Help!

I bought a retail store a year ago. I borrowed $670,000 from the bank to buy the business. Interest is $40,000 per year. The previous owner, Sally, showed me all the books before I bought it and it looked like a good deal. She and her husband had been running it themselves last year they made $180,000 before taxes but they were planning to retire. I didnt want to quit my Santa Fe job, so I figured that, if I got a competent manager and a couple of clerks and paid them about $100,000 per year in total, they could operate it for me, and Id have $80,000 left over. After paying the $40,000 interest on the loan, I estimated Id make myself $40,000 per year before taxes.

However, things dont seem to be going right.

In April, 2021 March, 2022, Sally had the following results (shes an honest person and I trust her numbers):

Gross Sales $1,050,000

Sales Returns 100,000

Gross Purchases 600,000

Purchase Allowances 50,000

Operating Expenses 200,000 (Sally and her husband didnt draw any salary; they just

kept the net income, after taxes.)

Inventory, April 1, 2021 220,000

Inventory, March 31, 2022 200,000

Here are the numbers for 2022-3 (last year results, since I bought it):

Gross Sales $1,100,100

Sales Returns 100,100

Gross Purchases 700,000

Purchase Allowances 60,000

Operating Expenses 200,000 (excluding payroll and interest)

Payroll Expense 100,000

Interest Expense 40,000

Est. Inventory, March. 31, 2023 150,000

For some reason, Ive had to borrow $30,000 more from my brother-in-law because I didnt have enough to pay the bank interest on the loan. Sales have obviously increased. Where did the money go?

The manager says he doesnt know whats wrong. When I hired him, I told him our normal gross profit margin was about 40%. Youre an accountant. Whats happening?

Your Answer:

Dear Harry,

Ive studied the information you sent me and have prepared the attached comparative income statements for the years ending March 31, 2022 and 2023, which I attach to this letter for your review. In my opinion as your accountant, there are several possible reasons why your business has not met your expectations, even allowing for the salaries and interest you knew you would have to pay.

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