Case study
The case involves an employee who decides to venture into his own business (Gentle) of manufacturing mattresses based on the broad knowledge he acquired in employment. He intended that the workers he employed at the business be familiar with important financial ratios so as that they could review the business performance and set goals.
There are various positive aspects in the financial data that the employee could obtained and these involves growth in revenue , higher demand for material and labor in comparison with the entire industry. The higher revenues and productivity serves as an indicator to employees that the business is performing well, which would encourage a positive attitude across the organization. This could be an indication of future growth even when other firms in the industry are experiencing negative growth. Such growth puts employees in a better position for possible personal growth, career wise and professionally which acts as a motivating factor. Generally, most talented employees want to advance in their career, increase their knowledge and improve on skills in an organization in which they are working (Hawawini & Viallet, 2011). Growth prospects in this business in comparison to the entire industry are an indication that employees look forward to a bright future.
The employees should be concerned with the profitability of the business in terms of Gross profits, the profitability ratios and current ratios. The profitability of the business remains well below the level of profits in the industry, with a -7% growth. This could indicate that the business is experiencing higher costs than other firms or the level of sales has not grown enough to maintain the industrial profitability. Moreover, the return on investment ratio is quite low, at 6.6 % as compared to the 22 % average ratio of the industry. This indicates that the firm has a long way to go to attain the sustainable returns. The current ratio of the firm is another aspect that the employees should be concerned about. The current ratio is below 1 percent, 0.9 %, which presents a problem for the business in repaying its obligations over the short-term. The average ratio for the other firms is above 1 % which indicates their improved capacity to pay creditors. The longer collection period may indicate a potential problem for bad debts in future.
Additional necessary information includes growth in market share and sales over the period the firm has been in operations. The market share in this case represents both volume and value, so that the market share of the firm out of the business out of the overall sales in the segment can be assessed. Market share is important since it measures the preference of customers for the mattresses over others offered by rival firms. A significant growth in market share indicates better sales and that the products of the firm are of the desired market quality (Hawawini & Viallet, 2011). An increase in market share would allow the business to improve its operations, productivity and thus, profitability.
The recommendation for the business includes a focus on improving the profitability through high quality and customer focused production and marketing efforts in order achieve better higher market share. In order to improve profitability, the firm should focus on cost reduction strategies without compromising on quality of the products. Cost reduction can be achieved through lean production, which will increase revenue and thus make the business more profitable. Lean production aims at reducing or eliminates waste that is related to the process of manufacturing (Stojanovic & Radojevic, 2006). Waste involves anything that will not add value the consumers. The reduction of collection period would also prevent cases of bad debts.
References
Hawawini, G. A., & Viallet, C. (2011). Finance for executives: Managing for value creation. Mason, Ohio: South-Western Cengage Learning.
Stojanovic, D., & Radojevic, Z. (2006). Accounting characteristics in lean manufacturing. International Scientific Days, 1146-1151.
