This document analyzes the business failure of ABC PLC established in 2005 as a sole proprietorship. Key factors that led to its collapse include declining sales and profits over time due to increased market competition. Ratio analysis showed profitability, liquidity, and efficiency ratios deteriorating between 2011 and 2010. The business experienced a low inventory turnover rate, difficulties meeting short-term financial obligations on time, and inefficient debt management. Lessons learned are the need to avoid aggressive debt financing, improve inventory management to reduce holding costs, strengthen credit policies to ensure faster debt collection, and optimize costs through better supply chain management and overhead control.

1. Analysis of Business Failure Occurred to
“ABC PLC-”
N.Mohamed Nidhal
HS/DIP/2012/2013/136
PGD in Acc.& Fin 2012/2013
University of Peradeniya

3. What is Business Failure ?
Business failure refers to a company ceasing
operation following its inability to make a
profit or bring out enough revenue to cover
its expenditures. Profitable business can fail if
it does not generate adequate cash flow to
meet expenses

4. Topics to be discussed…..
1. Description of the background to
the business
2. Discussion of accounting/business
issues lead to collapse
3. Discussion of any lessons learned
or issues/ practices to be avoided

5. 1.Description of the background to
the business
Established in 2005 as a Sol proprietorship, with Rs.12 Mn which includes a Term Loan
of Rs. 7 Mn from XYZ Bank.
Industry Analysis
By observation, only few Standardized Multi Shop available in our area
Diversified Consumer Products
14 Employees
Strategy Analysis
Set Lower price than other Wholesalers
Located in walking distance of area shoppers
Point of Sales (POS) Facility
Accounting Practices through Computerized Accounting

6. SUMMARY OF RATIO ANALYSIS OF CFC
PROFITABLITY 2011 2010
Return on Capital employed 19.20% 31.2
Return on Equity 12.6 31.3
Gross Profit Margin 14.8 26.8
Net Profit Margin 9.6 15.8
LIQUIDITY
Current Ratio 0.90 to 1 1.8 to 1
Quick Assets Ratio 0.5 to 1 1.1 to 1
Efficiency
Asset turnover 0.98 1.73
Inventory Holding Period 7 1Days 55 Days
Trade Receivable Collection Period 90 Days 61 Days
Trade Payable Payment Period 36 Days 54 Days

7. 2. DISCUSSION OF ACCOUNTING/BUSINESS
ISSUES LEAD TO COLLAPSE
Profitability Analysis
Risk and Liquidity Analysis
Analysis of Sources of funds and use of funds

8. Profitability Analysis
-The business is unable to control inventory costs or that
prices are set too low.
-Obtain Short Term borrowing to meet operational
expenses.
- Declining trend in sales over period due to Market
penetration by competitors.

9. Risk/Liquidity Analysis
• The firm experiencing a low inventory
turnover.
• difficulties to meet financial obligations when
they were due(settlement of Bank TOD’s,
Short term local creditors,)
• The firm found difficulties to meet short term
liabilities.
• Inefficient management of debtors or less
liquid debtors

10. Analysis of Sources of Funds and uses
of Funds
• The firm is negatively Geared.
• Biggest reason for this business failure is cited
as being ‘insufficient cash flow.

11. 3.Discussion of any lessons learned or
issues / Practices to be avoided
• The Aggressive financing with DEBT CAPITAL, make a additional
Interest payment
• Low inventory turnover make Holding cost
• The business needs to re-assess its credit management procedures
to ensure faster collection of debts.
• To improve your cash flow.
• It is important for businesses to have a good liquidity position
• Cost optimization
- Renegotiation with Suppliers
- Inventory Management and Managing Overheads

12. Thank You!