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Contents

RevisionList .................................................................................................................................. 3ConfidenceChecklist ...................................................................................................................... 4FormsofOwnership ....................................................................................................................... 7Activity1 .................................................................................................................................. 8Activity2 .................................................................................................................................. 9Endoftopicreview .................................................................................................................. 10

SourcesofFinance ....................................................................................................................... 11Activity ................................................................................................................................... 13EndofTopicReview ................................................................................................................. 14

CostsandRevenues ..................................................................................................................... 15

Whatarevariablecosts? ...................................................................................................... 15Whatarefixedcosts? ........................................................................................................... 15Whataresemi-variablecosts? .............................................................................................. 15Howarecostscalculated? .................................................................................................... 15Whatistherelationshipbetweenthelevelofoutputandcosts? ............................................. 16

Activity ................................................................................................................................... 16Howarerevenuescalculated? .............................................................................................. 17

EndofTopicReview ................................................................................................................. 17ProfitsandBreak-even ................................................................................................................ 18

Whatdoesprofitmean? ....................................................................................................... 18Whatisaloss? ..................................................................................................................... 18Whatisoutput? ................................................................................................................... 18Whyareprofitsimportanttoentrepreneurs? ......................................................................... 18Whatisabreakevencalculation? .......................................................................................... 18Whyisthebreakevenpointimportant? ................................................................................. 18Whatismeantbycontribution? ............................................................................................ 18Whatisthemarginofsafety? ............................................................................................... 19Whatarethelimitationsofbreakevenanalysis? ..................................................................... 19

EndofTopicReview ................................................................................................................. 19CashFlowForecasting .................................................................................................................. 20

Whatiscashflow? ............................................................................................................... 20Whatarethebenefitsoftheprocessofcashflowforecasting? ................................................ 20

Activity1: ............................................................................................................................... 21RudolphHucker’sCashFlowForecast ....................................................................................... 21Activity2: ............................................................................................................................... 22Norfolk&Chance’sCashFlow .................................................................................................. 22EndofTopicReview ................................................................................................................. 24

CashFlowMonitoring .................................................................................................................. 25

Whatisthedifferencebetweenacashflowforecastandacashflowstatement? ..................... 25Whatdoesinterpretingcashflowforecastsandstatementsmean? ......................................... 25

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Whatisacashflowproblem? ............................................................................................... 25Whatarecommoncausesofcashflowproblems? .................................................................. 25Whydoesthecashflowhaveaneffectonworkingcapital? ..................................................... 25Whatcanwedotoimprovecashflowproblem? .................................................................... 26

EndofTopicReview ................................................................................................................. 26SettingBudgetsandMonitoringBudgets ...................................................................................... 27

Whatisabudget? ................................................................................................................ 27Whatcanabusinessbudgetfor? ........................................................................................... 27Howdoweknowhowmuchsalesandexpendituretobudgetfor? .......................................... 27Whatisamasterbudget? ..................................................................................................... 27Howdobusinessesbenefitfrombudgetingforsalesandexpenses? ........................................ 28Whatisavariance? .............................................................................................................. 28Whatisafavourablevariance? ............................................................................................. 28Whatisanadversevariance? ................................................................................................ 28Whyareweinterestedinthevariances? ................................................................................ 28

Endoftopicreview .................................................................................................................. 29

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RevisionListThisisthestuffthatyouneedtoknowfortheexam…Makesurethatyoureaditcarefully,sortthroughyourclassnotes,makesurethatyouhavenotesonthefollowing…LegalFormsofBusinessTheownership,control,financing,advantagesanddisadvantagesofthefollowing:

• soletraders• partnerships• privatelimitedcompanies• publiclimitedcompanies.

SourcesofFinanceTheinternalandexternalsourcesoffinanceavailabletobusinesses,including:

• shareissues• loans• salesofassets• governmentgrants• workingcapital.

CostsandRevenues

• Thestructureofcosts,includingfixed,variableandsemi-variablecosts.

• Howcostsarecalculated,therelationshipbetweenthelevelofoutputandcosts.

• Howrevenuesarecalculated.• Theprice,quantityandrevenue

relationship.ProfitsandBreak-even

• Calculationofprofitandlossatdifferentlevelsofoutput.

• Theimportanceofprofitstoentrepreneurs.

