Reversing The Trend Of Falling Profitability Economics Essay

The intent of this drawn-out essay was to reply the inquiry ‘What should Afroplast Enterprise Ltd do to change by reversal the tendency of falling profitableness in 2010 and beyond?

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Through the income statements ( net income and loss histories ) , SWOT analysis of the company, and the company ‘s profile, that was obtained as the secondary beginnings of information and was used in the research, this essay analyzes the grounds for the downward tendency in the profitableness.

Apart from the secondary beginnings of information, primary research was carried out to place the client ‘s sentiments on assorted facets such as selling of the merchandise and the pricing of the merchandise.

Through the income statements and the SWOT analysis, I discovered that the company has been confronting a worsening tendency in the gross net income that it has earned owing to the big addition in the cost of gross revenues despite of the addition in the gross revenues. The net net incomes besides reduced greatly during the period under probe.

Furthermore, through primary research methods, the sentiments of the clients on assorted facets of the company revealed that although Afroplast Enterprises Ltd. produces good quality merchandises with mean monetary values, the publicity of the merchandises is lacking.

This paper recommends Afroplast Enterprise Ltd. to follow market development every bit good as market incursion in order to increase their gross revenues gross more than the cost of gross revenues therefore increasing their profitableness. Besides, in the instance of Afroplast Enterprises Ltd, variegation should be embraced which will besides take to important growing of gross revenues ensuing in an addition in the profitableness.

Introduction

Background

Packaging is the art, scientific discipline or engineering of enveloping or protecting goods for distribution, storage, sale, and usage. Afroplast Enterprise Limited is such a concern that deals with the production of fictile containers and other articles for the intended usage of storage of medical specialty, juices and other liquids.

Afroplast Enterprise Limited established over 15 old ages ago in 1995 is a private limited company that deals with the production and gross revenues of plastic bottles and jars of different capacities and utilizations. It is ISO ( International Standards Organization ) certified and reputed to be one of the taking manufacturers in plastic containers and other articles. It is located far off from town, in Portbell Luzira adjacent to Upper Prison – about 8km from the metropolis Centre of Kampala.

Some of the articles that are produced by Afroplast Enterprise Limited include: Juice/Milk/Liquids containers, pharmaceutical containers, Shampoo and Powder containers, Household Relief supplies, Water/Juice PET Bottles, PET Sweet Jars, cooking oil PET bottles etc. Afroplast does non merely fabricate the merchandises harmonizing to the client ‘s orders but besides provides other installations such as publishing Son, trade name names, and instructions on the plastic containers to do them aesthetically appealing.

Every concern faces competition for the market and so does Afroplast. It has many rivals – some emerging in the market late while the others are those who have been in this concern likely for the same clip as Afroplast. Some of the rivals names are ; Uganda Plastics Industries, Nice House of Plastics, Oxy Plastics, Rwenzori Beverages Co. Ltd and many others.

The company has been on mean sing big net incomes per annum. However, for the past three old ages ( 2007 to 2009 ) the company has been sing a autumn in the profitableness. Net income maximization is one of the major aims of most concerns including Afroplast Enterprise Limited. Put merely, net income is the difference between gross revenues gross and cost of gross revenues. Profitableness refers to the sum of net income received comparative to the sum invested into the company which is frequently measured by the rate of net income or the rate of return on capital employed ( ROCE ) – which is a profitableness ratio that shows the effectivity of a company in returning net incomes to the stockholders ‘ investings in the company. It is apparent from the interview with the Managing Director ( Appendix 1 ) that the direction of the company is concerned about the outgrowth of rivals who were foremost buying merchandises from Afroplast but so decided to fabricate it themselves therefore capturing portion of the market that was controlled by Afroplast Enterprise Limited impacting their profitableness. It is here that the significance and worthiness of my probe lies.

The intent as to why this research survey was chosen is because of the increasing demand for the packaging containers and articles by the merchandise fabrication companies and besides because of the employment opportunities that the company offers to the people in Uganda.

Therefore, this extended essay will take to reply the inquiry: ‘What should Afroplast Enterprise Ltd do to change by reversal the tendency of falling profitableness in 2010 and beyond? ‘

Methodology

In order to efficaciously measure the grounds underlying the falling profitableness tendencies of Afroplast Enterprise Limited, gross revenues gross, cost of gross revenues and disbursals were obtained from the net income and loss histories ( herein referred to as income statements ) dating from 2007 to 2009. Other paperss obtained for this purpose include ; the hard currency flow prognosiss.

I compared the income statements of the 3 old ages of the company and examined the factors that have contributed to the tendency of falling profitableness of the concern.

