Total Profit Margin and Cash Inflow Assignment Help
Columbia Needycare, a clinic in south Florida, wants to evaluate its profitability performance and cash flows for acquiring an additional building to provide basic medical care for homeless and indigent patients. The profitability performance needs an evaluation of the total profit margin and the net profit in addition to the elaboration of different between gross profit and net profit for an understanding of the clinic's financial performance.
The cost of operations is 70% of total revenue and it is assumed that the cost of operations includes all the costs related to the administration, selling and distribution, and other expenses. It is also assumed that the client has no taxation due to its nonprofit organization nature (Tracy, 2011).
Cost of operations = $5,000,000×70% = $3,500,000
Total Profit Margin and Net Income
Total profit margin reflects total income generation as a percentage of total revenue (Gibson, 2008). This margin measures the overall profitability performance of the clinic for assessing the efficiency to save the money from the revenues for incurring basic medical care services and facilities. Formula of the total profit margin is given below:
Total Profit Margin = (Total Profit )/(Total Revenue )×100
Total Profit Margin = ($500,000 )/($5,000,000 )×100
Total Profit Margin = 10.00%
The total profit margin of the clinic is 10.00% in 2017 measuring the reasonable level of profitability performance. The profitability performance of the clinic is reliable for further helping the basic medical care services to the homeless and indigent patients.
The net income of the clinic is $5,000,000 on the revenue of $5,000,000 reflects reasonable profitability for the provision of healthcare services and basic medical care for homeless and indigent patients. The income of the clinic in 2017 indicates a sufficient level of profitability for increasing medical facilities at the clinic level for providing healthcare and medical care services in the foreseeable future.
Gross Income and Net Income
Gross income indicates earning of income from the sale of goods or provision of services before deduction of administrative expenses, selling and distribution expenses, taxes, interest expenses, and other expenses. Net income indicates earning of income after deducting all the expenses including interest expense and taxes (Agtarap & Juan, 2007). Gross income reflects gross earnings performance of an entity supporting availability of funding for covering administrative, distribution, and financial expenses, whereas the Net income reflects overall profitability performance for finding a return to the real owners and future growth of the entity. Gross income is much of concerned to the management of the entity for internal purposes whereas Net income is much of concerned for all the stakeholders including management, employees, government agencies, shareholders, borrowers, etc (Agtarap & Juan, 2007).
Purchase and Renovation of New Facility
The clinic has an opportunity of buying an additional building for helping more homeless and indigent patients with the cost of $480,000 and a renovation cost of $35,000. Therefore, the total cost to be arranged through the cash inflows from the earnings of the clinic is given as per below table:
Now, there is a need to determine the amount of cash inflow from the operations of the clinic. The calculation of the cash inflow is given as per below table (Ehrhardt & Brigham, 2013):
The cash inflow from the operation is $1,500,000 and the total cost of additional building and renovation is $515,000. The clinic is much efficient to make the arrangement of the funding for the purpose of acquiring a new facility to explore the medical care services to homeless and indigent patients. Therefore, the clinic can easily afford the cost of a new facility with its profitability and cash inflows from the operations to increase the medical care services.
The above discussion concludes the total profit margin of the clinic is 10% along with the net income of $500,000 showing high profitability performance. The main difference between the gross income and net income is a deduction of the operating expenses and financial expenses because the net income is determined after allowing all the expenses whereas the gross income is determined by allowing the cost of sales only. The clinic can afford and buy the new facility for providing medical care to more patients because of earning high cash inflow from the operations to arrange to fund for the purchase of the additional building.
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