Any business needs financial control in the form of various reports that must maintain a balance of assets and liabilities and equalize debit with credit. Understanding financial movements control the situation and predetermine development scenarios in advance, whether a crisis or vice versa, a sufficient amount of retained earnings for expansion. This paper provides a financial analysis of a small new venture to evaluate its profitability, efficiency and solvency.
Process
First, a trial balance was drawn up at the beginning and end of the period, reflecting all the company’s income and expenses. The balance of debit and credit must be monitored to understand the size of net profit, the general financial position and to assess the investment attractiveness of the enterprise (Walker, 2022). In addition, a comprehensive income statement was calculated to assess the profitability of a business in the billing period without considering the entire capital. All revenues must cover estimated expenses for the organization to be liquid, that is, to cope with its short-term obligations. A more comprehensive picture is given by the balance sheet, which also demonstrates the enterprise’s solvency by assessing assets and liabilities. Moreover, the owner can now track the movements of his capital, considering the loan and using shareholder’s equity to maintain knowledge of the funds he has at his disposal.
Financial Statement Analysis
The company’s net profit ratio is 0.37, indicating relatively good profitability based on the results of the billing period. A positive value signals that the enterprise generates income monthly, which is the goal of any business. The current ratio is more significant than 346, which results from the leverage that is not included in current liabilities. This paper does not indicate the monthly loan payment, which will significantly reduce this indicator and allow a more accurate assessment of the company’s liquidity. Therefore, the company has room for expansion, provided it remains at the gross and net profit level to cover the potential interest on a long-term loan.
Internal Controls
The owner must implement the following internal control systems as the business expands. First, he should limit access to unrelated employees’ financial systems to avoid leakage. Second, as the enterprise expands, it will be necessary to introduce an independent internal audit to monitor potential balance sheet deviations. Finally, financial reporting can be diversified as the range of services expands to understand which section of the enterprise generates more revenue and which needs intervention.
Looking to the Future
The profitability of a business can be diversified through assets, which may include investments or inventories. These indicators are included in the balance sheet reporting varying degrees and require a deeper efficiency assessment by calculating the relationship between asset and inventory turnover. When it comes time for businesses to record their inventory, they typically use one of three different primary accounting methods: the weighted average method, FIFO, or LIFO. The weighted average method is most often used when inventories are so interconnected that assigning a specific value to a single item becomes difficult. FIFO eliminates the difference in time with dynamic pricing of goods and involves the sale of older goods. LIFO involves selling the freshest items in stock (Tanaka & Respati, 2021). The ideal merchandising scenarios are as follows: average method is best used for products with a series of required maintenance services; FIFO – is for design companies or food retailers; LIFO – is for pharmaceutical companies.
The straight-line method for accounting for depreciation is the simplest and is suitable for a small business like the owner. It involves calculating the duration of the useful life and scrap value, followed by deducting distributed depreciation from the asset’s value. However, if the asset wears out faster or is more productive at the beginning of its life cycle, then the sum of years method uses a more complex cost deduction relationship than the straight-line method (Nechaev & Rasputina, 2020) is better suited. As the business expands, the owner may move from the first method mentioned to the last.
References
Nechaev, A., & Rasputina, A. (2020). Integrated depreciation management system. In IOP Conference Series: Earth and Environmental Science (Vol. 421, No. 3, p. 032011). IOP Publishing. Web.
Tanaka, G. M. P., & Respati, H. (2021). Cost of inventory calculation analysis using the Fifo and Lifo methods. Journal of Business Management and Economic Research, 5(4), 109-120. Web.
Walker, C. H. (2022). Learn the basics in accounting with me: Accounting. Google Play Partner Center.