Promotion 1,200 (Client gifts, incentives, open houses, etc.)
Rent 5,000 (Monthly rent)
Repairs & maintenance 700 (Store repairs, general maintenance) Shop supplies 500 (Odds and ends, small tools)
Telephone, cell, computer 800 (Line rentals, long distance, Internet, cellular) Utilities 1,200 (Light, heat, and water)
Workers’ compensation 800 (Workers’ compensation) Total overhead $ 44,400
Net profit/(loss): $ ($7,900) Loss
Analysis of a statement of income and expenses It appears that Judy’s Home Furnishings Inc. has a few problems. The gross profit margin is healthy at $66,000 or 53 percent after cost of sales, but when sales wages and overhead costs are deducted, there is no profit left. Wages total $47,000, or 37.6 percent of costs. The total cost of sales is $88,500, or 71 percent of sales.
Add on all wages, and cost of sales plus wages equals $110,500. This leaves a measly 11.6 percent of sales, or $14,500 to cover the overhead costs. This store employs four people—two sales staff, the owner, and a bookkeeper. Either the wages are too high or the sales are too low. Perhaps staff hours should be reduced or a better marketing strategy implemented.
The other overhead costs are not far out of line. Marketing is necessary, and as a general rule, four to seven percent of sales should be allocated to promotion, and $2,000 represents only 1.6 percent of sales. Other overhead costs could be slightly trimmed but the main problem appears to be high wages that are not supported by sufficient sales. Some astute financial man- agement is needed here to reverse the bottom line.
CASE STUDY: Complete Computer Care Center
Marcel started Complete Computer Care Center, a home-based computer sales and service business. At the end of his second year, he took his books to his accountant to have the year-end prepared. When he started his busi- ness, Marcel’s idea was to educate and service clients in all facets of com- puter technology, including designing the right system to suit their needs, purchasing and installation, software education, consulting, problem-solving, and equipment servicing.
He purchased his equipment from a reputable supplier who extended good warranties. Because the industry was so competitive, he knew that his gross margins on equipment were not much over 10 percent. But with the busy lifestyle that many of his small business clients led, he hoped to encourage them to hire him to solve all their problems, from installing the new system and software to networking and upgrading their systems with new technology—such as fire- walls, new anti-virus software, and scanners. Using technology, Marcel could fix many clients’ problems by connecting to their computers from his office, saving unnecessary traveling time and costs.
Marcel purchased the latest computer equipment for himself and this year he borrowed money from the bank to buy a used van. His father lent him
$15,000 to start the business, which was not due until he had completed four years in business. He purchased some new systems for resale near the end of the year, as they were “a steal” and he knew he could make a better profit on them. He always kept some equipment in inventory.
It was a competitive field and Marcel found that he was busy reading and educating himself to keep up with the latest technological advances. He attended an expensive conference and actively promoted his business through both networking and various marketing strategies. Marcel’s hourly billing rate for consulting and service calls was $95, a reasonable industry billing charge.
He paid a bookkeeper to prepare his books every three months and subcon- tracted out some of the work that he could not handle. He had a new webpage designed and kept it high on the search engines. He was married with a lovely wife and had a second child on the way. Life was hectic. At the end of the year, Figure 3.5 shows how his financial statements looked. What do you observe from these figures?
Figure 3.5: ANALYZING COMPLETE COMPUTER CARE CENTER’S FINANCIAL STATEMENTS
Complete Computer Care Center Balance Sheet
December 31, XXXX (Unaudited)
ASSETS Current assets:
Cash at bank $ 3,237
Accounts receivable 7,310
Inventories 18,247
Prepayments & deposits 310 29,104
Fixed assets:
Computer equipment 25,500
Office furniture 3,170
Automotive equipment 15,750
44,420 Less accumulated depreciation (13,263)
31,157
Total assets: $60,261
LIABILITIES Current liabilities:
Accounts payable $28,862
State & federal taxes 3,198
Current portion bank loan 3,150 35,210
Long-term liabilities:
Bank loan 14,400
Loan, R. Matthews 15,000 29,400
64,610 EQUITY
Balance beginning of period $ 1,290
Contributed capital for period 1,210 2,500
Net profit for period 7,757
10,257
Less draws for period (14,606) (4,349)
Total liabilities and equity: $60,261
Complete Computer Care Center Statement of Income and Expenses December 31, XXXX
(Unaudited)
Revenue:
By computer sales $ 82,250
By parts and small items 22,978
By consulting 10,341
By service repairs 39,021 154,590
Cost of sales:
Opening inventory 7,830
Purchases 104,175
Freight in 2,790
114,795
Less closing inventory (18,247)
96,548
Gross profit: (37.5%) $58,042
Overhead expenditure:
Accounting fees 1,800
Advertising 3,120
Bad debts 1,170
Bank & credit card charges 2,635
Computer supplies 3,470
Depreciation 11,090
Discounts 1,020
Education, books, seminars 3,130
Fees, licenses, taxes 980
Insurance 760
Internet & website 3,210
Loan interest 1,230
Office supplies 910
Promotion & marketing 2,310
Rent & taxes 2,110
Repairs & maintenance 790
Small tools & shop supplies 910
Subcontract labor 2,100
Telephones 1,280
Travel & accommodation 1,210
Utilities 710
Vehicle–gas 1,630
Vehicle–repairs & maintenance 2,710 50,285
Net profit for period: $ 7,757