Carmen Diaz, with a ten thousand dollar loan from two of her cousins, and one thousand dollars that she invested in equity, was able to open a specialty store called Ribbons an’ Bows, Inc, which was located in Coconut Grove, Miami, Florida. Four months after opening the business, Carmen’s relatives requested a financial report, which was part of the original business arrangement. Within a short time, Carmen had expanded the business, purchased small equipment, paid wages to a part-time employee, and by all outward indicators, had been running a flourishing business. As Carmen gathered the necessary information to prepare financial statements, she started to scrutinize the transactions and was somewhat perplexed. Carmen realized that numbers were not adding up as she had anticipated. Additionally, it became questionable whether the business was operating successfully, at least when accounting principles were appropriately applied.
Statement of the Problem
It was fortuitous for Carmen Diaz to have family who were supportive of her small business endeavor, thereby providing start-up funds and legal advice. Carmen’s endeavor can be recognized as a “microbusiness” operation; “microcredit”, microenterprise” and “microfinance” are terms that have been associated with microbusinesses (Datar, 2009). Clearly, Carmen would have benefitted from some professional entrepreneurial guidance that is widely available at no cost in the United States. Indeed, her uncle practiced law, but it was not clear if business law (finance/ accounting) was within his forte. It was noticeable that Carmen was unskilled in accounting principles; she had apparently prepared a business plan but was not adept in all accounting proficiencies, for example, budgeting and long term planning. There was no evidence to indicate that Carmen had planned for the replacement of essential equipment, such as the computer and essential accounting management software, beyond the basic business tracking tools. She was not in tuned with important details of running a business. Altogether, Carmen was operating under a misapprehension about managing a business; one significant issue was that she was not paying herself a salary, and she had obviously not planned for such necessary compensation. In addition, Carmen had not make provisions for repayment of the loan from her family members. The major issue however, was that Carmen had spent more cash on the sewing machine, rent, employee wages and inventory, when compared with starting cash and the revenue that the business had generated (Appendix I: Income Statement). Carmen Diaz had encountered what has been described as “one of the most severe problems in microenterprise cost management” and that is the management of inventory (Datar, 2009).
DESCRIPTION OF ALTERNATIVE SOLUTIONS
According to Datar (2009), “access to financial capital isn't enough for many of the most vulnerable clients. Microbusiness owners often lack the knowledge and skills necessary to make effective use of financial capital.” While it was necessary for Carmen to pay rent, wages and purchase small equipment to develop her business, she needed to monitor cash flow data (Appendix II: Cash Flow), thereby paying better attention to details about inventory. Inventory sitting on shelves or stored in boxes is essential capital that was not performing for the business. 1
Carmen should seek out an accounting or business class at a local small business center, perhaps a community college, or engage the help of someone who could provide assistance with basic accounting skills. Having access to capital was promising but Carmen, by evidence, was somewhat vulnerable, lacking basic knowledge, skills and abilities to adequately utilize and “make effective use of financial capital” (Datar, 2009). As noted in the literature, “Five management accounting tools have the greatest potential for microbusinesses: cost management, throughput enhancement,...
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