Posted: May 24th, 2022

Accounting Advice Letter to CTS Plastics

Accounting Advice Letter to CTS Plastics
From: Financial Advisor at XYZ Inc.
To: CTS Plastics
Date: 4/26/2022
The Strategies that CTS should implement to Increase its Performance
Businesses need to ensure that they implement innovative strategies that increase their competitive advantage if their going concern is to be assured. According to Lynch (2018), companies operate in very competitive environments, thus the need to implement innovative strategies that will enable them to increase their performance. A firm’s performance is crucial as it dictates whether the business achieves its goals or not. This letter is intended to inform the management of CTS Plastics on the appropriate strategies they need to implement to better its performance and ensure its going concern. The advice presented to the corporation is based on its performance over the last three years. The firm’s performance has been declining for the last three years. It is expected that the corporation’s performance will increase if it implements the strategies this letter recommends.
Pro-active leadership systems are lacking at CTS Plastics. The models adopted by the enterprise owners of reducing their involvement in the firm’s day-to-day operations have had a massive influence on its decreasing performance. According to Barney & Hesterly (2020), business owners are better positioned to implement the strategic management process than any other party. The founders of an enterprise have more incentives to ensure that their company succeeds than anyone else. An analysis of the incentives that a corporations managers have to ensure its success is that they will get an income from it. On the other hand, the owners of an enterprise take a long-term view of their businesses and are usually willing to implement innovative strategies that will likely affect their short-term bottom line compared to hired managers. Anh Ngyuen, Mike Yang, and Simon Green should become more actively involved in managing their business as they have more incentives to do so.
The following table shows the KPIs of the firm from 2018-to 2020
Table 1: CTS Plastics KPIs
Financial Ratios 2018 2019 2020
Current Ratio 4.06 3.66 0.93
Debt to equity ratio 0.17 0.20 0.64
Return on Assets 0.2 – 0.041 -0.34
Profit margin 0.09 -0.02 -0.17

An analysis of the company’s current ratio shows that it has decreased from 2018 to 2020. According to Brigham & Ehrhardt (2019), the current ratio shows the ability of an enterprise to meet its current liabilities using the current resources it has. The current assets that can enable a corporation to pay for its current liabilities include cash and cash equivalents. A look at the performance of the enterprise shows that its ability to cover current liabilities is decreasing due to the declining performance over the three years. My advice to the owners of CTS Plastics on how to increase their current ratio is to adopt more long-term financing options, put in place an effective system to manage receivables and payables so that they are effected on time, and implement an effective cost-management system that will enable the company to reduce costs. Also, the company should incorporate technology into its operations to enable timely cost-tracking and response mechanisms.
An analysis of the return on assets ratio shows that it has decreased from 2018 to 2020. The return on assets shows the efficiency of an enterprise’s resources in creating value for shareholders (Brigham & Ehrhardt, 2019). The decreasing return on assets shows that the company is ineffective in utilizing its resources to create more value. Companies need to create more value in all their dealings, as failure to do that will result in the enterprise suffering losses and being forced to cease operations. My advice to the owners of CTS Plastics on how to increase the return on assets is to use effective technologies in production, implement effective cost-management systems, and increase labor productivity. If effective production technologies are implemented, the company will be better placed to increase its performance.
An analysis of the profit margin over the three years shows that it has been decreasing. In 2019 and 2020, the company had a negative profit margin. The negative profit margin means that its expenses were more than the revenue generated. A business whose expenses are more than the revenue generated is a business facing precarious situations. According to Lynch (2018), the profitability of an enterprise is a crucial element as it determines whether it is in a position to implement effective strategies or not. Profitability is a critical part of a firm’s operations, defining its competitive advantages (Brigham & Ehrhardt, 2019). Analyzing the trends in the alternative business idea the owners of CTS Plastics want to implement shows that the recyclable paper industry will keep growing soon. My advice to the owners of the corporation is that they should increase the competitiveness of the plastic factory first before availing additional resources to effect the recycling paper enterprise.
A look at the debt to equity ratio shows that the ratio has been increasing from 2018 to 2020. The use of debt financing presents various challenges to a business. According to Brigham & Ehrhardt (2019), debt financing presents challenges to businesses since interest on the loan has to be repaid irrespective of the companys performance. Another issue that debt financing causes are that it can result in the enterprise being placed under receivership if it does not meet its loan repayments. The increasing use of debt-financing to effect operations at the business is placing it in a precarious situation. My advice to the owners of CTS Plastics is that they need to use other alternatives to debt financing. The financing structure adopted should present fewer risks to the enterprise since its performance has declined. The business should use more equity financing instead as it seeks to implement strategies to increase its performance.
The company needs to make sure that its line of business will not be negatively impacted by government legislation. There is an increasing realization in various parts of the world that plastics present environmental hazards (Carvajal Rodrguez & Benavides Fernndez, 2022). The fact that there is a likelihood that plastics will be banned or limited should inform the need to diversify businesses by the enterprise. Since the owners of the corporation are discussing implementing a new business of creating recyclable paper for the hospitality industry, I recommend that they do that in conjunction with increasing the performance of the current business. Creating a new business requires significant capital expenditure that will take time to break even. Since the need to ensure environmental conservation will be one of the most critical determiners of a companys success, the enterprise should effect the new business while at the same time putting in place strategies to better the current corporations performance.
The employment model adopted by the enterprise for its staff is ineffective as most of them are casual laborers. According to Markey & McIvor (2018), casual laborers are less motivated than permanent staff. They feel less motivated as they believe that their input is only needed for the short term and that their contribution to the enterprise’s success is minimal. The lack of motivation among casual laborers decreases their performance or not performing optimally. Also, there is a challenge with predicting labor performance since the output or performance of casual workers is difficult to ascertain. A company is better positioned to predict the performance of its employees if it has in place workers with long-term contracts. Therefore, for the owners of CTS Plastics to increase the firm’s performance, they need to make the employment contracts of staff long-term.
In conclusion, this study has evaluated the factors that have made the performance of CTS Plastics decline. As found by this study, the factors that have contributed to the declining performance of the firm include ineffective management systems, inefficient employment structure, and the need to ensure environmental conservation. Also, the factors that decreased the corporations performance include inefficiencies in the technology employed and an ineffective cost-management structure. The solutions that the enterprise can implement to increase its competitive advantages include implementing an effective leadership structure, bettering the terms of employment for most of the staff on a long-term basis, and implementing effective cost-management systems. Also, the company needs to better the performance of the current factory before venturing into the new business line. There is a need to better the performance of CTS Plastics as the challenges experienced are primarily from within.
Yours Sincerely
Signature.
Financial Advisor at XYZ Inc.

References
Barney, J. B., & Hesterly, W. S. (2020). Strategic Management and Competitive Advantage: Concepts. Pearson.
Brigham, E. F., & Ehrhardt, M. C. (2019). Financial management: Theory & practice. Cengage Learning.
Carvajal Rodrguez, L. V., & Benavides Fernndez, C. D. (2022). Recent Trends to Address Plastic Waste at the Global Level. In Impact of Plastic Waste on the Marine Biota (pp. 81-99). Springer, Singapore.
Lynch, R. (2018). Strategic management. Pearson UK.
Markey, R., & McIvor, J. (2018). Regulating casual employment in Australia. Journal of Industrial Relations, 60(5), 593-618.

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