Introduction
Business expansion needs careful planning. The decision for one to extend his or her business must in fact come from thoughtful consideration of a number of factors including the logistical, financial, and even emotional readiness. As a rule of thumb, one should expand his or her business when untapped opportunities are present so as to benefit the business enterprise. Softly Pty Ltd is essentially an established business since it has been in operation for fifteen years. This report describes what the management of Softly Sofas Pty Ltd needs to consider for them to be successful in their expansion goal.
Possible sources of finance
One of the crucial issues, which face all the businesses, whether well-established or in start-up phase, is actually obtaining the levels of financing that are appropriate. There are a number of important sources of finance for Softly Sofas Pty Ltd. The first one and most common source is business savings. This is the most efficient source of finance for expansion of this business. Business savings plus the earned profits will thus be important in financing the expansion.
The other crucial possible source of finance is the conventional debt financing. The management should source its expansion funds from the credit unions, banks, and the other financial institutions. Softly Sofas Pty Ltd should acquire operating or credit loans that it will use to finance its accounts receivables or finance inventory. Apart from credit loans, the business should also acquire term loans, which will be used to finance its fixed assets in New Zealand. The other loans under this category are mortgages that will be important in financing the construction or purchase of buildings and lands.
Government assistance is the other possible source of finance for Softly Sofas Pty Ltd. The management needs to seek government assistance in form of loans or grants from the municipal, provincial, and federal levels of government. These government loans and grants will be valuable source of finance for the business. Nevertheless, the management should be ready to invest a considerable amount of time so as to complete the tiresome application process. The other imperative thing that the business management needs to know when financing the business through this source is that, the approval might take a long time due to the extensive review procedures.
Last but not least, strategic alliances or business partners are possible sources of finance for this business. Softly Sofas Pty Ltd management can obtain the finances to expand its operations through entering into alliances or partnerships with the other furniture retailers. This form of obtaining business finances will be advantageous to this business as it will take advantage of sources of financing of its partner, equipment, employees, their business acumen, and other crucial resources.
Softly Sofas Pty Ltd financial state.
It is important to assess the past performance and the current financial position of this business before it expands its operations. This will help to make the predictions about its future solvency, liquidity, profitability, and efficiency.
Liquidity refers to a measure of debtor’s ability to pay the debts he or she owes to a certain business as they fall due. Thus, it is debtor’s ability to pay his or her short term obligations. For this business, there are several ratios that one can use to calculate its liquidity. These are quick ratio, current ratio, and operating cash flow ratio. In this case, I will use current ratio to calculate Softly Sofas Pty Ltd liquidity for the 2 years that is, 2011 and 2012. Thus, the business liquidity for the two years is given by;
Current ratio for 2011
= Total Current Assets/ Total current liabilities
= (cash + Acc. Receivable + Inventory)/ (Overdraft + Acc. Payable + Accrued expenses)
= (40,000+125,500+139,500)/ (90,000+243,000+9,000) = 305,000/ 342,000
= 0.89
Current ratio for 2012
= (48,000+126,500+34,500) / (90,000+245,000+11,000) = 209,000 / 346,000
= 0.60.
The current ratio for this business is below 1 for the two years. For that reason, its current assets are less than the current liabilities hence the business will have problems in paying its bills on the required time. Moreover, its liquidity ratio of 1.5:1 is below the recommended ratio of 2:1.
Profitability is essentially a primary goal of every business venture. The chances of this business to survive in New Zealand are low without profitability. For that reason, it is vital for the management to measure the past and the current profitability of this business. It is also crucial for them to project the future profitability. In the calculation of this business profitability, there are a number of important formulas that one can use. These include gross profit margin, pretax profit margin, operating profit margin, and net profit margin. I will use gross profit in this case to calculate the profitability of this business for both 2011 and 2012.
Gross profit margin for 2011
= Gross profit / Net sales (Revenue)
= [1,800,000 – (150,000 + 950,000 – 140,000)] / 1, 800,000 = (1,800,000-960,000) / 1,800,000
= 0.467*100
= 46.7%
Gross profit margin for 2012
= [1,950,000-(140,000+1,000,000-160,000)] / 1,950,000= (1,950,000-980,000) / 1,950,000
= 970,000/1,950,000
= 0.497*100
49.7%
There is an improvement in the profitability of this business. In addition, the overall gross profit ratio for this business is 40%. The business can use the above profits to make predictions of the future profits.
Softly Sofas Pty Ltd solvency is actually degree to which its current assets exceed current liabilities. In other words, it is the ability of this business to meet the long term fixed expenses it has while at the same time accomplishing its long term expansion plus growth. It is interesting to note that for this business to avoid entering bankruptcy, it must ensure that it is not insolvent. The business solvency ratio is thus given by the formula below.
Solvency ratio= (After Tax Net Profit+ Depreciation) / Total liabilities
The business has a solvency ratio of 60% or 0.6. Therefore, this business does not have the optimal debt: equity ratio that is approximately 1.
Efficiency is performance level that describes a business process, which uses lowest inputs amount to create greatest outputs amount. Therefore, this is a crucial attribute in Softly Sofas Pty Ltd since the inputs that it requires for its expansion are scarce. This means that raw materials, money, and time are scarce for this business hence it is important for the management to devise ways of conserving these resources while maintaining a general production level that is acceptable. The efficiency ratio for this business is 20 days as calculated using the accounts receivable turnover ratio. Therefore, this shows that if this business will improve this ratio its profitability will improve.
Softly Sofas Pty Ltd needs to consider a number of things before expanding its operations. The management needs to determine whether there are economies of scale, which will be beneficial to its expansion. This means that the business should expand its operations only if the economies of scale allow it to make extra profit per item.
The business should also investigate whether its competitors are expanding. If they have expanded their operations, this means that these competitors have seen untapped and new opportunities in the market. For that reason, the business should follow competitor’s lead or wait and observe how they do. Last but not least, the business should investigate whether it can finance its expansion internally through carefully studying the expansion financial benefits. However, expansion is not feasible at this time. This business will experience growing pains since it is not financially sound to expand internationally as shown by its financial ststements.
Necessary Improvements
Based on the provided financial information, Sam needs to set the business goals. Setting objectives and goals is essentially an imperative part for the success of this business. For instance, the management needs to set a certain profit percentage for some period of time hence this will not only help to raise the required amount but will also improve the financial performance of the business. In addition, the management needs to utilize high impact marketing. They should learn the ways to use a low budget that will lead to high impact marketing so as to improve the financial performance of the business.
Ethical considerations and corporate social responsibility
Softly Sofas Pty Ltd should uphold the corporate social responsibility and ethical considerations if it wants to be successful in its operations. The relevance of these two concepts is that it essentially promotes the business accountability vision to a variety of stakeholders, in addition to the investors and shareholders. This will help the business to be successful in its endeavors.
