The Analysis of Short Term Financial Stability for Bourke Street Industries

The Analysis of Short Term Financial Stability for

Bourke Street Industries

Introduction

Short term financial stability refers to the statement of financial ability in short term for business. This report will analyse the financial ability for Bourke Street Industries, comparing with the Benchmarks. Some recommendations would also be mentioned.

Liquidity

Liquidity is defined as the ability of a business to meet its short term commitments. One of the most important measurements is current ratio. Current ratio measures the level of CA available to cover CL. The equation for calculating current ratio is CA divided by CL.

The current ratio in Bourke Street Industries decreased from 1.3: 1 to 1.21: 1 between 2006 to 2008, which was unfavorable trend. It indicated it was the satisfactory liquidity because current ratio was more than 1: 1. However, there was the lower level of CA to cover CL and liquidity was falling. There are many reasons. One of the most important reasons is lower level of cash reserves. When Bourke Street industries did not have enough cash, owner needed to purchase stock on credit and the level of CL would increase. Another reason was higher level of stock and debtors. Although stock and debtors were included in CA, it was not necessarily good for liquidity. Because it means less available cash on hand and indicates the slow debt collection, slow sales resulting and less cash receipts.

Lower level of current ratio has the negative effect on liquidity. It will decrease the level of liquidity. Moreover, it will be lower the level of revenue and profit for the business.

Compared with industries Benchmarks, it has the higher current ratio than Bourke Street Industries in 2008. This indicates most of industries had the satisfactory liquidity and higher level of CA to cover CL. Maybe other industries have higher reserves and good credit policy.

Efficiency

Efficiency refers to making good management decisions about the use of ST resources. Stock turnover ratio and debtor’s turnover ratio are two main measurements of efficiency.

The stock turnover ratio checks in turning stock into cash. It indicates the efficiency of stock management and control, and is measured as a number of times a year or as an average number of days. The equation for calculating stock turnover ratio is COGS divided by Average Stock Level. Furthermore, the average number of days for stock turnover is 365 divided by stock turnover.

The stock turnover ratio decreased from 2.69 times to 2.23 times from 2006 to 2008. And the number of days increased from 136 days to 164 days in the same period. It was an unfavourable trend. This indicated that stock was sold slowly and more stock is being hold. Moreover, in 2008, industries averages has 4 times for stock turnover and 91 days about it. Comparing with industry averages, Bourke Street Industries still was the low stock turnover ratio and it shows the low efficiency. Competition is one of the most important reasons. Maybe competitors set lower price, had higher quality and creative equipment and cooking utensils. Therefore, Bourke Street Industries lost consumers and sales. So, stock was sold slowly. Another reason was over-ordering Bryan Broken ordered more than he sold. Therefore, stock was held. Low stock turnover ratio impacts negatively on sales revenue due to less sales.  In addition, stock related costs like insurance and storage could be higher. It is not benefit to improve the level of profit for the business.

The debtor’s turnover ratio indicates owed into cash collection. This means how quickly the business turns debts owed into cash for use in the business. It is measured as a number of period or as the average number of days debtors take to pay. The equation for calculating debtor’s turnover is Credit sales divided by the Average Debtors Balance. In addition, average collection period for debtor s is calculated as 365 divided by debtor’s turnover.

The debtor’s turnover ratio in Bourke Street Industries decrease from 6.67 times to 5.65 times from 2006 to 2008. And the number of days increased from 55 days to 65 days which was more than credit terms. This was an unfavorable trend and inefficient debt collection. However, debtor’s turnover ratio was 7.5 tomes on 49 days for industries average which was more efficient than Bourke Street Industries.