Finance – Bake Me A Cake (BMAC) Evaluation
Executive Summary
Bake Me A cake is a sole proprietorship enterprise that is owned by Amy Bourgon. Since it was
founded in the early eighties it has concentrated on its core business of baking cakes. It has
mostly concentrated on supplying its products to shops, hotels and supermarkets. Lately it has
opted to start selling directly to customers from their bakery that is based next to their home in
the Portland metropolitan area of Beaverton, Oregon.
Finance
2
Contents Pages
Executive Summary 2
Introduction 4.0
Strengths and Weaknesses 4.1
Threats and Opportunities 5.0
Cash Flow Analysis 5.1
Financial Ratios Analysis 6.0
Differential analysis: Leasing verses Renovating 7.0
Pricing Policy 8.0
Advertising Strategy 9.0
Recommended Changes 9.1
Projected earnings and balance Sheet 9.2
Conclusion 11.0
Finance
3
References 12.0
Appendices 13
4.0 Introduction
Bake Me A Cake (BMAC) is a company owned by Amy Bourgon who is the sole proprietor of
the business. Its major business activity is in the production of cakes.
4.1 Strengths and Weaknesses
BMAC major strengths and weaknesses are found on its business structures and its ability to
adapt to different changes in the market. BMAC is a sole business proprietorship and making
decisions major and critical decisions that normally take weeks to make in big organizations can
be decided in a matter of minutes as no consultations are necessary. The operations of the
business are very flexible.
The major weakness to the business is reflected in its operation structure where if Bourbon is
incapacitated then the business will be ground to a halt. The business will not be able to continue
with normal operations if Bourgon is critically sick or in the event of death then the business will
also die naturally unless maybe it’s inherited and reregistered as a different business. A sole
proprietorship business has limited sources of borrowing money as the law does not allow them
to sell shares to the public to raise money for expansion instead they have to depend on private
sources like banks to lend them the funds. In case the firm can’t pay off its debts then the private
Finance
4
properties of Bourgon can be attached to settle the debts as the kind of firms have unlimited
liability. This makes the firms to be extra cautious when acquiring loans as their liabilities are
not protected by the law and these actually limits their expansion prospects.
5.0 Threats and Opportunities
The major threats and opportunities that may affect BMAC are mostly economic. The major
opportunity for growth and expansion for BMAC lies in the potential ready to eat food market
that is readily available in the US. The strong economy and the promising economic growths are
the best available opportunities to expand the business. (Ehrhardt and Brigham, 2008)
The technological advancement that includes new technologies tailored to reduce operational
costs, energy and which also conserve the environment as well as providing latest computer
software that optimize pricing calculations in revenue management, stock control, supply chain
management and improved customer relations management.
The threats facing BMAC are the constant fluctuation of raw material prices that threatens to
wipe out all the profit margins. The threat of new competitors and the high costs of financing.
5.1 Cash Flow Analysis
The net income increased by 12% in 2011, from a previous net income of 1.9 million in the year
- The net income for 2011 was $2.133 million respectively. Between the years 2010-2011,
the revenue reported a positive growth of 9.7%%, i.e. a difference of $1.85 million dollars while
Finance
5
during the same period, Nike, Inc incurred revenue cost that amounted to almost 46% of the total
revenue, an increase of 8% from the year 2010. The cash and cash Equivalents for the period
2010 and 2011 were negative 1.124 million and $0.788 million respectively. These represented a
negative growth of 242% in the year 2011 from the previous year i.e. in 2010. The returns on
assets (ROA) were 13.22% and 14.2% in the years 2010 and 2011 The Total assets were $14.419
million and $14.998 million in 2010 and 2011 respectively. (Vance, 2003)
The two major current assets were cash and cash equivalents and Accounts
receivable which were valued at $3079.1 million and $2649.8 million respectively in the year
2010 while the year 2009 were Accounts receivable and Inventories which were valued at
$2883.9 million and $2357 million respectively.
