Every business idea is developed with the aim of making profit. However, making profit is not as easy as one may conceive from an idea. Woolridge & Gray (2006) stress the importance of adopting a practical and a proactive approach in control and management of costs. The outcome is as good as how well costs are managed and control.
In the Lemonade Stand business discussed in this report, the key factors managed to ensure profitability of the business are costs and pricing. Costs incurred either from assets purchase or inventory were all managed in a manner that does not put the business to loss while at the same ensuring that the Lemonade was up to the client’s taste and requirement.
Additionally, pricing was controlled in such a manner that the costs incurred were all considered and adequately covered. The transactions taking place during the period are shown in the attached table below.
Table 1: Journal entries.
To evaluate how well the business performed, a number of business ratios were developed based on its income/revenue statement and the balance sheet entries. See the tables below for the two financial statements.
Table 2: Income statement.
Table 3: Balance sheet.
The two tables generally represent the financial position of the company at the end of the first seasons trading period. From the income statement, it can be conclusively affirmed that the business made considerable profits assuming no taxes were charged. Additionally, the balance sheet shows the position of the company with respect equity and asset portfolio at the end of the first season.
To further develop a comprehensive analysis of the business, a number of business ratios were used to evaluate the businesses performance. These include: Return of Equity (ROE), Return on Assets (ROA), Current ratio, profitability margin, and Debt to Equity ratio.
In Woolridge & Gray (2006) the authors state that ROE is useful in describing the profit generated from shareholder investment while ROA indicates the how efficiently assets are used to generate earnings. The current ratio was used in this evaluation to evaluate how able the business is to pay for its long short-term debts.
Profitability ratio on the other hand provided a basis upon which the business cost management and pricing strategies worked to its advantage or disadvantage (Woolridge & Gray (2006). Finally, Debt to equity ratio provided a measure of the company’s financial leverage. The calculated ratios are as shown in the table below:
Table 4: Financial Ratios.
During the first period, the company records a ROE of 75% much far beyond the often desired 15-20%. It generally shows that the business has exceeded expectations and yielded large profit volumes for the shareholders. The return on assets is 62% similarly indicating that assets have been well managed to generate profit for the business.
Profitability ratio of 66% that the appropriate pricing and cost management strategy has been adopted and as such the business has profit potential. A positive yield is reflected in the current ratio (5.46) and debt to equity ratio (1.21) indicating that the business is able to generate enough cash to pay for its short and long term debts respectively. However, its position to deal with short term debts are much stronger compared to long-term debts.
In conclusion it’s important to reiterate that the business has been able to perform well in its trading activities yielding an all round positive results over the first trading season. The returns show prospects of its continued growth in the short-term and long term future.
Reference
Woolridge, J. R. & Gray, G. (2006). Applied Principles of Finance. London: McGraw Hill.