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Corporate Finance Issues during the First Five Years of a New Company
Pages 8 (2008 words)
There are 5 important financial considerations during the first years of an enterprise, which are most relevant for Precision Distribution Services Limited (PDS hereafter). The first of these relates to the strengths and weaknesses as gleaned from the financial statements of the company, and their likely impacts on the essential direction with which the enterprise has been formed (2004, 2, Bhalla)…
Accumulated losses of the first 3 years have only been neutralized in the last accounting period for which actual results are available. Consequently, the company has never declared a dividend, and does not even forecast one for the first year of forecasted business results.
2. The Gross Margin has improved from 18.75% in 2004 to 21.57% in 2005. The forecast Gross Margin for 2006, at 22.92% is only slightly higher than the latest achievement of 2005. However, fuel costs, which are significant for a business such as that of PDS is forecast to rise to 26.04% of revenue, as against 25.49% in 2005 and 25% in 2004. It appears that PDS is not able to secure protection against a major inflation driver in to its business contracts. However, PDS has been able to reduce variable labor expenses from 56.25% of revenue to just 52.94% in 2005, and expects the trend to continue with a forecast of just 51.04% in 2006. These are significant productivity gains in a challenging human resources environment. Similarly, staff salaries are forecast to remain constant in 2006 compared to 2005, though net profits will more than double.
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