Managing Finance Assignment Sample
Introduction
Financial management is measure of managing finances within company. It facilitates long-term and short-term decisions of ventures associated with finance. Thus, managing finance is necessary for small, medium and large organizations. The study sheds light on financial management of Boohoo Plc. Boohoo is a British multinational online fashion retailer that has headquarters in Manchester. The study highlights key financial problems and solutions for the company by evaluating its financial ratios. Emphasis has been provided on profitability, efficiency and liquidity ratio of the company.
Ratio analysis
Accounting or financial ratios are relative magnitude of two or more numerical data taken from financial statement of company. It helps in determining profitability, efficiency, solvency, and liquidity position of an organization (Morales-Díaz and Zamora-Ramírez, 2018). Ratio analysis of Boohoo is conducted as under:
Profitability
Net profit margin
| Net profit margin | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Profit (Net) | 93,400 | 72,883 | 47,459 |
| </> Revenue | 1,745,300 | 1,234,876 | 856,920 |
| Net profit margin | 5.4% | 5.9% | 5.5% |
Net profit margin is financial ratio that signifies profitability position of business. This profitability ratio can be calculated as “net profit/sales” (Naris Wari and Nugroho, 2020). Comparing last three years net profit margin of Boohoo it has been found that slight reduction in profit margin has taken place. In 2019, the company had a net profit margin of 5.5% which increased by 0.4% in 2020. During Covid-19 pandemic, Boohoo made £173.6m EBITDA which was higher than 2019 (Reuters, 2022).
Return on Equity
| Return on Equity | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Income (Net) | 93,400 | 72,883 | 47,459 |
| </> Equities | 472,500 | 327,935 | 270,402 |
| Return on Equity | 20% | 22% | 18% |
Return on equity is financial ratio that signifies contribution of equity in profitability position of business. As per Li et al. (2020), if an organization uses equity efficiently, it can bring higher profitability to business. Return on equity is calculated as “net income/equity”. In Boohoo, slight reduction in utilization of equity has been found. The company has 22% returns on equity in 2020 which reduced to 22% in 20%. Comparing ratios of 2020 and 2019, an improvement of 4% has been found.
Gross profit margin
| Gross profit margin | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Profit (Gross) | 945,200 | 666,300 | 468,994 |
| </> Revenue | 1,745,300 | 1,234,876 | 856,920 |
| Gross profit margin | 54.2% | 54.0% | 54.7% |
Gross profit margin is profitability ratio compares value of gross profit with total aisles. If a company made higher gross profits, its profitability position is feasible (Astuti, 2021). This ratio is calculated as “gross profit/sales”. Boohoo has 54.2% gross profit margin in 2021 which was 54% in 2020 and 54.7% in 2019. This means, Boohoo was able to 0.2% higher profit from 200 but its profits are 0.5% lower than 2019. This indicates slight reduction in performance.
Liquidity
Current ratio
| Current ratio | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Asset (Current) | 483,000 | 382,982 | 296,323 |
| </> Liability (Current) | 285,700 | 217,906 | 162,093 |
| Current ratio | 1.69 | 1.76 | 1.83 |
Calculation of current ratio helps in analyzing liquidity position of business. Effective management of current assets helps in boosting liquidity position and ensures sound working capital position of business. It is calculated as “current assets/current liabilities” (Amanda, 2019). Current ratio of Boohoo is 1.69times in 2021, which is 0.07times lower than 2020 and 0.14times lower than 2019. This means the company is not managing its current assets effectively to boost its liquidity position.
Acid test ratio
| Acid test ratio | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Asset (Current) | 483,000 | 382,982 | 296,323 |
| Inventories | 14,490 | 99,107 | 66,806 |
| Asset (Balance) | 468,510 | 283,875 | 229,517 |
| </> Liability (Current) | 285,700 | 217,906 | 162,093 |
| Acid test ratio | 1.64 | 1.30 | 1.42 |
Acid test ratio is a financial ratio that analyses liquidity position of business without considering closing inventories. Closing inventories are current assets of business that require more than one financial period to liquidate (Lalithchandra, 2021). Acid test ratio is “current assets-inventories/current liabilities”. Boohoo has 1.64times acid test ratio which was 1.30times in 2020 and 1.42times in 2019. This indicates gradual improvement in the liquidity position of business due to maintaining less closing inventories.
Cash ratio
| Cash ratio | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Cash & Cash-Equivalent | 276,000 | 245,400 | 197,872 |
| </> Liability (Current) | 285,700 | 217,906 | 162,093 |
| Cash ratio | 0.97 | 1.13 | 1.22 |
Cash ratio is measurement of an organization’s liquidity position. The ratio specially emphasizes on cash and cash equivalents of business (Okeke et al., 2021). Cash ratio is “cash and cash equivalent/current liability”. This ratio signifies how well the company is using cash balance to pay short-term liabilities. Boohoo has 0.97times cash ratio in 2021, which was 1.13times in 2020 and 1.22times in 2019. This indicates significant reduction in liquidity position of venture as proportion of current liabilities was higher from cash & cash equivalent.
