Reference no: EM133377268

Sam's Social Media

Sam (they / them), who graduated from college last year with a Bachelor of Commerce degree with a Marketing major, is at a career crossroad. Last year, after some job hunting, Sam managed to get a job as a marketing assistant for a prominent financial planner in the area, Daman. With a colourful, outgoing personality, Sam was a natural fit to host information sessions and even going to trade shows to help promote the planning business.

Daman quickly realized that Sam was a bigger help to him than anyone he had hired before and bumped up their compensation from an hourly minimum wage to $32,000 a year (they agreed on about twenty hours a week, mostly on weekends). Sam believes they can earn $80,000 a year working full-time in financial planning, but that would be long, slow training process- perhaps over five years.
Sam is considering taking a second job which would pay them $18 an hour for five hours of work per day, three weekdays per week. While this would mean immediate cash in their pocket (they are currently living paycheck to paycheck), the job does not really relate to their career, nor does it have potential for promotion in the field (school bus driver). Due to their tight cash situation, Sam was about to accept the job on the spot after calling the number their friend had given them. However, they decided to hold off for a bit as the manager wanted them to start this week, which would conflict with a scheduled romantic rendezvous.

Sam is also considering their own start-up, social media consulting. During the COVID lockdown, Sam realized they have a natural knack for creating social media content. They managed to land an influencer contract with a local juice company, which has now expired.
Sam believes they can finally monetize on their abilities. With $3,000 worth of one-time advertising (influencer trade shows), Sam estimates that they can book $25,000 worth of consulting activity in the first year to help their clients earn total revenues from social media of $500,000. While this would not mean much money immediately, especially considering they would be spending about ten hours a week on the business, Sam does believe they can increase the revenue amount by 40% in the second year once word-of-mouth really kicks in.
Then, once Sam has a clientele established, they would be in a position to charge a commission of 6% in addition to the hourly consulting fee and benefit from 10% year-over-growth for three years. After that, the fee would be raised to 7% at that point with hourly revenues for the following five years. They have run some rough numbers and believes business expenses (mostly home office-related) can be held to only 12% of business revenues with this plan- they have not considered borrowing costs yet, though. Luckily, Sam has no student loan debt and, once financially stable, will rent a 1-bedroom apartment for $1,850 a month. Sam did some internet research on deducting home office costs in a business and found this article which they think is interesting and seems reputable as it is from the Business Development Bank of Canada (https://www.bdc.ca/en/articles-tools/money-finance/manage-finances/tax-deductible-expenses)
Sam has talked to their bank and was offered a $15,000 line-of-credit at a 7.05% annual rate. They believes that, if needed, the line-of-credit could be renegotiated to $25,000, but maybe with an 8% interest rate.
Another option is to start working on commission exclusively at first, and adding a flat fee in only once established. With this revised revenue structure, Sam anticipates they could generate revenue of $600,000 for their clients initially, while introducing an hourly rate structure in at year 3. The growth rate for the business under this model would be consistent with starting with an hourly rate and then switching to commissions.

Sam anticipates that they would need to upgrade their computer and office set-up to start this business. They anticipate they would need a MacBook Pro $4,499 which would last for 3 years, as well as other high end office equipment (monitors, printers, cameras etc.) which would cost $2,500. Sam is not sure how this equipment would be expensed in the business.
Sam is not great with projections and numbers, so they are asking you for help in deciding if this business is lucrative enough to pursue. They are also wondering about the importance about maintaining accurate records in general. They do not really know much about accounting, so they wants some quick advice on journal entries, T-accounts, accounting software and the like.
Sam is thinking of one final consideration- bringing in a business partner who is willing to cover the costs of the technology in exchange for a 25% share in his business. Their friend, Nina studied accounting and they would be willing to give her a 33.3% share if she took care of all accounting/finance tasks along with sharing in the back-end computer work. Sam has not mentioned this idea to her yet- they wants your thoughts first.

Sam wants specific advice on what he should do. If it is a good idea to pursue the Sam's social media business, they want detailed advice on business strategy, financing, ethical considerations, etc. They are open to advice beyond what is discussed in this case, but it should be relevant to their situation.

Required:
business memo to Sam (in Word) with all supporting calculations in an appendix. Your memo should talk about the primary issues raised in this document. The assignment should be written as a business memo with language appropriate for the audience (Sam).

Your appendices should be well formatted, easy to read and follow. All financial analysis should be in the appendices.