We believe PC Depot will be a great venture for Thompson Essay Example

We believe PC Depot will be a great venture for Thompson Essay Example We believe PC Depot will be a great venture for Thompson Essay We believe PC Depot will be a great venture for Thompson Essay In September, Barbara Thompson started PC Depot, a retail store for personal computers, with initial startup costs in the amount of $158,115 (Anthony, 2004, p.108). During the month various transactions occurred resulting in a net income for the month of September in the amount of $5,054. Financial transactions for the month of September have been recorded in the general journal, which also includes adjusting and closing entries. NC Gold has prepared the balance sheet and income statement for PC Depot for the month of September. A financial analysis of the balance sheet and income statement was conducted and areas of concern were identified. One area of concern for PC Depot is the amount of inventory they are carrying for a start up business. During the month of September, PC Depot purchased merchandise for inventory in the amount of $187,440 on credit from suppliers. Cost of sales for the month of September was $38,140 resulting in an ending inventory of $149,300. Another area of concern is the amount of debt PC Depot has incurred through bank loans in the amount of $100,000 and purchases from creditors in the amount of 187,440. NC Gold feels that PC Depot should focus on reducing inventory costs and reducing their short tem and long term debt. Some suggestions for reducing inventory costs include implementing the Just In Time or consignment method of inventory. Just In Time (JIT) is a comprehensive inventory and manufacturing control system in which no materials are purchased and no products are manufactured until they are needed (http://services.eliteral.com/glossary/glossary-of-quality-improvement-terms.php The JIT inventory method could eliminate financial risk. By keeping inventory stored for long periods, companies may experience high storage and investment costs and also obsolete inventory. These costs may hinder the companies profitability. For JIT to prove beneficial for PC Depot, the company needs to choose suppliers carefully. Companies may risk sales due to untimely deliveries or damaged merchandise by suppliers when using the JIT inventory method. Thompson needs to research and consider all possible suppliers when considering delivery on an as needed basis. Another option for PC Depot is the consignment method of inventory. Consignment inventory can be defined as goods placed at a customers location, with ownership of these goods remaining with the supplier. Payment is not made until the item is actually used. (Czarnecki, 2004, p. 24) By applying this method, PC Depot would not incur losses due to unused or unsold merchandise. The consignment method would eliminate upfront costs and allow PC Depot to maintain inventory on hand. The company would also be able to return unused inventory to the supplier within a reasonable amount of time. Dell Computers serves as an example of a company that uses consignment inventory. Dells Michael Gray credits the companys success to the low levels of inventory and says companies run risk of managing inventory that becomes obsolete (A Reminder, 2005). The consignment method of inventory, while potentially beneficial to PC Depot, requires proper management with suppliers. PC Depot must recognize the importance of relationships with suppliers who may make returning merchandise difficult. Czarnecki says, contracting with the vendor to keep track of inventory and allowing for return of supplies that are not used or are no longer current can help make this purchasing method more user-friendly (2004, p. 28). The amount of debt incurred by PC Depot to purchase inventory for the company is a major concern. Currently, Thompson is paying interest to creditors for inventory which is not being sold. Also, Thompson has a $100,000 bank loan at 15% interest which was used to start the business. In total PC Depot currently has $192,571 of combined debt. Considering the costs incurred to obtain inventory and how much inventory is currently being maintained, an alternative inventory control method such as JIT or consignment would work best for PC Depot. We recommend that for future inventory needs PC Depot establish a relationship with suppliers that can provide them inventory utilizing the JIT method. The JIT method is preferred over the consignment inventory method because it eliminates storage issues. If PC Depot were to use the consignment method of inventory, they may still incur costs associated with the housing and returning unused merchandise. NC Gold recommends that PC Depot reduce as much cost as possible by eliminating inventory overage. Thompson should also consider a line of credit as opposed to paying interest on the $100,000 bank loan. With a line of credit, Thompson will be able to borrow money as needed and pay interest only on the amount used. To accomplish this, Thompson should use the initial cash investment, paid-in capital, of $65,000 to pay towards the $100,000 note payable and utilize the line of credit when needed. Applying the standard 8% rate on a line of credit, Thompson would pay $4,800 in interest as opposed to $15,000 annually (moneycafe.com/library/prime.htm). We believe PC Depot will be a great venture for Thompson as evident by a net income of $5,054 for the companys first month of operations. We feel that our recommendations to reduce inventory costs and debt will be beneficial to PC Depot and provide them an opportunity to be more profitable in the future. Our findings and recommendations can be supported by the following financial exhibits.