Efficiency
Receivable period
| Receivable period | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Receivables | 40,600 | 31,828 | 22,576 |
| <x> Operating days (365) | 14819000 | 11617220 | 8240240 |
| </> Sales | 1,745,300.00 | 1,234,876.00 | 856,920.00 |
| Receivable period | 8 | 9 | 10 |
Receivable period is efficiency ratio that indicates time taken by an organization for collecting dues from customers. If a company takes more time, its performance is inefficient (Krylov, 2020). Receivable period is “receivables*365days/sales”. Boohoo has taken 8days to collect dues in 2021, which was 9days in 2020 and 10days in 2019. This means the company has collected dues in less time even when it has higher trade receivables in 2021.
Payable period
| Payable period | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Payables | 535,000 | 293,000 | 154,351 |
| <x> Operating days (365) | 195,275,000 | 106,945,000 | 56,338,115 |
| </> Sales Cost | 800,100 | 568,640 | 387,926 |
| Payable period | 244 | 188 | 145 |
Payable period is efficiency ratio that indicates time taken by an organisation for paying dues to suppliers. If a company takes more time, its performance is inefficient (Sabki et al., 2019). Payable period is “payables*365days/sales cost”. Boohoo has taken 244days to pay dues in 2021, which was 188days in 2020 and 145days in 2019. This means the company has paid dues in high time for paying dues in 2021.
Inventory period
| Inventory period | |||
| Details | Entity: Boohoo Plc | ||
| £m-2021 | £m-2020 | £m-2019 | |
| Inventories | 14,490 | 99,107 | 66,806 |
| <x> Operating days (365) | 5288850 | 36174055 | 24384190 |
| </> Sales Cost | 800,100 | 568,640 | 387,926 |
| Inventory period | 7 | 64 | 63 |
This financial ratio sheds light on time taken by companies to convert inventories into cash. If a company has a longer inventory period, its performance is inefficient. However, selling inventories in less time signifies sound business performance. Inventory period is “inventories*365days/sales cost”. Boohoo has an inventory period 7days in 2021, 64days in 2020, and 63days in 2019. This indicates sound performance of boohoo in 2021. The company has maintained lower closing stocks and took less time for selling goods to customers.
Identification of problems
Boohoo Plc is leading fashion Retail Company of UK. The company was started back in 2006 and its target customer base is 16-30 year olds (Boohooplc, 2022). Ratio analysis of the last 3 years indicates a number of financial issues of the company. Issues faced by Boohoo are discussed as under:
Declined profitability position
As per ratio analysis, a redacted profitability position of the company has been found. Comparing last 3 year performance, the company is able to maintain high profitability in 2019 and 2020 (Boohooplc, 2022). However, profit decreased in 2021 despite higher sales revenue.
Increasing expenses
Considering net profit margin and gross profit margin, it has been found that the company and increasing trend of expenditure. In 2021, net profit margin and gross profit margin were reduced even when it made higher sales revenue. Such reduction in profitability has taken place due to high spending on cost of goods sold and operating expenses.
High short-term debt
As per analysis of current and acid test ratio, it has been found that Boohoo has taken higher short-term debt for financing its operations. Taking higher short-term debt has adversely impacted upon working capital position of the company and harmed the ability to pay liabilities as soon as possible.
Ineffective use of equity
Considering results of return on equity it can be said that Boohoo is not using equity capital efficiently. Comparing return on equity of 2021 with 2020 and 2019, the company has declined return on equity which means equities are not utilised into its full potential for generating higher earnings for company.
High payment period
Evaluation of efficiency ratios shows higher payment period of Boohoo. This means the company is taking higher time to pay dues to suppliers. Due to such issues, dissatisfaction in suppliers might take place which would harm the image of the company in the market.
Low cash balance
Maintaining a low cash balance can harm ability of a venture to pay day-to-day expenditures and run business efficiently (Purnamasari et al., 2021). As per cash ratio, it has been found that cash and cash equivalent of Boohoo falls short against current liabilities. This also negatively impacts the working capital of the company.
Overcoming solutions
Boohoo is one of the leading fashion retailing companies of UK. During the pandemic situation of 2020, effective management of performance in online market has helped it in becoming a market leader in global fashion industry. However, competing last 3 years’ financial ratios indicates some issue in its financial performance. Thus, overcoming solution for this problem is discussed as under:
Making expenditure budget
As per ratio analysis it has been found that Boohoo is facing issues of high operating expenditures. So, making an expenditure budget would be helpful, for making expenses within a feasible limit. As per Panigrahi (2019), making a sound budget plan is helpful for dealing with issue of overspending. It would allow the company to allocate expenses in key expenses and perform according to it.
