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The expected sales units after 6 months are 168,579, and at this level, company will earn £245,255 net profit. The targeted profit £150,000, and to achieve the target, firm requires selling at least 135,733 units of Solid Shampoo. Based on estimated sales, it can be stated that firm will easily achieve its targeted profit even in worst case.
Decline in the demand of Solid Shampoo can be major risk for the company which might result into fall in sales revenue up to 10%. On the other hand, there is an opportunity that plastic reducing concept might be favoured by customers and demand for Solid Shampoo might increase by 10%.
Break even chart
(Source: by author)
The margin of safety at expected sales units lies on 84,571 units which is almost 50% of expected units to be sold. This figure indicates that company has a capacity to lose their sales units up to this level, where firm will be able to achieve net profit above fixed expenses (CFI, 2020).
The changes in selling price gave different sensitivity results. For instance, if company has to reduce its selling price to £3 to match with the competitor, then company will face loss of around £91,904. Also to achieve break-even situation, company will be required to sale at least 270,695 units of Solid Shampoo. On the other hand, if company charges £4 per Shampoo, then it will earn profit even in worst situation (CFI, 2020). This indicates that firm has an opportunity to reduce its sales price up to £4 per unit.
One of the way through which company can reduce its financial risk or increase its profit is by selling more units of Solid Shampoo. For instance, if company able to increase its actual sales 10% above expected, then its total net profit will increase by £48,888. Apart from this, if firm is able to sale only 84,009 units of Solid Shampoo, then it will achieve no profit no loss situation. Hence, to reduce financial risk firm has to increase its sales.
The cash budget of the company shows that after the month of February, firms closing balance of cash account is continuously raising.
(Source: By author)
The above bar graph clearly indicates that in the month of February, firm has shortage of cash; and as a result, company has an additional requirement. But after the end of the February month, company's cash flow is moving towards upward trends. This indicates strong liquidity of the company (Madushanka & Jathurika, 2018).
The working capital is the balance remaining with the organization if it pays all its payables. The trade receivables of the company are 3 times more than trade payables. This indicates strong solvency of the company, but at the same time it indicates poor management of fund also. To improve its working capital position, company requires either increasing trade payable period or reducing trade receivable duration (Altaf & Ahmed, 2019).
If company adopts strict payment receiving policy, then it can reduce the trade receivables and working capital will improve.
Firm also an option through which it can improve its cash balances. This includes bargaining with suppliers to give less payment; and another way is to charge more from buyers. The difference between two will improve the cash balances.
The business requires working on its credit policy, as majority of business cash is blocked among debtors. Company is not doing cash sales, which increases the risk of bad debts. Additional to this, company is paying off its debt earlier than receiving payment. This difference will increase the unnecessary cost on taking additional loan by company.
Altaf, N., & Ahmad, F. (2019). Working capital financing, firm performance and financial constraints. International Journal of Managerial Finance.
CFI, (2020) What is Break Even Analysis? Available at: https://corporatefinanceinstitute.com/resources/knowledge/modeling/break-even-analysis/. Accessed 17 March 2021.
Madushanka, K. H. I., & Jathurika, M. (2018) The impact of liquidity ratios on profitability. International Research Journal of Advanced Engineering and Science, 3(4), 157-161.
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