Interpretation of Clever Clothes Accounts Essays

Interpretation of Clever Clothes Accounts Essays Interpretation of Clever Clothes Accounts Essay Interpretation of Clever Clothes Accounts Essay Clever Clothes is a medium sized limited company with one major shareholder Mr Barnes. The company operates in the highly competitive textile industry. Clever Clothes is principally a commercial clothing manufacturer to the retail company Marks and Spencer, however it has seen the market reduce this year as the retail company seeks cheaper clothing from abroad, historically it has produced clothes as a sub-contractor to other textile companies but again due to the competition from abroad and the fact that Clever Clothes is not a highly automated business, sales from this sector have reduced dramatically over a 5 year period (see graph 1.Percentage Breakdown of Turnover). Clever Clothes is known in the industry for producing high quality garments and delivering good service and in the last three years has entered the mail order market and has started to see some growth in this sector this year where the opportunity to increase profits is possible as the customer is not in the extremely competitive commercial sector. The following pages will examine the recent historical past of Clever Clothes through examination of the Clever Clothes accounts from 1991 through to 1996 using the profit and loss and balance sheet accounts attached in Appendix 1. and Appendix 2.(page 19 and 20). From the P + L account the first and last figures give cause for concern, the turnover for the company has grown by 140% in four years yet Net profits have actually fallen from i 69K to i 57K over the same period. The costs of materials has increased in the four years by i 6. 4 million an increase of 292% and labour has increased by 140% over the same period, which would imply a larger production force and thus an improvement in profits however, when you look at the stock levels in the balance sheet it is apparent that too much material is being held here be it raw material or finished goods. As depreciation has not been shown separately I have assumed this figure is within the factory overheads and this would explain why there has been a steady increase in overheads as there has been little movement in plant and machinery, motor vehicles and office equipment up until this year. From the expenses in the P+L it can be see that there has been a small increase in Admin and Marketing over the four years but when comparing that to turnover in 95/6 both figures are around 1.5% this seems especially small when the company is trying to attract mail order work which one would imagine requires good marketing and phone support for potential customers. Two further lines of notes in the P+L account are the directors salary which has increased over the four years by 55% and the fact that dividend payments have remained at i 81K over the period which has certainly facilitated the decline in profits. From the balance sheet it is notable that fixed assets have not been re-valued over the four years and that in 1995/96 new plant and machinery was purchased almost doubling the current levels and this has clearly been paid for through Bank Loans and a   600K hire purchase agreement which one can only assume was taken out due to a potential refusal for a further loan from the bank especially as there appears to be a reliance on the bank overdraft where it is being utilised as a bank loan with the figure increasing from  132K to   597K in 1995/6. Two other worrying trends in the balance sheet are the increase in debtors and Creditors. Debtors now stand at i 699K and creditors at 858K. The following graph shows the trend over the period and whilst debtor days and creditor days have remained low (especially creditors 1995/96 22. 7 days) the trend for creditors certainly appears to be steep.