Using questionnaires, the sentiments of the bing clients ( a sample of 20 ) of Afroplast about Afroplast Enterprise Limited were determined and analyzed to measure the selling schemes of the company in footings of the pricing policies and to some extent the publicity carried out by the concern. This was employed in order to measure both the company ‘s profitableness and to what extent their selling schemes are impacting their profitableness with a position to placing the factors underlying the falling profitableness of the concern.

The Managing Director of the company was interviewed to obtain the mark informations needed – the background of the company, competition in the market and rivals of the company, any selling schemes that the company has employed and the possible impact on the gross revenues.

Other analytical tools used for analysing the company ‘s profitableness and its place in the market were:

Ansoff ‘s matrix to assist Afroplast Enterprises Ltd. make up one’s mind their merchandise and market growing scheme enabling them to better the gross revenues gross, a factor that greatly affects the profitableness.

SWOT analysis of the company in order to place the strengths that the company should capitalise on, failings that the company should turn to, every bit good as the possible chances that the company should prehend and threats that the company should look out for from the concern environment.

Scope of the Secondary Data and its restrictions

The secondary information was merely obtained from the company doing it a restricting factor to the analysis of the market for the same merchandises. One of the restrictions in roll uping and analysing the secondary information was the deficiency of willingness on the portion of the rivals in unwraping their company ‘s income statements that would hold enabled me to do effectual comparing with the profitableness place of Afroplast Enterprise Limited.

Findingss and Analysis of Primary Data

Questionnaires were given out to a sample of 20 clients of Afroplast Enterprise Ltd. and the consequences are illustrated utilizing assorted signifiers of charts and graphs below.

Figure 1: Doughnut Chart demoing the evaluation of Afroplast Enterprise Ltd. merchandises ( 1 being hapless and 10 being excellent )

About half of the clients were found to hold thought that the merchandises of Afroplast Enterprise Ltd. are of good quality and satisfactory. This suggests that the company stands a high opportunity of increasing their gross revenues gross therefore increasing the company ‘s profitableness. The company should besides take to go on keeping and further bettering the quality of their merchandises in order to pull a greater figure of clients and avoid losing their bing clients to rivals.

Figure 2: Pie Chart demoing the frequence of buying Afroplast merchandises

From the consequences it is apparent that most of the clients purchase the merchandises twice a twelvemonth. This consequence shows that the frequence of the clients buying the goods is non good plenty for the company to accomplish greater gross revenues in order to increase their profitableness. These consequences besides show that the concern needs to diversify in order to enlarge the market every bit good as augmenting its gross revenues gross which will assist the house better its profitableness.

Figure 3: Bar Chart demoing the clients ‘ sentiments on the pricing

In position of the consequences above, it is clear that most of the clients appreciate that the current pricing policy is acceptable, that is non really expensive and besides non really inexpensive – bespeaking the quality of the merchandise. This indicates that Afroplast should to the full work this pricing policy and keep their pricing policies, that is the promotional pricing and competitory pricing.

Figure 4: Pie Chart demoing the client ‘s sentiments on the company ‘s lack

Sing the client study, it is apparent that half of Afroplast ‘s clients believe that the job with the company is chiefly the publicity of their merchandises. This indicates that rather a figure of people are non cognizant of the company ‘s merchandise which hence calls for aggressive publicity.

Gross saless Gross

Gross saless Gross is the entire sum of money that a house earns from the sale of all or portion of its goods and proviso of its services during a given trading period. It is besides known as the gross revenues turnover

It is known that the gross revenues gross is dependent on the monetary value charged and the measure of merchandises sold by the concern. Therefore,

Sing the fact that the monetary values at which the merchandises are sold affect the gross revenues gross which in bend affects the profitableness of the concern, it necessitated me to analyse the pricing schemes and policies used by the company in order to acquire to the underside of the affair, that is, the grounds for the falling profitableness in Afroplast Enterprises Limited.

Therefore if the gross revenues gross of a concern is high, the gross net income is likely to be high as good. In the instance of Afroplast, over the three old ages under probe, the gross revenues gross has been increasing as seen in Appendix 2. This tendency in addition is shown in the graph below:

Graph 1: Addition in gross revenues gross

This upward tendency in the gross revenues gross is attributed to the big measures sold to the big clients such as ; Unilever Uganda and Uganda Pharmaceuticals industries as seen in Appendix 1. From the interview – in Appendix 1 – with the pull offing manager, I discovered that the company adopted chiefly competitory pricing policy but in 2009 they used more of promotional pricing which allowed them to catch the attending of more clients. The addition in the gross revenues gross from 2007 to 2008 is 332,437,277 Ushs, which is an 11 % addition per annum. The addition in the gross revenues gross from 2008 to 2009 is 457,333,902 Ushs, which was a 13.6 % addition per annum. However, this can merely be utile if there are other old ages to compare the tendency of increasing gross revenues gross with this per centum addition.

