Lilly Havens is your friend, and she decided to start a small business after graduation. She opened her own beautician business in the last year and has contracted her services to a local theatre. She is paid a monthly fee for her services.

She has just received her first-year end set of financial statements and ratios with comparative percentages from her accountant. However, she is unsure to see information about ratios and net income:

The Proft margin calculated by her accountant is 20%, but the one competitor salon has a profit margin of 32%, and the industry average is 30%. She is not familiar with these figures and asked you to explain the profit margin ratio and analyse its business profitability compared to the competitor and the industry average profitability ratio. The statements show a cash balance of 3,600 at the end of the year, but a net income of only 500. She has written you an email, asking you whether such a situation is possible or whether she should find another accountant. Questions:

a) Write an email to your friend and explain the above two scenarios. (10 marks)

Lilly Havens beautician studio is a small business. But, according to the researchers, small businesses face a finance gap and are not financed well by financial institutions.

Questions:

b) Why is there a finance gap for small firms? Using academic sources, discuss the challenges small businesses face in accessing finance [equity (share) capital and bank lending]. (15 marks)