• Calculationofbreak-evenoutputandtheconstructionofbreak-evencharts.

• Effectsofchangingcostsandrevenuesonbreak-evenoutput.

• Strengthsandweaknessesofbreak-evenasamanagementtechnique.

CashFlowForecastingThecomponentsofcashflow,including:

• cashandcreditinflows• thecomponentsofcashoutflows:

wages,materials,etc• netmonthlycashflows,opening

balancesandclosingbalances.Thereasonswhybusinessesforecastcashflowandthebenefitsoftheprocess.CashFlowMonitoring

• Howtointerpretcashflowforecasts.• Commoncausesofcashflowproblems,

includingpoorplanning,excessivetradecreditandexternalshocks(suchaschangesineconomicandmarketconditions).

• Actionswhichentrepreneursandmanagerscantaketoimproveacashposition:

o useofoverdraftsandtradecredit

o factoringandsaleofassetso reschedulingpayments.

SettingBudgets

• Theuseofrevenue(orsales)budgetsandexpenditurebudgets.

• Examplesofthestructureofsalesandexpenditurebudgets.

• Theprocessofsettingbudgets,startingwithsalesforecasts.

• Thereasonsforsettingbudgetsandthebenefitsfromthisprocess.

MonitoringBudgets

• Theuseofforecastedandactualbudgetdataandtheanalysisofvariances,includingfavourableandadversevariances.

• Expectedrelationshipswithinbudgetsandactualdata,eghighersalesfiguresleadingtoadverseexpenditurevariances.

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ConfidenceChecklist 1 2 3 4LegalFormsofBusiness

Theownership,control,financing,advantagesanddisadvantagesofthefollowing:• soletraders • partnerships • privatelimitedcompanies(LTD’s) • publiclimitedcompanies.(PLC’s)

SourcesofFinance• Internalsourcesoffinance • Externalsourcesoffinance • Understandingwhichsourceoffinancetouseandwhen

CostsandRevenues• Fixed,variableandsemi-variablecosts. • Howcostsarecalculated,therelationshipbetweenthelevelofoutputandcosts. • Howrevenuesarecalculated.

ProfitsandBreak-even• Calculationofprofitandlossatdifferentlevelsofoutput. • Theimportanceofprofitstoentrepreneurs. • Calculationofbreak-evenoutputandtheconstructionofbreak-evencharts. • Effectsofchangingcostsandrevenuesonbreak-evenoutput. • Strengthsandweaknessesofbreak-evenasamanagementtechnique.

CashFlowForecastingHowtoconstructacashflowforecast Thereasonswhybusinessesforecastcashflowandthebenefitsoftheprocess. CashFlowMonitoring

• Howtointerpretcashflowforecasts. • Commoncausesofcashflowproblems,includingpoorplanning,excessivetrade

creditandexternalshocks(suchaschangesineconomicandmarketconditions).

• Actionswhichentrepreneursandmanagerscantaketoimproveacashposition: o useofoverdraftsandtradecredit o factoringandsaleofassets o reschedulingpayments.

SettingBudgets• Theuseofrevenue(orsales)budgetsandexpenditurebudgets. • Examplesofthestructureofsalesandexpenditurebudgets. • Theprocessofsettingbudgets,startingwithsalesforecasts. • Thereasonsforsettingbudgetsandthebenefitsfromthisprocess. MonitoringBudgets

• Varianceanalysis,includingfavourableandadversevariances.

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334ExamTechnique(EvaluateQuestions) These are questions that require you to consider a 2 sided discussion and then give an overall judgment or conclusion.

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Practicing 334 Questions Tessa runs a chain of three tea shops in the Lake District, each called Tea Time Treats, followed by the name of the closest lake e.g. Tea Time Treats in Windermere. The tea shops have built up a good reputation for fine quality teas and delicious home made cakes to eat in or take away. Tea Time Treats is now featured in many tourist guides for the area, always with rave reviews. Tessa is now keen to expand the business and is considering offering the Tea Time Treat name as a franchise. Tessa is putting together a prospectus for potential franchisees of Tea Time Treats. Tim, her business adviser has suggested that she includes in it both her own business objectives and those a franchisee may expect to fulfil. Tim has also said that it is important to include in the prospectus that all ingredients used are sourced locally and of a high quality. For example Tessa buys only free range eggs from local farmers and uses only fruits in season from local growers.