Cost of Gross saless

Cost of gross revenues, on the other manus, is the amount of the cost of buying the natural stuffs in order to change over them into semi-finished or finished merchandises. Over the three old ages under probe, the costs of gross revenues incurred by Afroplast Enterprise Limited showed an upward tendency ( Appendix 2 ) . This tendency in addition is illustrated in the graph below:

Graph 2: Addition in cost of gross revenues

Harmonizing to the Managing Director and besides seen in the SWOT Analysis, the grasp of the dollar to the local currency, Uganda shillings, had a great impact on the costs of importing the natural stuffs from Saudi Arabia. Thus it is an index as one of the major subscribers to the lifting costs. The addition in the cost of gross revenues from 2007 to 2008 is 449,110,075 Ushs, which is an 18.7 % addition per annum. The addition in the cost of gross revenues from 2008 to 2009 is 651,606,330 Ushs, which is a 22.8 % addition per annum. Again, this can merely be utile if there are other old ages or other similar concerns to compare the tendency of increasing cost of gross revenues with this per centum addition.

Cost of gross revenues besides affects the gross net income that a concern makes during its trading period. If the cost of gross revenues is high, even if the gross revenues gross is high, the gross net income that the concern earns reduces in value as shown in the graph below for Afroplast Enterprises Limited:

Graph 3: Tendency of gross net income for 2007, 2008 and 2009

Between the old ages 2007 to 2008, the gross revenues gross increased by 11 % while the cost of gross revenues increased by 18.7 % during the same period and the per centum lessening of the gross net income was 19 % .

Between the old ages 2008 to 2009, the gross revenues gross increased by 13.6 % while the cost of gross revenues increased by 22.8 % during the same period and the per centum lessening of the gross net income was 38.8 % .

In the two state of affairss, the cost of gross revenues has increased by a greater per centum than the gross revenues gross clearly explicating the worsening tendency in the gross net income and therefore demoing that gross revenues gross and cost of gross revenues are the major determiners of the gross net income of a concern. Therefore,

Expenses/Overheads

Operating expenses are ongoing disbursals that an operating concern incurs and that can non be straight assigned to a peculiar merchandise or section. They are besides known and ‘indirect costs ‘ . Examples of such disbursals of Afroplast are ; labour costs, depreciation, machinery fixs and administrative disbursals.

Net net income is the sum earned by a concern after deducting the disbursals from the gross net income. Operating expenses are major factors that affect the net net income of a concern. When the gross net income of the concern is high but these disbursals are every bit high so the net net income will be lowered compared to when the gross net income is high and these disbursals are comparatively low. This shows that the net net income is dependent on these two variables and besides it highlights the significance and demand to pull off the disbursals efficaciously in order to give a high net net income. Therefore,

For Afroplast, the disbursals increased over the period under consideration ( Appendix 3 ) , as shown in the graph below:

Graph 4: Addition in expenses/overheads

This increasing tendency of operating expenses surely impacted negatively on the net profitableness of Afroplast ; hence the demand to detect a solution since this essay is look intoing ways and agencies of Afroplast to change by reversal the tendency of falling profitableness.

Since the gross net income and the disbursals varied during the three old ages, there were fluctuations in the net net income every bit good as shown below:

Graph 5: Tendency of Net net income ( before revenue enhancement )

Graph 6: Tendency of Net Net income ( after revenue enhancement )

In the graphs above, the decreasing/downward tendency of the net net income is attributed to the increasing expenses/overheads and the decreasing gross net income.

Profitability Ratios

These are fiscal ratios that measure the public presentation ( whether it is good or hapless ) of a company by analysing the net income made by the house and these figures are compared with the size of the house, the entire assets of the house and the entire gross revenues made by the house in the trading twelvemonth.

From the net income and loss histories and balance sheets, I was able to cipher the relevant ‘profitability ‘ ratios viz. : the gross net income borders, the net net income border and the Return On Capital Employed ( ROCE ) , with a position to measuring Afroplast ‘s fiscal public presentations, particularly its ability to command disbursals and to be able to urge whether investors should put on the line their money in the concern.

Gross Profit Margin ( % )

Gross net income border is the gross net income as a per centum of the gross revenues gross. The gross net income border indicates what the house receives as the return after the variable costs are deducted from the gross revenues gross. The gross net income border can be calculated utilizing the expression below:

A low gross net income border indicates that the company generates low sums of net incomes from the grosss and that the production costs are beyond the control of the concern.

