Inventory Management and Profitability

ACCOUNTING AND
FINANCE
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Table of Contents
INTRODUCTION......................................................................................................................1
TASK 1......................................................................................................................................1
Analysis of financial and non-financial performance.......................................................1
Non-financial performance indicators (NFPI)..................................................................3
Analysis of financial performance of Next Plc and H&M through charts.......................3
Recommendations to Certified Financial Manager of Asol Ltd.......................................6
Recommendation to H&M management..........................................................................6
Limitation of ratio analysis...............................................................................................7
TASK 2......................................................................................................................................7
Q.1. Investment appraisal techniques or capital budgeting tools......................................8
Net cash flow....................................................................................................................8
Payback period..................................................................................................................9
Project NPV......................................................................................................................9
Accounting rate of return................................................................................................10
Recommendation to senior management of Hilltop Ltd with justification.....................10
Q. 2. Limitations of investment appraisal techniques.....................................................10
CONCLUSION........................................................................................................................11
REFERENCES.........................................................................................................................12
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Index of Tables
Table 1: Calculation of Net cash flow of project A (In £000's).................................................8
Table 2: Calculation of Net cash flow of project B (In £000's).................................................8
Table 3: Computation of payback period of project A and B (In £000's)..................................9
Table 4: Project Net present value (In £000's)...........................................................................9
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INTRODUCTION
Accounting and finance plays a crucial role in every business organization as it helps
to operate business without any difficulty and determine performance. Asol Ltd, is a large
retail organization who is providing fashionable cloths to large number of buyers. It was
founded in Swedish in 1947. In now-a-days, Certified Financial Manager (CFO) of the firm
desires to buy shares of one of the well established firms that are Next Plc, as well as Hennes
and Mauritz (H&M). The report will make detailed examination of both the firms’
performance so that appropriate investment decisions can be taken. Another part of the report
will apply the use of various capital budgeting tools so that Hilltop Ltd., can identify the most
viable project in which funds can be invested.
TASK 1
Analysis of financial and non-financial performance
Financial strength Current ratio (CR) and quick ratio (QR): Balance sheet gives information regarding
company's financial strength. Proportion of current assets and current liabilities can be
determined through CR whilst quick ratio indicates proportion of quick assets and
current liabilities (Saleem and Rehman, 2011). In Next plc, CR and QR show a rising
trend and gone increased to 1.82 and 1.16. On contrary, H&M possesses decreased
trend to 2.11 and 1.07 respectively. High CR of Next Plc. demonstrates greater
Working capital available amounted to 729400 however, in H&M, it has been
reduced. Thus, it can be interpreted that Next Plc is comparatively more able to satisfy
their short-term obligations within one year (Malik, Awais and Khursheed, 2016).
Proper and sufficient availability of funds help to run operations without any hazards.
Hence, it is clear that Next Plc has sound liquidity position.
Efficiency ratios Inventory turnover ratio and days: Time lag between both the firms will convert their
goods into actual sales can be measured through inventory days (Koumanakos, 2008).
High stock turnover ratio will lower this length of time and vice versa. In Next plc
and H&M, the ratio has been reduced from 6.70 to 6.62 and 3.70 to 3.46 respectively.
This in turn, inventory conversion days are 55.13 and 105.63. It demonstrates that
Next plc is comparatively more able and selling its goods quickly in the market (Gaur
and Kesavan, 2008). It is because turnover ratio is 2 time higher and conversion days
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