1. Discuss THREE business objectives that would be appropriate Tessa’s business (10 Marks)

2. Do you think that it is a good idea for Tessa to set up Tea Time Treats as a franchise? Justify your opinion (10 Marks)

3. Will a business plan guarantee success for Tea Time Treats expanding as a

franchise? (10 Marks)

Write the evaluation only- apply it to the case study Yes No

• Gives a focus for the business

• Allows the business to plan for events in the future

• Can help measure how successful the business is

• Can help identify where the business is going wrong

• Business plan is only a plan and plans do not always go according to plan

• There is uncertainty about what will happen in the future (i.e. recession)

• The person starting the business may not have the necessary skills to plan ahead effectively

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RevisionTopic1:FormsofOwnership

Theownership,control,financing,advantagesanddisadvantagesofthefollowing:soletraders,partnerships,privatelimitedcompaniesandpubliclimitedcompanies.

Mostbusinessesstartassoletraders.Astheygrow,theyoftenchangetodifferenttypesofownership.Thisinvolvesmoreandmoreowners(shareholders).Thehigherthenumberofshareholders,themoresharesabusiness can sell to them. Thus the companywill growbecause it can raisemore finance.Large companies generally also have access to more loans and other finance source than smallcompanies.Smallerfirms

SoleTrader

Partnership

PrivateLimitedCompany

PublicLimitedCompany

LargerfirmsA sole trader usually does all themanaging himself. By contrast, the partners in a firm will haveregularmeetings to discuss themanagement decisions together. The owners of a sole trader andpartnershipsbothownandcontrolthebusiness.If the company has many owners, it becomes difficult for them all to agree on how the companyshouldbemanaged.However,theadvantageofhavingmanyownersisthatthefirmwillhavealotofmoneyatitsdisposal.Thisdilemmaissolvedbythedivorceofownershipandcontrol.Thisiswhentheownersdecidetonolongermanagethebusinessdirectlyandappointdirectorstooverseetherunningofthebusinessontheirbehalf. Directorsareoftenhighlypaidexpertsintheirfields,forexamplemarketing,financeorproduction.If thedirectorswere incompetent and thebusiness endedupwithmoredebts than it canpay, theownersarenotheldresponsibleforthedirectors’mismanagement.Theycanlosetheinvestmenttheymadewhentheyoriginallybought theshares in thebusinessbutnomore. Their liability is limited.Thedirectors,however,canbebannedfrombeingdirectorsduetomismanagement.Theexistenceoflimitedliabilityencouragespeopletoinvestinplc’sandprivatelimitedcompaniesandhasledtoathrivingstockmarketintheUK.

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It is important to understand the difference between issuing shares and trading them in the stockmarket. When plc’s issue new shares to be sold to shareholders, the firms receivemoney. This isthereforeasourceoffinanceforthem.The share owners can sell the shares in the stock market. In this case, the firm receives no newfinance.Thenewownerpaysfortheshares,andthesellergetsthemoney.Hopefully,thesellerhasmadeaprofitontheinvestmentintheseshares.

Activity1Here are the four main types of business ownership in the UK. Write a description of thedocumentationrequiredtosetupeachofthebusinesses.Thereareafewhintsatthebottomofthepage!SoletraderPartnershipPrivatelimitedcompanyPubliclimitedcompany

Amemorandumofassociationtellsoutsidersaboutthelimitedcompany:itsnameandregisteredoffice,itsbusinessanditssharecapital.Thearticlesofassociationtellshareholderstherulesofthelimitedcompany:whattheirrightsare,whothedirectorsare,howtheseareappointedandhowoftenmeetingsareheld.Adeedofpartnershipisanagreementbetweenthepartnersinabusinesswhicheachpartnersigns.Itregulateswhatthebusinessdoes,howprofitsareshared,whattodoincaseofthedeathofapartner,andsoforth.

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Activity2Themostimportantconsiderationregardingwhichlegalformthebusinesswilltakeisitssize.Thisdeterminesitsabilitytoraisefinance.However,foreachoftheownershiptypesyoushouldknowatleasttwoadvantagesandtwodisadvantages.Fillintheadvantagesanddisadvantages.Eachboxinthetablebelowrelatestoonetypeofownership.Theyarenotinorder.

