That Sales are growing does not mean this is good because the cost price of goods sold is also increasing faster than Sales. The increase in sales figures may be due to the mark-ups of Louise to the Cost price.
Louise is therefore selling a lower volume of goods but at higher prices as confirmed by the - 2% figure above, even though in Year 5, sales grew by 20% after Louise dropped gross margins from 30% to 25%.
The gross margin is the ratio of gross profit to Sales and is the mark-up Louise adds to the cost of her products, whilst the net margin is the ratio of net profit to Sales after expenses are deducted from gross profit.
Declining (- 4%) gross profits means sales are not increasing as fast as Cost price of goods, whilst the increase (14%) in net profits only means that Louise is controlling her expenses better, as shown by the 17% Average Sales/Expenses figure.
Louise can improve the management of her business by spending more on marketing to increase demand and Sales figures. This would result in higher expenses, but it would increase Sales at a faster rate than the Cost price of goods and would result in an increase in net profits. Unless Sales increase, Louise's profits will be squeezed.
If the capital of 60,000 in Year 1 is assumed to be the total she invested in the business, which includes initial inventory, improvements on the premises, furnishings and equipment, the van, and working capital to pay for wages and other expenses, the drawings of 64,000 over five years represents her return on that investment which, at a net value of 4,000 over five years does not seem much of a good one (at 1.3% per year).
She may be better off depositing her money in the bank for a return of 3% to 5% (Economist, 2007). Of course, Louise may derive fun from running the business or perhaps she invested much less than 60,000 of capital, in which case she may be happy with the 12,800 annual income.
An added danger is that assets are growing slower than liabilities (which would include accounts payables or debt to her suppliers), so unless Louise brings down debt, she may go bankrupt. She must manage her cash better to address this. And it seems that Louise is not paying taxes, so she better watch out as the taxman soon cometh
3. By reference to the figures, give a detailed assessment of the impact of the trading and financial performance of "Louise" on the personal financial situation of Louise Walford, over the five year period. [20/200]
Louise Walford is not living the high life in Derbyshire we can be sure because her annual income is only 12,800, and unless she drives up sales at the shop to increase her net profits, she risks losing everything if her liabilities continue growing faster than assets.
She drew only 8,000 in Year 3, and