Smith has ambitions of starting an ethical laptop retail and repair services shop; however, he faces challenges in making critical decisions regarding financing, business projections, investments, community backing, and the profitability of business ventures. This study offers insights and suggestions to help Smith make decisions to enhance his idea of ensuring transparency, customer satisfaction, and adept financial management through a blend of debt and equity financing. It emphasizes precise financial projections as decision anchors, considers optimal repair machinery investment timing and depreciation, and the equilibrium between social impact and financial aspects in community engagement. The intricacies of profit and cash flow alignment with growth ambitions are deliberated, creating a path for Smith’s triumphant, ethical, and enduring business venture.
To formulate a projected income statement for the first year, an analysis of different quotes was undertaken to determine the quote that will optimize profitability while keeping in line with our estimation of selling 85 laptops within the year. The process of finding the most suitable quote involved the following detailed calculations:
For the quote involving 5 laptops
The cost per laptop would be $1,600 divided by 5 laptops, which equals $320. Hence the total cost for acquiring 85 laptops at this rate would be (85 laptops multiplied by $320) $27,200.
For the quote involving 10 laptops
Calculating the cost per laptop using the $3,000 quote for 10 laptops yields $300; this shows that acquiring 85 laptops under this quote would result in a total cost of )(85 laptops multiplied by $300) $25,500.
Quote for 100 laptops
Regarding the quote for 100 laptops, dividing the cost of $28,000 for 100 laptops gives a cost per laptop of $280; hence if 85 laptops are to be purchased at this rate, the total cost would be (85 laptops multiplied by $280,) $23,800.
Based on this analysis, the quote that allows for effective minimization of cost for optimum profit is the one entailing purchasing laptops from the supplier under 100 laptops quote; this choice presents a lower cost per laptop and aligns with our strategy to achieve profitability while making an efficient initial investment. Therefore the income statement for the first year of Business and the Statement of retained earnings at the end of the first year would be as detailed in Tables 1 and 2, respectively.
Table 1
Income Statement for the first year in Business
| Smith’s Laptop Retail and Repair Shop
First-Year Projected Income Statement |
||
| Item | Amount ($) | Description |
| Sales Revenue | ||
| · Laptop Sales | $42,925 | 85 laptops x $505 |
| · Laptop Repair Services | $13,500 | 150 repairs x $90 |
| $56,425 | ||
| Cost of Goods Sold
· Laptop Purchase |
$28,000 | 100 laptops Quote |
| Gross Profit | $28,425 | Sales Revenue – Cost of Goods Sold |
| Operating Expenses | ||
| · Labor costs | $6,000 | 150 repairs x $40 |
| · Materials Cost | $1,500 | 150 repairs x $10 |
| · Variable Cost | $750 | 150 repairs x $5 |
| · Rent | $14,400 | 12 months x $1,200 |
| · Utilities | $5,400 | 12 months x $450 |
| · Advertising | $2,400 | 12 months x $200 |
| · Interest Expense | $1,800 | 12 months x $150 |
| · | $32,250 | |
| Operating Income | -$3,825 | Gross Profit – Operating Expenses |
| Interest Income | Not provided | Assuming $0 for now |
| Interest Expense | $1,800 | Given in the operating expenses |
| Income Before Taxes | -$5,625 | Operating Income – Interest Expense |
| Income Tax Expense | Not provided | Assuming $0 for now |
| Net Income | -$5,625 | Income Before Taxes – Income Tax Expense |
Table 2
Statement of retained earnings at the end of first
| Smith’s Laptop Retail and Repair Shop
Statement of Retained Earnings |
||
| Item | Amount ($) | Description |
| Beginning Retained Earnings | $0 | |
| Net Income | -$5,625 | From the income statement |
| · Dividends | $10,000 | |
| Ending Retained Earnings | -$15,625 | Net Income – Dividends |
Tables 1 and 2, depicted above, comprehensively illustrate the income projection and retained earnings for Smith’s Laptop Retail and Repair Shop within its inaugural year of operation. Within this context, it becomes evident that the Business is likely to incur a net loss of $5,625 during this nascent period; however, it is important to note that the scenarios are most common to new Businesses; it illustrates the importance of managing the expenses through the entire process. Furthermore, this financial disposition accentuates the prudence of orchestrating an equitable synergy between equity and debt financing, with cautious regard for overextending the borrowing capacity given the incurred net loss. A salient facet worth elucidating is the impact of early dividend payments on the financial equilibrium of the enterprise, to counteract this, the Business is recommended to center efforts on the reduction of operational expenses, the increasing of sales services, and the strategic reinvestment of profits back into the Business.
Financial Ratios and Key Decisions
Gross Profit Margin
The Gross Profit Margin is a financial metric that gauges the proportion of revenue remaining after subtracting the cost of goods sold (COGS), indicating the effectiveness of core operational profit generation (Nariswari & Nugraha, 2020).
The Gross Profit Margin for Smith’s Laptop Retail and Repair Shop will be:
Gross Profit Margin = ($28,425 / $56,425) x 100
≈ 50.36%
The computed Gross Profit Margin of approximately 50.36% implies that about 50.36 cents from each dollar of revenue is retained as gross profit, considering the COGS. In this case, for the Business to optimize profit, negotiation for better terms with laptop suppliers is essential as it will lower the cost of goods sold; in addition, the Business can carefully adjust pricing to balance the profit without affecting the customer demand.
Operating Expense Ratio
Operating Expense Ratio in Business determines the relationship between the Business’s operational expenses and sales revenue; it helps the Business assess its adeptness in expense management to generate revenue more efficiently (Suartini et al., 2019).
