Earth’s General Store Financial Analysis

Financial Analysis

Profitability ratios

20152014Change 
Gross Margin
Gross Profit$  1,108,735.00 0.306264600.250.05
Sales$  3,748,805.00 2505948
Net Margin
Net Profit Before Tax$   (187,296.00)-0.05-36590-0.01
Sales$  3,748,805.00 2505948
operating margin
Operating income-215648-0.06-41949-0.02-0.04
net sales37488052505948
Interest coverage ratio
EBIT-187296-16.06-36590#DIV/0!#DIV/0!
interest expense11664

Gross Margin 

This margin shows the percentage of sales revenue that is available for reinvestment after the cost of goods have been deducted. The gross margin for the company improved from 5% in 2014 to 30% in 2015. The ratio looks into how well a company controls the cost of its inventory and manufacturing of products. The costs are then passed to its customers. The larger the gross profit margin, the better for the company. 

Operating Profit Margin

The operating profit margin considers the earnings before interest and taxes and compares this to the sales. This margin measures the overall operating efficiency, which includes all the expenses incurred in the daily business activity. Earth’s Green Store had deteriorating operating margin as it moved from -4% in 2014 to -6% in 2015. This implied that the company was losing it efficiency. The company therefore needs to be innovative for it to survive.  

Interest Coverage Ratio

This ratio is a measure of a company’s potential in honoring its debts obligations when they fall due. Earth’s General store had a negative ratio with -16.06 in 2015. Such a ratio implies that the company is not generating enough cash to meet its obligations. This affects the sustainability of the company as it would be forced to increase its debts.

Net Profit Margin

This seeks to determine the amount of sales that end up as net income after accounting for all the expenses. In 2014 the company had a net profit margin of 1% and 5% in 2015. This was slight improvement. The 5% margin indicates that for every 100 dollar sale only 5 dollars are profit. 

Recommendation

The company needs to work on innovative means of improving their sales. This may be through increasing the types of food served on the menu. They should run various marketing campaigns with the intention of boosting the amount of sales for the company. They should give offers and discounts on certain days and for certain dishes as a means of encouraging sales. 

The operating profits should also be minimized. The management should consider innovative and efficient ways of producing. This will help in improving the profitability of the business’s operations. The non-essential costs should be cut.

Balanced Score Card

The management at Earth’s Green store can use a balanced score card as its main strategic planning and management for communicating the aims and goals of the business, aligning the daily operations with the strategy, prioritizing projects, and goods and services offered, as well as providing measures for checking the progress towards attainment of the strategic objectives (Zizlasvsky, 2014). 

MissionOffer people information and products that would help in reducing the impacts to the ecosystem , the planet, and the inhabitants 
Strategy Map/ ObjectivesMeasuresTargetsInitiatives
Financial PerspectiveOffers organic groceries and fair-trade good in EdmontonEnsure financial sustainability of the storesEnsure that all stores remained open and fully operationalIncreases sales levelsHigher profit marginReduced operating expenses.  A net profit margin of 40%An interest coverage ratio greater than 3. Continuous operations in the two storesExtend 2 days of offer on the pricesIncreased recycling  initiativesRunning market campaigns
Customer PerspectiveOffer environmental-friendly consumer products.Ensure genuine conversations with the customersProviding information to customers on eco-friendly product optionsCustomers loyaltyIncreased customer satisfaction Good customer ratings (4/5).60% customers loyalty Teaching staff of good customer service practicesOffering discounts and offersCustomer loyalty reward scheme
ProcessesFocus on quality and origin of products rather than priceContinuous market surveyOffering delivery optionTrustworthy sourcing of the suppliesDietary information offeredOperational delivery serviceCertified organic supplies onlyPublishing and displaying information on organic products100 deliveries per dayCollaborate with the certification bodies to identify the certified suppliesMaintain an information cornerDiscounts and gifts on deliveries
Learning growth Research and development Introduction of new productsMarket research Research and development on new organic dishesQuarterly market surveysCustomer review2 new dishes every monthEngage in market research programsMotivation of chefs and the staff to be innovative

Management Accounting Tools for Value Addition and Enhanced Decision Making

Measuring/managing customer relationships and profitability

Customer satisfaction is one of the intangible assets that creates a hard time for businesses to measure. Earth’s Green Store understands its value as their participation in funding the initial phases of the business proved to be effective. Customers are important intangible assets and it is, thus, important to have a deeper understanding of them. Understanding the role of customer value may include Customer Equity, Life Time Value (LTV) and Customer relationship. LTV offers the best financial outcome to measure customer value. The financial dimension gives an economic value of the profitability of marketing and commercial policy (Bermejo & Monroy, 2010). 

Quality management

Quality management system is a formalized system through which processes, procedures, and responsibilities are documented with an aim of achieving quality policies and objectives. The presence of this system in an organization helps it coordinate and direct its activities. The objective of this is to facilitate meeting the customers and regulatory requirements. It also helps to improve effectiveness on a continuous basis. Earth’s Green Store may get value from this tool by identifying the aspects leading to wastages and improving on the internal processes. Operating an organic based system such as the one maintained by Earth’s Green Store would help the business maintain quality of its organic product and ensure compliance with the set standards (American Society of Quality, 2018).

Theory of constraints

This is a methodological tool used for identifying the limiting factor that may hinder the attainment of the organization goals. It also helps identifying ways of improving the constraint until it is no longer a constraint. The tool follows a scientific approach to improvement. Earth’s Green Store is currently facing financial constraints which are threatening its sustainability. The management can use the Theory of Constraints to focus its attention on the means of improving its financial position in a way that would assure it of its continued existence (Simsit, Gunay, & Vayvay, 2014).

References

American Society of Quality. (2018). Quality Management System- ISO 9001. Retrieved from http://asq.org/learn-about-quality/quality-management-system/

Bermejo, G., & Monroy, C. (2010). How to Measure Customer Value and its Relationship with Shareholder Value in a Business-to-Business Market. Intangible Capital.

Simsit, Z., Gunay, N., & Vayvay, O. (2014). Theory of Constraint: A Literature Review. Social and Behavioral Sciences, 930-936.

Zizlasvsky, O. (2014). The Balanced Scorecard: Innovative Performance Measurement and Management Control System. Journal of Technology Management & Innovation.

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