Business Case Controls

Analyze financial ratios and comment on the possible reasons for the change to these ratios

GROSS MARGIN LAST YEAR: 55.56% CURRENT YEAR: 51.02%

1. Possible reasons for Maria and Amanda’s Business Gross Profit Margin to decrease from the previous year is as follows;

Discounting; because discounting could reduce gross profits which reduce gross profit margin
Shrinkage; because shrinkage will increase costs of goods sold reducing gross profit resulting in lower gross margin percentages. Note that the sales rep was caught given away free samples).
Higher costs of goods; because depreciation expenses are categorized below the gross profit line. “Sales and profits do not guarantee cash in the bank.”

2. If we continue discounting heavily, revenue will continue to decrease, thus gross profit will also. Shrinkage is a negative sign for any business and controls should be in place so this trend does not continue. If COGs does not decrease, we will need to increase prices for revenue and gross profit to fit accordingly.

OVERHEAD RATIO (OPERATING EXPENSES) LAST YEAR: 43.89% CURRENT YEAR: 51.94%

1. Possible reasons for Maria and Amanda’s Business Overhead ratio to increase from the previous year could be because the operating expenses to run their business has increased and an example of this would be Management Salaries increasing as well as Telephone expense ext.

2. We need to control expenses, as the way to increase profits is to either increase revenue or decrease expenses. Controlling these expenses in the future would be beneficial as it would increase profit numbers.

EBITDA : Earnings Before Interest, Tax, Depreciation, and Amortization. (OPERATING COSTS RELATIVE TO SALES).

EBITDA LAST YEAR: 12.92% CURRENT YEAR: 1.53%

1. The reason for EBITDA to decrease which in these two businesses owners case has been a