A forecast cash budget to show how suggestions made in question 6 above could improve cash flow over the next year in terms of an increase in cash from £ 1,000 in 2007 to £ 48,800 in 2008. As to how this would impact on the profit for the year and strengthen the balance sheet could be explained by the fact that cash follows would insure profitability (Meigs and Meigs, 1995) since filling the needs for cash when they are needed will cause the proper generation of revenues that would be enough to cover the necessary expenses needed to carry the business.
This could be proved by the fact the return on assets and net profit margin would improve. The first ratio resulted to increase from 1% in 2007 to 11%, while for the second ratio there was a marked increase from almost 0% to 3% in 2008. (See Appendix B. ) Better profitability will necessarily result in a better financial position since more profits will result in better liquidity and better financial leverage. Liquidity means the capacity of the business to meet its currently maturing obligations and therefore short term insolvency is prevented.
Better liquidity is reflected from the current ratio improving from 0.47 in 2007 to 1.26 in 2008 ( See Appendix B). Better financial leverage indicates making the company less risky to invest with since the debt to equity ratios will be improved as a result of better profitability. As the latter could happen is not difficult to understand since better earning would bring better stockholders equity which passes by increasing first the retained earnings account which is part of the stockholders' equity portion in the balance sheet.
Better financial leverage (Brigham and Houston, 2002) is clear from the expected improvement from 46.37 in 2007 to 7.34 in 2008. (See Appendix B) JML has a good reason to choose the option of increasing turnover over the options decreasing the fixed cost or the variable cost. The big portion of fixed cost is causing the company much headache that it is always best to keep operating to recover the same. But the company has also options for maximizing the use of fixed assets as they are not fully utilized.
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