Leisure Outfit Ltd (LOL) Assignment Example | Topics and Well Written Essays - 2000 words

Leisure Outfit Ltd (LOL) - Assignment Example The bank currently wants the overdraft amount to be reduced over the tenure of next six months. In this regard, the paper presents a comprehensive analytical report to the board of directors of the company on the financial position of LOL so that the roots of the problem is understood and resolved accordingly. Two problems have been detected so far with respect to the company and these are the excessive dependency on over-draft and cash management. It is expected that this situation will affect firm’s short term and long term solvency as well. Considering this factors, the ratio analysis was considered appropriate for evaluating financial position and profitability of the company. The cash position of the company will also be compared between both the years so as to understand where the firm has been investing most of its cash. The liquidity assessment is best conducted with the help of current ratio and acid test ratio. The current ratio points towards a proportionate financial relationship between current assets and current liabilities. The current assets of LOL have improved from  £4356, 000 to  £9974, 000 which can be considered healthy but deeper analysis suggest the sharp decline in the cash position of the company. In addition, inventory has also increased significantly over the year. The ratio has shrunk from 1.76 to 1.13 indicating illiquidity. The other reasons for the decline were determined to be high overdraft that the company received from the bank and almost doubled trade payable. Considering other factors being justifiable, the issue related to the sharp decline in cash require significant attention of the management (Penman 1-35). In addition to that, the acid test ratio revealed that the ratio has declined from 0.78:1 to 0.47:1 which is again another concerning area. The main reason was determined to be the high amount of stocked inventory.