Advantages DisadvantagesRelativelyeasytoestablish:registeratCompanies’HouseCanraisefinancebysellingsharesprivately

Theownersareliabletopayingallthedebts:thereisnoprotectionfromcreditorsThepartnerscanargueanddisagree

CanraiselargesumsofmoneybyissuingnewshareswhichitthensellstoshareholdersPublicinterestwillresultinahighprofile

Theownerisliabletopayingallthedebts:thereisnoprotectionfromcreditorsTheowneroftenhastotakeonallthetasksandresponsibilitiesinthebusiness

EstablishingthiscompanyusuallyneedsnospecialpaperworkAlltheprofitsgototheownerofthebusiness

Thecompanyhastopublishdetailedinformationaboutitselfeveryyear.Itcanbe“takenover”byanotherlargefirmandloseitsidentityandindependence

TheownersdiscussthebusinesstogetherandcanarriveatsolutionstoproblemstogetherSeveralpartnersarelikelytoraisemorefundsthanasoletraderbyhimself

SomefinancialinformationmustregularlybepublishedThesharescannotbetradedonthestockmarket

TheadvantagesanddisadvantagesofthemainformsofbusinessownershipSoletrader:Partnership:

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PrivateLimitedCompany:PublicLimitedCompany:

Endoftopicreview

1. Whatisasoletrader?

2. Whatisapartnership?

3. Whyisthereadivorceofownershipfromcontrolinlimitedcompanies?

4. Whatismeantbyashareholder?

5. Whatismeantbylimitedliability?

6. Whatisthemainadvantageoflimitedliability?

7. Whatisaplc?

8. Namethreeexamplesofplc’syouhaveheardof,andlookuptheirshareprice.

9. Whoneedsamemorandumofassociation?

10. Whattypesofissuesareagreedinadeedofpartnership?

11. Whydoyouthinkasoletrader,incontrastwithothertypesofownership,doesnotneedany

documentationtosetupanewbusiness?

12. Nametwoadvantagesandtwodisadvantagesforeachtypeofbusinessownership.

13. Whydofirmsnotreceiveanyadditionalfinancewhenshareholdersselltheirsharesinthestock

market?

14. Forwhatreasonswouldcompanieswanttochangetheirtypeofownership?

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RevisionTopic2:SourcesofFinance

Theinternalandexternalsourcesoffinanceavailabletobusinesses,includingshareissues,loans,sales

ofassets,governmentgrantsandworkingcapital.

Itcostsmoneytomakemoney!Beforeanythingissold,thebusinessownersneedtofindmoneywithwhichto:

§ Buymaterialsorstock(thegoodsthataretobesold)§ Carryoutsomemarketresearchanddoothertypesofmarketing§ Rentofficespace§ Recruitpeople§ Buyassetsandequipment

Businessesneedtoraisefinancewhenthey:

1. Startup2. Expandtheiroperationssignificantly

Whichtypeoffinanceabusinesscanraisedependsonanumberofconsiderations.Theyinclude:

§ Whetherthebusinessisneworestablished§ Whetherthebusinessissuccessfulandcreditworthy§ Whetherthebusinesscanoffercollateral§ Whattypeofbusinessownershipthebusinesshas§ Whetherthecurrentownersarehappytodilutetheircontrolbyissuingnewshares§ Whatthefinanceisintendedfor§ Howlongthefinanceisneededfor§ Interestrates,thecompany’sreputationanditsshareprice(ifaplc)

Thesourcesoffinanceforabusinessare:External sources of finance. A new start-up business has to get all of its finance from externalsourcesoffinance.Anestablishedbusinesswantingtoexpandcanalsousethese.Theyare:

§ Loans,mainly frombanks. Loan finance isopentoallownership types. Banksoftenask forcollateralwhenlendingmoney. Iftheloanisnotpaidback,thebanktakespossessionofthecollateral.Collateralacceptabletoabankisalmostalwaysabuilding.

§ Sharecapital. Privateandpublic limitedcompaniescan issuenew,additional shares. Thesearethensoldtonewinvestors,whowillusetheirownmoney(savings)topayforthem.Themoneytheypayisaddedtothesharecapitalofthebusiness,andisthusasourceoffinance.Theoldownersnowownasmallershareofthebusiness:theirstakehasbeendilutedbythenewsharesthathavebeenissued.

