IB Business Management HL 3.5 Profitability and Liquidity Ratio Analysis Questions

Generic strategies include:
- reducing direct costs;
- reducing overhead costs. Checking on the indirect costs to see where unnecessary expenses may be avoided;
- increasing price;
- adopting more aggressive promotional strategies that will persuade the customers to buy its products.

For the application mark, the only applicable strategy seems to be increasing price as C I M is price competitive and can afford to increase its selling price. Reducing direct cost or overheads seems unlikely as CIM is a small start-up and their bargaining power or purchasing economies of scale are probably low to reduce unit cost. Overheads costs are already at a minimum level. Adopting more aggressive promotion may be costly unless an inexpensive below the line (BTL) strategy is used.

Liquidity is the ability to pay short-term debts. Papel's liquidity position is delicate. Working capital is zero and Papel's acid test is 0.75 , which means that Papel has less than $1 of liquid assets with which to repay every $1 of its short-term debts.

Papel could improve its liquidity position by keeping a tight credit control with debtors. Many are not paying on time, which means that Papel does not keep a check of customers' accounts.

Papel could use a debt factoring service to recoup some of the debt as a way to boost its liquidity.

Papel should monitor debtors and chase them to pay on time and to respect the credit periods established and agreed.

Creditors are increasing even though 80 % of accounts are settled in cash. To improve the liquidity position, Papel could try to negotiate improved credit terms with its suppliers.

Reward candidates who highlight 'surplus' or 'unused' assets to sell but not a generic response of 'sell assets'. Award maximum [1] as no application is possible.