Gurinder singh runs a small business that manufactures office furniture. His best selling products are office desks and chairs. Sales turnover has risen but profits have stayed constant. The business is also experiencing cash flow problems.
a) Explain 2 reasons why Gurinder profit might have stayed the same despite sales turnover increasing.
b) Identify and explain possible causes of his cash flow problem
a) Two reasons why Gurinder's profit might have stayed the same despite sales turnover increasing could be:
1) Increased costs: If the cost of raw materials, labor, or other expenses associated with manufacturing office furniture has also gone up, it could eat into the increased revenue. For example, if the cost of wood for desks and chairs has increased, it would decrease the profit margin even though the sales turnover has increased.
2) Pricing strategy: If Gurinder has decreased the prices of his office furniture in order to drive sales volume, it could impact the profit margins. Though increased sales turnover may result in higher revenue, if the profit margin on each unit sold is smaller, it can lead to a situation where the overall profits stay the same.
b) Possible causes of Gurinder's cash flow problem could be:
1) Overstocked inventory: If Gurinder has ordered or manufactured a large quantity of office furniture anticipating higher sales but hasn't been able to sell them as quickly as expected, it could result in excess inventory. This can tie up cash as inventory costs money to store and maintain.
2) Slow-paying customers: If Gurinder's business has customers who take a long time to pay their invoices, it can create cash flow problems. Even if sales are increasing, if the payment cycle is delayed, it can create a gap between when expenses need to be paid (such as raw materials, labor, utilities) and when revenue is received.
Additionally, there could be other factors like delayed collections, high overhead costs, or insufficient working capital that may be contributing to Gurinder's cash flow problems. It would be important for him to analyze the specific circumstances of his business to identify the root causes.