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Competition Bike Operational Strengths and Weaknesses Based on Horizontal Analysis

Essay by   •  June 11, 2013  •  Case Study  •  5,447 Words (22 Pages)  •  1,671 Views

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Competition Bike Operational Strengths and Weaknesses based on Horizontal Analysis

It is important to have a working definition of the term horizontal analysis. The free dictionary defines horizontal analysis as "the process of dividing each expense item of a given year by the same expense item in the base year. It allows assessment of changes in the relative importance of expense items over time and the behavior of expense items as sales change".

The company had an outstanding performance in 2007. In year 7, net sales increase by over 33.3% at $1,495,000 with a corresponding increase in gross profit of 37.5%. This meant the Competition Bikes pricing strategy was well executed. They were able to add enough mark-up value to the price of the bikes that was sold during the financial period. Cost of Sold also increased this is a direct result of the increase in net sales. What is important to determine is whether the sales were from bikes in stock or newly made bikes. In years 8 there was a 15% decrease in net sales with a loss of $897,000 from year 7. Gross profit had a 16.3% decrease, at a loss of $266,600 as well in year 8. This is due to the current economic conditions that have had an impact on the sponsor's ability to fund riders as they usually do. The cut back on funding is expected to continue for the next three years.

The operating overheads of the company mainly advertisement and market research both increased by 37.5%. In orders to gain a competitive edge over its main competitor, Competition Bike has to focus more heavily in advertisement as in the past their efforts were limited, most of the advertisement were done by satisfied customer spreading their satisfaction with the product by word of mouth. Continuous research and development has to be maintained in order to meet customer's unique demands.

Total operating expense increased by 23.9% which includes executive compensation. This shows that the company is motivating employees to make strategic decisions that have enabled them to be profitable. Business was very profitable for Competition Bikes in year 7 as they were able to triple their net income. From the analysis it's apparent that the company's product line did exceptionally well in the market. Most of the success is due supplying a customer drive product, that is producing a product that is customized to the customer's physical attributes.

Total selling expense has decreased by 14.9% which is expected as sales have decreased by approximately the same percentage. However total general and administrative expense has increase by 1.2%. Utilities have increased by over 11.1% this needs to be investigated. If production has reduces by 600 units, utilities should have been reduced as well. Management need to research what has caused this drastic increase to see if there is waste or if the utilities company has increased their rates. Whatever the case may be immediate actions needs to be taken as such huge expense in a time of reduce sales will have a negative impact on profitability.

Analysis the company's balance sheet, year 7 and 8 both yielded positive results on the overall growth of the company's assets at 31.5% and 16.5% respectively. The results can be explained by the outstanding performance in year 7 that lead to net profits been tripled in that year. However in year 8 the company faced a decline in sale of approximately 15%.

In year 8 cash and cash equivalent has increased by over 348.2% which might not be a good sign for the company as it appears to be too liquid in comparison to year 7 when the percentage was -64.6%. The company should consider investing some of this cash. A decrease in receivables shows that the company is collecting monies owed to them. This could be the reason why the company has so much cash. As mentioned the company could invest some of the cash into dome profit generating business venture. "Otherwise, said resources will eventually be depleted, because the company has to pay fixed overhead costs as an on-going business venture". (Cantoria, 2011)

The company's payables have increased in both years 7 and 8 by 192% and 33.3% respectively. The company appears to be using their payables as short term loans for cash flow purposes. It does not appear that the company is making wise decisions; they have predicted that sales would decline by 15% for the next three years. Therefore less material will be need for productions and it is quite evident that raw material in stock has increased by 3.1%in year 8 hence and increase in payables. The company needs to pay off some of its short term debt namely payables in order to maintain a good relationship with them.

Competition Bike Operational Strengths and Weaknesses based on Vertical Analysis

The business dictionary defines vertical analysis as a "technique for identifying relationship between items in the same financial statement by expressing all amounts as the percentage of the total amount taken as 100".

Based on a vertical analysis of the income statement cost of goods sold as a percentage of sales appear to be constant for years 6, 7 and 8 approximately 73% which also yield a gross profit margin of approximately 27% for the three year. The company appears to have a have a good pricing strategy in place. Even through sales reduced in year 8 by over 600 units the company didn't change its pricing strategy the price per bike remains constant. I think this is a good strategy as the company knows that they are producing high quality products.

Selling expense remained fixed for the 3 years at 6.7% although there was fluctuation in sales. Also total operating expense increased by over 3% in year 8 when sales decline. This should be an area of concern to the accounting manager. There seems to be some area of concern where operating expenses are concerned. Comparing year 7 to year 8, 600 units less was produced however the total operating expense 18.4% was compared to 15.5%.

Vertical analysis also determines how sale affects the company's assets as well as other resources. Analyzing the balance sheet, in year 6 cash and it equivalent was at 6.2% while its current debt was at 2.5%, however in year 7 cash was 2.2% and current debt was 5.4% this meant that the company had cash flow problems, they would not be able to pay off their current debt if it was due immediately. This might be a reason why the company issued stock. "Companies purchase treasury stock if shares are needed for employee compensation plans or to acquire another company, and to reduce the number of outstanding shares because the stock is considered a good buy. Purchasing treasury stock may stimulate trading, and without changing net income, will increase earnings per share". ("Treasury

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