An Analysis and Evaluation of Financial Performance

TASK

1. Identify and Evaluate the Impact the Economy has on Debenhams Business Organisations:

Overview of company: Debenhams is public limited company and mainly associated with activity of selling a range of clothings for men, women and kids, furniture items and household items. It has approx 240 stores and providing unique range, exclusive mix and differentiated own brands and accessories across 22 countries (Brigham and Houston, 2012).

Identification and evaluation of impact of economical environment on Debenhams: Being an UK based company company has great impact of economical environment of UK. In recent time UK as well as other countries has been highly affected by recession. In recession period retail sector majorly influenced by credit crisis, low purchasing power of customers, scarcity of funds and investor risk aversion. First adverse impact of recession on Debenhams was decrease in investor's confidence due to increase in large debt to obtain fund however company is trying to pay out debts through regular instalments. This can be seen as major impact of economy on company. Due to credit crunch in UK purchasing power of individuals has decreased. Now people prefers to spend money in low cost products and avoiding purchase of luxurious products therefore Debenhams is trying to switch existing pricing structure to retain customers. In coming years Economy is estimated to grow out of this problem but in order to maintain growth, Debenhams is required to evaluate strategies and modify their existing structure of business. In order to recover from current economic crisis Debenhams is trying to expand business into the international market, developing a new customers group by introducing new brands with new attractive prices (Brooks and Mukherjee, 2013).

In UK's economy interference of online retail market is significant issue for company. Now customers wants to buy product using new technologies and advertising strategy is also changed due to this. Debenhams is also providing services through online platforms but this also affects their selling structure and refund polices. By use of latest technologies now company is under pressure to convert their exiting business format into online retailing business format. Company is continuously enhancing quality of contents on web site by adding features like social networking competence, videos and catwalk or outfit projection, an online platform that spreads current offers and promotions, feature that enables customers to by product by size, product reviews and feedbacks (Burtonshaw, 2017). Due to Inflation in economy Debenhams is facing problems such as increase in opportunity cost, decreasing purchase power of customers, discourage investment by investors. Due to inflation confidence of investors has decreased which results in withdrawal of support by key investors and may lead to unfavourable debt equity ratio.

2. Evaluate Financial Information in a Range of Organisational Contexts of Debenhams:

The best to to evaluate financial information of an business organisation is ratio analysis. Through ratio analysis a complete comparative performance of business organisation can be obtained to track a performance during one or more period (Dudin, 2014). Following are the major financial ratios of Debenhams, as follows:

3. Interpretation of Key Financial Information for Decision Making and Performance Monitoring of Debenhams:

Interpretation of financial ratio assists management to take vital decision and for tracking performance of organisation while covering different financial aspects. A brief interpretation of different key financial ratios are discussed below:

1. Gross Profit Ratio: Due to decrease in revenues and gross profit during the years 2016, 2017 and 2018 gross profit ratio is decreased, which shows that company's efficiency to generate profit after cost of goods sold is dropped. There is decreasing trend in gross profit ratio (Hastings, Madrian and Skimmyhorn, 2013).
2. Net Profit Ratio: In 2018 there is net loss due to which net profit ratio showing negative percentage where as in 2017 and 2016 there is profit, but there is overall decrease in net profit ratio during the three years. Decrease trend in net profit ratio shows that organisation's overall efficiency to generate net income has decreased and there is improvement in ratio is required in year 2018.
3. Asset Turnover Ratio: Asset turnover ratio has been improved in year 2018 but there is slight decrease in 2017, which exhibits that company's ability to generate revenue from its assets has been enhanced. However there is overall increasing trend in asset turnover ratio.
4. Return on capital employed: ROCE in three years has decreased and negative in 2018 which shows that ability of company to provide profit on capital invested is decreased and in 2018 negative ROCE points out that company is unable to generate profit on capital invested in company. There is overall decreasing trned in return on capital employed (Lee and Saen, 2012).
5. Current Ratio: Ideal current ratio is 2:1, Debenhams has decrease in current ratio during three year which indicates bad or unfavourable financial soundness. During all the three years current ratio is below the ideal current ratio that points out that ability of company to pay its current obligation has been decreased. There is overall decreasing trend in liquidity position of company.
6. Quick Ratio: There is decreasing trend in Quick ratio. Ideal quick ratio is 1:1, but company has quick ratio below the ideal ratio which indicates that company too much depends upon inventory or other assets to pay its short-term liabilities. Quick ratio during the three year has been decreased.

Strategic decisions organisation should take from analysis:

• In Debenhams revenues from UK and international markets has been decreased in recent years, and net profit and gross profit ratios showing decrease trends due to recession effects and its turnaround strategy so company should change their business structure and strategies already implemented (Lusardi and Mitchell, 2014). As a strategy cost cutting strategy is most helpful in this situation to reduce net loss but in long term company should take some major decision like modification in high cost producing process, out sourcing of any costly business function.
• Current ratio below the standard is red alert for Debenhams because it points pout towards need of improvement in liquidity situation of company. In order to improve liquidity ratio company should use sweep accounts by allocating and retain funds into higher interest rate accounts till the period these funds are not needed and transfer back to suitable accounts as the case may be.
• In order to enhance profit Debenhams should conduct analysis like SWOT analysis, Porters five model, cost volume analysis to identify main reason for decreasing sale and increasing expenditures. After identification of main reason, company should create internal policies and guidelines to short out current problem and to avoid any same issue in future.
• To increase their sales Debenhams should choose expansion strategy to expand its business in potential markets and also unproductive or loss making units of company should be disposed to generate and improve cash flow. Improvement in cash flow is necessary to recover existing losses and to maintain profits because in net loss situation organisation would not be able to met requirement of working capital so cash flow can used to fulfil working capital requirement (Mills and Broughton, 2016).

