Evaluating Financial Performance

Evaluating Financial performance Name: Professor’s name: Course title: Date: Evaluating Financial Performance In evaluating the financial performance of Corner Café, both the balance sheet and the income statement provide insights on financial position. In most cases, organizations compare their performance with similar organizations in the same industry. Thus, financial performance helps to gauge the overall financial strength of an organization depending on its ability to generate revenues and use assets efficiently (Megginson , & Smart, 2009). The partners of Corner Café maintain separate capital accounts representing money invested by each one of them in the business. Thus, for the partners financial performance it is vital to establish the returns of investing in the café business. The current assets of the company have increased from 34, 000 to 70, 500, but current liabilities have also increased. Nonetheless, the quick ratio in 2011 is 5.08 and the ratio increased to 7.1 in 2012. An increase in the ratio shows that the café did take up more short debt, and the investment in inventory is appropriate for the business as capital is not tied up in inventory. Thus, in the short term the business will not suffer insolvency or suffer liquidity problems and the café is able to meet short- term targets, with the value of the inventory increasing from 1,000 to 3,000. At a quick glance, the operating expenses can provide information on the financial performance of the café, but there is a need to also look at other measures from the balance sheet and cash flow statement to get a clearer picture (Peterson & Fabozzi, 2012). The operating expenses to sales ratio, is one of the measures that show performance and efficiency, with the ratio being the operating expenses divided by the net sales. The operating expense ratio is 0.24 (120,000/ 500,000) which means that the café used 24 cents in creating sales for every dollar received after sales. Because this measure also takes into account, the café’s total cost of operations it gives a snapshot of the level of profitability with a low ratio indicating more efficiency. Furthermore, the cash flow statement shows that the net cash from operating activities is 231, 500. So as to maintain sustainability, a business typically requires profitability, which determines whether a business will continue its operations in the foreseeable future. An increase in profitability over a period of time makes it possible for business owners to invest more in the business. The gross profit margin ratio for the café is 70% (350,000/500,000* 100) being the percentage of gross profit over net sales, which means that the café is able to maintain p...