Analyse the financial statements that have been prepared by Eco-well Ltd. In particular, comment on the following aspect
Posted: Wed May 04, 2022 4:31 pm
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-well’s 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 company’s 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 Baker’s 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, it’s 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.
At 31 December 2022
At 31 December 2021
Non-current assets
Property and equipment
Vehicles
Total non-current assets
Current assets
Inventory
Receivables
Cash at bank
Total current assets
Current liabilities
Payables
Corporation tax
Total current liabilities
Net current assets/working capital
Total assets less current
liabilities
Long-term liabilities
Bank loan
Net Assets
Equity
Share capital
Reserve: retained earnings
Total Equity
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-well’s 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 company’s 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 Baker’s 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, it’s 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.
At 31 December 2022
At 31 December 2021
Non-current assets
Property and equipment
Vehicles
Total non-current assets
Current assets
Inventory
Receivables
Cash at bank
Total current assets
Current liabilities
Payables
Corporation tax
Total current liabilities
Net current assets/working capital
Total assets less current
liabilities
Long-term liabilities
Bank loan
Net Assets
Equity
Share capital
Reserve: retained earnings
Total Equity