Vic Rogers is a sole trader running a vehicle parts business for the motor trade. All his sales are on credit terms. During 2011, he reduced his selling prices in order to increase the volume of sales. His objective was to make his business bigger, stronger and more profitable. To facilitate this expansion, he had to build an extra storeroom and purchase more storage bins. However, during 2011, he was surprised that he had to ask his bank for an overdraft. He was originally granted £5,000 but had to apply for a further £5,000 a few months later. The bank reluctantly agreed to his request but made it clear that it would not consider any further increase until 2013. It also insisted that the whole £10,000 overdraft be secured against his private residence. But even with this facility, some of his suppliers are very unhappy with the length of time Vic is taking to pay them. At the moment, he is relying heavily on their goodwill for continued supplies of stock items.

Tasks:1 Calculate the following ratios for both years:

?   Percentage mark-up on cost of sales

?   Gross profit margin

?   Return on capital employed

?   Debtor collection period

?   Stock turnover days

?   Creditors payment period (stock at 1 January 2010 = £5,000)

?   Current ratio

?   Liquid ratio.2 Discuss how the profitability and liquidity have been affected by the increase in sales and advise Vic on the running of his business in 2012.