4. Appraise and Propose Courses of Action Informed by Accounting Tools and Concepts:

Accounting tools and concepts adopted by Debenhams helps their management to provide framework for decision making. Such tools and concepts creates boundaries and sets limitations under which all decisions of company framed by management in order to avoid any misinterpretation and fraud. Following are the Appraise and propose courses of action informed by accounting tools and concepts in the context of Debenhams, as follows:

Economic Entity

Under this concept Debenhams and its owner are two separate legal entities. So it is the duty of company's accountant to separate the account of Debenhams from its owner. Like drawings are the liability of business owner. Moreover, they are considered as single entity only for legal purpose.

Monetary Measurement

In money measurement concept accountant of Debenhams will record only those transaction that can be expressed in term of money like purchase of machinery, sales of goods etc. There are non monetary transaction which are important for organisation like goodwill but it can't be recorded and become the part of financial transaction (Postmus, 2001).

Time Period Assumption

According to time period assumption all the financial statements (balance sheet, profit and loss) are prepared for a specific period of time. Hence, Debenhams prepare financial statement in order to discloses the position of the company for that specific duration.

Historical Cost Principle

This principle state that the value of assets keeps on changing with the change in time. Moreover, it is the duty of Debenhams accountant to update only that price on which the assets were taken or brought into the company. Company don't have to do anything with the current value of the asset. Their further valuation on asset takes place on the basis of historical prices.

Full Disclosure of Account

Full disclosure principle states that any relevant information for the stakeholder must be displayed in the books of account. Furthermore, Debenhams make sure any other side party or stakeholders don't get any manipulative or misleading data as well as it ensure company don't hide any relevant entry. In addition, it is the responsibility of Debenhams to disclose all anticipated loss.

Going Concern Principles

This principle assumes that the motive of Debenhams, is to operate with life long running prospective. Asset of Debenhams are valued on the basis of original cost not on market value and assume that it will be used for indefinite purpose. In case if the accountant of company comes to know that the company can't continue any more then this information must also be disclosed in financial statement.

Matching Concept

Under matching concept the expenditures of the Debenhams must match with the revenue of the company. All the expenses must be recorded on the day they were incurred like advertisement expense, sales expense, bonus expense etc.

Revenue Recognition Principles

Under revenue recognition all the income, revenue or profit of Debenhams must be recorded on the date they were received. Hence, once company receives receipt then only they will add that amount in their financial statement.

Materiality

Materiality principle means all the transaction of Debenhams should be recorded and disclose properly. This brings transparency and attract outside party. Suppose if the liability or expenses of company are more than asset or income it must be clearly stated in its final account. Hence, all the petty information should not be hide from the outside party (Raudla and Kattel, 2013).

Conservatism

Principle of conservatism state that the accountant of Debenhams must disclose all the potential or anticipated losses but should not disclose potential or anticipate gain. Disclosing anticipated losses makes easier for the outside party to make right choice.

Conclusion

From above report it has been concluded that evaluation and monitoring of performance of business organisation plays a major role in decision making process. Ratio analysis is major tool to evaluate and analyse the performance and accordingly strategies are framed by management to improve performance of business organisation. Some economical issues also have direct or indirect impact on organisation's performance but analysis of these factor using some numerical data can avoid any financial disaster. Further more actions of management and business should be compatible with accounting tools and concepts.

References

Books and Journals

• Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank performance in the financial crisis. Journal of Banking & Finance. 36 (12). Pp.3213-3226.
• Brigham, E. F. and Houston, J. F., 2012. Fundamentals of financial management. Cengage Learning.
• Brooks, R. and Mukherjee, A. K., 2013. Financial management: core concepts. Pearson.
• Burtonshaw-Gunn, S. A., 2017. Risk and financial management in construction. Routledge.
• Dudin, M. and et. al., 2014. The organization approaches peculiarities of an industrial enterprises financial management.
• Hastings, J. S., Madrian, B. C. and Skimmyhorn, W. L., 2013. Financial literacy, financial education, and economic outcomes. Annu. Rev. Econ. 5(1). Pp.347-373.
• Lee, K. H. and Saen, R. F., 2012. Measuring corporate sustainability management: A data envelopment analysis approach. International Journal of Production Economics. 140(1). pp.219-226.
• Lusardi, A. and Mitchell, O.S., 2014. The economic importance of financial literacy: Theory and evidence. Journal of economic literature. 52(1). Pp.5-44.
• Mills, J. and Broughton, V., 2016. Bliss Bibliographic Classification: Class T: Economics Management of Economic Enterprises. Elsevier.
• Postmus, J. L. and et. al., 2013. Financial literacy: Building economic empowerment with survivors of violence. Journal of Family and Economic Issues. 34(3). Pp.275-284.
• Raudla, R. and Kattel, R., 2013. Fiscal stress management during the financial and economic crisis: The case of the Baltic countries. International Journal of Public Administration. 36(10), pp.732-742.

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