Recommendations to the structure of the proposed business

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Reference no: EM131186946

Part 1-

1. Business Units

The business premises will consist of a warehouse where the SeaBin will be made. They have segmented the market and have set differing prices and credit terms for the three distinct groups of customers they have initially targeted for the Seabin:

 

Direct to
marinas and
ports

To local
councils
(floating sea

OM)

To
construction
companies
building hotel
complexes
alongside
private
beaches

Selling price per product*

£2,300

£1,700

£2,200

Credit terms

No credit (cash
sales only)

1 month

2 months

Expected proportion of total sales

30%

60%

10%

2. Sales: Andrew and Pete estimate that in May (their first month's trading), they will sell 150 units in total, growing approximately at a rate of 12% per month until the end of the first financial year in December (i.e. December will be the last month in which sales will show an increase on the previous month). So for June (168 Seabins), July (188 Seabins), August (210 Seabins), September (235 Seabins), October (263 Seabins), November (294 Seabins) until December (329 offices). The product is not affected by seasonal demand since humans continue to pollute, irrespective of the weather.

3. The direct raw materials required to produce each Seabin will cost £950. As a new business, they cannot assume suppliers will offer any credit, so to be prudent they are planning on the basis that their invoices will all have to be paid at the time of purchase. They plans to keep (in stock) at all times, sufficient inventory of raw materials to cover the following month's trading (so for example, raw materials for May will have to be procured and paid for in Aril, etc). As they plan to make-to-order and to manufacture on a just-in-time basis, it is not necessary to plan for any inventory of either finished products or work-in-progress.

4. Staff costs are forecast to be:-

The partners will be producing the SeaBins from a workshop at the back of a showroom. They will recruit their surfing friends as staff on the following basis:

Workshop: 7 full time people paid at £14 per hour, each working a 50-hour week Showroom: 2 full time people paid at El 1 per hour, each working a 50-hour week. Staff wages will be paid at the end of each week.

The company will also have to pay a further 25% of this amount in social security and pensions contributions, and these will be payable 1 month in arrears. Both categories of staff will be employed as from the start of March.

5. Energy & water: When the business starts trading, the workshop will consume energy and water at the rate of £15 per product. The showroom will also consume energy at the rate of £5 for each hour it is open for business.

In the period January - April the workshop and showroom will each consume energy & water to the value of:

 

Workshop

Showroom

January

£250

£100

February

£250

£100

March

£1,200

£250

April

£2,000

£250

Energy and water costs are payable 1 month in arrears.

They plan to open the showroom from 9:30am to 6pm each day for 6 days per week, i.e. 50 hours per week (rounded, for simplicity).

6. Premises (workshop and showroom): rent of £5,500 per month will be payable quarterly in advance, plus a deposit equal to one quarter's rent as soon as they move in (i.e. on January 1st). This will be returnable only when they vacate the premises. The landlord has agreed not to charge any rent for the period January to April, so the first payment of rent will be needed only at the end of April (covering the period May-July), with subsequent quarterly payments for August-October (payable in July), November-January (payable in October). The rental agreement will expire after 7 years, after which the building will revert to the landlord.

7. Showroom fixtures and fittings: The premises will need fixtures and fittings worth £25,500 to be installed before business can start trading and payable in three equal instalments in Jan, Feb and March. These will be installed by an outside contractor over the period January. February and March. They are expected to have a useful life of 7 years and an estimated residual value of £4,000 and are depreciated on a straight line basis.

8. Business rates are charged at a rate of £15,000 per annum. The property company has agreed to absorb this cost up to the end of the current government financial year, which ends on 31st March. They will have to bear this cost as from 1st April onwards. The charge for the year is payable in 10 equal monthly instalments, from April to January inclusive (so £1,500 payable from April onwards).

9. Various equipment costing £350,000 will be delivered in March and installed and tested in April, in time to start trading on May 1st. The suppliers allow 1 month's credit after the date of delivery, and they will take up this offer. The equipment is expected to last for 5 years before it will need replacing, and will have no disposal value. The company has chosen a straight line depreciation method for the equipment.

10. Two delivery vans will be purchased in April in time for the start of business on 1st May. Each has the capacity to transport 150 completed units. They will cost £30,000, to be paid in full at the time of purchase. They are expected to last for 5 years, after which time, each will be sold for £5,000 each. The company has chosen a straight line depreciation method for the van.

11. Marketing & advertising: The partners consider they will need to invest £10,000 in marketing and advertising in each of Jan, Feb, March and April, then at an ongoing rate of £1,500 per month indefinitely into the future. This will have to be paid for as it is incurred on the first day of each month (i.e. there is no credit).

12 Financing: Both partners are each investing £100,000 of their own savings in the form of equity. They also plan to borrow a further £400,000 on a 7-year loan at an interest rate of 6% per annum, payable monthly. This loan would be taken in two equal instalments, on 1st January and 1st April. It would be on an interest-only basis with interest paid monthly at the end of each month and no repayments of capital until the end of the loan period. Any further finance beyond this would have to be borrowed through an overdraft. The bank has assured Anne they will make this available if required.

NB: overdrafts are a common form of short-term financing and many other countries, though lot universally. In essence it simply means that your bank has agreed to allow you to run tour current (checking) account with a negative cash balance, up to a pre-agreed limit overdrafts are not a separate source of new finance). If in your cash budget you find that the :ash balance is negative at any time, simply show it as this. If at the year-end the balance is )egative, it should be included in the budgeted balance sheet as a current liability. (NB: for Simplicity, assume for this assignment that this overdraft is interest-free)]

13. General management of the business: The partners will handle the general management, marketing and sales to business customers themselves. They do not intend to take any money out of the company during the first year.

Assumptions

For simplicity and to keep this exercise manageable, make the following working assumptions:-

  • The case is indeed one from Australia and we are assuming the partners are producing their accounts in GBP,
  • Assume that months 1 and 2 in each quarter (January, February, April, May etc.) are of 4 weeks, and the third month (March, June, September, December) is a 5-week month,
  • Assume 52 weeks in each year,
  • The owners set up the business in an enterprise zone which is except from Corporation Tax rate in their first trading year of a business,
  • Round any odd amounts to the nearest whole pound (do not show pence).

Part 2-

In light of the forecasted cash and profit outcomes, they are asking you to suggest at least 5 realistic recommendations to the structure of the proposed business that would 1) generate at least an operating profit margin of 45%, and 2) ensure a maximum cash deficit of no more than £50000 in each of the trading months. You should use the template provided to do this, and post extracts whilst justifying your recommendations. Please rote increasing the sales price is not an acceptable recommendation since it implies zero demand elasticity.

Attachment:- Assignment.rar

Reference no: EM131186946

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