§ Grants.Grantsare,onprinciple,opentoallownershiptypes.Thegovernmenthasaninterestinsupportingsmallfirms,thoseusingenvironmentallybeneficialproductionmethodsandanybusinesses who will set up and create jobs in areas of high unemployment. However, thefinancialhelpwilldependonwhatthecompanydoes,howmanyjobsitcreatesandwhattypesofassetsitbuys.

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Twospecialexternalsourcesoffinanceare:§ Venturecapitalists.Thesearefundmanagerswhoinvestamountsof£100,000to£2millionin

promisingnewbusinessventures.Asabusinessowner,youreallyneedtoconvinceaventurecapitalistthatyourbusiness isworth investing in. Theventurecapitalistswillseektomakeaprofitbyinvestingwhenthefirmisnew,seeingthebusinessbecomesuccessfulandgrow,andthensellingtheinvestmentatahighprice.

§ Factoring.Ifabusinesshassentoutinvoiceswhichremainunpaidafteralongperiodoftime,itcan sell these to a factoring company. The factoring companywill pay a percentage of thevalue of the invoice, for example 50% to the business. It then seeks payment from thecompany that has not paid the invoice; this can take a long time and a lot of threats andpersuasion. If the entire amount is paid, the factoring companyhasmadeaprofit of 100%.Businessesusefactoringservicesbecausetheydonothavetheresourcestochasedebts,andbecausetheygetanimmediate–ifsmaller–cashinflowwhentheyselltheinvoice.

Internalsourcesoffinance.Anestablishedbusinesswantingtoexpandcanalsouseinternalsourcesoffinance:

§ Working capital. This is used for paying everyday bills. It is the day-to-day finance for allbusinesses and consists of cash and those assets which can quickly be turned into cash(creditorsandstock),lessliabilitieswhichneedtobepaidintheshortterm.Firmscanaskfortradecreditasasourceofworkingcapital.Thisiswhentheycandelaypaymentforgoodsthathavebeendeliveredtothem.Anothersourceofworkingcapitalisabankoverdraft.

§ Reinvestedprofit. Thisisthemostcommonandcheapestsourceoffinance.Overtheyears,theprofitthefirmmakesdoesnotallneedtobepaidouttotheowners/shareholdersinprofitsand dividends. Some profit can be kept in the business and used for investing in largerpremisesorbettermachinery.

§ Saleofassets. Someassetsareno longerrequired in thebusiness. Forexample,somehighstreetchainssellshopsinareasinwhichtheynolongerwishtobepresent.Assetsmarkedforsaleareusually inefficient:theydonotgenerateenoughprofits forthefirm. It issensibletosellthemtobuymoreefficientassets.

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ActivityIneachofthelinesofthefollowingtable,youwillseeabusinessownershipform,whatthebusinesswishestofinanceandonepossibleproposedmethodoffinancing.Considerthemeritsanddrawbacksofthisformoffinancing.Suggestanalternative,andjustifywhyyouthinkthisalternativeissuitable.

Businessownership

Whatistobefinanced?

Proposedfinancing Alternative Justification

Asoletrader

Startupinbusiness

Bankloan,withowners’flatascollateral

Asoletrader

Buyanotherdeliveryvan

Overdraftfrombank

Apartnership

Refurbishtheentireoffice

Introducinganewpartnerwhocanbringfinance

Apartnership

Setupabranchofficeabroad

LoanfromaUKbank,partnersprovidecollateral

Privatelimitedcompany

Expandfactory Venturecapitalist

Privatelimitedcompany

Buyanothercompanyofalmostequalsizeasyourown

Privateshareissue

Publiclimitedcompany

Financeyourexpansionoverseas,where100newbranchesofyourshopswillsoonbeopened

Bankloan

Publiclimitedcompany

Payingoffaloanforwhichahighinterestrateisbeingcharged

Publicshareissue

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EndofTopicReview

1. Whatarethetwomainreasonsforbusinessestoraisenewfinance?

2. Namefivefactorswhichshouldbeconsideredwhendecidingonwhichtypeoffinancetoraise.

3. Whatarethesixsourcesofexternalfinance?

4. Whatismeantbycollateral?

5. Whatismeantby“dilutionofownership”?

6. Whatisashare?

7. Whatarethethreeinternalsourcesoffinance?

8. Whatismeantbytradecredit?

9. Nameoneadvantageandonedisadvantageoffactoring.

10. Underwhatcircumstancewouldabusinesssellassetstoraisefinance?

11. Whatismeantbyworkingcapital?

12. Whyisworkingcapitalveryimportantforabusiness?

13. Forwhatthreemainreasonsdoesthegovernmentgivegrantstobusinesses?

14. Whatisthemostcommonsourceoffinanceforbusinesses?

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RevisionTopic3:

