Various financial statements are used in the analysis of business performance. These include the balance sheet, income statement and the cash flow statements (Woolridge & Gray, 2006). These statements are used to reflect various aspects of business performance, including calculation of key ratios that are used to evaluate performance of a business entity.
An income statement makes available an entities revenues and expenses for a given duration and hence its serves as a basic measure of profitability (Carl, 2008). On the other hand, a balance sheet shows an entities assets portfolio and hence reflects the business liquidity position. The cash flow statement shows the businesses’ cash spending and hence reflects the cash available for use by the business at any given time.
The Lemonade case falls under fast-food restaurant and as such to evaluate its actual financial performance, it is wise to insider its performance to that of other players within the industry. This report compares the Lemonade stand business against Green tree Mall fast food restaurant, a fast growing fast food restaurant that has been able to record god financial results over the last three years.
The choice of Green tree Mall restaurant is largely motivated by its astounding financial performance over the last five years, making it a leading player in the industry. In its last quarter, the fast-food restaurant recorded 42% profit, with a return on equity and return on assets of 56% and 52% respectively.
Its outstanding performance is reflected by its large profitability ratio (62%). The current ratio of 5.12 while debt to equity ratio of 1.14. The results were far beyond the industry’s debt to equity ratio of 0.85 and a current ratio of 4.80. This positions the fast-food restaurant as the industry’s benchmark of performance excellence. However, this is not the focus of this paper.
Green tree Mall fast food restaurant will only be used as a benchmark measure of the performance of Lemonade stand business. The performance of the Lemonade stand presented in this report, is a continuation of its first season’s performance. An additional comparison is made between its first season’s performance and second season’s performance. The performance is shown by the income statement, the balance sheet, and the financaila ratios indicating the businesses’ performance. See below:
Table 1: Income statement year 1 and year 2
Year 1 and year 2 results reveal a rise in spending as well as revenue from year 1 to year 2. This shows that the businesses generated more income and expenses during the second season.
The balance also reveals that the businesses’ assets and liability portfolios grew from year one to two. Assets grew from $196.13 to $ 332.28, while liabilities similarly grew from $34.25 and $44.25. The business also grew its owner’s capital from $40 to $161.88.
This is mainly attributed to the fact that no dividends were issued and instated all the earnings for the previous year were retained into the business. To better evaluate the business performance a comparison is made between its first season and the second season. This is best accomplished with the help of financial ratios shown in the table below:
The return on equity grew from 75% to 79%. This indicates that the owners earning from their capital investment also grew. While in the previous season, the owners accumulated 75 cents for every dollar they invested, in the current season, each owner accumulated 79 cents for their equity owning.
Similarly, the return yielded by assets grew marginally. For each dollar worth of an asset, 72 cents were yielded as compared to the provision year where a dollar worth of an asset’s yielded 66 cents. The businesses’ profitability ratio also grew from 66% to 72% indicating that for each invested dollar, a 72 cents profit was accumulated.
The current ratio also grew from 5.46, during the previous season to 7.24 during the current season indicating that the businesses was more able to generate cash to pay for its operations. However, the businesses’ ability to pay for its long-term liabilities dropped from 1.21 to 1.15. The decline is however, a positive results considering that lenders often prefer a low debt to equity ratio (Erich, 2001).
The debt to equity ratio acts a measurement of the relationship between capital contributed by the business owners and that contributed by the creditors. Additionally, the ratio shows the extent to which the capital input by shareholders can business can meet its responsibilities to the creditors when a business is liquidated.
In relation to the industries performance, the lemonade business performed astonishingly better exceeding even the performance of the selected benchmark industry player.
While the benchmark industry player retuned a profitability of 42%, earnings its shareholders 56 cents and 52 cents for every dollar worth of owners equity and assets, the lemonade stand business earned its owners’ equity and asset portfolio 79 cents and 72 cents for every dollar respectively. The performance of the business can therefore be summarized as growing over time and has been able to ward off competition from similar products offered by its competitors.
In conclusion, it’s important to mention that the performance of the businesses not only grew within its own operations but also recorded very positive results compared to the industries performance.
This indicates that the strategic approach adopted by the entrepreneurs has been successfully in ensuring that spending is controlled in a manner that works positively towards the businesses success. Additionally, the performance could be attributed to the businesses pricing strategy and response to the varying weather conditions as key determinants to the clients purchasing trends.
Positively identifying the factors that clients consider in order to purchase the products is crucial to the success of the business, and seemingly, this is an aspect that the business managers have been able to successfully manage. In general, the strategic objective adopted by the business managers has yielded positive results and has seen the business performance astonishingly well compared to other players in the industry.
References
Carl, W. (2008). Survey of Accounting. Cincinnati: South-Western College Publication. pp. 128–132.
Erich, H. (2001). The Nature of Financial Statements: The Income Statement. Financial Analysis – Tools and Techniques – A Guide for Managers. London: McGraw-Hill. p. 40.
Woolridge, J. R. & Gray, G. (2006). Applied Principles of Finance. London: McGraw Hill.