BUSINESS FINANCE

CASE STUDY
Of

*Christine Carino

Submitted to: Mrs. Pinky Tacason

Submitted by: Kezia Faith C. De Vera *Christian Calicdan

Bryan Gatpo *Melanie Dela Cruz

Chelsie Petis
 I. Background of the Study

Chloe Mendez owns a clothing company, Chloe’s Closet. She has a team of tailors who work for
8 hours every day from Monday to Saturday. Demand for her business is strong but there
seems to be something preventing her from meeting the demands of her customers.

Chloe sells to both big department stores and small boutique stores under the brand Chloe’s
Closet. Some brands also ask her to manufacture their own designs. Business for Chloe has
been good since it started last 2014. In fact, despite the tough competition from cheaper
manufacturers abroad, she still manages to grow her customer base.

On December 4, 2015 Chloe received a billing statement from a raw material supplier for an
amount of PHP400,000 which will be due in 5 days. She is also scheduled to pay her
employees’ monthly salary of PHP70,000 the following day. Upon checking her bank account,
she only has a PHP67,000 balance. She knew she had exceeded her sales target last October
and November so she is wondering why she only has this amount of cash in her bank account.
Was her money stolen? Being a CPA, she checked the bank statement and her financial
records and found no mistakes.

Here is the latest financial statement of Chloe’s Closet as of November 30, 2015:

STATEMENT OF FINANCIAL POSITION

Nov. 30 2015 Dec. 31 2014
Cash 60,000.00 270,000.00
Accounts Receivable 740,000.00 500,000.00
Inventory 600,000.00 400,000.00
Machinery 800,000.00 850,000.00
TOTAL ASSETS 2,200,000.00 2,020,000.00

Accounts Payable 400,000.00 500,000.00

Salaries Payable 150,000.00 150,000.00
Total Liabilities 550,000.00 650,000.00
Capital Stock 200,000.00 200,000.00
Accumulated Profit 1,600,000.00 1,320,000.00
Total Equity 1,800,000.00 1,800,000.00
TOTAL EQUITY AND LIABILITIES 2,350,000.00 2,170,000.00

Statement of Financial Position

Nov 30, 2015 Dec 31, 2014
Sales 800,000.00 600,000.00
Cost of Goods Sold 300,000.00 225,000.00
Operating Expenses 100,000.00 105,000.00
Operating Income 400,000.00 270,000.00
Machinery 120,000.00 81,000.00
NET INCOME 280,000.00 189,000.00
 II. Capital Structure of Chloe`s Closet

Liabilities = Total Liability

Total Equity and Liability
2015
= ₱ 550,000.00 = 0.2340 = 23.40 %
₱ 2,350,000.00
2014
= ₱ 650,000.00 = 0.2995 = 29.95 %
₱ 2,170,000.00

Liabilities
2014
column1

2015

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Interpretation: It is favorable for the Chloe’s closet company for decreasing the liability from 2014and
that is 29.95 % to 23.405% for 2015.

Equity = Total Equity

Total Equity and Liability
2015
= ₱ 1,800,000.00 = 0.7660 = 76.60 %
₱ 2,350,00.00
2014
= ₱1,800,000.00 = 0.7005 = 70.05%
₱ 2,170,000.00

Equity
2014
column1

2015

66.00% 68.00% 70.00% 72.00% 74.00% 76.00% 78.00%

Interpretation:The equity ratio shown that the 2014 equity is 70.05% while the 2015 equity is 76.60%.
therefore it is favorable for Chloe’s closet company to increase the equity.
 II. Analysis
Profitability Ratios

Return on Equity = Net Income

Stockholders equity
2015
= 280,000.00 = 1.4 = 140 %
200,000.00
2014
= 189,000.00 = 0.945 = 94.5 %
200,000.00

Return on Equity
2014
column1

2015

0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 140.00% 160.00%

Interpretation: It is favorable to the company for having 140% in 2015 in return on equity than 2014 for
94.5% only. It shown the increasing on return on equity.

Return on Assets = Operating Income

Total Assets
2015
= 400,000.00 = 0.1818 = 18.18 %
2,200,000.00
2014
= 270,000.00 = 0.1337 = 13.37 %
2,020,000.00

Returns on Assets
2014
column1

2015

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%

Interpretation: The return on Assets of the company in 2014 is 13.37% while in 2015 18.18%. Therefore it
is favorable in the company because of the increasing in Return on assets.
Gross Profit Margin = Gross Profit
Sales
2015
= 500,000.00 = 0.6250 = 62.50 %
800,000.00
2014
= 375,000.00 = 0.6250 = 62.50 %
600,000.00

Gross Profit Margin

2014
column1

2015

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%

Interpretation: The Gross Profir Margin of the company shown that it remains the same and it is not good
because it means that the profits of the company have didn’t increase at sell.

Net Profit Margin = Net Income

Sales
2015
= 280,000.00 = 0.35 = 35 %
800,000.00
2014
= 189,000.00 = 0.315 = 31.5 %
600,000.00

Net Profit Margin

2014
column1

2015

29.00% 30.00% 31.00% 32.00% 33.00% 34.00% 35.00% 36.00%

Interpretation: The Net profit Margin shown that the 2014 is 31.5% and for 2015 is 35% . it is favorable
for the company to increase the Net Profit Margin
Efficiency Ratios

Accounts Receivable Turnover = Sales

Accounts Receivable
2015
= 800,000.00 = 10.8108= 1081.08%
740,000.00
2014
= 600,000.00 = 1.2 = 120%
500,000.00

Accounts Receivable Turnover

2014
column1

2015

0.00% 200.00% 400.00% 600.00% 800.00% 1000.00% 1200.00%

Interpretation: The Accounts Receivable turnover in 2014 9s 120% only while in 2015 was 1081.08% and
the increase of Accounts Receivable turnover is not favorable for it indicates that the company didn’t
manage the Receivables they have that almost of their products in 2015 where belong to accounts
receivable.

