Financial Report: Summary, Reflection, and Recommendations

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Table of Contents

Executive Summary
Financial Statement
Profit and Loss Statement (from January to December)
Balance Sheet
Critical Reflection
Recommendations
References

Executive Summary

Dorothy’s financial report for the first year of operating her firm is provided in this paper. The report includes the balance sheet, profit and loss account, and break-even analysis. All these have been calculated and analyzed concerning the information Dorothy provided. From this data, the evaluation was able to demonstrate that the break-even point was very low. Dorothy’s initial capital to start the business was £ 450,000, which was an above-average figure for a start-up company. Nevertheless, since this is a new business, there was no long-term liability. The financial report further evaluates the monthly cash flow of the new business. From the result, it is clear that it would be mostly surplus throughout the year. Dorothy further had some weaknesses within her organization, which this financial report illustrates. The firm closes its financial year when the cash it started with is bigger than the initial starting capital.

Financial Statement

Break-Even Analysis


Production capacity	Every month
Contribution margin	£ 26.99
The target for selling per unit	£ 35.00
Break-even point (unit	£ 74.10
Break-even point (revenue)	£ 2,593.55
Fixed cost
Explanation	Each unit	Every month
Part-time employee income		1,500
Part-time assistant income		200
Payable rent		300
	Fixed cost	£ 2000
Variable cost
Explanation	Each unit	Every month
Price for Geodes		3.93
Shipping price from Uruguay		4.08
	Total variable costs	£ 8.01

Table showing the break even analysis for Dorothy’s company.

The table above demonstrates the capacity of production for every month. A break-even analysis is essential in calculating the risk point of a new organization (Bai et al., 2018). From Dorothy’s information, what is targeted to be sold every month is £ 35 per kilogram. From the computations, the aggregate sum of fixed costs is £ 2,000 for each month. The analysis further demonstrates that the total variable costs amount to £ 8.01 per kilogram for each month. For Dorothy’s new business to break even, it must sell 74.01 kilograms, which is the equivalent of selling £ 2,593.55 each month.

The break-even analysis above assumes that all costs needed for the business can be divided into variable and fixed components. Furthermore, in case the data will be represented on a graph, the cost behavior will be linear with the representation having a straight line. For currency exchange rate the assumption is that average exchange rate from £ to $U will be 60.02 (£ 1 = $U 60.02, “Disclaimer – Google finance,” 2021) tomodify the evaluation no exchange rate loss or gain has been considered. Nevertheless, there will be an exchange rate loss or gain taking into account the actual transaction and operation depending on the market circumstances.

Profit and Loss Statement (from January to December)


	Jan	Feb	March	April	May	June	July	Aug	Sep	Oct	Nov	Dec
Sold units	50	114	178	242	306	370	434	498	562	626	690	754
Geodes	£ 1,750	£ 3,990	£ 6,230	£ 8,470	£ 10,710	12,950	£ 15,190	£ 17,430	£ 19,670	£ 21,910	£ 24,150	£ 26,390
Geodes cabinet	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270	£ 270
Total income	£ 2,020	£ 6,260	£ 6,500	£ 8,740	£ 10,980	£ 13,220	£ 15,460	17,700	£ 19,740	£ 22,180	£ 24,420	£ 26,660
Cost of sales
Salary for assistant	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200	£ 200
Cabinet	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42	£ 42
Manufacturing material (geodes)	£ 196.5	£ 448.02	£ 699.54	£ 951.06	£ 1,202.58	£ 1,454.1	£ 1,705.62	£ 1,957.14	£ 2,208.66	£ 2.460.18	£ 2,711.7	£ 2,96322
Credit card charge	£ 21	£ 47.88	£ 74.76	£ 101.64	£ 128.52	£ 155.4	£ 182.28	£ 209.16	£ 236.04	£ 262.92	£ 289.80	£ 316.68
Total costs of sales	£ 459.5	£ 727.9	£ 1016.3	£ 1,294.7	£ 1,573.1	£ 1,851.5	£ 2,129.90	£ 2,408.3	£ 2,686.7	£ 2,965.1	£ 3,243.5	£ 3,521.9
Gross profit	£ 1,560.5	£ 3,522.1	£ 5,483.7	£ 7,445.3	£ 9,406.9	£ 11,368.5	£ 13,330.1	£ 15,291.7	£ 17,253.3	£ 19,214.9	£ 21,176.5	£ 23,134.1
Expense for operation
Rent	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300	£ 300
Part-time income for students	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500	£ 1,500
Shipping from Uruguay	£ 204	£ 465.12	£ 726.24	£ 987.36	£ 1,248.48	£ 1,509.6	£ 1,770.72	£ 2,031.84	£ 2,292.96	£ 2,554.08	£ 2,815.2	£ 3,076.32
Shipping and packaging in UK	£ 275	£ 627	£ 979	£ 1,331	£ 1,683	£ 2,035	£ 2,387	£ 2,739	£ 3,091	£ 3,443	£ 3,795	£ 4,147
Total expenses for operation	£ 2,279	£ 2,892.12	£ 3,505.24	£ 4,118.36	£ 4, 73148.48	£ 5,344.6	£ 5,957.72	£ 6,570.84	£ 7,183.96	£ 7,797.08	£ 8,410.2	£ 9,023.32
Income for operation	-£ 718	£ 629	£ 1,978.46	£ 3,326.94	£ 4, 675.42	£ 6,023.9	£ 7,372.38	£ 8,720.86	£ 10,069.34	£ 11,417.82	£ 12,766.3	£ 14,114.78
Net income	-£ 718	£ 629	£ 1,978.46	£ 3,326.94	£ 4, 675.42	£ 6,023.9	£ 7,372.38	£ 8,720.86	£ 10,069.34	£ 11,417.82	£ 12,766.3	£ 14,114.78
Yearly income	£ 80,377.68
Yearly income tax	28%
Net profit	£ 57,871.93

Table showing the profit and loss statement for Dorothy’s company.

