Strategic Planning in the Small Business

Unit 2 HO 2-5 (continued)

Table 2-5

Comparative     Income Statement Percentages

(Vertical Analysis)

Year 4

Year 3 Year 2 Year I

Net sales 100 100 100 100

Cost of goods sold 60 60 70 67

Gross profit on sales 40 40 30 33

Expenses:

Operating expenses 20 20 22 22

Depreciation expense 4 3

2 3

Net income from operations

16 17 6 8

Less interest expense -1

1 1 1

Net income before tax 15 16 5 7

Less income tax expense 7.5 8

2.5 3.5

NET INCOME

7.5 8 2.5 3.5

The picture changes in year three. It appears the firm reduced

volume of sales and increased sales prices. This gave a much

better gross profit percentage in year three. With the lower

level of activity, operating

expense decreased (Table 2-3) as a

percentage

of sales revenue (Table 2-5). Growth in Sales in

year four led to a small increase in net income dollars after tax

(Table 2-3), with almost no changes in percentages (Table 2­

5).

Table 2-2 and 2-4 indicate the firm is far less dependent

on borrowed funds at the end of year four than it was at any

previous year-end. Although long-term notes payable are higher

than in years one and two, the $40,000 balance represents less

of the balance sheet total than in year three. Retained earnin. "s

have provided most of the growth for the business over the

four years. Short-term payables seem to

be well-controlled by

the end of yeay-four. More detailed analysis may indicate that

this was not true in earlier years. Although these financial com­

parisons are quite revealing, additional insight may be attained

by examining a series of financial ratios.

Chapter Two Internal Analysis 65

208