The total current assets for the years 2010 and 2011 were $10.959.2 million and $11.297 million
respectively. (Drucker, 1999)
The total cash flow received from operating activities which amounted to $3.164
million and $1.812 million in the years 2010 and 2011 respectively. The total cash flow from all
the investments activities were negative $-1.021 million and $-1.268 million in 2010 and 2011
respectively. The total cash flows from Financing activities amounted to negative -1.972 million
and $-1.061 million in 2010 and 2011 respectively.
The working capital = Total assets – Total liabilities. = For the years 2010 and
2011 = $14.419 million – $4.665 million = $9.754 million and $14.998 million –$ 5.155 million
= $9.843 million.
6.0 Financial Ratios Analysis
Finance
6
For the years 2010 and 2011, the Current ratio = Current Assets / Current liabilities
which equals to 10.9592/3.3642 and 11.297/3.958 = 3.26 and 3 respectively. The quick ratio =
Current assets – inventory/Current liabilities = 10.9592- 2.0408/3.3642 = 2.66 and 11.531-
2.715/3.958 = 2.23 for the two years respectively i.e. 2010 and 2011. These means that BMAC is
able to meet its immediate financial obligation.
The debt to Equity ratio is calculated by dividing Total debts by Total Equity and
also Total debts by Total Assets. This is equal to 1. Total debts/Total Equity for the 2010 and
2011 = 445.8/9753.7 and 437.2/8693.1 = 4.6% and 5%. Respectively while 2. Total debts/Total
Assets = 445.8/14419.3 and 437.2/13249.6 = 3.1 % and 3.3 % for the years 2010 and 2009
respectively.
The return on equity (ROE), i.e. profit after taxes/ share holders equity. These
equals to 20.7% in 2010 which represented an increase of 2.7% from the year 2011. The
inventory turnover increased to 4.6 in 2010 from 4.4 turns in 2011. (Khan, 1953)
The price/earnings ratio for the year 2010 and 2011 remained at 18.8. These
represented no improvement on the earnings ratio.
7.0 Differential analysis: Leasing verses Renovating
Differential analysis is also referred to as incremental analysis. It normally identifies the
Necessary and relevant costs that each option and its future impact. Renovating the family home
is basically less expensive than leasing a shop or a business premises. The major advantage of
renovating the house is that it’s cheaper than leasing and there are no more financial payments in
future unlike the lease that has to be renewed every year at some costs. Renovating is also
Finance
7
convenient as the operations of the business can be supervised from the comfort of the house.
The disadvantages are that the business will be affected during the renovation period and there
will be loss of business and loyal customers will also be affected. The lease is convenient as the
business premises can be leased at an ideal location that can be more profitable. The business
operations may not be affected for a long period as in the case of renovations.
Differential Analysis
Renovate Lease Incremental
Lease 100,000 -100,000
Direct materials 40,000 40,000
Direct labor 30,000 30,000
overhead cost 20,000 20,000
Total relevant
costs
90,000 100,000 -10,000
From the following figures its profitable to renovate the family home because of the lower costs
associated with the project unlike the case of leasing. However the opportunist cost of renovating
the house are much higher than those of leasing. The renovation period will definitely affect the
costs and the lost opportunity of locating the business in an ideal business environment will be
lost if the renovations are preferred. (Kieso, Weygandt & Warfield, 2007)
8.0 Pricing Policy
The advantages of increasing cupcake prices are that the firm will earn more money than it did
previously. Also the money can be utilized to improve the quality of the cakes and also offer
other essential services. The major disadvantage of increasing the prices is that it may affect the
Finance
8
sales and also some customers may react negatively and opt for other alternatives in other
competitors businesses. (Garrison, Noreen and Brewer, 2009).
Cost per cake and the contribution per day
Sales 1000 cakes @ $10 $10,000
variable exp 1000 @ 4 $4,000
contribution margin $6,000
Fixed ex $1,000
Net income $5,000
9.0 Advertising Strategy
The marketing strategy that BMAC should adopt should basically target the ready to eat market
where most consumers prefer quick snacks rather than the expensive birth parties which should
also not be overruled. The packaging should be attractive and mouth watering to capture and
arouse the potential customer’s appetites.
