Performance and Business Analysis of Brimore Engineering

Introduction

The performance of a company is determined by its ability to meet the production overheads. Profitability is one of the methods to evaluate the effectiveness of a company.

Investors are attracted to a profitable company. The primary objective of investors is to make returns; therefore, a profitable organization will offer them a chance to maximize their wealth (Aithal, 2017a).

The two non-family shareholders of Brimore Engineering Limited aims at maximizing their wealth. By considering the budget and the actuals for 2019, the revenues exceeded the budget.

The actual sales were also more than the budgeted amount. Moreover, other projected costs, such as overheads and cost of sales, recorded a higher amount than budgeted allocations. Ideally, an increase in sales volume does not determine the performance of an organization.

Financial analysts suggest that an increase in net sales does not prove the profitability of the company. Instead, a proper analysis should be carried out on the financial statements of the company (Aithal, 2017b). This paper uses financial ratios to analyze the performance of Brimore Engineering Limited.

Analysis

Various financial ratios determine the performance of an organization. Profitability ratios determine whether a business is making returns to meet its objectives. Liquidity ratios measure an organization’s ability to meet its expenses when they become due.

Liquidity ratios	2017	2018	2019
Current ratio	1.8	1.7	1.6
Quick ratio	1.2	1.1	0.9

The calculations are based on the following formulas;

Current ratio = Current assets/current liabilities

Quick ratio = (Current asset-inventories)/ current liabilities

According to industry standards, the commonly acceptable current ratio is 2. Brimore Engineering Limited recorded a current ratio of 1.8, 1.7, and 1.6 in 2017, 2028, and 2019, respectively. These ratios show that the company’s current ratio decreased by 5.5% in 2018 and 2019 as well. The decline in the current ratio is attributable to the decrease in the current assets from 2017 to 2019.

If the company continues to reduce its current assets, the current ratio is likely to decrease further. The company has also experienced a quick decreasing ratio from 2017 to 2019. The decline shows that the company’s quick, available assets are decreasing. As a result, the company may experience challenges in meeting its obligations when they become due (Aithal, 2017c).

Profitability ratios	2017	2018	2019
Gross profit ratio	78.6	79.0	77.0
Return on capital employed ratio	48.57	38.94	25.71
Operating profit ratio	36.76	35.40	30.98
Overall profitability ratio	0.69	0.58	0.41

The profitability ratios are calculated based on the following formulas;

Gross profit ratio = Gross profit/ Revenues * 100

Return on capital employed = Profit for the year/ Gross capital employed * 100

Operating profit ratio = Profit for the year/ Revenues * 100

These company has experienced a declining gross profit ratio from 2017 to 2019. The decrease in the gross profit ratio is attributable to the declining gross profit. Despite the increase in capital employed, the company recorded a decline in gross profit in 2019. The decline is attributable to the increasing cost of sales.

According to the budget, the company anticipated to use £336 000 on the cost of sales; however, the actual amount reported was £381,990. These figures show that the various economic factors such as a spontaneous increase in the prices of raw material as well as the cost of labor increase (Bayraktar and Cömert, 2018).

A significant increase in the cost of sales reduces both operating profit and the gross profit. The company has also recorded a decline in the return on capital employed for the last three years. The decline in the return on capital employed resulted from the decrease in profit after tax over the three years.

Working capital ratios	2017	2018	2019
Inventory ratio	17.76	17.47	12.25
Working capital turnover ratio	1.32	1.10	0.83

The working capital ratios are calculated using the following formulas;

Inventory ratio = Revenues/ Inventory

Working capital turnover ratio = Revenues or Net sales/ working capital

The working capital ratios show the company’s ability to pay off its current debt using the current assets. In this case, the company is experiencing a declining trend in both inventory ratio and working capital turnover ratio (Castilla-Polo et al., 2018).

Even though the company has recorded an increase in the working capital over the last three years, the decline in the net revenue contributes to the low working capital turnover ratio. If the company does not adopt effective strategies to increase its net revenue, it may face challenges paying off its current liabilities.

Causes and effect

Poor strategy and execution are some of the reasons for company results. The decreasing performance may result from a poor strategy that the management implemented. In regards to marketing, a reduced plan does not attract many customers.

If the business adopts ineffective marketing strategies, it will not increase its sales volume. Studies indicate that the management, board of directors play a vital role in the success of a business (Groenewald and Powell, 2016). The decisions made by the management determines the organization’s performance.

For the employees to perform effectively, they need the management’s direction. The decline in the net revenue recorded by Brimore Engineering Limited would have resulted from the management’s decision.

The effects of poor strategy and execution in slow growth. Even though Brimore Engineering Limited recorded improvements in various aspects such as capital employed and retained earnings, the management of the funds plays an important role.

Another effect of the poor strategy is low profitability. The business exists to make a profit and to perform better than the previous year. The growth of a company is determined by its performance in subsequent years (Hassan et al., 2020). If the company’s profits of the year continue to decline, it will result in losses.

The company has fixed costs which do not change despite the fluctuations in the sales volume. For instant, the company has to pay its employees even though the company experiences a downturn in its profitability.

Poor marketing and communication is another course of poor financial performance. Even though the company received additional funds from non-family directors, it recorded a decline in gross profit. As the company’s gross profit decrease, the sales also reduces.

The main element that reduces sales is the number of customers. If the company has poor marketing and communication strategies, many customers may not be attracted to its products (Raffoni et al., 2018).

If the organization does not implement effective marketing and communication strategies, the sales volume is likely to decrease further. The decrease will result in low profitability and an inability to meet current assets. In the long run, the company will face difficulties in paying off its debts.

Solutions

The management of Brimore Engineering Limited should adopt an effective marketing strategy to attract new customers. The marketing strategy should not only create awareness on the existence of the company’s products, but also it should convince the customers to buy.

Before adopting a new marketing strategy, the company should revise its pricing approach. After that, the marketing department should include discounts and gifts in the advertisement.

Following such enticements, many customers will purchase the company’s products hence increasing its sales volume (Rivera et al., 2017). A rise in the revenues will result in a significant increase in the net profit, thus boosting the company’s profitability.

The business should continually review accounts receivable to boost its liquidity. In other words, the company should ensure that customers pay their bills on time. Moreover, the company should restructure its debt to reduce its current liabilities. Instead of purchasing materials on credit, the company should adopt cash payments. The idle funds should also be utilized in paying current liabilities.

These strategies will enable the company to increase its liquidity. After restructuring the business’s debt, the existing assets should be more than the obligations. However, the management should ensure that these strategies applied in the long run.

The board of directors should spearhead the reduction of overheads to improve liquidity ratio. In this regard, the company should identify different sources of materials and compare the prices. By reducing the amount of money spent on overheads, the business will have additional cash to meet its obligations when they become due. Furthermore, the company should reduce debts by restructuring its financial structure (Tudose and Avasilcai, 2019).

The continuous increase in non-current liabilities from 2017 through 2019 shows that the company frequently uses debt finance. Instead, the company should utilize its retained earnings to increase its productivity. As a result, the company’s capital employed will increase further.

Another critical strategy is setting goals and adopting effective strategies to meet them. Before coming up with any plan, the board of directors should set organizational goals that will guide them towards the success of the business. The organizational goals should portray the future outlook of the organization.

Both employees and the management should work together towards the achievement of the goals. For instance, the company may set a target to increase its sales volume by 5% in each financial year. After that, the management should assign duties to various departments such as production, marketing, and sales to ensure that the target is met.