As the Dorothy starts her operation in the first month, the market research demonstrate that she can sell 5 kilograms of her products. Eventually, according to this market research, the business will slowly grow until she would be able to sell 754 kilograms every month. The expectation is that each month there would be an additional 64 kilograms to the business. Income generation is through the sale of cabinets combined with geodes. Within the first month of business operation, it is assumed that the level of demand will be at 50 kilograms. As a result, Dorothy’s organization would lose an income of £ 718.5. Nevertheless, as the organization continues to trade in its products, it is expected that the company will increase its profit. An amount of £ 14,114 will be Dorothy’s total income when the year ends. £ 80,377.68 is the expected gross annual income; However, Dorothy has to pay an income tax of 28%. Thus, £ 57,871.93 is the net income that Dorothy will have at the when the her initial year of conducting business comes to an end.

Balance Sheet

Assets
	Current Assets
		Amount
	Cash	£ 530,377.68
	Total current assets	£ 530,377.68
		Amount

	Total fixed assets	–
			Total assets	£ 530,377.68
Liabilities
	Current liabilities
		Amount
	Payable income tax	£ 22,505.75

	Non-current assets
		Amount
	–
	Total long term liabilities
Equity			Total liabilities	£ 22,505.75
		Amount
	Retained earnings	£ 57,871.93
	Initial capital	£ 450,000
			Total equity	£ 507,871.93
			Total equity and liability	£ 530,377.68

Table showing Dorothy’s organization’s Balance Sheet.

Dorothy’s initial capital was £ 450,000 and it is projected that by the end of the first-year she would have generated an income of £ 80,377.68. Therefore, after the analysis above, £ 530,377.68 will be the total assets under Dorothy when the year ends, and this elaborates her total equity and liability amount.

Critical Reflection

From the data given by Dorothy, one can conclude that she will need about £ 12,000 as set-up cost. She requires £3,500 for tools she will use within the business. Furthermore, she needs £ 4,000 to pay for the website development. The organization requires £ 3,000 for market research, which would enable the business to study its target market. To secure her organization she requires £ 900 to pay for the security of the company. Finally, the firm must have a place for operation for which the show will pay £ 300. Other vital costs include an advance payment for geodes, which amounts to about £ 400.50. This expense includes the cost of shipping the geodes from Uruguay to the UK. Thus, this price may be slightly higher than £ 12,000. In terms of the attractive of the business, I have considered the risks that Dorothy did not realize. In this case, I found that these were negligible and that the initial cost could be adjusted to include these expenses. Furthermore, apart from the first month, she will continue to make profit, thereby making the business venture a lucrative one.

The financial report reveals additional risks that Dorothy did not take into account. Besides the information she provided, there are other risks related to the business operation that she did not realize. The costs incorporate the price of carriage and office supplies that the firm must secure if Dorothy wants to guarantee that her venture would be prosperous. Furthermore, she must spare some finances for buying geodes for future operations, since her credit company will finance her every two weeks after every calendar month ends. These are minor operation costs that may pose such risks as reducing the profitability of Dorothy’s organization. For that reason, she cannot attain the expected benefits from the business, since they derail the Dorothy’s efforts. Dorothy further wants exclusive rights from Colada Geodes so that she could be the main supplier. For her to attain this goal, she has calculated a period of six years of making payments. To ensure that she secures this venture, Dorothy can pay a maximum of £ 8,000 upfront. The reason for this is because the business is still new and the price will increase in the future.

Recommendations

Dorothy was made an offer of exclusive rights of supplying geodes after six years. However, this is an expensive offer and she risks spending a lot of money without viable returns because it is a new company. Furthermore, the cost may affect her ability to finance her operation cost due to low profits from the organization. As a result, the company may be bankrupt at the end of the first year. What Dorothy should consider is to make a deal with the supplier of goedes that she would always pay her dues quarterly. This would give her ample time in paying for the exclusive rights of supplying geodes. Furthermore, she would also save a lot of money, while securing the deal. Additionally, Dorothy has enough capital to set up her business and, therefore, she does not need to take a loan from her bank.

In the process of calculating the financial report data, it is clear that the organization will generate excellent profit. As with every new business, the initial period of operation often comes with a lot of challenges and the business may make losses. However, I believe that as the business continues to operate, it would generate more profit that would cover its operation. Furthermore, if Dorothy could maintain a sale of 750 kilograms of geodes from the second year through the sixth year, her profit margins are bound to increase. Nevertheless, she must realize that a new business has other expenses. Thus, she needs to account for these since they may affect her profit margins, thereby leading to bankruptcy.

References

Bai, X., Dong, Y., & Hu, N. (2018). Financial report readability and stock return synchronicity.Applied Economics, 51(4), 346-363.

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