Sim Venture

Activity 1 Consultancy Report

1. Executive Summary:

1. Venture Company is a self-owned company which is 6 months old. It deals in sale of computer and its business is picking up a rising trend.

2. When the business is apparently expanding, a major operation problem is looming large. Venture Company finds it difficult to raise sufficient funds to pay for its stocks. Not only suffering from a small business profit, its customers are not paying up. Cash in hand is tight and the danger of a cash-flow crisis looks set to befall.

3. Venture Company has now engaged us to overhaul its business operation and to put forward observations, recommendation to rescue the company from running into insolvency.

2. Accounting Ratios

1. The problem which lies ahead is a cash-flow hardship. Before any business decision is made, we make use of the financial information of the past 6 months to understand and interpret Venture’s Performance. In essence, we have analyzed some financial ratios to achieve this purpose.

2. The financial ratios which have been performed are listed hereunder. While the actual calculation is appended at Annex A, our comments are summarized below:--

a) Gross Margin = 27.94%

This ratio shows how much profit is left after deducting the cost of sales to cover operating and all other costs. This ratio measures the ability of the company to increase selling price and to reduce the cost of goods sold in order to attain a higher gross profit.

With a ratio of 27.94%, the company is not gaining a significant profit margin. Consideration can be given to either raise the selling price or reduce costs or both.

b) Net Margin = 1.82%

This ratio indicates the profitability generated by a company and hence is an important performance measure. It can also be viewed as a measurement of efficient cost control.

Given a net margin of just 1.82%, Venture must critically examine its cost control mechanism....