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Analyzing an Income Statement

Published December 6, 2013 by Mayrbear's Lair

money

The goal of analyzing an income statement is to determine whether a company is operating effectively and making a profit.  Alvarez and Fridson (2011) suggest that to achieve this objective, the analyst must draw their conclusions by comparing the information from an earlier period as well as from examining statements of other companies in the industry. This helps give a better picture as to how well an organization is performing and how well they measure in terms of their competition (Alvarez & Fridson, 2011). To help us understand the concepts more effectively, we can examine the data provided from the Elf Corporation’s Income statement (see Exhibit A) to ascertain whether the figures reveal overall if they had better sales in 2010 than in 2008. For example, the statement shows that their sales figures increased 18% in 2009 from the 2008 figures and jumped another 8% in 2010. This means the company showed a total sales increase of 27% during that three year period. In the meantime, the cost of goods sold reflects the same percentage increases during that period. This indicates that the sales increase resulted from the amount of units sold, not due to a higher cost of goods. In addition, the statement shows that they decreased their advertising expenses. In 2008 for instance, the company invested 14% of their revenue to advertising costs that decreased to 11% in 2009 and dropped down to 7% in 2010. This may suggest that their brand may have become more recognizable and management decided to reduce advertising costs to maximize profit margins. The statement also exhibits that there was no change in the amount of expenses that were allocated for administrative costs which remained the same rate during that three year period. However, administrative costs expose a 4% decrease over that time because of the rising sales levels.

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Fraser and Ormiston (2010) explain that a company’s operating profit margin measures the overall performance of the company’s operations and provides the basis for determining the success of a firm (Fraser & Ormiston, 2010). The Elf Corporation’s income statement for instance, indicates a steady increase during that three year period with respect to their operating profits. This signals an increase from 18% of the company’s sales revenue in 2008 to 29% in 2010. This ratio suggests that the company experienced a steady strengthening in their returns. Other expenses incurred where interest amounts paid on the firm’s debts. For example, in 2008, the company paid 5% in interest expenses which rose to 8% in 2009 and 10% in 2010. This means that as profits rose, more funds were available for debt commitments. In addition, the statement also shows that the revenue the company collected before income taxes also reflected a steady increase during that three year period. For instance, in 2010 Elf’s earnings revealed an increase of 24% from that of 2008. Finally, the last item on the income statement shows the company’s bottom line, their earnings or the net income they profited after all revenue and expenses were deducted. These figures indicate a steady increase that began at 6% in 2008 and rose to 9% by 2010. My brief analysis of the Elf Corporation’s income statement concluded that the company continued to show a steady increase in profit from the 2008 to 2010 accounting period.

Exhibit A

Elf Corporation Income Statements for the Years Ending December 31

ELF

References:

Alvarez, F., & Fridson, M. (2011). Financial statement analysis: A practioner’s guide. Hoboken, NJ: John Wiley & Sons, Inc.

Fraser, L., & Ormiston, A. (2010). Understanding financial statements. Pearson Education

 

Leveraging Resources

Published March 18, 2013 by Mayrbear's Lair

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Entrepreneurs are the headmasters of their organizations and the taskmasters that seek funding for their businesses, whether for initial start-up, to continue operations or to expand. While changes in banking have altered the financial landscape and closed a few doors to funding opportunities, innovative ideas have opened the doors to others. USA Today’s Small Business Columnist, Steven Strauss (2011) explains two kinds of financing: (a) debt financing; and (b) equity financing. Debt financing requires the entrepreneur take on debt to finance the business, whereas equity financing entails bartering or selling a portion of the venture in exchange for cash that does not have to be paid back (Strauss S. , 2011).

micro-loans

In the meantime, contemporary business leaders use a combination of resources to fund their ventures. Some of these include more unorthodox methods of financing like: personal savings, retirement funds, credit cards, online grants, business plan competitions, peer-to-peer lending, a variety of loans including friends and family plans, as well as crowd funding and microloans. There also the more conventional methods available from traditional financial banking institutions and business oriented organizations like SBA.

