Introduction
High profitability is the ultimate goal of all businesses, and it can be achieved through methods such as increasing sales volumes, increasing profit margins, or reducing costs. Increasing sales volume could require investment in marketing, and growing profit margins could drive up prices, reducing competitiveness. Lowering costs is an efficient way of increasing business profitability. Business costs are incurred in purchasing, storage, delivery, debt financing, and many other aspects. This paper will look into Ransil Marine Ltd to assess the company’s effectiveness in its processes.
Key Features Needing Immediate Consideration by Owners
Debt to Equity Ratio
The owners of Ransil Marine Ltd want to grow the company by reinvesting profits before they can start issuing year-on-year dividends. After investing £12,000, the owners got an overdraft of £10,000 and a bank loan of £6,000. Capital investment is intended to spur business growth, and debt financing incurs interest expense that must be repaid; therefore, the associated income from debt should exceed the interest cost (Dyreng, Hillegeist, and Penalva, 2022). In the reported year, Ransil Marine Ltd incurred a loan capital repayment cost of £2,000 while earning a net profit of £1,800. The enterprise’s gearing ratio is a high-risk rate at 135.19% (see Appendix 1). A high debt-to-equity ratio is risky for a business, as it increases the risk of default and financial distress.
Guidance
Ransil Marine Ltd should focus on making profits and reinvesting them as its primary source of financing. In the future, debt should be maintained at a reasonable level, in line with industry standards (Narain, 2022). The company’s current gearing ratio is high-risk, and owners should avoid borrowing until the debts are repaid and the gearing ratio is 50% or below. Minimizing costs and increasing process efficiency will help the business become more profitable.
Supply Issues
Ransil Marine Ltd sources most of its products directly from niche manufacturers. However, some of them have stopped supplying to the company. This issue poses the risk of stockouts, which lead to financial losses and customers switching to competitors (McMaster et al., 2020). Suppliers may have various reasons for stopping supply to Ransil Marine Ltd, including long creditor days. While the average credit period is 90 days, Ransil Marine Ltd takes 254 days to pay creditors (see Appendix 1).
Guidance
To avoid stockouts, Ransil Marine Ltd should communicate with suppliers to agree on a reasonable repayment time. A strong supplier relationship management plan that includes mutually beneficial contracts, open lines of communication, and proactive problem-solving is essential (Droste, 2023). The company can subscribe to the one-warehouse plan in Zoho, an inventory management software that costs £274.44 annually. This move will increase operating costs, reducing net profit from £1,800 to £1,525.56. The software will help Ransil Marine Ltd streamline its supply chain, maintain strong relationships with suppliers, and potentially reduce supply chain costs. Currently, the company is buying more stock than it is selling; the beginning stock was valued at £4,300 (see Appendix 1), while the closing stock was £13,500. Finding other suppliers is another option to ensure products do not run out. Suppliers can also engage in forward integration and begin selling to customers directly. Cutting short the supply of Ransil Marine Ltd. would reduce competition. To avoid all these risks, the company can produce a wider variety of products in-house.
Communication with Credit Customers
Communication is vital in ensuring all parties are on the same page. Essential business documents, such as invoices, confirm that a debtor repays on time. Credit sales are approximately 70% of total sales, which is a high percentage given that the current debtor days are 48 (see Appendix 1). This problem poses a risk of financial loss due to poor invoicing. With such a high level of debt, the risk of losses also increases, which is a threat to the company.
Guidance
All business records should be well-kept, and transactions should be recorded at the point of occurrence. Average debtor days should be set to the industry-average receivable days of 9. According to Fu et al. (2022), this process can be automated using software or business management applications for easy management. An accounting system such as QuickBooks would be appropriate for managing expenses, paying bills, tracking time, and sending invoices. Using the £12 monthly subscription plan would increase operating expenses by £144 annually and reduce profit.
Storage and Returns
Storing goods is an expense to the company; Ransil Marine Ltd incurs storage costs for 123 days, the time taken to sell the stock (see Appendix 1). Seeking new premises entails additional storage costs while the existing holding costs remain high. According to Cárdenas-Barrón et al. (2020), this approach is undesirable for any company.
Return inwards reduces accounts receivable in a business, and high amounts are an alarm that goods are not meeting customer standards. In other words, the products are not being properly inspected before delivery. Consequently, customers receive incorrect goods, or the mix-up of returned items with old stock could result in the sale of expired goods.