CostsandRevenuesThestructureofcosts,includingfixed,variableandsemi-variablecosts.Howcostsarecalculated,therelationshipbetweenthelevelofoutputandcosts.Howrevenuesarecalculated.Theprice,quantity

andrevenuerelationship.Whatdoes“thestructureofcostsmean”?Businesseshavedifferenttypesofcost.Imagineasandwichbarthatmakesfreshsandwichestoorder.Variable costs will depend on how much the sandwich bar sells, for example the costs of theingredientsandthepackaging. Fixedcostswillstaythesame, forexampletherentandtheheatingbill.Coststructurereferstowhatproportion(percentage)ofthetotalcostsofthebusinessisinfixedcosts,andwhatproportion is variablecosts. Generally, the lower theproportionof fixedcosts, thebetter.

Whatarevariablecosts?Thisisthecostwhichthebusinesshastopayeachtimeitproducesagoodorservice.Forexampleinasandwichbar,asalami,saladandmayonnaisesandwichonbrownwill incurthecostoftwoslicesofbrownbread,fiveslicesofsalami,ahandfulofsaladandadollopofmayonnaise. Thecostofthis is50p. Eachtimesuchasandwichismade,50pincostsare incurredbythebusiness. Thus,themoresandwichesaremade,thehigherthevariablecostswillbe:ifinoneday,50sandwichesareordered,thevariablecostwillbe£25.If100areordered,thevariablecostwillbe£50.Variablemeansthecostvarieswiththenumberproduced.

Whatarefixedcosts?Carryingonwith thesandwichbar, thereare somecosts thathave tobepaidnomatterhowmanysandwichesaresold–aslongasthesandwichbarwantstostayinbusiness. Examplesoftheseare:rent,rates(whichisataxpaidtothelocalcouncil),themonthlysalariesofthestaffandthewaterbill.

Whataresemi-variablecosts?Someitemsneedtobepaidanywaybuttheirconsumptiongoesupwhentherearemorecustomers.Forexample,ifthesandwichbarkeepsadeliveryvan,thencertainitemswouldneedtobepaidfor,nomatterwhethertheydeliver50or100sandwiches:Roadtax,MOT,insurance,theannualserviceandthe driver’s salary all need to be paid and are therefore fixed costs. However, petrol is variablebecausethemoredeliveriesthereare,themorepetrolwillbeused.Sothecostofkeepingthevanispartlyfixed,andpartlyvariable–itissemi-variable.

Howarecostscalculated?Total costs have to be expressed per time period, not per unit. Therefore, costs are calculated asfollows:First,takethefixedcostspermonth.Next,findouthowmanyunitsweresoldduringthatmonthandcalculatetotalvariablecostsbymultiplyingthenumberofunitsbythevariablecostperunit.Addbothtogethertofindthetotalcostforthemonth.

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Whatistherelationshipbetweenthelevelofoutputandcosts?Ifabusinesssellsmoreunits(say,sandwiches),itsvariablecostsofsandwich-makingwillgoup.Thisisbecauseitmakesmore.However,itwillalsosellmoresorevenuewillgouptoo.Fixedcostslikerentwillstaythesame.Forexample,herearethecostsofasandwichshop:Sandwichessoldpermonth: 1000Variablecosts: 2000x£0.50=£500Fixedcostpermonth: £2000Totalcosts(whenselling2000sandwiches):£2500Sandwichessoldpermonth: 2000Variablecosts: 2000x£0.50=£1000Fixedcostpermonth: £2000Totalcosts(whenselling2000sandwiches):£3000Sandwichessoldpermonth: 3000Variablecosts: 3000x£0.50=£1500Fixedcostpermonth: £2000Totalcosts(whenselling2000sandwiches):£3500Sandwichessoldpermonth: 4000Variablecosts: 2000x£0.50=£2000Fixedcostpermonth: £2000Totalcosts(whenselling4000sandwiches):£4000

ActivityNowassumethateachsandwichissoldfor£3.00.Calculatetherevenueandtheprofit(=revenuelesscosts)foralevelofoutputof1000,2000and3000sandwiches.