Strict policy for making payment
Currently, the company has an inadequate policy to pay off dues to suppliers which is declining its efficiency. However, developing a strict policy for paying dues to suppliers would be helpful for Boohoo. The company can also hire more skilled and knowledgeable staff for managing dues.
Reducing use of short-term liabilities
Financing operation of both short-term liabilities harms working capital and declines liquidity position (Altaf and Ahmad, 2019). Instead of financing operations with short-term liabilities the company can use cash balance of retained profits. This would allow the company to maintain a sound balance of current assets in management.
Increasing cash balance
Considering results of cash ratio, it can be recommended to Boohoo that it should maintain a feasible amount of cash and cash equivalent within management in order to pay off short-term liabilities. In absence of sound cash and cash equivalent, ability of venture to pay short-term dues declined. Such situation can harm the financial position of Boohoo in global fashion market.
Enhancing utilisation of equity
As per return on equity ratio, equity capital of company is underutilised which leads to lower profitability. Therefore, Boohoo should ensure that its equity capital is well utilised for making profits. For instance, the company can use capital raised from equality as such a project that will bring higher returns to shareholders. In this way, equity capital could be well utilised.
Increasing sales
Currently, the company is offering products and services to customers through online websites. However, the company can also expand its business in the brick & mortar market to enhance sales revenue. This would help the company in furnishing its existence in the physical market and improving customer satisfaction. Operating in physical market would allow Boohoo to offer products to those customers who are reluctant to make purchases from online platforms.
Conclusion
Managing finance is all about planning, organisation, managing, directing, and controlling financial operations of business. Ratio analysis determines profitability, efficiency, solvency, and liquidity position of an organisation. Ratio analysis of Boohoo Plc indicates slight reduction in profitability position due overspending. Besides, the liquidity position of Boohoo declined due to higher current liabilities and low cash & cash equivalent in 2021. Also, the company has taken higher time to pay dues to suppliers. Thus, making a budget for expenditure, increasing sales revenue, making a strict policy for making payment and reducing use of current liabilities would be helpful for Boohoo Plc.
References
Altaf, N. and Ahmad, F., (2019). Working capital financing, firm performance and financial constraints: Empirical evidence from India. International Journal of Managerial Finance, 3(1), pp.88-100.
Amanda, R.I., (2019). The Impact of Cash Turnover, Receivable Turnover, Inventory Turnover, Current Ratio and Debt to Equity Ratio on Profitability. Journal of research in management, 2(2), pp.88-90.
Astuti, W., (2021). A Literature Review of Net Profit Margin. Social Science Studies, 1(2), pp.115-128.
Boohooplc (2022). About Annual Repot of Boohoo Plc. Available at: https://www.boohooplc.com/sites/boohoo-corp/files/all-documents/result-centre/(2020)/boohoo-com-plc-annual-report-(2021).pdf[Accessed on 4th January 2022]
Boohooplc (2022). About Boohoo Plc. Available at: https://www.boohooplc.com/[Accessed on 6th January 2022]
Lalithchandra, B.N., (2021). Liquidity Ratio: An Important Financial Metrics. Turkish Journal of Computer and Mathematics Education (TURCOMAT), 12(2), pp.1113-1114.
Li, S.T., Li, G. and Shi, S., (2021), August. Prediction and Sensitivity Analysis of Companies’ Return on Equity Based on Deep Neural Network. In (2021) 4th International Conference on Information Management and Management Science, 3(2), pp. 131-139.
Morales-Díaz, J. and Zamora-Ramírez, C., (2018). The impact of IFRS 16 on key financial ratios: A new methodological approach. Accounting in Europe, 15(1), pp.105-133.
Nariswari, T.N. and Nugraha, N.M., (2020). Profit Growth: Impact of Net Profit Margin, Gross Profit Margin and Total Assests Turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96.
Okeke, L.N., Ezejiofor, R.A. and Okoye, N.J., (2021). Leverage and cash ratio: an empirical study of conglomerates firm in Nigeria. American Journal of Contemporary Management Sciences Research, 3(1), pp.90-100.
Panigrahi, C.M.A., (2019). Liquidity and profitability relationship and financial fallacy. Think India Journal, 2(3),, pp.0971-1260.
Purnamasari, D., Almira, A. and Della Savira, N., (2021). The accounting for inventory from a commercial point of view. Research Horizon, 1(2), pp.81-85.
Reuters (2022). About Boohoo Plc’s performance during Covid-19 pandemic. Available at: https://www.reuters.com/world/uk/boohoo-earnings-up-37-pandemic-drives-business-online-(2021)-05-05/[Accessed on 5th January 2022]
Sabki, S., Wong, W.C. and Regupathi, A., (2019). SME liquidity and its determinants. International Journal of Business & Society, 20(1), pp.11-15.
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