ANALYSIS OF AMY’S INCOME STATEMENT

Table of Contents

Executive summary 3

Findings 3

Assumptions in the development of the profit and loss statement 3

Revenues 6

Expenditures 6

Conclusion 8

References 9

Executive summary

Amy’s business is on the verge of takeoff. The business, according to the market study done, is likely to break even and make a profit in the first year of operations. Sales will start at lows of 50 units per month and will rise steadily to 700 units per month. There is a spike in the sales in November due to customers shopping for December gifts. Revenues are increasing in the second year and this is likely to remain as such unless something is done to stimulate profits. When strictly considering the first two years, the business is in shape. Expenditure is operating within the normal parameters of fixed and variable costs. Expenses in the business include labor which is £18,000 per year and rent which stands at £5,700 per year. With the business operating at this level, Amy will not need to loan £50,000 at 4% p.a. since her expenditures are within her capital limits at least in the first two years of operation. This can be re-evaluated in the third year where she can consider the loan for expansion. The business is seen to fulfill Amy’s vision of ensuring the benefits of three important stakeholders, first, customer benefits, which has been manifested through increased sales, second, employees’ benefits are met through prompt payment of their salaries and other benefits such as healthcare, and lastly, Amy’s profits which have been proved to be sustainable. 

Findings 

Assumptions in the development of the profit and loss statement 

1. Sales in January were ordered and purchased in December of the previous year (2017)
2. Sales will rise at a steady rate till they hit 700 units by end of year as there is no other provided mechanism of growing the sales in the year
3. Purchases will be made with full estimated sales for the next month in mind. This will allow us to compute the purchases that will fit the following months sales perfectly
4. Depreciation of Racking has been calculated at 10% p.a. (Ernst & Young, 2016).  
5. The website (an asset) will not be depreciated since is subject to continuous upgrading. 
6. All personalized covers (300) will be sold to Kaarl
7. Exchange rate of MDL to Euro is 0.05 (Xe.com, 2018).
8. The website cost is an asset

Assumptions in the development of the balance sheet; profit and loss statement

Revenues 

The revenues for the first year are low compared to the projected revenues for the second year in operation. The revenues in the first year are rising steadily while in the second year they have been assumed to remain stagnant. Sales to Kaarl are however earning Amy a small margin of 22 euros compared to others which are selling at 32 euros. This is despite consuming additional expenditures in labor and lease costs for the machinery. 

Expenditures 

  The first year is marked by a high expenditure burden to Amy. The investment has two fixed costs, rent and labor. Labor is the largest expense followed by packaging and shipping. Market study costs are not extended to the second year as they are assumed to be one off.  The 10% depreciation costs on racks are not of any help to her tax claims since they are normal expenses which are not tax allowable. The costs for the year 2018 have been summarized as shown in the pie chart below

Projected costs for the second year are as shown in the chart below

To effectively compare the expenses for the two years, the following bar chart demonstrates this effectively. The chart shows that there is a significant change in packaging and shipment costs and credit card transaction costs in 2019 compared to 2018. The costs are variable and depend on the level of sales. With increasing sales, they also rise. 

Conclusion

It can be concluded that the business consideration that Amy is considering is worthy. Performance for the first year is not as impressing but this can be attributed to the fact that the business is new. From the market study, it has been demonstrated that the business is likely to make sales that are sufficient to have it remain afloat. According to McCoy et al. (2018, p2), the location of the business matters. As such, it is hoped that the business is located in a place that will allow expansion and diversification into other products to grow the revenues exponentially. Johnson & Van (2017) also throw in the idea of staying ahead of competition using different approaches. One of the approaches is to use the concept of flexible working. This element, will save her the need for increasing office space and labour costs in the wake of an expanding business. Further, she can operate from a home office which will save her the need for considering taking up the £50,000 at 4% p.a. During both the first and second years of operations, the businesses is generating a surplus that can be ploughed back into the operations to expand the business. During the expansion, more so in the third year, Amy can consider a £50,000 loan to purchase more stock, to do marketing, and/or hiring more staff to handle the increasing business. After considering the income statement, it can be seen that the business does not require Amy to borrow. The amount of cash required to run the business in the first year is well within the capital that she has kept aside to develop the business. 

References

Ernst & Young. (2016).  Worldwide Capital and Fixed Assets Guide 2016. Retrieved from https://www.ey.com/Publication/vwLUAssets/Worldwide_Capital_and_Fixed_Assets_Guide_2016/$FILE/Worldwide%20Capital%20and%20Fixed%20Assets%20Guide%202016.pdf

Johnson S, Van de Ven AH. A framework for entrepreneurial strategy. Strategic entrepreneurship: Creating a new mindset. 2017 Aug 25:66-85.

McCoy, D., Lyons, S., Morgenroth, E., Palcic, D. and Allen, L., 2018. The local factors that affect where new businesses are set up (No. RB201805).Xe.com. (2018). XE Currency Converter: MDL to EUR. Retrieved from https://www.xe.com/currencyconverter/convert/?Amount=1&From=MDL&To=EUR