Guidance
The owners of Ransil Marine Ltd need to address product mixing. To avoid mixing returns and old stock, arrange all products in a systematic order and label each category to clear the pile-up of goods in the storage facility and create more space for use. Gregor, Chandra Kruse, and Seidel (2022) advise that the first-in, first-out principle should always be applied to achieve a well-organized inventory. Before considering the acquisition of new storage premises, the Zoho inventory management system should be used to efficiently manage stock in the existing premises using real-time data to streamline the process.
Safety Equipment Business
Opening new business lines can increase cash flow or lead to losses. All businesses require start-up capital, which can come from owners, debt, or profits generated by the company (Tobing et al., 2019). In this case, Ransil Marine Ltd made a net profit of £1,800 in the reported year. Therefore, the company is expected to grow by plowing profits back into the business until it is well established. Using the available statement of accounts, Ransil Marine Ltd is unable to provide capital for investment in the new venture.
Guidance
The current performance of Ransil Marine Ltd, 6.46% return on investment, is low compared to the average of 31.7%. The Net Profit Margin is currently 2.38%, while the average is 9.7%. These metrics indicate that the company is not doing well; therefore, it is not yet time to expand. Management should focus on existing products first and achieve high profitability before expanding into safety equipment.
Reasons for Feature Selection over Others
The debt-to-equity ratio is essential in understanding the company’s financial leverage. Understanding the current gearing ratio will help the management of Ransil Marine Ltd make appropriate investment decisions and avoid debt financing since the current gearing ratio is at a high-risk level (Atrill and McLaney, 2017). Supply is a critical part of business, and without products to sell, the company will be non-operational. Therefore, addressing the current supplier shortage will help the business get back on track.
Effective communication between the organization and its stakeholders is also essential. Poor communication with credit customers leads to accumulated debt and a high credit sales percentage (Brunnermeier and Krishnamurthy, 2020). A short-term liquidity problem is bound to arise if this problem is not addressed urgently. All cash that could be used to finance business operations will be stuck in debt.
Acquiring new storage premises requires a cash injection; therefore, an additional storage facility imposes additional costs on the business. Efficient use of the current premises must be the priority to cut expenses and avoid product wastage due to poor inventory management. The safety equipment business requires urgent evaluation, given the company’s high gearing ratio, low return on capital employed, and low profitability. Expanding into other product lines could bring in more trouble for the business.
Conclusion
In conclusion, Ransil Marine Ltd should avoid debt financing and focus on reinvesting profits until the company’s gearing ratio is 50% or below. Maintaining good relations with suppliers and having a diverse supplier base will help Ransil Marine Ltd avoid future supply shortages. The company should maintain short credit periods and automated recordkeeping to make this work easier and more accurate. The existing storage facility should be organized, and the flow of goods should be monitored using an inventory management system instead of another storage facility. The safety equipment business should be shelved for now, and the focus should be on making the existing products more profitable.
Reference List
Atrill, P. and McLaney, E.J. (2017) Accounting and finance for non-specialists. Pearson Education.
Brunnermeier, M., and Krishnamurthy, A. (2020) ‘Corporate debt overhang and credit policy’, Brookings Papers on Economic Activity, 2020(2), 447-502.
Cárdenas-Barrón, L. E. et al. (2020) ‘An EOQ inventory model with nonlinear stock dependent holding cost, nonlinear stock dependent demand and trade credit’, Computers & Industrial Engineering, 139, 105557.
Droste, C.H.H. (2023) Examples managing supplier spillovers in buyer-supplier relationships. Bachelor’s Thesis. University of Twente.
Dyreng, S. D., Hillegeist, S. A., and Penalva, F. (2022) ’Earnings management to avoid debt covenant violations and future performance’, European Accounting Review, 31(2), 311-343.
Fu, Q., et al. (2022) ‘Sustainable supply chain and business performance: the impact of strategy, network design, information systems, and organizational structure’, Sustainability, 14(3).
Gregor, S., Chandra Kruse, L., and Seidel, S. (2020) Research perspectives: the anatomy of a design principle. Association for Information Systems.
Narain, R. S. (2022) ‘Good credit management’s impact: how does it contribute to material effectiveness and possibility in business’, Materials Today: Proceedings, 63, 376-381.
McMaster, M., et al. (2020) ‘Risk management: rethinking fashion supply chain management for multinational corporations in light of the COVID-19 outbreak’, Journal of Risk and Financial Management, 13(8), 173.
Tobing, M., et al. (2019) ‘An analysis on the factors which influence the earnings of micro and small business: case at blacksmith metal industry’, Academic Journal of Economic Studies, 5(1), 17-23.
Appendix
