The firm needs to reduce the collection period to be less than 30 days and increase the stock turnover to avoid holding excess inventory that might not fetch the desired profit. The firm should reduce borrowing from the bank since interests are increasing the expense. The firm needs to increase efficiency by ensuring timely collection of debts. The firm operates at the loss when production is lower. As the production and sales increases, the profit increases until it can cover the total cost fully (Baker & Powell, 2005). A meeting point between profit and total cost, the firm can break-even and manage the cost by ensuring that any increase in variable cost such as increased in labor cost, is within the desired range such that profitability is not affected. Although it is difficult to manage the fixed cost such as legal reserve, the firm needs to ensure availability of free cash flow by reducing debts and account receivables. The firm will have to grapple with lower profits as it increases costs because the marginal benefit keeps reducing with increased interests’ expenses and stock holding cost. Due to lack of efficient operations in handling the receivable, the firm will have wait for long to receive the money from debtors, thereby hurting profitability. Role Of Financial Resources.
Ehrhardt, M., & Brigham, E. 2013. Corporate finance: A focused approach. Mason, O: South-Western Cengage Learning
Pike, R., & Neale, B. 2006. Corporate finance and investment: decisions & strategies. Harlow: Financial Times Prentice Hall.
Baker, H. K., & Powell, G. E. 2005. Understanding financial management a practical guide. Malden, MA: Blackwell Pub.
Hirschey, M. 2009. Managerial economics. Mason, O: South-Western Cengage Learning.
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