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Smith Company: Profitability Determination Case Study


Income Statement

Income Expenses Net Profit
Gross Sales $436,000 Marketing $4,500 Net Operating income
Net Sales $436,000 Property taxes $8,900 $86,740
Cost of Goods Sold Rent $18,000
Beginning inventory $234,000 Salaries $67,500
Inventory available $234,000 Travel
Ending inventory $25,000 Supplies
Cost of Goods Sold (result) $209,000 Phone
Gross profit $227,000 Operations and Support
Technology
Depreciation expenses $24,350
Insurance $1,400
Utilities $6,700
Debt
Total Expenses $140,260

Balance Sheet

Assets
Current Assets (2016)
Common stock $10,000
Inventory $25,000
Accounts receivable $24,500
Accounts payable $67,000
Total current assets $116,000
Fixed assets
Equipment $316,000
Equity & investments
Total fixed assets $316,000
Liabilities and owner’s equity
Current Liabilities
Accounts payable $67,000
Property taxes $8,900
Long-term Debt $145,000
Total 780,850
Owner’s equity $49,000
Common stock $10,000
Total liabilities and owner’s equity $829,850

Smith Company: The Story

Even though the background of the organization under analysis has not been identified, its basic story can be tracked down comparatively easily after a quick overview of its financial statements. It can be assumed that the Smith Company has only recently started to explore the target market and is not yet comfortable with the strategies that it has chosen for managing its resources and addressing the relevant needs, including the distribution of its financial assets to the corresponding departments, the waste management approach, etc.

As a result, the corporation is facing issues with handling its debts (Das, 2013). The incorporation of the Lean Management principles and the concept of sustainable resource usage should be viewed as the means of helping the firm retain its position and address the issue of the debt.

Profitability

Based on the company’s data, it can be assumed that entrepreneurship has been doing comparatively well over the past year. Indeed, a closer look at the income statement will reveal that the organization has received an $86,740 net profit. Although the identified amount of money could be seen as comparatively small by the modern standards of the global economy, it, nevertheless, managed to create prerequisites for gaining a positive net profit.

Nevertheless, the company’s profit can be increased substantively by reconsidering the current approach toward expenses management and cost allocation strategies. Indeed, another look at Table 1 will make it clear that the Smith Company won only by a very narrow margin. As a result, the necessity to reconsider its current approach toward cost allocation should be viewed as crucial for its further viability.

The depreciation expenses point quite graphically to the fact that the entrepreneurship leaders have not been paying enough attention to the way, in which the assets are used. Specifically, the salvage value of the utilities at hand has been underrated. As a result, entrepreneurship is in a consistent need for the acquisition of new materials, tools, and equipment.

The fact that the approach toward using the company’s assets and materials could be changed radically slipped under the managers’ radar, as the depreciation clearly grew out of proportions. Instead of increasing the salvage value of the equipment and the related items, the leaders and managers of the firm focused on searching for opportunities to acquire new financial assets. As a result, the long-term debt of entrepreneurship has also grown to reach a rather significant amount of $145,000.

Despite the fact that the company has delivered quite positive results over the past year, it is unlikely to keep its performance consistently god. As stressed above, Smith exhausts its resources far too easily and does not seem to understand the significance of using the available assets sparingly.

The concept of sustainability should be introduced into the framework of the entrepreneurship, as it has clearly been using its resources without considering the implications and divvying the financial resources up between the departments equally.

Debt Load

The debt load, in its turn, shows quite clearly that the entrepreneurship could use a better policy of allocating its financial resources. As stressed above, the debt of the corporation is very high compared to the current assets of the organization and the revenue received in the course of its operations. Particularly, the debt load amounts to $145,000, which means that entrepreneurship will have to be very creative in managing its debts and remaining in the market environment.

On the one hand, the choice of selling its current assets seems the most obvious solution to the existing problem. On the other hand, the identified step will not help improve the company’s operations and avoid further situations of debt load increase. As stressed above, Smith Corporation has been using its assets in a manner that requires more elaboration. The concept of sustainability as the foundation for entrepreneurship’s decision-making as far as the location of costs and the usage of resources is concerned should be considered an essential adjustment (Boone & ‎Kurtz, 2015).

Furthermore, smith Corporation dismissed the idea of lean manufacturing as the tool for reducing waste. As the costs mentioned in the balance sheet point quite graphically, the firm dismissed the opportunity of incorporating the principles of Lean Manufacturing into its framework. As a result, the cost of goods sold has risen significantly over the past year, which is an admittedly positive, yet quite temporary effect. Seeing that the organization has recently started to build its influence in the environment of the global economy, it will need to be more careful and cautious in the choice of the strategies that will be used to attract new customers (Nobes, 2014).

It could be argued, though, that the data provided above indicates the start of the company’s operations. Therefore, it can be assumed that Smith Corporation will be able to receive a significantly larger amount of money the following year. As a result, the debt issue will be addressed gradually while the firm gains weight in the target market and attracts an increasingly large number of customers (Davis, 2014).

Nevertheless, the current state of Smith’s finances points quite graphically to the need to enhance the assets allocation framework so that the company could use its resources in a reasonable way and to its advantage. As soon as the company leaders realize that the current debt liabilities are far too large for the entrepreneurship to handle within an observable amount of time and introduce the framework for managing the expenses, the company is likely to become more successful and gain larger profits. Furthermore, customer loyalty rates will be increased significantly due to the promotion of Lean Management, reduction in waste levels, and the subsequent increase in product quality. As a result, the Smith Company will be capable of addressing the debt liabilities and reduce the financial risks to a considerable extent.

Reference List

Boone, L. E., & ‎Kurtz, D. S. (2015). Contemporary marketing. Boston, MA: Cengage Learning.

Das, S. (2013). Business accounting and financial management. New Delhi: PHI Learning Pvt. Ltd..

Davis, (2014). The Definitive Guide to HR Management Tools (Collection). New York, NY: FT Press.

Nobes, C. (2014). Accounting: A Very Short Introduction. Oxford: OUP Oxford.

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IvyPanda. (2020, October 18). Smith Company: Profitability Determination. Retrieved from https://ivypanda.com/essays/smith-company-profitability-determination/

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IvyPanda. "Smith Company: Profitability Determination." October 18, 2020. https://ivypanda.com/essays/smith-company-profitability-determination/.

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IvyPanda. 2020. "Smith Company: Profitability Determination." October 18, 2020. https://ivypanda.com/essays/smith-company-profitability-determination/.

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IvyPanda. (2020) 'Smith Company: Profitability Determination'. 18 October.

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