd. is also not using well for the overdraft facility. So in this case bank may be putting the business
under pressure to reverse this position, which could raise difficulties.
A brief overview: This report also highlights the following points can be noted:

Reduction of fixed assets: Gloss Paints Ltd. purposed to sale of fixed assets of £132k in June in out of total
fixed assets of £450k for controlling the liquidity problem and purchase of fixed assets. But company also
purposed to expand their capital expenditure of £48k in May & £32K in June. And company also expand their
plant & machinery, motor vehicles in year 1989 from £146K to £167K. But not any improvement seen for the
year and not any forecasted improvement seen on forecasted cash flow statement.

Reduction in the element of current assets: These have decrease by about 10% (from £1195 to £1093) by
squeezing debtors for the current year from £716k to 618k. But trade creditors position same for the both
years and company also control their work in progress and raw materials around 10% for the year. And
company also increased cash at bank from £10k to 17k for the year compare to 1988.

Maintaining negative cash flow: Gloss Paints Ltd. also maintaining the negative cash flow for whole the
year. Company not maintaining their sales growth, money came very less from the debtors and overheads are
same for the year. And in the end of current year opening & closing balance cash flow is in the negative
balance of around £300k. and company used their full overdraft limit from the bank. But not maintaining any
growth in sales or liquidity. Even company paid VAT only 3 times in forecasted cash flow statement instead
of 4 times.

Falling Sales & loss making company: Gloss Paints Ltd. also becomes a loss making company for the
year 1989 comparing the year 1988. And there is 10% decline in sales for the year 1989. Even after falling
sales there is not any improvement sales growth seen on the forecasted cash flow statement for the current
year.
How to overcome from that situation:

Increasing sales: Gloss Paints Ltd. must focused on their sales growth. Sales contribute inadequate finance to
fund the level of trade receivables and inventories necessary for sales revenue that is achieving. This situation
usually reflects a poor level of financial control over the business.

Maintain liquidity: Lack of liquidity is an important symptom of overtrading. To deal with the liquidity
problem, Gloss Paints Ltd must ensure that the finance available is consistent with the level of operations.
Thus, if Gloss Paints Ltd. is facing liquidity problem is unable to raise new finance; it should cut back its level
of operations in line with finance available. It may be necessary to ensure survival over the longer term.

Average settlement period of trade receivable: In case of Gloss Paints Ltd. the average settlement period for
trade receivables may be lower than normally expected. Where business is suffering from liquidity problems
it may chase credit customers more vigorously in order to cash flows. So company should be squeeze
settlement period of trade receivable for improving the liquidity problems.

Average settlements of trade payables: The average settlement period for trade payables may be higher than
normally expected. Gloss Paints Ltd. may try to delay payments to its suppliers because of the liquidity
problems arising but it can caused problems for over dependency of creditors. The company’s ability to
squeeze more cash from suppliers, to get paid earlier its customer and reduce the amount of costly product
held in its warehouse or elsewhere in the supply chain.

Average inventories turnover period: The average inventories turnover period would be lower than normally
expected. Where Company is facing liquidity problems the level of inventories held will be low because of
the problems of financing them. In short term, sales revenue may not be badly affected by the low inventories
level and therefore inventories will be turned over more quickly.

Management performance: In case of Gloss Paints Mr. Matthew Black is major shareholder, with 82% of the
equity. He should be take active part in the business and management decision. Where dependency of the
managers may have miscalculated the level of expected sales & loose control of debtors and or have failed to
control escalating project cost. And it cause difficult to longer term planning. So new management should
perform well by learning past experience.

Multi product businesses: Most businesses do not offer just one product or services. But here in case of Gloss
Paints Ltd. focused only on single paints business. So new general manager should be focused on multi
products business to controlling the overheads and improving additional sales.
 Part 3
Cash Flow Forecast

Cash flow statement tells us how the business has generated cash during the period and where that cash has
gone. Cash flow statement shows the main sources and uses of cash. Cash is properly regarded as the
lifeblood of any business. Tracking the cash movement over several periods may reveal financing and
investing patterns and may help predict future management action.

Looking specifically at the cash flow statement for Gloss Paints Ltd. and Based on assessing past satisfactory
performance and current poor performance of business bank declined the current request with the reasons of

• Net cash inflow from Gloss Paints Ltd. is not strong and net outflows of cash are excess than cash
inflow for whole of the year. On the other hand there is less cash generated to pay down the overheads
and debt.
• Forecasted cash flows show there is not well use of overdraft facility.
• Mr. Matthew Black is the major shareholder with 82% of the equity. But he has not taking active role
in management of the company. He concentrated only on his other business.
• Gloss Paints ltd. shows poor trading performance for the current year is now a loss making compare to
last year. And no sign indicates the better performance for the forecasted cash flow statement.
• Vat only paid 3times instead of 4times. This indicates shortage of liquidity. And also caused the
problem of penalty and interest for delayed payment with interest from the government.
• Opening cash flow is negative & closing cash flow forecast can only keep within 300k shows full use
of Overdraft limit.
• Gloss Paints Ltd. becomes loss making from profit and sign there is not any it can not improve to
maintain the forecasted good sales growth.
• Gloss Paints Ltd. also sold their fixed assets of 132k for improving the liquidity problem and purchase
of fixed assets. But that does not show any improvement for the whole year.
• Gloss Paints Ltd. is loss making and company forecast doing the capital expenditure of 80k which is
not necessary because after expenditure the forecast sales growth is not increasing for whole year.
• And Gloss Paints Ltd. having loose control of debtors. That also caused the liquidity problems and
depends on overdraft facility.
• Gloss Paints Ltd. also paid vat only 3 times instead of 4 times because the shortage of liquidity. That
also caused the penalty from the government and interest for delayed payment.
• Gloss Paints Ltd. forecasted average sales for the whole year even they don’t control other overheads
and their wages/salaries and other expenditures.
• Gloss Paints Ltd. dismissed their general manager for poor performance of business but it is not
necessary that new general manager or new management will perform well.
• Conclusion: For Gloss Paints Ltd. the big challenge for the company is to extract more cash from the
business because no business can operate without it. And focused on increasing sales from business
and improve stock turn over. And company also control the period allowed to debtors and credit taken
from suppliers. And new manager also focused on improvement in working capital position. And also
controlled their overheads according to sales. Mr. Matthew Black is the major shareholder with 82%
of the equity. But he has not taking active role in management of the company. He concentrated only
on his other business. So he should be take active part in the company and focused on this business.
And company also squeeze their overheads according to sales. And make better use of their available
overdraft facility.