BUSI 3016 Week 11 Financial Position Memo Example

Memorandum

To: Senior Service Technician and future owner, Ozark Comfort Heating & Air

From: Service Manager

Date: January 22, 2029

Re: Where the business stands, in plain words, and what to watch in your first year

The Short Version

The business is healthy. It earned $182,000 in 2027 on $3.24 million of sales, it has steady customers and a growing maintenance plan base, and it has never missed a payroll. But three things weakened in 2027 and need your attention: we keep a smaller share of each sale than we used to, our newer commercial customers pay slowly, and summer leaves us short of cash even though it is our most profitable season. None of these is dangerous today. Each is easier to fix early than late.

What We Earn and What We Keep

The income statement shows what we billed and what it cost us to do the work and run the company. In 2027 we billed $3.24 million and, after the cost of equipment, parts and technicians' time on jobs, kept $1.135 million. That share, 35 cents of every dollar, is our gross margin. It was 36 cents the year before. One cent sounds small, but on our sales it is about $32,000 a year.

Two things caused it. Equipment prices rose as manufacturers changed refrigerants, and we raised our prices months later. And for years our repair prices were set with a markup we thought was a margin, so they came out lower than intended. The pricing sheet has been corrected. Watching that 35-cent figure every month is the single best habit you can build.

Profit Is Not Cash

Last summer, we earned $90,000 in profit but only $15,000 of cash came in from the work. Customers who had not paid yet, equipment bought early to beat a price increase and tune-ups done for plans paid months before all soaked up the difference. We also send cash to the owners each quarter to cover their income taxes on the company's profit. The line of credit filled the gap.

The biggest piece you can control is how fast customers pay. Homeowners pay on the spot, but our two property management customers take forty-five days. That added about seven days to the time it takes us to collect, which ties up about $63,000. Deloof (2003) found that companies that collect faster tend to be more profitable. Asking for thirty-day terms, or a deposit on large jobs, would help.

What Each Repair Call Really Costs

We often say a repair call costs $160. That is the average, but only $71 of it changes with each call: the technician's time on the job, fuel and small materials. The rest, about $38,000 a month, we pay no matter how many calls we run: base pay, vans, dispatch and software. Our repair department needs about 219 calls a month to cover those fixed costs. We run over 600 in July but only about 240 in April and October.

That is why a $99 spring tune-up offer makes sense in April but not in July. In April, technicians have time and each $99 call adds $28 to profit after its own costs. In July, the same slot would otherwise hold a full-price repair. Garrison et al. (2021) call this idea contribution margin, and it is the right way to think about any discount.

Budgets and Surprises

The spring budget lists every revenue and cost line with where the number came from and how sure we are. Last summer we came in $24,000 below plan on repairs: about a fifth fewer calls because June and July were mild, partly made up by bigger repair jobs. Weather will always move our summers. Plan for a cool summer and a hot one rather than a single number, and check actual calls against plan every two weeks.

The Van Decision

A sixth service van and technician would cost $60,000 and bring in about $21,000 a year in added cash. It would pay for itself in just under three years and, counting the value of money over time, add about $39,000 to what the business is worth. The key uncertainty is whether the extra calls will come; the van breaks even at about 330 added calls a year. I recommend buying it before the summer.

Maintenance Plans Are an Asset and a Promise

About 2,000 customers have paid in advance for tune-ups. At the end of 2027 we owed them 2,000 visits, worth $150,000, that we had already been paid for. That money is a promise of work, not profit we can spend, so book technicians for the two tune-up seasons before anything else goes on the calendar.

Three Numbers to Watch Every Month

1. Gross margin: the share of each sales dollar we keep after job costs. Keep it at 36 percent or better.

2. Days to collect: how long customers take to pay. Bring it back toward 32 days.

3. Cash in the bank against the line of credit: whether we are borrowing more or less than last year at the same month.

Higgins et al. (2023) note that a few well-chosen figures, watched over time, tell a manager more than a full set of statements read once. Beaver (1966) showed that simple ratios like these can signal trouble years before it arrives, which is the reason to watch them now, while the business is strong.

References

Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4, 71-111. https://doi.org/10.2307/2490171

Deloof, M. (2003). Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30(3-4), 573-588. https://doi.org/10.1111/1468-5957.00008

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting (17th ed.). McGraw Hill.

Higgins, R. C., Koski, J. L., & Mitton, T. (2023). Analysis for financial management (13th ed.). McGraw Hill.