Why Woolworths Failed as a Business

Topics: Revenue, Inventory, Corporate finance Pages: 3 (1182 words) Published: December 4, 2014
Based on the text above, and the financial data provided (Tables 4.11-4.13), to what extent was it inevitable that Woolworths would fail as a business? Justify your view, using suitable ratios to support your judgment. (35 MARKS)

Business failure refers to a company ceasing operations following its inability to make a profit or to bring enough revenue to cover its expenses. A profitable business can fail if it does not generate adequate cash flow to meet these expenses. There are many factors that affect a businesses ability to succeed, including the consumer demand for the product and the surrounding competition within the operating market, however it ultimately comes down to the firms financial efficiency and its ability to cover short-term debts and generate a steady profit before growth and expansion is considered. It is apparent that Woolworths went into administration in the year 2008 due to declining profits and decreasing demand for products”. This statement presents arguments both for and against, as to whether this was an inevitable scenario or not.

It is initially apparent that Woolworths provided an extensive range of diverse products to consumers which meant they “did not get the discounts enjoyed by specialist retailers, which could buy vast quantities of a more limited range” and could therefore not benefit from bulk-buying economies of scale. This therefore suggests that Woolworths were unable to finance the buying of stock and consequently bought inventories on credit, as suggested through payables currently being at £(782) million and current liabilities being of the same amount. This leads us to the fact that Woolworths current ratio presently stands at 1:1which shows that the organization has £1 of current assets for very £1 of current liabilities, indicating that the firm does have enough capital to pay off its short-term debts. This figure, however, means that the company does not uptake any safety margin and its ratio is shown to be...
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