Calculation of the Operating Expense Ratio is done as follows :
Operating Expense Ratio = (Operating Expenses / Sales Revenue) x 100
Upon considering the data presented in Table 1, the Operating Expense Ratio for Smith’s Business in the first year will be:
Operating Expense Ratio = ($32,250 / $56,425) x 100
≈ 57.18%
With a calculated Operating Expense Ratio of roughly 57.18%, it becomes evident that approximately 57.18 cents from each dollar of sales revenue are utilized to cover operational expenses; this illustrates the importance of allocating generated revenue toward the Business’s operations. A comprehensive examination of the Operating Expense Ratio will give the Business a valuable compass to navigate the intricacies of cost control, Improve profitability, and augment the overall operational landscape.
Machine Purchase Decision
The projected income statement indicates that the Business will face a net loss of -$5,625 in its first year. Because of this initial loss, as evident from the projected profit and loss statement, Smith shouldn’t purchase the repair machine immediately as this could strain the Business’s cash flow. The most suitable method for this calculation is the Straight-Line Depreciation method, which spreads out the depreciation expense evenly over the machine’s productive lifespan.
In a scenario where Smith decides to buy the $35,000 repair machine, applying the straight-line depreciation method and assuming the machine will be able to repair 1,500 laptops, there would be an additional depreciation expense calculated as follows:
Depreciation Expense per Laptop Repair = Cost of Machine / Estimated Repairs
Depreciation Expense per Laptop Repair = $35,000 / 1,500
Depreciation Expense per Laptop Repair = $23.33 per laptop repair.
This means that for each laptop repair the machine contributes to, there would be an additional depreciation expense of $23.33. With this, the updated income statement for the first year of Business will be as detailed in Table 3 bellow
Table 3
Projected income statement in case the machine is procured in the first year of Business
| Smith’s Laptop Retail and Repair Shop
First-Year Projected Income Statement |
||
| Item | Amount ($) | Description |
| Sales Revenue | ||
| · Laptop Sales | $42,925 | 85 laptops x $505 |
| · Laptop Repair Services | $13,500 | 150 repairs x $90 |
| · | $56,425 | |
| Cost of Goods Sold
· Laptop Purchase |
$28,000 | 100 laptops Quote |
| · Machine Purchase | $35,000 | |
| $63,000 | ||
| Gross Profit | -$6,575 | Sales Revenue – Cost of Goods Sold |
| Operating Expenses | ||
| · Labor costs | $2250 | 150 repairs x $15 |
| · Materials Cost | $1,500 | 150 repairs x $10 |
| · Variable Cost | $750 | 150 repairs x $5 |
| · Rent | $14,400 | 12 months x $1,200 |
| · Utilities | $5,400 | 12 months x $450 |
| · Advertising | $2,400 | 12 months x $200 |
| · Interest Expense | $1,800 | 12 months x $150 |
| $28,500 | ||
| Operating Income | -$35,075 | Gross Profit – Operating Expenses |
| Interest Income | Not provided | Assuming $0 for now |
| Interest Expense | $1,800 | Given in the operating expenses |
| Depreciation Expense | $3,499.50 | $23.33 x 150 repairs |
| Income Before Taxes | -$40,374.50 | Operating Income – Interest Expense |
| Income Tax Expense | Not provided | Assuming $0 for now |
| Net Income | -$40,374.50 | Income Before Taxes – Income Tax Expense |
From Table 3, the immediate purchase of the repair machine is not advisable as it would result in the Business’s operating income loss of 40,374.50. However, once the Business is firmly established, acquiring the machine could become a recommended action.
Optimal Financing Mix for Laptop Retail and Repair Business
Identifying the best financing mix is vital for a steady financial base, highlighted by the projected -$5,625 first-year loss. Equity financing involves selling ownership shares and offering shared risk and flexibility (Sharma & Tripathi, 2016). Given the initial financial situation, equity financing helps without instant repayment pressure, aiding business momentum. But it comes with ownership dilution and profit-sharing. A cautious method involves retaining substantial ownership and inviting strategic investors.
According to Ko & Yoon (2011), debt financing provides quick capital to start a business but comes with the burden of interest repayments. With this, equity financing is the perfect fit for startup costs and operations, while debt should be used prudently for growth once the Business has gathered momentum. Merging both reduces risks and positions the business well. By combining equity and debt financing, Smith can create a solid base for growth, reducing risks while navigating the competitive market. This mix tackles immediate needs and ensures lasting financial stability.
References
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Ko, J. K., & Yoon, S.-S. (2011). Tax benefits of debt and debt financing in Korea*. Asia-Pacific Journal of Financial Studies, 40(6), 824–855. https://doi.org/10.1111/j.2041-6156.2011.01059.x
Nariswari, T. N., & Nugraha, N. M. (2020). Profit growth : Impact of net profit margin, gross profit margin, and total assets turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), 87–96. https://doi.org/10.20525/ijfbs.v9i4.937
SHARMA, J. K., & TRIPATHI, S. (2016). Staged financing as a means to alleviate risk in VC/PE financing. The Journal of Private Equity. https://doi.org/10.3905/jpe.2016.2016.1.051
Suartini, S., Sulistiyo, H., & Indrianti, W. (2019). The effect of nonperforming financing, financing to deposit ratio, and operating expense to operating income ratio (BOPO) to profitability. AFEBI Economic and Finance Review, 3(02), 69. https://doi.org/10.47312/aefr.v3i02.207
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