Illustrate the benefit for the good financial management of a business of the: (i) Profit and Loss account and (ii) The Balance Sheet - Leaving Cert Business - Question A - 2004

The Balance Sheet offers a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and shareholder equity. Good financial management manifested through the Balance Sheet aids in understanding the liquidity and solvency of the business. It allows stakeholders to assess whether the firm can meet its short-term obligations (liquidity) and its long-term financial health (solvency). Proper management of assets and liabilities through the Balance Sheet can enhance planning and growth strategies.

1. Gross Margin Ratio (GMPG):

   • For 2002: $GMPG = \frac{Gross\ Profit}{Sales} = \frac{45,150}{169,500} = 0.266 \ (26.6\%)$
   • For 2003: $GMPG = \frac{40,950}{157,500} = 0.260 \ (26.0\%)$ This indicates a slight decline in profitability as the gross margin percentage decreased from 26.6% to 26.0%.

2. Net Profit Margin (NPNP):

   • For 2002: $NPNP = \frac{Net\ Profit}{Sales} = \frac{15,100}{169,500} = 0.089 \ (8.9\%)$
   • For 2003: $NPNP = \frac{12,285}{157,500} = 0.078 \ (7.8\%)$ A decrease in net profit margin signifies challenges in controlling expenses or declining sales income.

1. Working Capital Ratio:

   • For 2002: $Working\ Capital = Current\ Assets - Current\ Liabilities = 15,900 - 8,100 = 7,800$ Ratio = (\frac{Current\ Assets}{Current\ Liabilities} = \frac{15,900}{8,100} = 1.96)\
   • For 2003: $Working\ Capital = 16,800 - 17,400 = -600$ Ratio = (\frac{16,800}{17,400} = 0.97)\ The decline from a working capital ratio of 1.96 to 0.97 signals a turn towards liquidity risk, indicating current liabilities exceed current assets.

2. Acid Test Ratio (Quick Ratio):

   • For 2002: $Acid\ Test\ Ratio = \frac{Current\ Assets - Closing\ Stock}{Current\ Liabilities} = \frac{15,900 - 9,100}{8,100} = 0.84$
   • For 2003: $Acid\ Test\ Ratio = \frac{16,800 - 7,200}{17,400} = 0.55$ A decrease in the acid test ratio signifies weakening liquidity, requiring immediate attention.

To improve profitability trends, Calty Construction Co. can focus on cost control measures and enhancing sales through effective marketing strategies. Understanding why the gross profit and net profit margins are declining can help in identifying specific problem areas, perhaps through better supplier negotiations or operational efficiencies.

For enhancing liquidity, it is crucial to better manage receivables and inventory. Speeding up the collection of receivables and reviewing current stock levels may free up cash flow. Additionally, establishing a financial cushion by ensuring access to credit facilities can also help mitigate liquidity risk.