Output: 1000sandwiches 2000sandwiches 3000sandwiches 4000sandwichesTotalRevenue:£3.00persandwichxnumberofsandwichessold

Less:Fixedcostsofrunningshop

Variablecostsofproducingsandwiches

Totalcosts

Profit(loss)=Revenuelesstotalcosts

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Howarerevenuescalculated?Revenuesare calculatedbymultiplying thenumberof goods sold in a timeperiod, forexamplepermonthorperyear,bythesalespriceofthegoods.Forexample,ifsalamisandwichesare£3.00andwesold2000thismonth,cheesesandwichesare£2.50andwesold3000andturkeysandwichesare£4.00andwesold4000,thentotalrevenueiscalculatedlikethis:What? Howmucheach? Howmanysoldthis

month?Revenuethismonth

Salamisandwiches £3.00 2000 £6,000Cheesesandwiches £2.50 3000 £7,500Turkeysandwiches £4.00 4000 £16,000Totalrevenue £29,500Tomaximiseprofits,business’pricingstrategyneedstobearinmind:

§ Whether there is price competition in themarket for the good. If retailers usually undercuteach other in terms of prices, then it is possible tomaximize revenue by decreasing prices.(Example:whitebread,tinnedtomatoes,bakedbeans)

§ If the good is a necessity, then retailers can charge a higher price without losing custom(Example:sanitarytowels,nappies,pharmaceuticals)

§ Ifthegoodisapremiumgood,thenretailerscanrelyonitscustomershavingenoughmoneytoaffordan increase in itsprice(Example:clothessold inHarrods,HarveyNichollsanddesignerboutiques)

§ Ifthegoodhasabrandname,customerswilltrustitandbuyitdespiteanincreaseinitsprice(Example:Nike,Sony,Bang&Olufson)

EndofTopicReview

1. Whatisacoststructure?

2. Whatarefixedcosts?

3. Whatarevariablecosts?

4. Whataresemi-variablecosts?

5. Howarecostscalculated?

6. Whatistherelationshipbetweenthelevelofoutputandcosts?

7. Howarerevenuescalculated?

8. Whatistherelationshipbetweenprice,quantityandrevenue?

9. Howaretotalcostscalculated?

10. Howdoesabusinesscalculatetheprofit?

11. Whatismeantbypriceelasticity?

12. Whendecidingwhethertoraiseorlowerthepriceofaproduct,whichfourfactorsshouldit

bearinmind?

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RevisionTopic4:ProfitsandBreak-even

Calculationofprofitandlossatdifferentlevelsofoutput.Theimportanceofprofitstoentrepreneurs.

Calculationofbreak-evenoutputandtheconstructionofbreak-evencharts.Effectsofchangingcostsandrevenuesonbreak-evenoutput.Strengthsandweaknessesof

break-evenasamanagementtechnique.

Whatdoesprofitmean?Profitisthedifferencebetweentherevenueabusinessearnsinayear,andthetotalcostitincursinthatyear(thesearefixedcostsandvariablecosts).

Whatisaloss?Alossoccurswhenthecostsarehigherthantherevenue.

Whatisoutput?Output is the number of units (of its product or service)which the business produces and sells peryear.

Whyareprofitsimportanttoentrepreneurs?Entrepreneursare inbusiness toearnprofits. They invest theirown (andotherpeople’s)money inbusinesses.Thismeantheystandtolosetheirmoneyandotherpeoples’.Therewardforthisriskistheprofittheystandtogainfromsuccessfulbusinesses.