Table 1: Gross net income border of Afroplast Enterprises Limited for the old ages 2007, 2008 and 2009

2007

2008

2009

Gross saless Revenue, Ushs

3,023,634,982

3,356,072,259

3,813,406,161

Cost of gross revenues, Ushs

2,406,646,173

2,855,756,248

3,507,362,578

Gross net income, Ushs

616,988,809

500,316,011

306,043,583

Gross net income border, %

20.41

14.91

8.03

Comparing the three old ages, it is apparent that the gross net incomes of the company have been diminishing over the clip period even if the gross revenues gross has been increasing. The ground as to why this is seen through the figures of the cost of gross revenues that are increasing by about a factor of 1.2.

Net net income border ( % )

Net net income border is the net net income – after revenue enhancement, as a per centum of the gross revenues gross. For illustration, in table 2 in 2007, the house made a net net income border of 7.08 % which means that for every $ 100 of gross revenues $ 7.08 is net net income. This is the net income that is left after all costs of production ( both direct and indirect costs ) have been accounted for.

This border is a step of the profitableness of a concern and gives the ability of the concern in commanding its disbursals. Net net income border is calculated as shown below:

The lower the net net income border, the lower the safety border which means that the company is at a higher hazard that a diminution in the gross revenues will minimise or even wholly extinguish the entire net incomes therefore take downing the net income/profits earned.

Table 2: Net net income border of Afroplast Enterprises Limited for the old ages 2007, 2008 and 2009

2007

2008

2009

Gross saless Revenue, Ushs

3,023,634,982

3,356,072,259

3,813,406,161

Net Net income, Ushs

214,057,161

206,455,164

12,262,459

Net Net income border, %

7.08

6.15

0.32

Comparing the three old ages, it is apparent that the net net income of the company has been diminishing over the clip period even if the gross revenues gross has been increasing. The ground as to why it is like this is because the net net income decreased drastically from 2007 to 2009. A lessening in the net net income is attributed to the lifting cost of gross revenues and disbursals during the three old ages. A lessening in net net income border besides illustrates that Afroplast is progressively losing on its net incomes and therefore the company as a whole has a lower safety border. This underscores the urgency of Afroplast pull offing their disbursals expeditiously and efficaciously.

ROCE ( Return on Capital Employed )

ROCE is referred to as a primary ratio that informs the stakeholders of a concern about the effectivity of the concern in returning net income from the capital that has been invested into the concern. In short, this ratio compares the net incomes of a concern to the capital invested in it.

It is besides known as the Return on Net Assets ( RONA ) and calculated utilizing the expression shown below:

The greater the ROCE is, the higher the stockholder ‘s net incomes since there will be a lessening in the adoptions. The capital employed is another word for the working capital which is calculated by entire assets minus the current liabilities.

Table 3: ROCE of Afroplast Enterprises Limited for the old ages 2007, 2008 and 2009

2007

2008

2009

Net Net income before revenue enhancement, Ushs

241,030,062

306,118,902

12,262,459

Entire Assets, Ushs

2,465,212,083

2,637,513,470

3,016,978,394

Current Liabilitiess, Ushs

294,426,649

706,472,837

968,402,598

Capital Employed, Ushs

2,170,785,434

1,931,040,633

2,048,575,796

ROCE

11.103

15.853

0.599

There is fluctuation in the return on capital employed from 2007 to 2008 where the return on the capital employed increased implying that the stockholder ‘s net incomes increased every bit good. However, from 2008 to 2009 the return on the capital employed decreased by 96.2 % implying that the stockholder ‘s lost a batch of their net incomes perchance even more than the capital they must hold invested. A lessening in the stockholder ‘s net incomes indicates that the adoptions of company must hold increased during the trading period of 2009 therefore ensuing in a lower entire income earned impacting the profitableness of the concern. The net net income ( before revenue enhancement ) is what has attributed to the drastic autumn in the ROCE from 2008 to 2009.

Recommendations

Market Development

Market development is portion of Ansoff ‘s merchandise and market growing schemes. Market development involves the selling of bing merchandises in new markets. In the instance of Afroplast, the company can venture into new markets like the greater lakes part particularly Burundi, Rwanda and Democratic Republic of Congo ( DRC ) .

Furthermore, the hapless substructure in these states may be a confining factor to carry through this scheme. Besides, there is still insecurity in some of these states like Burundi. Existent companies in a similar field airs as rivals therefore restricting their market portion.

Market Penetration

Market incursion is besides one of Ansoff ‘s merchandise and market growing schemes which involves marketing current merchandises in bing markets.

