Essay Preview: Financial Statements
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In order to boost the sales for Atlantis Company Andy has come up with a plan to improve his ratios for the year. This plan involves extending the credit terms for a period of two months instead of the usual one month. This in turn should help generate the sales that Andy needs to boost his revenue so that he will be able to expand his business.
Andy is not the only business to use this method as a “crutch” to help generate sales. Think about the ads you see in papers around November and December, “No interest no payments until January 2009”, this is only one form used to generate revenue at years end for many businesses. His actions are ethical in the business world. If Andys Pro Forma does not meet the standards set by the loaning institution, even with the newly generated sales, they will not loan the money anyway. They are going to safeguard themselves before doing anything that will result in a default on a loan.
Several ratios that will benefit from this plan fall into the categories of liquidity ratios and profitability ratios. The quick ratio, a measure of current assets-inventory/current liabilities, and the current ratio, current assets/current liabilities, will be improved: although the average collection period will be higher using this strategy.
Profitability ratios that will be helped using this strategy will be EBIT to sales, asset turnover, and return on assets.
As long as Andy feels that his business will be able to increase the sales or even sustain current sales I would advise to use this plan. Upon increasing the business Andy should also increase sales thus enabling him to repay the loan and not show a decrease in profits next year.