P2: Carry Out Analysis of the Business Using Comparative Measures of Performance

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P2: Carry out an analysis of the business using comparative measures of performance.

One of the keys to success of the World Beat Fitness Center is the ability to offer reasonably priced programs. The club has increased the size of its fitness center and added more equipment that gives full satisfaction to all members. They are exposing everyone to the variety of activities and services the club offers.

Analysis of the business financial statement particularly the assets and liabilities are computed below:

GROSS AND NET PROFIT MARGIN ANALYSIS

Net profit margin is one of the profitability ratios and an important tool for financial analysis. It is the final output any business is looking out for. Net profit ratio is a ratio of net profits after taxes to the net sales of a firm. All the efforts and decision making in the business is to achieve a higher net profit margin with increase in net profits.

Net profit margin shows the margin left for the equity and preference shareholders i.e. the owners. Unlike the gross profit which measures the operating efficiency of the business, net profit margin measures the overall efficiency of the business. An adequate margin of net profits will be generated only when most of all the activities are being done efficiently. The activities may be production, administration, selling, financing, pricing, tax management or inventory management. Even if any of these perform badly, the effect on net profits and their margins can be seen.

Below is the graph that shows the center performance for three years. For the sake of confidentiality, amounts were deleted as shown:

The graph shows an annual increase of World Beat Fitness Center sales, gross margin and net profit from 2009 to 2011. It has a stable increase of approximately 15% every year in sales but 14.29%, 15.53% and 17.55% for year 2009, 2010 and 2011, respectively in gross margin that gives an increasing net profit that ranges from 4% every year.

Such performance maintains its good status in the competition and in the business with their targeted increase of just 4% every year. People are hard to maintain and spend much to fitness and health unless they feel something is wrong with their health. Thus, the increasing income even though very little is a good evidence of the effectiveness of the center’ fitness and health promotional campaign.

ACCOUNTS RECEIVABLE TURNOVER ANALYSIS

Receivables / Debtors turnover ratio is one of the key turnover ratios used to analyze the performance of a business. This ratio throws light on effectiveness of the business in utilizing its working capital blocked in debtors. It also indicates the frequency of conversion of receivables into cash in a given financial year. So, fundamentally, it comments on the liquidity of the receivables of the business.

Receivables turnover ratio has another variant i.e. Average Collection Period which gives a time period in which debtors are converted into cash. Both the ratios indicate same thing but in different terms. The former is expresses no. of times debtors are converted into cash in a financial year whereas the latter gives no. of days or months in which the debtors are converted into cash.

According to the World Beat Fitness Center, it has no bad debts and the collection period of the account receivable is zero (0). It means that all means are paying their membership on time but it is important to note that people come and go to the center which reflects a very high members’ turnover. Only 40% of the total members at present are retained or have been staying in the center for 2 or more years. The remaining 60% have been in the center for only weeks or months not to exceed two years. The business has also zero accounts receivable turnover.

Receivables turnover ratio is an absolute figure normally between 2 to 6. A receivable turnover ratio of 2 would give an average collection period of 6 Months (12 Months / 2)...
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