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Role Of Financial Resources Essay Example

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Role Of Financial Resources

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Role Of Financial Resources. Stock turnover for Al-Sham Engineering Company has improved over the years from 2 to 8 to 11 turns a year. A turnover of 11 is still low pointing that the firm is holding too much stock.Debtors’ collection keeps on rising at the firm from 47 to 225 to 216, which points that customers are facing serious financial problems. Increased collection period leads to difficulty in turning sales into profits. Assets turnover of 1 on average for the three years is a clear indication that the firm is performing very poor in terms of returns to investments. First, interest paid for loans causes the huge outflow of funds earned from the profit. Second, increased debts’ collection turnaround starves the firm off the funds required to meet short-term obligations hence resorting to borrowing.

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.

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