Red Flag 1
Although the revenue on snack food decreases every year, the cost of goods sold increases every year. The costs of these snacks purchased from vendors are increasing while the prices they are sold for in the gift shop remain the same. The gift shop should raise the price on the snacks sold. As an alternative, the gift shop could seek to purchase these snacks for cheaper from another vendor. Ultimately, the prices should be raised enough to cover the cost to buy them produce a profit.
Red Flag 2
Some of the items in the gift shop appear dusty and “shopworn.” Although this may not directly contribute to a decrease in sales, the customers’ perceptions of the shop maybe affected. Keeping the shop neat and tidy will help in the overall appearance of the shop. Customers will see products more attractive and be more prone to purchase them.
Red Flag 3
In your examination of the financial statements, you see that there is a bank loan on the books. The average balance of the loan is $14,000 at the beginning of the prior year, and $10,000 at the end of the prior year. The interest expense on the income statement for the year is $1,560. Interest has to be paid on any loan. The gift shop could elect to use money in savings to pay the balance of the loan. This would eliminate the interest expense and contribute to the shop’s savings. Conversely, the shop could find another bank with a lower interest rate for this. Paying interest on a loan seems unlikely for a not-for-profit organization; however, in this case, the loan should be paid with the net income of the shop.