MBA FPX 5010 Assessment 3 Performance Evaluation

Company’s Financial Health and Assessment 

Ace Company uses financial as well as managerial accounting for measuring its business and financial position. The financial analysis carried out in this report aims to provide a holistic view of the company’s progress regarding applying for a loan from our financial organization. As a decision-maker and a financial officer of the organization, I have been assigned the duty of assessing the financial statements of Ace Company and prepare a recommendation for the management regarding the viability and the stability of Ace Company. Therefore, the aim of this financial analysis is to determine various financial statistics to help the company avail a loan facility on the basis of its financial health or standing. 

Analysis of Accounts Receivable Trends 

Several factors have been considered in this financial analysis of the Ace Company to assess the financial statements and the related performance documents. For the upper management team of Ace Company, it is crucial to determine where their business stands in terms of financial trends and accounts receivables. As a loan manager, I am determining the recent trends related to accounts receivables for Ace Company to review the company’s loan request and make my recommendations preceding it. For example, financial experts often use three ways to determine the performance of an organization such as measuring the past performance, measuring the future performance to predict through statistical methods, and doing a comparison of data from the actual figures to the market figures (Bundocks, 2020). The purpose of observing the accounts receivable trends is to know that the company has ample cash flows and strong working capital.  

According to Nanih’s (2021) study, the latest 2022 accounts receivable trends include the following: 

• The company must improve or should be improving the customers’ experience and offer multiple payment options to customers. 
• The company should use the AR automation process and must not rely on the manual excel sheets. 
• The company must minimize the credit risk to ensure the highest levels of data security. 
• The organization must not rely on the paper invoices that are outdated in modern firms and should forecast cash flows. 

These trends related to the company’s AR are relevant because they can help the company to earn more cash and profits and make or break its financial stability and viability in the market in 2022. These are the latest trends in the market related to accounting of accounts receivables; ignoring or not following these trends can result in inefficiency that can make the application of loan unsuccessful for the company. Moreover, the trends regarding AR and reducing paper invoices are improving in Ace Company due to the movement towards complete automation software instead of using accounting registered and pencil-based practices. 

MBA FPX 5010 Assessment 3 Performance Evaluation

Comparing Inventory Turnover Rate

The successful financial management of Ace Company depends heavily on inventory management and the overall credit policy of the organization. The company’s inventory turnover ratio is a vital measure for Ace Company that helps the managers and decision-makers to discover its sales power. For instance, this measure allows managers of the organization to find out how much of the inventory company is turning into sales and it also shows how well the financial managers are performing in terms of managing the costs which are associated with the inventory (Park, 2021). This means that by identifying the inventory turnover ratio and comparing it turnover rate will help decision-makers to determine whether they are purchasing too little or too much inventory.

For example, the following table shows the inventory turnover and the inventory period details of the company:

The inventory turnover is given for the years 2016 to 2021 in the following data below. 

Moreover, for several industries in the United States, the most favorable inventory turnover ratio falls between 5 and 10; this means that the after every two months’ time, the organization can restock its existing inventory and avoid any stockouts. This is not the ideal ratio for Ace Company because it should be higher in order to avoid any inventory losses to spoilage (Soboleva et al., 2018). In 2022, the average turnover of the industry increased to 9.53. However, according to the company’s records, the average industry turnover of Ace Company is ten times per year. This shows that the company’s average inventory turnover is higher than the market average. 

Since Inventory turnover helps to determine the rate at which the inventory is sold or stocked or replaced by the company, this vital ratio is measured by dividing the cost of goods sold by an average inventory of the organization pertaining to a similar accounting period. The higher inventory turnover ratio tends to predict that the company is making good progress in terms of sales and the lower inventory turnover ratio means the opposite, lower sales revenue for the Ace Company. This trend has worsened since 2021 but the company still seems to be making significant sales. 

MBA FPX 5010 Assessment 3 Performance Evaluation

Evaluating Company’s Credit Worthiness for Loan Application 

Evaluating the company’s creditworthiness is vital for making loan recommendations. This means that if the company fails to meet the financial performance goals and metrics, they can be linked with many factors including reduced sales and lower cash flow returns. By applying the Asset Valuation Model, the company’s rate of return is 45%. The information of cash flows is also obtained from the company’s accounts and credible resources; the accounting data from the Income Statement shows that the revenue growth rate was materially higher for Ace Company compared to the average rate of the industry (Park, 2020). Also, the following figures help to measure the long-term financial standing of the company which helps us to forecast its financial viability for the loan. 

The company’s gross profit margin has been 25% that is slightly lower but can be accounted for the increase in its operating expenses by 8% in the past two years. The return on assets is 30% for the previous years and 40% for the current year. This ratio shows a general relationship between the average total assets and net income (Nanih, 2020). The average total assets are associated with the company’s balance sheet while the company’s net income figure comes from the Income Statement.  At present, these figures show a promising standing of the organization; however, it may trouble the loan providers in the future. Moreover, the company has kept a cash balance $90 million during the past two years. This shows that the company’s cash ratio is also promising and healthy because the company has maintained ample cash for the past two years. This also shows that the company’s liquidity position is positive and out of danger (Bundocks, 2020). Finally, the company’s revenue for the past two years has been $30 million and $33.2 million per annum which also show a strong figure for a medium organization. 

Recommendations and the Decision

The loan’s decisions are based on the company’s past two years’ performance. The focus of the company is to increase its revenues in the subsequent years because the owners are investing it back into the business for the past five years. This means that the company is unlikely to have a low stagnant cash balance and must have ample cash in the bank account to meet any urgent expenses and repay the loans. Moreover, the company maintains a simple business model and often does not make shifts in its overall strategies. The Free Cash Flow to Equity model shows an increase in cash flows from operations. The company’s revenue growth has been steady over the past two years which implies it is in a position to get positive returns on its investment (Bioscopy et al., 2020). Therefore, all these facts and figures help us to determine that we should recommend providing a loan to Ace Company because the decision will turn out to be viable as per the company’s financial health and position. 

MBA FPX 5010 Assessment 3 Performance Evaluation

References

Bioscopy, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8.

Bundocks, M., & Maina, K. E. (2020). Effect of Portfolio Diversification Practices on Cash Flow Management among National Technical and Vocational Education and Training Institutions in Usain Gishu County, Kenya. Journal of Finance, 2, 19.

Nanih, E., Ofori, T. N., & Ven, O. (2020). Cash flow management and financial performance of quoted oil and gas firms in Nigeria. Journal of Accounting and Financial Management, 6(4), 1-11.

Park, E., & Kim, W. H. (2021). The effect of inventory turnover on financial performance in the US restaurant industry: The moderating role of exposure to commodity price risk. Tourism Economics, 27(7), 1417-1429.

Soboleva, Y. P., Matveev, V. V., Alinsky, S. A., Efimenko, I. S., Prusakova, I. V., & Mazur, L. V. (2018). Monitoring of business operations with cash flow analysis. International Journal of Civil Engineering and Technology, 9(11), 2034.