9.1 Recommended Changes
The changes that Bourgon should institute include hiring new premises which are strategically
located in populous areas that can sustain the business. The pricing policy should be favorable to
the customers and also profitable for the company. The business should also have a reasonable
budget for advertising, marketing and promotion of its products. The company should also
invest in friendly customer relations management training for its front office staff.
9.2 Projected income Statement
| s
Period Ending May 30, 2012
Total Revenue 24,128,000
Finance
9
Cost of Revenue 13,657,000
Gross Profit 10,471,000
Research Development –
Selling General and Administrative 7,431,000
Non Recurring –
Others –
Total Operating Expenses –
Operating Income or Loss 3,040,000
Total Other Income/Expenses Net (54,000)
Earnings Before Interest And Taxes 2,986,000
Interest Expense 3,000
Income Before Tax 2,983,000
Income Tax Expense 760,000
-
Net Income From Continuing Ops 2,223,000
Non-recurring Events
Discontinued Operations – – –
Extraordinary Items – – –
Effect Of Accounting Changes – – –
Other Items – – –
Net Income 2223,000
Finance
10
Projected Balance Sheet
s
Period Ending May 30, 2012
Assets
Current Assets
Cash And Cash Equivalents 2,317,000
Short Term Investments 1,440,000
Net Receivables 3,554,000
Inventory 3,350,000
Other Current Assets 870,000
Total Current Assets 11,531,000
Long Term Investments –
Property Plant and Equipment 2,279,000
Goodwill 201,000
Intangible Assets 535,000
Accumulated Amortization –
Other Assets –
Deferred Long Term Asset Charges 919,000
Total Assets 15,465,000
Liabilities
Current Liabilities
Accounts Payable 3,708,000
Short/Current Long Term Debt 157,000
Other Current Liabilities –
Total Current Liabilities 3,865,000
Long Term Debt 228,000
Other Liabilities –
Finance
11
Deferred Long Term Liability Charges 991,000
Minority Interest –
Negative Goodwill –
Total Liabilities 5,084,000
Misc Stocks Options Warrants –
Common Stock 3,000
Retained Earnings 5,588,000
Treasury Stock –
Capital Surplus 4,641,000
Additional capital 149,000
Total capital 10,381,000
Data sources: www.Yahoo.business finance.com
11.1 Conclusion
To conclude, the BMAC expansion strategy by Bourgon can only succeed if she embraces new
ideas and utilizes the current technological advancement to her advantage. The advertising
strategy can pay off she implements it and also changes her business operations to include retail
selling besides the whole sale business.
Finance
12
12.0 Reference.
Drucker, F. (1999) Management Challenges of the 21st Century. New York: Harper Business.
Ehrhardt, M., Brigham, E. (2008) Corporate Finance: A Focused Approach (3rd Ed.). p. 131.
Garrison, Ray, Noreen, W., Brewer, P. (2009). Managerial Accounting . McGraw-Hill Irwin.
Kieso E., Weygandt, J. J., & Warfield, T. D (2007). Intermediate Accounting (12th
Ed.).(Hoboken, NJ: John Wiley & Sons, p. 1320.
Khan, M. (1953) Theory & Problems in Financial Management. Boston: McGraw Hill
Higher Education.
