A1a. Horizontal Analysis
Net sales are down 15% between years 7 and 8. In years 6 and 7 Net Sales had previously gone up 33%. A 15% drop in sales in one year is a weakness that management should be very concerned about. Based on the data provided, the drop is attributed to the declining economy and sales trends in the product mix. Based on the data provided, this trend is expected to continue for the next three years (TaskStream.com - Task 1 competition Bikes Inc. Storyline, 2015).
Gross Profits are another area where there is a weakness between years 7 and 8, which is considerable at 16.3%. In prior years, year 6 to year 7, Gross Profits was a strength for the company and had previously gone up 37.5% due to additional sale during this time period. When net sales decreases, Gross Profits will also decrease. Between years 7 and 8 the decrease in sales was offset by a 14.5% decrease in Cost Goods Sold (COGS), which helped offset the decrease in sales. Due to less volume sold, the unit price increased slightly, this should have been expected. Regarding cost containment, this can be viewed as a small strength.
Between year 7 and year 8 General and Administrative Expenses includes three areas of concern: Other General and Admin Expenses, Research and Development, and Utilities. Utilities between year 7 and year 8 increased by 11.1%, which is unexpected given the decrease in sales. We would anticipate seeing a decrease in production leading to a decrease in utilities. Between years 7 and 8 there was a 7.6% increase in Other General and Admin Expenses. At this same time sales decreased and did not support this additional overhead. There was a very small overall increase of 1.2% in General and Administrative Expenses, between years 7 and 8. This was ‘balanced' by a reduction of 16.3% in Research and Development between years 7 and 8. Cutting Research and Development funding may have been a strategy employed by management to decrease operating expenses and can be considered a current strength for Competition Bikes. Whether this is a good strategy, only time will tell.
Between years 7 and 8 Operating Income fell sharply due to the above referenced areas, while between year 6 to year 7 it had gone up 154.6% with a significant investment in Research and Development. The sharp drop in Operating Income, 69.1% between years 7 and 8, leads to a deterioration in the Earnings Before Income Taxes (EBIT) line. EBIT dropped to 81.6% between years 7 and 8, which is a significant decline when it had previously (year 6 to year 7) showed a whopping 313.4% increase, with a gain of $198,420 before income taxes. Another weakness is the decrease in EBIT, which occurred due to greater expenses and weaker sales between years 7 and 8.
At this juncture we are asking why sales have dropped. A couple of possibilities are present in the financial statements. Advertising dollars dropped by 16.3%, possibly as a measure to reduce operating expenses between years 7 and 8 and Net Sales were down 15% during the same period. In year 6 to year 7, Advertising dollars went up 37.5%, and Net Sales increased by 33.3% during the same period. Overall Selling Expenses dropped by 14.9% from year 7 to year 8. It is possible that in order to improve sales, the overall Selling Expenses will need to ramp up. In addition, Competition Bikes has stated that the current economic situation has impacted their orders. Better oversight of Other General and Admin Expenses is necessary in these tough economic times.
Between year 6 and year 7, we see a decline in Cash and Cash Equivalents, with a drop of $168,624, which is 64.6%. We see a dramatic increase between years 7 and 8 in Cash and Cash Equivalents of 348.2%, which is an increase of $321,661. Over the three years studied there was an increase in Accounts and Notes Payable. Between years 6 and 7 we see an increase from $67,080 to…