The SWOT analysis shows that one of the failings of the house is lack of advertizement and aggressive gross revenues staff. This serious failing has to be addressed by Afroplast as they embark on market development in these foreign states. Since their mark audience is chiefly concern organisations, so, Afroplast could utilize media such as telecastings, national newspapers, hoardings every bit good as professional magazines in these states. Successful advertizement ( both informative and persuasive ) helps to increase the gross revenues gross – something that Afroplast urgently needs. As for non holding aggressive advertisement staff, Afroplast should utilize off-the-job preparation where some of the workers are sent to colleges. This will function to complement the on-the-job preparation already being employed by the house. However, it should be noted that all of these steps will increase costs incurred by the house, at least in the short tally but will pay off in the long tally.

Furthermore, the questionnaire given out to clients uncover the sentiments of the clients on the company and particularly shows how the concern is deficient of effectual and adequate selling of their merchandises.

Diversification

Diversification occurs when a company produces new merchandises that are intended for new markets. Afroplast Enterprises Ltd trades in plastic merchandises, nevertheless they could venture into other merchandises such as mineral H2O which they can sell into other markets like southern Sudan. The intent of this is to increase their gross and minimise the dependableness on the bing merchandises and markets. Increase in gross will therefore imply increasing profitableness.

This option should besides be considered since the clients purchase the merchandises from the concern largely twice a twelvemonth which is non a good mark in footings of the gross revenues gross as seen from the primary research that was carried out. This shows that the concern needs to diversify in order to enlarge the market every bit good as augmenting its gross revenues gross which will assist the house better its profitableness.

Michael Porter ( 1980 ) in his book ‘Competitive Strategy ‘ suggested that under certain fortunes concern can act upon the markets in which they operate. One of the five forces that determine the extent to which concerns are able to pull off competition within their markets is the ‘threat of new entrants ‘ . In the instance of Afroplast Enterprises Ltd the menace of new entrants arises from the old clients who are now fabricating the merchandises, which they used to buy from Afroplast, themselves. This decreases the gross earned by Afroplast and in bend affect their profitableness negatively.

This happens because it is simpler for the new entrants to perforate the market. It is possible that concerns may be prevented or deterred from come ining the bing markets due to barriers of entry. For illustration, for Afroplast the concern may hold to put in publicities to a great extent that will move as a barrier for other concerns in the same field who will happen it hard to fit such high degree of promotional disbursement therefore they will be unable to pull as many clients as Afroplast does. Attracting more clients will connote that the gross revenues of the merchandises have increased therefore the gross revenues gross additions. As a consequence of the gross revenues gross increasing the profitableness is most likely to increase. However, since the concern will be passing to a great extent on the publicity, the disbursals that the concern has will increase which might decline the status of the concern. This can propose that this method of increasing gross revenues gross will non be truly executable.

Decision

In replying the research inquiry ‘What should Afroplast Enterprises Ltd do in order to change by reversal the falling tendency of profitableness? ‘ I determined the tendencies in the gross revenues gross, costs of sale, gross net income every bit good as net net income.

The gross revenues gross has been lifting and should go on lifting by diversifying, that is, developing new merchandises for new markets and market development. The lifting cost of gross revenues should be reduced by procuring inexpensive cost of natural stuff if possible, for illustration, from China. However, the concern may non hold much control over the costs of natural stuffs imported because of the appreciating exchange rate of the local currency, Ugandan shillings, against the US dollar.

I besides determined the tendency of the disbursals that the concern had in the three old ages and discovered that they rose drastically chiefly due to increase in the fiscal costs particularly the involvement charges that about doubled. The disbursals can be reduced by taking different beginnings of finance other than loans such as sale of more portions to relations and friends since it is a private limited company. Afroplast can besides believe of other long-run beginnings of finance like change overing into a public limited company where the pool of capital additions drastically by the sale of portions to the general populace on the stock market. The job with this is that it is a really expensive procedure because of the legal trifles and the disbursals of bring forthing a prospectus for the prospective investors. There is besides the danger of the current stockholders losing control over the concern one time turned public.

The company should besides keep their pricing schemes that have been employed in the past such as promotional and competitory since these schemes are being accepted by the clients as seen in their responses to the questionnaires as seen below:

I should advert here that the concluding histories I have used ( herein referred to as ‘income statements ‘ ) do non uncover anything about Afroplast ‘s non-financial affairs ( qualitative factors ) such as ; ethical aims, and the location of the house that could earnestly impact on the gross revenues gross and/or cost of gross revenues and therefore the profitableness of the house. Furthermore, the income statements used, while legitimately produced, it does non intend that they report the complete truth.

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