FINANCE AND ACCOUNITING ESSAY

FINANCE AND ACCOUNITING ESSAY

EXCELLENCY CLOTHING COMPANY

REASONS FOR PROFIT DECLINE AND SUGGESTIONS OF IMPROVING PROFIT

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Reasons for Profit Decline

The financial statement of Excellency Clothing Company depicts a reflection that there has been a decline of profit from £14746 in 2913 to £13176 in 2014. It is worth to note that there has been a general low rate of return by several London companies and businesses for the recent past years and not only hr clothing companies. However this analytical and explanative papers shall be solely focused in determining the probable reasons behind the declines in profit for the

Clothing industry in London, that is Excellency Clothing Company. The paper’s thesis shall in addition provide a discussion on the suggestions of what are to be done in order to improve the profit performance of the industry in the future. The following analyses are the probable reasons for the reduction of the industry’s profit according to the London’s time and tide (2011) newspaper explanation.

According to the Excellence Clothing Company journal of 2014, there is a general decrease in base of revenue for the company. The revenue of the industry declined from £255063 to £215623 from the years 2013 to 2014. Since profit is a direct related function of revenue, that is profit = revenue – cost (cost of sales). Such a reduction in revenue consequently leads to loss realization or profit decline. There can be quite a number of factors that may lead to such a reduction in revenues. The policies of London have been proved to be ignorant on the clothing industries. The policies have not allowed for any incentive offer to be given to the industry. There are also varieties of stringent restrictive actions imposed by the London policies that have subjected the industry to many operation ceilings (CLUTTERBUCK, & CRAINER, 2012). This means that the company cannot operate beyond a certain set level of production even if it has the capacity of doing so. Most of the policies especially those by the London government have imposed huge amount of taxation on the industry in the year 2014. The industry is being taxed hugely in cases where the clothing raw materials to be used are imported. The custom duty to be paid in such cases of raw materials importation have been cutting deep in to the amount of cost expenses that are to be paid by the industry.

The company is as well expected to be paying excise duties monthly and submitting their returns for excise duty charges. The above mentioned costs of taxation are of a negative impact to the industries revenues. Since such costs have to be paid by the industry through making withdrawals and deductions from the revenue amount. As provided in the equation for profit determination, when the revenue reduces and cost (arising from the taxation policies) increases, the profit amount has to definitely decline. This provides an explanation as to why the industry has realized a decline in its profit amount in the year 2014. On the other hand, the profit for the industry in the year 2013 is much higher than that of 2014. This can be argued to be for such reasons as, for instance, in 2013 the rate of taxation by the government stood at a lower percentage of 35% compared to the 40% of 2014 on the total gross profit. This therefore led to increased profit base in 2013. Since there were less deductions to be made on revenue of 2013 while the deductions of 2014’s revenue were much higher. Consequently making the profits of 2013 (£14746) to be higher than that of 2014 (£13176) as recorded in the financial statement of the company. It can therefore be concluded that the increases in deduction amounts imposed by taxation policies is a reason that lowers the revenue of the industry (CLUTTERBUCK, & CRAINER, 2012). Thereby in extension leading to profit declines.

The trade receivables of 2013 are lower than that of 2014. The trade receivable of 2013 and 2014 are £30124 and £34592 respectively. Trade receivables are financial elements which represent the amounts of debt that the company is expecting to receive. How does the higher trade receivables of 2014 than that of 2013 lead to decline of profits in 2014? The higher amounts of trade receivables expected by industry in 2014 than that of 2013, means that there were debts much that had not been received by the company in 2014 than in 2013. This is why the trade receivables (or the expected amount) by the company is higher in 2014. Since a lot of the amounts being to be paid by the customers who made purchases on debt are still pending and have not been settled.

In Layman’s language, what this means is that, in 2013 the company received much more amount in its debts sales than in received in 2014. Therefore in 2014, due to the low amounts that got paid in debt expected amounts, there was a decline in profit amounts. One of the reasons that lead to such reduced amounts of trade receivables is majorly caused by default in payments by the customers. Most of the default payments are always subject to write offs. Therefore it can be argued also that in 2014, there were more debts written off than in 2013 leading to the trade receivable of 2014 being much higher than that of 2013. This is because there were amounts that were expected to be received in 2014 and yet in reality those receipts were not really realized. Therefore, this explanation provides one of the reasons why the profit declined from 2013 to 2014.

The retained profits of 2013 (£70715) is lower than that of 2014 (£83236). How then does lead to decline in profit from 2013 to 2014? The lower retained profits of 2013 may imply that much of the profits received were used for other purposes of additional clothing production investments. Such additional investments are potential factors that can increase the amount of revenue received by the industry. On the other hand, the higher amounts of retained profits by the industry in 2014 can be an indication that much of the profits received put in idle accounts and were rather not used for any other form of investment. The phenomenon of putting the company’s profits in idle accounts as retained profit means that there will be as well low amount of revenues to be received or expected in the year 2014. From the explanation, it is therefore clear that in 2014 there were less revenue or profit to be received by retaining much of the profits rather than investing for other additional profits. While in 2013 much revenue or profit were expected or received due to investing much of the profit and retaining less of them.

The trade payables in 2014 are higher than the trade payable in 2013. Trade payables are always a representation of the Excellence Clothing Company’s credits (amounts to be paid by the company to its creditors or the debts owed by the company). This means that in 2014 the company had much debt which it paid standing at amount of £40243, than in 2013 when its debts were £31986. The paying of much more debts in 2014 than those paid in 2013 also makes the profit of 2014 to be of a decline when compared to the profits of 2013.

Suggestion of Improving Profit

The profits of the Excellence Clothing Company can be improved by using a variety of financial tools and elements as suggested in following discussion. Taxation rate should be cut by the government. Reduced taxation amount leads to the company to realize more revenue earned in its financial or income accounts. Since profits are in a direct relationship with revenue if all other financial factors are considered constant. The reduction in taxation leading to increased revenue earnings makes the company to realize much improved profit (PRESTWICH, 2009).

The company should also cut its cost of operation and reduction. Cost reduction consequently lead to reduced company’s debt (that is trade payable). When the company has low debts which it is to pay to its creditors, the profit amounts will consequently increase. Also, the company should expand its production and sales operation by investing much of its profits in other separate additional investments. The additional investments may be actuated by opening up more clothing departments for the purposes of either production or sales. Through additional investments the company is likely to improve its profit since more revenues will be being fetched.

In addition, the financial tool of traded receivable can be used by the company to increase its profit. This can be done in such a manner that the company ensures it reduces its trade receivable. This can be achieved by the company through reducing its debt sales. Reducing debt sales creates a provision that the company will be subjected to little or no debts from its customers. Some of the ways of ensuing that the trade receivables (debts by the company’s customers) are reduced is by initiating measures as cash in hand payment, payment on delivery or payment on receipt systems. The company will therefore be able to realize more improved profits since every sale made has an assured of payment or receipt (FERGUSON, 2013).

Bibliograhies

(2011). Time & tide. London, Time and tide.

(2014). Textile manufacturer: materials, production, management. Manchester, England, Joseph Appleby Ltd.

CLUTTERBUCK, D., & CRAINER, S. (2012). The decline and rise of British industry. London, Mercury Books.

FERGUSON, N. (2013). The great degeneration: how institutions decay and economies die.

GREGG, S. (2012). Becoming Europe economic decline, culture, and how America can avoid a European future. New York, Encounter Books. http://public.eblib.com/choice/publicfullrecord.aspx?p=909526.

PRESTWICH, M. (2009). Proceedings of the Durham Conference, 1997. Woodbridge [u.a.], Boydell Press.