Question 2

Using trend analysis and appropriate ratios, analyze the financial statements that have been prepared by the business in the case study. In particular, comment on the following aspects of the company:

• areas of concern in financial performance, focusing mainly on the performance statement
• areas of concern in financial health, focusing mainly on both the performance and position statements

Question 3

Using the analysis in your answer to Question 2, comment on the validity of the concerns expressed about the business by Tech Telecom's finance director. What practical steps should now be undertaken to improve the financial performance and financial health of the business?

David was a qualified software engineer and a senior consultant of IT, who retired in 2007 from a well-reputed software house in the south of England, UK. After retirement he decided to trade in computing equipment including buying and selling laptops of various brands. For this, he met with various domestic suppliers in the IT field. He also started to travel to IT fairs and auctions across Europe to buy computing equipment which might be sold for a profit. He incorporated his business as 'The Techno House Ltd' in 2010 of which he was the sole owner and director. His activity in the trade (and his reputation as a discerning buyer and seller of high-quality user-friendly laptops) increased steadily over the next 15 years, and by 2024 he had built a very successful business with an inventory of many thousands of laptops, some held at his home but many in the secure storerooms of several other IT sellers across Europe.

David continued to run his business alone, advertising his laptops through a website and by email to customers. With the aid of a bank overdraft, the company was able to invest in a wide variety of laptops. Particularly expensive items were bought with the aid of a bank loan of 100,000 (bearing interest at 10% p.a.) taken out on 1 January 2020 and repayable in 10 instalments of 10,000 each at the end of 2020 and every financial year for the following nine years. Laptops sold were invoiced directly to customers, with payment expected within 30 days. The independent IT seller outlets operated on his instructions to pack and send laptops to customers. For this service they received a commission of 10% of the sales value of each laptop, plus the cost of any associated postage and taxes.

By 2023 David's health was starting to fail and he decided that he could no longer continue to devote himself full-time to this business. In particular, he could no longer spend the time and energy travelling around Europe to buy laptops. He understood that the business had a reputation that was valuable - many of his customers had been with him for some years, and they could be relied upon to provide a significant proportion of his annual sales for several years to come - and up to 2022 it had always been profitable. One of his European IT seller partners (Tech Telecom) had indicated that they would be willing to buy the company and all of its inventory and remaining business assets and liabilities with effect from 1 January 2024, provided they could continue to use his name and employ him as a consultant to stay in touch with his major customers and IT seller partners for the next three years. Apart from these obligations, David would resign as the sole director and have no further responsibility for the running of the company, which would henceforth be managed by an employee of Tech Telecom. David was asked to organize the transfer of all inventory to Tech Telecom storerooms before 1 January 2024 and to agree to pay all associated costs incurred by the partner IT sellers. From that date, all commission and associated arrangements came to an end. David found all of this acceptable and a contract was signed accordingly.

It is now early 2025 and you are the manager of The Techno House Ltd. Your line manager (Tech Telecom's Finance Director) has indicated that she is concerned about the business's performance (profitability) and financial health (working capital and cash management) and has asked you to review the financial statements of the company for 2024 and 2023 and:

1. identify the particular elements of performance (profitability) and financial health (working capital and cash management) that might be regarded as problematic
2. make recommendations to improve the business's future performance and financial health.

You have been presented with the following financial statements:

	Year to 31 Dec 2024	Year to 31 Dec 2023
	k	k	k	k
Sales revenue		140.1		124.1
Less: cost of goods sold:
Opening inventory of laptops	135.9		125.5
Purchases from IT fairs and auction sites	82.4		50.2
	218.3		175.7
Less closing inventory of laptops	165.6		135.9
Cost of books sold		52.7		39.8
Gross profit		87.4		84.3
Minus operating expenses:
Salaries and other costs (management and office staff)	40.0		0.0
IT seller commission, postage and duty	0.0		12.4
IT seller costs on transfer of inventory	0.0		5.5
Insurance	6.6		5.2
Other postage costs	10.6		2.6
Website and email advertising expenses	20.4		15.1
Depreciation	42.2		28.9
Accounting and legal costs	15.0		5.0
Total operating expenses		134.8		74.7
Operating profit / (loss)		(47.4)		9.6
Minus interest costs:
Interest on bank loan	6.0		7.0
Interest on bank overdraft	10.0		2.1
Total interest costs		16.0		9.1
Profit / (loss) before taxation		(63.4)		0.5
Corporation tax		0.0		0.0
Profit / (loss) after taxation		(63.4)		0.5

	31 December 2024	31 December 2023
	k	k	k	k
Non-current assets
Computers and office equipment		38.1		21.4
Current assets
Inventory	165.6		135.9
Receivables	25.6		15.6
Other current assets	2.0		2.0
Total current assets	193.2		153.5
Current liabilities
Payables	25.6		6.0
Corporation tax	0.0		0.0
Other tax liabilities	7.8		7.4
Bank overdraft	143.9		34.1
Total current liabilities	177.3		47.5
Net current assets/working capital		15.9		106.0
Total assetslesscurrent liabilities		54.0		127.4
Long-term liabilities
Bank loan		50.0		60.0
Net Assets		4.0		67.4
Equity
Share capital		20.0		20.0
Reserve: retained earnings		(16.0)		47.4
Total Equity		4.0		67.4