Vance, D. (2003) Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
Finance
13
Appendices
Income Statement
| s
Period Ending May 30, 2012 May 30, 2011 May 30, 2010
Total Revenue 24,128,000 20,862,000 19,014,000
Cost of Revenue 13,657,000 11,354,000 10,214,000
Gross Profit 10,471,000 9,508,000 8,800,000
Operating Expenses
Research Development – – –
Selling General and Administrative 7,431,000 6,693,000 6,326,000
Non Recurring – – –
Others – – –
Total Operating Expenses – – –
Operating Income or Loss 3,040,000 2,815,000 2,474,000
Income from Continuing Operations
Total Other Income/Expenses Net (54,000) 33,000 49,000
Earnings Before Interest And Taxes 2,986,000 2,848,000 2,523,000
Interest Expense 3,000 4,000 6,000
Income Before Tax 2,983,000 2,844,000 2,517,000
Income Tax Expense 760,000 711,000 610,000
Minority Interest – – –
Net Income From Continuing Ops 2,223,000 2,133,000 1,907,000
Non-recurring Events
Discontinued Operations – – –
Finance
14
Extraordinary Items – – –
Effect Of Accounting Changes – – –
Other Items – – –
Net Income 2,223,000 2,133,000 1,907,000
Net Income 2,223,000 2,133,000 1,907,000
Data sources: www.Yahoo.business finance.com
Appendices
Balance Sheet
s
Period Ending May 30, 2012 May 30, 2011 May 30, 2010
Assets
Current Assets
Cash And Cash Equivalents 2,317,000 1,955,000 3,079,000
Short Term Investments 1,440,000 2,583,000 2,067,000
Net Receivables 3,554,000 3,450,000 2,899,000
Inventory 3,350,000 2,715,000 2,041,000
Other Current Assets 870,000 594,000 873,000
Total Current Assets 11,531,000 11,297,000 10,959,000
Long Term Investments – – –
Property Plant and Equipment 2,279,000 2,115,000 1,932,000
Goodwill 201,000 205,000 188,000
Intangible Assets 535,000 487,000 467,000
Accumulated Amortization – – –
Finance
15
Other Assets – – –
Deferred Long Term Asset Charges 919,000 894,000 873,000
Total Assets 15,465,000 14,998,000 14,419,000
Liabilities
Current Liabilities
Accounts Payable 3,708,000 3,571,000 3,218,000
Short/Current Long Term Debt 157,000 387,000 146,000
Other Current Liabilities – – –
Total Current Liabilities 3,865,000 3,958,000 3,364,000
Long Term Debt 228,000 276,000 446,000
Other Liabilities – – –
Deferred Long Term Liability Charges 991,000 921,000 855,000
- – –
Negative Goodwill – – –
Total Liabilities 5,084,000 5,155,000 4,665,000 - – –
Prepayments received 3,000 3,000 3,000
Retained Earnings 5,588,000 5,801,000 6,095,000 - – –
Capital Surplus 4,641,000 3,944,000 3,441,000
Additional capital 149,000 95,000 215,000
Total capital 10,381,000 9,843,000 9,754,000
Net Tangible Assets 9,645,000 9,151,000 9,099,000
Cash Flow
Finance
16
Period Ending May 30, 2012 May 30, 2011 May 30, 2010
Net Income 2,223,000 2,133,000 1,907,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation 405,000 358,000 396,000
Adjustments To Net Income 70,000 29,000 167,000
Changes In Accounts Receivables (323,000) (273,000) 182,000
Changes In Liabilities 470,000 151,000 297,000
Changes In Inventories (805,000) (551,000) 285,000
Changes In Other Operating Activities (141,000) (35,000) (70,000)
Total Cash Flow From Operating Activities 1,899,000 1,812,000 3,164,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (597,000) (432,000) (335,000)
Investments 1,146,000 (560,000) (932,000)
Other Cash flows from Investing Activities (35,000) (29,000) (1,000)
Total Cash Flows From Investing Activities 514,000 (1,021,000) (1,268,000)
Financing Activities, Cash Flows Provided By or Used In
commission (619,000) (555,000) (505,000)
Sale Purchase private stock (1,346,000) (1,514,000) (377,000)
Net Borrowings (203,000) (8,000) (32,000)
Other Cash Flows from Financing Activities – – –
Total Cash Flows From Financing Activities (2,118,000) (1,972,000) (1,061,000)
Effect Of Exchange Rate Changes 67,000 57,000 (47,000)
Change In Cash and Cash Equivalents 362,000 (1,124,000) 788,000
