Financial Statements of Small Businesses - Essay Example

The paper seeks to write a report about the projected financial statements of a proposed business, the capitalization of which would come from four partners at $80,000 each or a total of $320,000. This will evaluate the financial information for the next three years if the benefits will justify the cost of going into business. Since the financial statements are meant for the future to evaluate the feasibility of the proposal this report will discuss the profitability of the venture that would have to be supported with good liquidity and acceptable solvency or financial leverage.

As can be seen from Appendix A, the business will have losses for the first two years but beginning in the third year profitability will become positive and the following years thereafter. However, this paper will report only the first three years. The higher expenses than revenues in the first two years are understandable as the business is just starting. Sales revenues will expand over time with higher sales volume into new locations as the branded products of the business become known. The decreasing expenses starting after two years would come as the business take less expensive locations. This would result in an increasing gross monthly margin over time as can be seen in Appendix B.
Increasing sales is observable for the next three-year period and such behavior should indicate growth of the business for the next three years. The greater the revenues the higher would be the chances for better profitability after deducting the expense (Bernstein, 1993; Droms, 1990). The profitability of the business is obvious in the third year and as reflected in the positive net profit margin of 16.7% after having negative rates for the past two years because of the losses. See Appendix C.

Profitability essentially means higher revenues than expenses which would mean that the business would naturally incur costs or expenses in running the business but the same should generate higher revenues in exchange for the expenses to indicate the profitability of the business.

The profit generated by the business is not enough to assure that business will prosper. The business must be able to pay its maturing obligations on time like the salaries of employees, payment for goods and services to supplies, and regular bills for electricity, telephone, and other utilities. In other words, it must have sufficient working capital or excess of current assets over its current liabilities at one point in time which can be measured also by liquidity ratios (Helfert, 2001). The company is found liquid for the next three years as could be seen from the positive current ratio and quick asset ratio ratios. The company was able to maintain good liquidity ratios for the first three years although it declined over the years because of the losses in the first two years which were not strong enough to endanger the company to becoming bankrupt as the company still exhibited a 1.34 current ratio year 3, which means that it has higher current assets than current liabilities.

Good liquidity ratios are an assurance of a company's ability to meet its currently maturing obligations (Gitman, 2006; Helfert, 2001). No company can operate normally if salaries payable, accounts payable, and other accrued expenses are not settled on time. The moment that working capital becomes negative becoming insolvent would bring greater problems if the bankruptcy sets. Sometimes, it could mean the closure of a business as an extreme possibility. Moreover, the high positive cash flows are year ends for three are very reassuring. See Appendix F.

Aside from profitability and liquidity, a business needs to be solvent, or it should have long-term health (Kieso, et al, 2007; Higgins, 2007) to survive temporary tsunamis in the economy. Such solvency or financial leverage is normally measured by relating the level of total debt to total assets. Read More