FINANCIAL ANALYSIS

Case Study



Case Study

Victoria

The study is related to Victoria intends to start a business selling cakes in a small shop. The cash statement and Income Statement of business is mentioned below;

Cash Statement

 

 

Nov - 11

Beginning Cash Balance

15,000

Cash Inflows (Income):

Total Revenue

45,240.00

insurance premium 20.00 Total Cash Inflows

60,260.00

Cash Outflows (Expenses):

Salary

120

Telephone

100

Electricity

150

Gass

300

Rates

100

water

50

Rent Expense

2000

Interest Expense

300

Total Cash Outflows

3,120.00

Ending Cash Balance

57,140.00

Income Statement for the Month of November

Sales

45240

Less:

COGS

96000

Gross Profit

- 50760

Less:

Operating Expenses:

Salary

120

Telephone

100

Electricity

150

Gass

300

Rates

100

water

50

Rent Expense

2000

Total Operating Expense

2820

EBIT

- 53580

Less:

Interest Expense

300

Net Loss

- 53880

From the above income statement, it can be observed that the business will be incurring loss in the month of November 2011. As the business will be incurring various expenses that include Salary expense, telephone expense, electricity expense, Gass expense, Rates expense, water expense and Rent Expense. Besides it, Victoria has also taken a loan from which she has to pay interest on loan that is 300 pounds. In addition to this, Victoria has received insurance premium of 20 pounds.

Moreover, from the income statement of Victoria, it can be observed that in the month of November, the business will incur loss of 53880 pounds. In addition to this, it can also be observed from the cash statement of Victoria that the business has excess cash that is 57,140 pounds at the end of November. Therefore, the business has excess cash which is not being involved in the business activity. Excess cash is the cash remaining after payment of interest and other operating expenses of the business. Cash is the most important resource any company has, so their proper management is crucial for the proper and efficient operation thereof. Cash is what allows the company to invest, buy assets, goods, raw materials, payment of payroll, payment of liabilities, etc.

Victoria must maintain sufficient cash available to cover their minimum needs, as well as having the capacity to build any additional cash needs. The proper planning and forecasting cash flow necessary for the proper functioning of the company, is a very important tool to maximize resource utilization. It must be careful not to have excess cash, since this time over lose their purchasing power, therefore, any excess cash should be spent quickly to avoid erosion of their purchasing power, and ensure profitability adequate resources. This necessarily requires a realistic and accurate projections of cash inflows and outflows, at any time since the company must know exactly how much cash you have or have in the short term in order to project the investment of any surplus effective resulting in a given period. The money in cash, current accounts and savings generated no profit whatsoever, so that where possible there should be money in these media, because as already stated, all you get is losing its purchasing power during the time you are in that state (Groppelli and Ehsan, 2006, 32 - 46).

Part of the excess cash to address in short-term investments that allow rapid recovery in case of urgent need of it, since it is ...