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BFD Co has occurrence rapid growth in turnover since its formation three years ago but it has been unable to maintain net profit margin which has fallen from 19% in 2002 to 12% in 2004. On an optimistic note our net profit margin is higher than the sector average but this may as well indicate that a further decrease may arise.
Our growth in turnover hasn't been matched by growth in long-term finance. Separately from the original equity investment made by the founder directors growth in long term finance has been through retained earnings alone. Our company has more and more relied on short-term finance and over the three-year period the overdraft has grown from $50000 to $1167000. From a monetary risk point of view gearing has increased from 4% to 54% and interest cover has declined from 165 times to nine times. Both ratios are at present worse than the comparable sector average. An average period of time in which we settle with trade payables has grown from 69 days to 90 days compared to a sector average of 70 days.
The average sum of credit extended by the sector is 75 days but our receivables' ratio has grown from 56 days to 98 days. This has raised the amount of working capital finance we need as has the growth in inventory days from 104 days to 116 days compared to a sector average of 85 days. Finances which are tied up in inventory and receivables decrease profitability.
There is additional bad news in the area of working capital management since both our current ratio and quick ratio are less than the current sector average having declined in each of the past two years.
Dangers of over-reliance on trade credit In effect for the reason that trade credit represents temporary borrowing from suppliers until invoices are paid it becomes an importan
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