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Some entrepreneurial organizations engage in a variety of strategies as leverage for resources. For instance, entrepreneurs that are in the storming and norming stages of their organizational venture, can invest personal capital in small increments from billable service profits. The pros of personal investment are: (a) interest free resources, (b) no approval is required from others for expenditures, and (c) there is no liability to others. On the other hand, some of the cons for using personal resources include: (a) the depletion of funds which may be required for a rainy day, and (b) it is not always enough. Strauss’s book, The Business Bible recommends a few other inexpensive ways to attract more business revenue with mobile marketing strategies and other social media outlets like Facebook, Twitter, YouTube and LinkedIn. These are some of the innovative resources available that are great for free advertising as a cost effective way that can assist to further expose a company’s brand and services (Strauss S. , 2012). When an organization has cash flow challenges and are unable to secure more financing for budget expenses, capital and headcount, other services some entrepreneurs consider, is raising capital from short video ads on social media outlets like YouTube with the intent of making it go viral. A smart entrepreneur understands that in today’s marketplace, a viral video can become a capital resource game changer.

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References:

Strauss, S. (2011). Get your business funded: Creative methods for getting the money you need. Hoboken, NJ: John Wiley and Sons, Inc. Publishing.

Strauss, S. (2012). The small business bible (3rd ed.). Hoboken NJ: John Wiley and Sons, Inc.

The Entrepreneurial Culture

Published February 27, 2013 by Mayrbear's Lair

oc-Entrepreneurship

Research reveals that more and more companies are embracing an entrepreneurial culture in the innovation process within their organizations. Firms have begun to comprehend that the nature of innovation is transforming the workplace and have developed policies to accommodate this paradigm shift.  The field of innovation now expands beyond the traditional arenas of science and technology.  Organizations have done this by instigating innovation in ways that also address new components to include: 1) co-creation, 2) user involvement, and 3) environmental and social challenges (Prahalad, 2010). The Lego Corporation, for example has emerged as a company that incorporates a visible entrepreneurial culture.

lego-mindstorm-nxt

In 2006, innovators at Lego decided to involve users in the early stages of the development process for the next generation of a popular product called Mindstorms.  They picked four advanced users from an online community to help develop new features. This strategic union between users and non-users from the in-house production staff turned out to be quite successful and a contribution to Lego’s culture toward a better organizational experience. The experience and insight users offered were a valuable asset for the engineers who could now develop a new product directly with the feedback of the operators. It was so successful, they eventually became a part of the Lego Innovation team and the new version of Mindstorms NXT went on to garner two achievement awards within the first few months of its release. MacDonald (2008) purports that working for a huge corporation can hinder productivity due to the bureaucratic nature.  In other words there is less freedom to engage in creativity that can help individuals fully realize their potential (MacDonald, 2008, pp. 4-6). The Lego corporation has found a way to break some of these bureaucratic barriers by incorporating innovative entrepreneurial techniques.

economic-crisis

Economic crisis and high unemployment rates forced some out of the world of bureaumania and into the world of entrepreneurship. It forced some individuals to find solutions outside the box for employment. For example, one person began offering marketing and social media production services to a select corporate executives as an independent contractor.  The venture is still in the infancy stages as they continue to learn from their experiences and work out the bugs from the structures that hinder the process which include the expansion of a client base and the resources to support it. Badal (2013) suggests that creating the right environment which includes: (a) being open to risk, (b) developing trusting relationships, (c) building skills and knowledge, (d) offering support, (e) obtaining access to resources, (f) maintaining a supportive organizational structure, and (g) setting realistic goals, is pivotal for the innovation process that is emerging in the entrepreneurial sector (Badal, 2013).

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References:

Badal, S. (2013). Building corporate entrepreneurship is hard work. Retrieved February 13, 2013, from Gallup Business Journal: http://businessjournal.gallup.com/content/157604/building-corporate-entrepreneurship-hard-work.aspx

MacDonald, R. (2008). Beat the system: 11 secrets to building an entrepreneurial culture in a bureaucratic world. Hoboken, NJ: John Wiley & Sons, Inc.

Prahalad, C. K. (2010). The new nature of innovation. Ann Arbor, MI: OECD.