XYZ CLOTHING RETAILER
Introduction
Clothing retailing industry is an industry that sells clothing and accessories. Once the clothing has been designed and manufactured, they have to be sold out in the market. This is the starting point of retail whereby the clothes are transferred from the manufacturer’s premises to where the customers are. The function of retailers is to make initial purchases for resale. The clothes can be stored from three to around six months before can purchase them from the store. XYZ Company is a business for buying and selling as well as distributing and repairing baby products. The purpose of this report, therefore, is to analyze the financial performance factors, benchmarking factors as well as to provide a recommendation for XYZ Company.
Financial Performance Factors
Selected Items of the Financial Statements
| XYZ Company | 30th May 2020 | |
| $ | Per cent | |
| Income Statement | ||
| Revenue | 521,899 | 100.0% |
| Cost of Goods Sold | 352,560 | 67.6% |
| Interest Expense | 392 | 0.1% |
| Tax Expense | 0 | 0.0% |
| Income from Cont Operations | 54,636 | 10.5% |
| Net Income | 54,636 | 10.5% |
| Balance Sheet | ||
| Cash | 83,242 | 4.9% |
| Short Term Investments | 0 | 0.0% |
| Accounts Receivable | 574,089 | 33.6% |
| Inventory | 662,900 | 38.8% |
| Current Assets | 1,320,231 | 77.2% |
| Long Term Investments | 0 | 0.0% |
| Net Fixed Assets | 390,000 | 22.8% |
| Other Assets | 0 | 0.0% |
| Total Assets | 1,710,231 | 100.0% |
| Current Liabilities | 352,560 | 20.6% |
| Total Liabilities | 411,362 | 24.1% |
| Stockholders’ Equity | 748,520 | 43.8% |
Performance Benchmarks
The benchmark data shows business income to business expenses that were used to compare the performance of XYZ Company against competitors in the industry. The benchmark information is reported based on tax returns as well as activity statements for the financial year 2016-17. These benchmark data are updated every year. The key benchmark range for clothing retail industry is the cost of sales turnover, which is regarded as the most accurate when predicting the turnover of the business. The key benchmark range is as shown in the table below.
| Key Benchmark Range | Annual Turnover Range | ||
| $65,000 – $250,000 | $250,001 – $500,000 | More than $500,000 | |
| Cost of Sales/Turnover | 44% – 57% | 50% – 60% | 51% – 59% |
| Average Cost of Sales | 50% | 55% | 55% |
| Total Expenses/Turnover | 76% – 86% | 82% – 90% | 86% – 93% |
| Average total expenses | 81% | 86% | 89% |
Cost of Goods Sold/Turnover
Cost of goods sold: this category involve expenses that are directly attributed to the delivery of services such as material cost, labour cost and shipping cost. The reason for this type of cost is to measure all cost related to purchases of the goods. For the case of our company which is dealers are clothing these type of cost include;Cost of keeping the product running for customers. This cost is expected to increase due to expansion of customer base which demands more storage, cost of supporting customers on the use of the product for example depreciation of equipment and other costs that are incurred on the sale of the product such as licensing fees, and credit card fees. The cost of goods sold turnover was found to be $352,560. This, therefore, falls within the range of $250,001 – $500,000, which has the cost of sales turnover of 50% to 60%. However, the percentage of cost of goods sold to total sales in the common size statement is represented by 67.6 per cent, as shown in table 1.
Other Expenses
Other expenses being incurred include payroll; these are expenses due to the salaries of the employees mentioned in the personnel plan, marketing expenses; this cost includes all marketing expenses such as advertisement, depreciation; this is the cost due to the decrease in the value of computers and other furniture items within an office, cost of website closing; these include cost of upgrading our datacenter, insurance expense; in our case, this cost is included in the running activities of the company, utilities; these are also classified under the running cost of the main company and travelling expenses; these include all cost of transportation to company’s events.
Other Benchmarks
It is known that not all businesses cannot report all expenses. Therefore, the following information is available for the benchmark.
| Benchmark Range | Annual Turnover Range | ||
| $65,000 – $250,000 | $250,001 – $500,000 | More than $500,000 | |
| Rent/turnover | 12% – 20% | 9% – 15% | 7% – 13% |
| Motor vehicle expenses/turnover | 2% – 4% | 1% – 2% | 1% |
Financial Ratio Analysis
| Activity Ratios | |
| Receivable Turnover | 0.9 |
| Inventory Turnover | 0.5 |
| Fixed Asset Turnover | 1.3 |
| Profit Ratios | |
| Profit Margin | 10.5% |
| Return on Assets | 3.2% |
| Return on Equity | 7.3% |
| Liquidity Ratios | |
| Current Ratio | 3.74 |
| Quick Ratio | 1.86 |
| Solvency Ratios | |
| Debt to Total Assets | 0.24 |
Liquidity Ratios
These ratios measure the company’s ability in meeting its short-term obligation. Liquidity ratios are obtained by dividing cash and other liquid assets by current liabilities and other short term borrowings. In our case, we have identified two liquidity ratios to measure liquidity situations at XYZ Company. They include Current ratio and Quick ratio.
Current Ratio
This ratio measures the ability of a company to meet its short-term obligation when they fall due. It is calculated by comparing the total current assets with total current liabilities of the company. The current ratio was found to be 3.74, indicating that the company is financially strong in terms of its ability to pay debts.
Quickie Ratio
This ratio indicates the ability of XYZ to meet its short-term obligations by using its most liquid assets. It is also called the acid-test ratio because it uses the company’s near cash in paying down the current liabilities. This ratio was found to be 1.86. For the month of May, this ratio is morethan one and indicates that XYZ Company has no difficulties in settling the current liabilities using its near cash assets.
Recommendation
The retail industry has been adversely affected by the Coronavirus pandemic that outbroke in March 2020. Most governments have implemented quarantine policies, which has kept people in their houses in order to control the spread of the disease. I could recommend, therefore, that XYZ Company should utilize selling their products through online platforms. Secondly, the company should retail clothes that adapt to changing weather conditions.