Analyse the financial statements that have been prepared by Eco-well Ltd. In particular, comment on the following aspects of the company:

areas of concern in financial performance, focussing mainly on information from the income statement areas of concern in financial health, focussing mainly on ratios dependent on the income statement and the balance sheet.

areas of concern in cash flow management, focussing mainly on information available from the cash flow statement

Claudia has been an environmental enthusiast since a very young age. In 2013, at the young age of 18, she set up a start-up business that specialised in turning old, unwanted items into new products. These items were then sold online, initially locally and then internationally via platforms such as eBay and Amazon. Her most successful line of product was turning leather sofas and car seats into jackets. She later expanded to create handbags, gloves, belts and other different kinds of holders, such as passport holders and laptop cases etc.

As the business started to grow, Claudia, founder and director of the business, felt she needed a trusted partner who was as enthusiastic about the environment as her and who could also bring in capital investment to help grow the business.

In 2016, Teri, a close friend of Claudia, became a partner of Eco-well Ltd and Claudia and Teri owned 70% of the shares between them. The rest of the shares were owned by Mr Baker, who invested in the business at the early stages. Mr Baker also recently took the role of Eco-wells financial adviser, given the lack of experience of Claudia and Teri in managing finances. Claudia and Teri have never had formal training in running a business. In the past, they mainly relied on profits to reinvest in the business to help it grow.

Eco-well Ltd was working on a consistent scale up until 2020 when Claudia and Teri decided to share their enthusiasm of the environment and their innovative recycled and repurposed products on Instagram. The duo created a business Instagram account and started sharing images of its innovative recycled products. As a result, within a year they had already outgrown their original premises and were in need of new, much bigger, premises and needed to hire new staff. In order to do so, Eco-well required additional finance. Both Claudia and Teri agreed on this and, given historically low rates of interest, they took out a loan of 800,000 from the bank at an interest rate of 6% in 2022. They further suggested that they will be looking to invest more in the company to continue to make it grow for the next 3 to 5 years.

Eco-well Ltd has been profitable for most of its existence. Over the past few years, with the exception of the current year, revenues have increased on average by 4% per annum. In the year ending 31 December 2021 the company achieved a return on equity of 66%. The companys financial performance has significantly benefited from the Instagram account that the company owners created.

Mr Baker, however, has concerns that the business was outpacing the capacity of owners to watch its finances and may run into liquidity problems. An excerpt from Mr Bakers letter of concern to Claudia and Teri is as follows:

When the business was smaller, with my help, we had a pretty good command of our numbers. We were able to watch your cash, debtors, liabilities and know quickly how expenses were stacking up to sales. But once you get to a certain sales range, which we are now reaching, its very hard to keep track of our finances unless we have professional help. I struggled to keep track of the cashflow this year and we almost ran out of cash I see this as a big issue going into next year.

Mr Baker wishes to understand more about the latest financial statements, any trends indicated by an analysis of the financial statements and the implications of the recent growth in revenue.

Eco-well Ltd income statements for the years ended 31 December 2022 and 31 December 2021

	Year to 31 Dec 2022		Year to 31 Dec 2021
	k	k	k	k
Sales revenue		61,980		54,250
Less cost of goods sold:
Opening inventory	18,200		16,550
Purchases	Total29,250		Total22,680
	47,450		39,230
Less closing inventory	Total22,200		Total18,200
Cost of goods sold		Total25,250		Total21,030
Gross profit		36,730		33,220
Less expenses:
Salaries	8,100		7,100
Rent and insurance	880		1,010
Delivery costs	3,020		1,654
Marketing and advertising expenses	1,310		790
Energy and other utilities	880		690
Depreciation	620		440
Accountants fees	90		80
Total Expenses		Total14,900		Total11,764
Operating Profit		21,830		21,456
Less Interest cost		Total72		Total24
Profit before taxation		21,758		21,432
Less Corporation tax		Total4,352		Total4,286
Profit after taxation		17,406		17,146

Eco-well Ltd balance sheets at 31 December 2022 and 31 December 2021

	At 31 December 2022					At 31 December 2021
	k				k	k	k
Non-current assets
Property and equipment					33,658		28,850
Vehicles					Total1,900		Total926
Total non-current assets					35,558		29,776
Current assets
Inventory	22,200					18,200
Receivables	18,800					14,400
Cash at bank			Total70			Total280
Total current assets			41,070			32,880
Current liabilities
Payables	10,500					14,800
Corporation tax	Total4,352					Total4,286
Total current liabilities	14,852					19,086
Net current assets/working capital					Total26,218		Total13,794
Total assets less current liabilities					Total61,776		Total43,570
Long-term liabilities
Bank loan					Total1,200		Total400
Net Assets					Total60,576		Total43,170
Equity
Share capital					25,000		25,000
Reserve: retained earnings					Total35,576		Total18,170
Total Equity					Total60,576		Total43,170

Eco-well Ltd cash flow statement for the years ended 31 December 2022 and 31 December 2021

	Year to 31 Dec 2022	Year to 31 Dec 2021
	k	k
Operating activity:
Operating profit	21,830	21,456
Corporation tax paid	(4,286)	(4,189)
Non-cash expenses:
Depreciation	620	440
Changes in cash invested in working capital:
(Increase)/Decrease in inventory	(4,000)	(1,650)
(Increase)/Decrease in receivables	(4,400)	(4,920)
Increase/(Decrease) in payables	Total(4,300)	Total(3,998)
Net cash inflow from operating activities	Total5,464	Total7,139
Investing activity:
Purchase of non-current assets	Total(6,402)	Total(5,989)
Net cash outflow from investing activities	Total(6,402)	Total(5,989)
Financing activity
Bank loan	800	-
Interest paid on bank loan	Total(72)	Total(24)
Net cash outflow generated by financing activities	Total728	Total(24)
Change in cash balances	(210)	1,126
Opening cash balance at 1st January	Total280	Total(846)
Closing cash balance at 31st December	70	280