Quiz 8: Accounting Records and Financial Statements


Origin of the case: J.P and G.S founded M.L Tea Company in the year 2000. M.L fills a niche market in high-end hotels, restaurants and specialist food shops. In early 2007, the pair decided to move into the mass market by selling their tea in supermarkets. The other major player L. Tea had just introduced its product in the grocery stores. Some employees believed that it would be riskier to get into supermarkets sales and the other fraction of employees believed it would be a great idea to get into supermarket sales. Meanwhile, the response J.P and G.S got from hotels and restaurants were tremendous, by the end of 2006 the sales went up to reach $13.5 million. J.P and G.S began implementing their strategy to move into the mass market. They kept an eye on their competitors, but did not panic. They believed by getting into supermarkets, the company would be doubled within a few years. The pair started selling tea in the supermarkets by reducing the cost by selling what their competitor was selling, premium brand tea. The competitor was not happy with the move of M.L tea getting into supermarkets, as their sales started to dip down. There are many inheritance risks involved in the M.L Tea Company by getting into supermarket sales, such as, the company needs to source whole bunch of more tea leaves from the suppliers, production levels increase in the factory, and whole and the new sales staff should be hired as it is selling to bigger chains. The following are the financial risks M.L will have, by entering into supermarket sales: • The cost of production will increase, as there would be a requirement of rapid increase in the production. • The expenses will get higher for building up new national sales forces with better quality performance. • If the product fails to perform well in the market, it will affect the entire cash flow of the company. • As supermarkets and grocery stores require different kind of packaging than what is sold in restaurants and high end hotels, the cost will go up for change in packaging. • Huge investments in marketing activities are required for supermarkets sales.

Business plan: Business plan is a statement which consists of business goals , plan of reaching those goals, and the reason to attain those goals. It also contains background information about the organization's attempt to reach the goals. The following are the contents of a business plan: Executive summary: Summary should consist of overview of the business concepts such as key objectives, management team, ownership, product or service offering, target market, competitive advantages, marketing strategy, and summary of financial projections. Business overview: Business history, mission, vision and ownership structure should be present under this. Product and services: Detailed explanation about the product or service is required. Product features, benefits, competitive advantages, and marketing concept of the product should be produced. Industry overview: In the industry overview, viability of the business is discussed. Size, growth of the industry, target markets, and customer point of purchase is illustrated in the overview. Marketing strategy: The marketing strategy is an opportunity to demonstrate the target market segments of the business and unique selling proposition of the product or services. Product or service pricing and promotion activities should appear in the marketing strategy. Description of how products or services will be sold and buying cycle of the target market is provided. Operating plan: In operating plan, location of the business, human resource plan, profile of the management team, and the production plan must be shown. Financial plan: Financial plan is the most important part of the business plan. Three years projection of financial statement which includes income statements, pro-forma balance sheets, and monthly cash flow statement should be provided. This projection should be very clear as it is used to forecast the revenue and the expenses of the business.

Financial statement: Financial statement is a primary record of all financial activities of a business. It includes balance sheet, income statement and statement of cash flow. Benefits of financial statements: The following are the problems that have been identified by the financial statements and solved by the management. • Employees in the organization: Employees in the organization can use the financial statement to know the impact of their performance in the profitability of the business. • Managers or Management: Financial statement helps the managers to analyze the performance and future profitability of the particular project. It also provides financial information required at the middle level decision making. • Owners: Owners of the organization use the financial statement to determine the Return on Investments (ROI), profitability, and it also helps at the top level decision making. • Investors: Investors of the business use the financial information to identify the Return on Investments made. This also helps the investors to decide about the future investments in the business. • Other governmental organizations and banks: Banks and other governmental organizations use the financial statement of the company to identify the honesty of the firm. It also helps to obtain loans and overdrafts from bank. • Government: Government uses the financial statement for the purpose of identifying the economic contribution of the business towards the economic development of the country.

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