Scenario Questions: Read The Given Information Below

Scenario Questionsinformation Givenread The Scenario Below And Answ

Read the scenario below and answer the following 3 questions. You will also need to complete the Budget on the "Income Statement & Budget" tab. Scenario: South Shore Medical Clinic is expanding its operations. As you will notice from Year 3 to Year 4, they have increased their revenue and encountered additional expenses. In addition, they have rented a new office at the end of the year so their rent expense is going to increase (they will now have two offices). In addition, they have added 2 additional staff members to payroll. Using the Income Statement, prepare a budget that takes these changes into account for the upcoming year.

Questions:

1. Using the Balance Sheet, calculate the current ratio. Comment on whether or not the ratio shows financial strength.
2. Using the Income Statement, calculate the operating margin ratio for Year 4. How well does the company measure in terms of operating efficiency?
3. Explain your budget suggestions. Do you think Revenue will increase or decrease? Do you think Expenses will increase or decrease?

Story: South Shore Medical Clinic is expanding its operations. As observed from Year 3 to Year 4, there have been increases in revenue and expenses, and the clinic has rented a second office at the end of Year 4, resulting in higher rent expenses. Two additional staff members have been added to the payroll, which will also impact expenses. The task is to prepare a Year 5 budget considering these changes.

Paper For Above instruction

The financial health and operational efficiency of South Shore Medical Clinic are crucial factors for its sustainable growth, especially considering its expansion plans. The financial statements—specifically the Balance Sheet and Income Statement—offer vital insights into the company's current position and future planning needs. By analyzing these documents, we can assess the clinic’s liquidity, profitability, and operational effectiveness, enabling informed budget recommendations for Year 5.

1. Calculating the Current Ratio and Its Implications

The current ratio is a key liquidity ratio that measures the company's ability to pay its short-term obligations with its short-term assets. It is calculated as:

Current Ratio = Current Assets / Current Liabilities

From the Balance Sheet provided, the current assets amount to $145,000, and the current liabilities total $97,200. Thus, the current ratio is:

Current Ratio = $145,000 / $97,200 ≈ 1.49

A current ratio of approximately 1.49 indicates that the clinic maintains enough liquid assets to cover its short-term liabilities nearly one and a half times over. Generally, a current ratio between 1.2 and 2.0 suggests a healthy liquidity position, meaning the clinic is sufficiently liquid to meet immediate obligations without resorting to borrowing or asset liquidation.

However, while this ratio demonstrates relative financial strength, it also warrants caution. A very high current ratio may imply excess holdings of current assets, possibly indicating underutilized resources or inefficient asset management. Overall, the current ratio of 1.49 reflects a financially sound position suitable for supporting operational growth, including the expansion into a second office and increased staffing.

2. Operating Margin Ratio for Year 4 and Operational Efficiency

The operating margin ratio assesses how effectively a company manages its core operations, indicating profit generated per dollar of revenue before interest and taxes. It is calculated as:

Operating Margin Ratio = Operating Income / Total Revenues

Based on the income statement, total revenues are $160,000, and net income is $10,800. To compute the operating margin ratio, we need operating income, which is typically derived before interest and taxes. Assuming net income closely approximates operating income in this scenario, the calculation is:

Operating Margin Ratio = $10,800 / $160,000 ≈ 0.0675 or 6.75%

This indicates that approximately 6.75 cents of profit are earned for every dollar of revenue generated. Compared to industry benchmarks, a margin around 6-8% is modest, implying that the clinic operates efficiently but has room for improvement in cost management and revenue optimization.

Strong operational efficiency would be reflected in a higher margin, possibly through better billing practices, cost control, or service diversification. Therefore, while the clinic's current operating margin shows reasonable efficiency, strategic initiatives in Year 5 could aim to increase this ratio, thereby enhancing profitability.

3. Budget Suggestions for Year 5: Revenue and Expenses

Given the expansion activities—adding a second office, increasing staff, and anticipated revenue growth—it is reasonable to project that both revenue and expenses will rise in Year 5.

Revenue: With the addition of a second office and more staff, the clinic's service capacity and market reach are likely to improve. Assuming the clinic capitalizes on its expanded resources, revenue should increase. A conservative estimate might project a 15-20% growth in revenue, leading to an estimated Year 5 revenue of:

$160,000 (Year 4 revenue) × 1.20 = $192,000

This increase considers a growing patient base and enhanced service offerings facilitated by the new office and additional staff.

Expenses: Expenses related to salaries are expected to increase significantly due to the two new staff members. Rent expenses will also rise from $32,000 to account for the second office. Other operational costs, such as utilities, advertising, and supplies, will likely increase proportionally or marginally, considering scale efficiencies.

Assuming a 25% increase in overall expenses, the estimated Year 5 expenses would be:

$80,000 (salaries) + $32,000 (rent) + other expenses (proportionally increased) = approximately $200,000 total.

In this context, the combined increase in expenses aligns with proportional operational scaling, maintaining the clinic's financial health while supporting growth initiatives. Budgeting for a 20% increase in revenues against a 25% rise in expenses suggests focusing on strategies to maximize revenue (such as expanding services or improving billing collection) to sustain profitability.

Overall, the Year 5 budget should reflect a targeted revenue of around $192,000 and expenses of approximately $200,000, with a focus on controlling costs to improve margins. Cost control measures could include renegotiating supplier contracts, optimizing staffing levels, and streamlining administrative processes. Profitability may temporarily dip due to these investments; however, operational efficiencies and revenue growth could lead to improved margins in subsequent years.

References

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