Average Collection Period = 365

Accounts Receivable Turnover
2015
= 365 = 0.3376 = 33.76 %
1081.08%
2014
= 365 = 3.0417 = 304.17 %
120%

Average Collection Period

2014
column1

2015

0.00% 50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00%

Interpretation: the Average Collection Period of the company in 2014 is 33.76% and in 2015 is 304.17% .
it is favorable for the company to decrease the Average Collection Period it implies that it took 34 days in
one year before they collect the Accounts the receivables they have unlike in 2014 where it is 304.17% or
304 days.

Inventory Turnover = Cost of goods sold

Inventory
2015
= 300,000.00 = 0.5 = 50 %
600,000.00
2014
= 225,000.00 = 0.5625 = 56.25 %
400,000.00

Inventory Turnover
2014
column1

2015

46.00% 48.00% 50.00% 52.00% 54.00% 56.00% 58.00%

Interpretation: it is favorable to the company to have 56.25% in 2014 and 50% only in 2015. The
decrease of the inventory indicates that the cloth products of the company were fast moving.
Average Age of Inventory = 365
Inventory Turn over
2015
= 365 = 7.3 = 730 %
50 %
2014
= 365 = 6.489 = 648.9 %
56.25 %

Average age of Inventory

2014
column1

2015

600.00% 620.00% 640.00% 660.00% 680.00% 700.00% 720.00% 740.00%

Interpretation: the average age of inventory in 2014 is 648.9% and for 2015 is 730% , it is favorable
because the average age turnover was increase.
Accounts Payable Turnover = Purchases
Inventory
Purchase 2015 Purchase 2014
300,000 225,000
+ 600,000 + 600,000
900,000 825,000
- 400,000 - 400,000
500,000 425,000

2015
= 500,000.00 = 1.2 = 120 %
600,000.00
2014
= 425,000.00 = 1.0625 = 106.25 %
400,000.00

Accounts Payable Turnover

2014
column1

2015

95.00% 100.00% 105.00% 110.00% 115.00% 120.00% 125.00%

Interpretation: The accounts payable turnover for 2014 was 106.25% and in 2015 is 120% it is not
favorable for the company increasing the accounts payable turnover.

Average Payment Period = 365

Accounts Payable Turnover
2015
= 365 = 3.0417 = 304.17 %
120%
2014
= 365 = 3.4353 = 343.53 %
106. 25%

Average Payment Period

2014
column1

2015

280.00% 290.00% 300.00% 310.00% 320.00% 330.00% 340.00% 350.00%

Interpretation: the average payment period of the company in 2014 is 343.53% and for 2015 is 304.17%
the decrease of the average payment period is favorable meaning that the accounts were paid in short of
period time compare to 2014.

Operating Cycle = Average Collection Period + Average Age of Inventory

2015
= 33.76 + 730 = 763.76
2014
= 304.17 + 648.9 = 953.07

Operating Cycle
2014
column1

2015

0.00% 200.00% 400.00% 600.00% 800.00% 1000.00% 1200.00%

Interpretation: the operating cycle of the company in 2014 is 953.07 and in 2015 is 735.76 the decrease of
operating cycle is favorable because it operates faster than 2014

Cash Conversion Cycle = Operating Cycle – Average Age payable

2015
= 763.76 – 304.17 = 459.59
2014
= 953.07 – 343.53 = 609.54

Cash Convension Cycle

2014
column1

2015

0.00% 100.00% 200.00% 300.00% 400.00% 500.00% 600.00% 700.00%

Interpretation: the cash conversion cycle of the company in 2014 is 609.54 while in 2015 is 459.59 the
decrease of cash conversion cycle is nor favorable because it means the cash were decrease on the
company.
Debt to Equity Ratios

Debt Ratio = Total Liability

Total Assets
2015
= 550,000.00 = 0.25 = 25 %
2,200,000.00
2014
= 650,000.00 = 0.3218 = 32.18 %
2,020,000.00

Debt Ratio
2014
column1

2015

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Interpretation: the debt ratio in 2014 is 32.14 while in 2015 is 25% the of debt ratio is favorable because it
implies that the debt of the company decrease in 2015.

Debt to Equity Ratio = Total Liability

Total Equity
2015
= 550,000.00 = 0.3056 = 30.56 %
1,800,00.00
2014
= 650,000.00 = 0.4276 = 42.76 %
1,520,000.00

Debt to equity ratio

2014
Debt to equity ratio

2015

0.00% 5.00% 10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%

Interpretation: the Debt to equity ratio of 2014 is 43,76% while in 2015 is 30.56% it decrease the
debt to equity ratio and it is not favorable.

Recommendation:

There are some things that this company need to improve it is not good to increase only the net
profit margin while there is also the increase of accounts receivable turnover. Meaning the net
profit margin was not generated as cash on time, it was only in accounts receivable turnover.

Second the decrease in Account Payable turnover while there is the decrease cash conversion
cycle, it is good for the company to minimize the account payable but the decrease in cash
conversion implies that generated income of the company were already used to paid the
account payable.

The company must increase the net profit margin and decrease the accounts receivable
turnover and decrease the accounts payable turnover but the increase in cash conversion must
be improved. It is not enough to be remaining the same in Gross profit because it only shown
that there is no improvement sales in the company. Yes the company is continues to have sale
but it should increase.

They should think to change their marketing strategy to increase their sales. And also monitor
also the flow of the accounts receivable it should be generated/paid as cash on time, and
control the account payable to avoid the decreasing in cash conversion cycle.