Lemonade Stand — Season Three

This report provides factual quantative information on Lemonade Stand, sourced from financial statements, the business’ General Journal and financial data collected during Seasons One, Two and Three. The following economic summary report will consider how well Lemonade Stand’s business is performing by, among other things, deducting the stand’s capital costs from its profits. Through analysis of the previously stated quantiative information, the company will be able to measure how well the stand is using capital to build economic value, with perhaps deploying company resources in ways that will further enhance its economic value.

In short, the economic summary report’s fundamental objective is to maximize the stand’s return for its owners, as well as to focus on very precise value-related targets, be they cost reductions, new investments, or other resource allocation. Over the three season period of review, Lemonade Stand has shown a steady revenue growth. Although this growth is positive, there are aspects of the business that, if managed more efficiently, could have brought the stand a significant increase in overall profits.

First, the price per cup could have been increased throughout Season Two – instead of maintaining a steady price of $0. 60 during the whole season. This simple increase in price would increase revenues and profits for the season. Second, there was a lack of wise management towards the purchase of supplies during Season Two. It was difficult to forecast the turnout for each day and excess supplies were purchased in preparation for a predicted rush of customers.

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This mismanagement lead to a waste of supplies, – especially ice – a low inventory turnover, increased expenses – due to management mistakes instead of business operations -- and excess inventory at the ending of the season. However, despite the downfall in Season Two, inventory turnover did improve during Season Three as well as the stand’s current ratio. The Lemonade Stand’s current ratio increased significantly from having $5. 80 in current assets for ever $1. 00 in current liabilities in Season One, to having $14. 50 in current assets for every $1. 0 in current liabilities at the conclusion of Season Three. The higher current ratio indicates the liquidty of the business, meaning that there is a greater margin of safety to cover short-term debts. As a result of a higher current ratio, the stand will be able to obtain necessities from short-term creditors such as suppliers, easier than before. The ability to obtain supplies and other necessities from short-term creditors will allow the stand to expand – if desired – and perhaps secure a more profitable Season Four.

In addition, the decrease in the debt-equity ratio is another positive sign that shows us that the stand can be successful in the future if managed properly. The owners of Lemonade Stand place a value of $100. 00 toward being their own boss and thus have the freedom and flexibility that they would otherwise not experience while working for another person or company. This form of revenue can be found in the stand’s implicit revenue on the stand’s balance sheet and is added to the value of learning how to run the business -- $50. 0 for Season One – as well as gaining more information and/or education on increasing profits and learning how to better manage the stand. During the third season, the stand was more concerned with maximizing returns on resources and therefore lead to a greater economic profit for that season. When the information contained in the business’ financial statements is used to create strategic objectives, such as maximizing returns on resources, the stand will be able to focus on those activities that will produce the desired result and also guide the owners in the management of the business.

By focusing on activities that create the most value and, conversley, avoiding devoting inordinate amounts of resources to activities that produce little value the stand will be able to maintain its financial health and generate higher profits in the seasons to come. Lemonade Stand is in a strong position to expand and through expansion, will be able to set larger strategic objectives and potentially increase the health and value of the business.

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