Ratio Analysis And Financial Performance Of Cullen Manufacturing Limited

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Ratio Analysis and Financial Performance of Cullen Manufacturing Limited

In assessing the development of businesses, analysts and investors have established

various analytical concepts, techniques, and tools aimed at comparing the relative weaknesses

and strengths of companies. Financial ratios Assists in linking the main financial statements

together and give figures that can be compared across sectors and industries and between

companies. Therefore, ratio analysis is the most used analysis techniques in evaluating the

performance of companies. Financial ratios can be defined as a mathematical expression relating

one figure to another in an attempt to provide insightful comparison premised on financial

statements. To clearly and overtly assess the performance of any particular firm, it is critical to

compare the performance of any particular firm with those of others. The primal aim of this

paper is, therefore, to analyze the strategies that could be adopted by the Cullen manufacturing

limited to minimize the decline in liquidity and inventory turnover with the aim of increasing the

company profitability.

Ratios are therefore vital in examining the current performance of Cullen manufacturing

limited in comparison to the previous periods and identifying critical problems facing the firm

company that needs timely fixing. As a result, the company could in advance avoid potential

problems that could be catastrophic to its existence. Furthermore, the company could utilize the

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ratios in comparing its performance with that of the competitors in the same industry and thus

commanding its share in the market. Consequently, they will display the trends along which the

company is operating and thereby, assist the company management in its decision-making

process (Markopoulou & Chrysi, 125). The most common used ratios include common size

ratios, solvency ratios. Liquidity ratios and efficiency ratios that are mostly developed from the

income statement and balance sheet items (Chackwell, para 5). In assessing its performance,

Cullen manufacturing limited uses return on capital employed, gross profit margin, operating

profit margin, inventory turnover, current ratio and acid test ratio to evaluate its performance in

the manufacturing industry.

Declining Liquidity

Corporate liquidity is a measure determining whether a firm has enough finance and cash

flow to settle all its operations and bills. When a company has enough cash to cover its expenses,

this is referred as liquidity while inability by any particular company to meet its expenses and

bills is called illiquid. Declining liquidity affects the company ability to effectively meets its

expenses and bills drowning the company in debts. Additionally, declining liquidity reduces the

company's access to credit facility as financial institutions only consider those organizations with

self-sustaining cash flows (Ferderer, 371). Furthermore, declining profitability might affect the

company severely making it hard for the company to meet very basic operation expenses leading

to its closure.

Decreasing Inventory Turnover Ratio

Low or decreasing inventory turnover indicates that firm holds much of its inventory

stock than the sales the company makes driving the company to register low sales below the

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expected levels and thereby reducing the profit it makes. Therefore, comparing the company to

competitors or other similar players in the same industry, the company might be losing out as it

might mean lower sales as compared to previous periods and hence might imply that it is losing

out its market share. This situation might prompt the organization to come up with decisions that

could change its overall production compelling it to either reduce production or increase its

advertisement investments (Ferderer, 374). As a survival tactic, firms normally seek for short-

term borrowings from credit organizations or banks during low seasons and economic recession

periods.

Strategies Undertaken to Increase Profitability according to John

Properly strategizing to eradicate the issues of declining liquidity and decreasing

inventory turnover requires Cullen manufacturing to undertake some steps or tactics to ensure its

profitability. This could be achieved by the company by undertaking the following strategies.

Firstly, the company should increase its networking and reduce on advertising costs; this will

reduce costs and increase returns. In the contemporary business world, customers have gone

beyond purchasing from those who market their products more to the buying from the producers

they know better (Chadwick, para 6). Therefore, Cullen manufacturing should consider going out

in the market and network more with potential customers and increase its partnerships with

referral partners.

Secondly, the company can subcontract some responsibilities; Those tasks that require

part-time services can be contracted so that Cullen manufacturing only pays for the labor that it

need vis-a-vis incurring higher costs on unbillable bench time labor. This will save the company

a good amount of money on insurance, payroll, and taxes. Thirdly, the company can develop a

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well-established payment system; Cullen manufacturing should reach out to its customers and

agree with them on how to handle payments in a way that will reduce the uncontrollable amounts

and minimize the collection costs. This will ensure a well-set agreement that will ensure the

payment terms are clear and the company can timely collect the money owed by customers.

Additionally, the company should aim at minimizing its storage costs by drop shipping its

products directly from its vendor to customers. This will see the company cutting down some

costs like product insurance and rent. These costs normally eat up the company profits.

Therefore, by taking this strategy, it minimizes on time wastage and costs. Moreover, the

company should be aimed at reimbursing employees for mileage instead of providing some

employees with company vehicles and fueling for them. This will help the organization in

cutting on maintenance, insurance, and other multiples costs associated with providing

employees with vehicles. Furthermore, Cullen manufacturing should provide insurance

allowances to its employees as compared to offering group health insurance. However, as a cover

to the employees and an effort from the company management, employees can be benefited by

channeling a given amount of money towards their insurance costs. This strategy is very valid

and imperative in increasing the company’s profitability by saving the company money while at

the same time still benefiting the employees (Chadwick, para 3). Last but not least, the company

should adopt an efficient technology that would ensure that the assets of the corporation are

efficiently managed to produce products effectively without incurring unnecessary costs.

Effectiveness of the methods proposed

Drop shipping of products directly to the customers enable the company to reduce storage

costs associated with keeping the products as they await the customers. Channeling a given

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amount of funds towards employee insurance does not only reduce excessive costs that could

have arisen if the company chose to provide group health insurance but also minimizes chances

of employee turnover (Chackwell, para 2). However, reducing advertisement costs to focus on

networking could result in high rates of low product awareness as only the customers who are

close to the referral agents or only those who will have the opportunity to be reached in

networking efforts and thus affect company sales negatively. Furthermore, contracting some

services might result in contracted employees giving sub-standard services or work since they

not directly answerable to Cullen manufacturing limited.

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Works Cited

Markopoulou, & Chrysi E. "Realized Hedge Ratio: Predictability and Hedging

Performance." International Review of Financial Analysis, vol 45, 2016, pp. 121-133. Elsevier

BV, doi:10.1016/j.irfa.2016.03.005.

Ferderer, J. Peter, P. Fang, Wilshere, T. "Increasing Liquidity and the Declining

Informational Content of the Paper-Bill Spread." Journal of Economics and Business, vol 50, no.

4, 1998, pp. 361-377. Elsevier BV, doi:10.1016/s0148-6195(98)00009-5.

Chadwick, Simon. "Five Strategies for Survival, Growth, and Profitability." Research

World, Wiley-Blackwell, doi:10.1002/rwm3.20472.

Chackwell, Wiley. "Increasing Company Profitability." Business Gateway, 2015,

http://strategies for increasing company profitability.

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