Balance Sheet Optimization: A Study on Wesfarmers Limited

Running Head: Entrepreneurial Finance
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Project Report: Entrepreneurial Finance

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Contents
Balance sheet optimization:......................................................................................................... 3
Introduction:................................................................................................................................. 3
Company overview:..................................................................................................................... 3
Liquidity and working capital analysis:.........................................................................................3
Recommendation to improve the working capital and liquidity:...................................................4
Competitor’s comparison:............................................................................................................ 5
Improvement in KPI:.................................................................................................................... 6
Conclusion:.................................................................................................................................. 6
References:................................................................................................................................. 7

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Balance sheet optimization:
Introduction:
Balance sheet optimization helps the financial manager and financial analyst to measure the
assets of the business in order to meet the requirement of the business and achieve higher
profitability level in the business (Gibson, 2011). In the report, the balance sheet optimization study
has been performed on the Wesfarmers limited to measure that how the company is managing the
financial performance and profitability level. The working capital, liquidity ratios and cash conversion
cycle of the business has been studied in the report to identify the performance of the business.
Company overview:
Wesfarmers limited is an Australian company which stock is traded in the Australian stock
exchange by the name of “WES”. It is a retail company which operates its business in Australia, New
Zealand, Ireland, United Kingdom and Bangladesh. The company is operating its business since 1914
in the Australian market (Reuters, 2018). The main products of the company include chemicals, coal
mining, fertilizers, industrial and safety products etc. the main competitors of the company in the
industry is “Woolworths limited”.
Liquidity and working capital analysis:
Liquidity and working capital analysis has been conducted on the Wesfarmers limited firstly to
measure that whether the company is able to meet all the current demands on the basis of the current
available funds of the business (Gibson, 2011). On the basis of the evaluation on the liquidity
evaluation on the business, it has been measured that the current ratio and quick ratios of the
company are 0.87 and 0.27. Current ratio explains that whether the company is able to pay all the
current debt of the business against the current assets of the business. On the basis of the current
level of the business, it has been found that the current assets of the companies are just 0.87 times of
current liabilities of the business (Morningstar, 2018). It explains that the company is not able to pay
the current debt of the company at an instance. It leads to the conclusion that it is crucial for the
Wesfarmers limited to improve the level of the current assets in order to improve the performance of
the business.
Liquidity Ratios 2018
Current Ratio
Current Assets / 8,706,000
Current liabilities 10,025,000
Answer: 0.87
(Morningstar, 2018)
Quick ratio explains that whether the company is able to pay all the current debt of the business
against the quick assets i.e. those assets which could be convertible into cash quickly, of the
company. On the basis of the quick level of the business, it has been found that the quick assets of
the companies are just 0.27 times of current liabilities of the business. It explains that the company is

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not able to pay the current debt of the company at an instance. It leads to the conclusion that it is
crucial for the Wesfarmers limited to improve the level of the quick assets in order to improve the
performance of the business (Brigham and Ehrhardt, 2013).
Liquidity Ratios 2018
Acid test ratio
Current Assets -
Inventory / 2,695,000
Current Liabilities 10,025,000
Answer: 0.27
(Morningstar, 2018)
Further, the working capital ratio of the business has been evaluated in order to measure the
amount which is kept by the company to run the business of the company. On the basis of the below
given table, it has been found that the working capital of the business is $ -13,91,000,000. The
company’s working capital level is negative which denotes that company has not sufficient funds to
run the daily activities and operations of the business.
Working capital
Current Assets - 8,706,000
Current liabilities 10,025,000
Answer: -1319000
(Morningstar,
2018)
Recommendation to improve the working capital and liquidity:
On the basis of the above analysis, it has been measured that the level of current liquidity
ratio, quick liquidity ratio and the working capital of the business is quite lower than an ideal position. It
evaluates that the company has not sufficient funds to manage the daily operations and the activities
of the business as well as the business is not able to pay the short term debt of the business. The
company would follow the below suggestion in order to strengthening and managing their working
capital and liquidity position of the business:
1. Incentivize receivables so that the debtors pay the amount on early basis
2. Meet the debt obligation of the business on tome and avoid the delay payment
3. Choose the suppliers who offers better discount (Higgins, 2012)
4. Analyze all the fixed and variable cost of the business to measure and reduce the level of
expenses of the business
5. Manage the inventory
6. Examine the interest payment
7. Automate the accounting receivable and monitoring the payment system of the business
8. Resolve the disputes with the suppliers and the customers of the business (Kaplan and
Atkinson, 2015)
9. Issue the common shares, improve the profitability position etc are few ways through which
the liquidity level and working capital level of the business could be managed.