Whatisabreakevencalculation?Thiscalculateshowmanyunitsabusinessneedstoproducetomakesure itcoversall itscosts. Thehighertheproportionoffixedcosts,themorethebusinessmustproducetobreak-even. TotalfixedcostssBreakevenpoint = Sellingpriceperunit–variablecostperunit

Whyisthebreakevenpointimportant?If all costswere variable costs, the firmwouldmakeaprofit oneachunit itmakes. However, thesellingpricealsoneedstocoverthefixedcostsofthebusiness.Onceenoughunitshavebeensoldtocover the fixed costs and the variable costs, the business moves into profit. If the selling price isloweredorthefixedcostsatthefactoryrise,moreunitsneedtobesoldtobreakeven.Ifthesellingpricecanberaisedorfixedcostsfall,thenfewerunitsareenoughtobreakeven.

Whatismeantbycontribution?Thesellingpriceofaproductneedstocoveritsvariablecostsanditsfixedcosts.Aftervariablecostshavebeencoveredwhatisleftisnotprofit,butacontributiontothefixedcostsofthebusiness.Onlywhenallthefixedcostshavebeencoveredwillthiscontributionbecometheprofitofthebusiness.Example:Sellingprice£10,variablecosts£1thereforethecontributionis£9.

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Iffixedcostsare£900,then100unitsneedtobesoldtocoverfixedcostsfully.Thisisthebreakevenpoint.Any further units sold will still have to cover the £1 variable costs but each unit sold above thebreakevenpointwillgenerateaprofitof£9.

Whatisthemarginofsafety?Thisisthedifferencebetweenhowmuchweproduceandthequantityweneedtoproducetobreakeven. For example, if the breakevenquantity is 100 units andour factory has beendesigned for acapacityof150units,ourmarginofsafetyis50units.Productioncanfallby50unitsyetthefactoryisstillprofitable.

Whatarethelimitationsofbreakevenanalysis?§ Breakevenanalysisisusefulbutitcanonlyprovideasnapshotofcostsintime.§ Fixedcostsdon’tstaythesameinthelongterm.Salariesandexpenseschangeovertime.§ Pricesarelikelytochangeovertimeaswell,whichmeansthattherevenuechanges.§ Eachtimeasinglecostorthepriceoftheproductchanges,breakevenneedstoberecalculated.§ Goods are often sold at different prices, for example some customers might get discounts.

Somegoodsmaynotbesold,forexamplebecausetheyarefaulty.Breakevenanalysisassumesthatallthegoodsaresoldatthesameprice.

§ Breakeven analysis does not take into account the impact of any price change on customerdemand.

EndofTopicReview

1. Howistotalrevenuecalculated?

2. Howaretotalcostscalculated?

3. Whatismeantbythebreakevenpoint?

4. Whatismeantbycontribution?

5. Whatdoesabreakevencharttellus?

6. Whathappenstothebreakevenpointwhen

a. fixedcostsrise

b. fixedcostsfall

c. variablecostsfall

d. thesellingpricefalls

e. thesellingpricerises?

7. Whatarethelimitationsofbreak-evenanalysisasatechnique?

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RevisionTopic5:CashFlowForecasting

Thecomponentsofcashflow,including;cashandcreditinflow,thecomponents

ofcashoutflows:wages,materials,etc,netmonthlycashflows,openingbalancesandclosingbalances.

Thereasonswhybusinessesforecastcashflowandthebenefitsoftheprocess.

Whatiscashflow?Cashflowisthemoneythatthebusinessgets(cashinflow)andthemoneyitpays(cashoutflow).Cashinflowsincludeloans,capitalraised,grantsandsales. Cashoutflowsincludepaymentsformaterials,wages,expenses,administrationandlargeinvestments.Ifcashoutflowsaregreaterthancashinflows,thenthefirmsneedstofindthedifferencefromitsbankaccountoraskforanoverdraft.Thereisoftenalongdelaybetweenafirmspendingmoneyonmaterialsandexpenses,andthepointwhen it receivesmoney fromselling the finishedproduct. In themeantime, the firmneeds tohaveenoughcashtobeabletomeetitspayments.Thisdelaywillbelongerifthefirmsellstoitscustomersoncredit.Firmsoftenpay30daysaftertheproductshavebeendelivered. In contrast, some firms suchas retailers, only accept cashpayment,whichismadeonreceiptofthegood.

Whatarethebenefitsoftheprocessofcashflowforecasting?§ Ifabusinesscanestimateinadvancehowmuchmoneywillbecominginandgoingout,itwill

notbecaughtshortofcashwhenitneedstomakeanessentialpurchaseorpayitsstaff.§ Ifacompanyknows inadvancewhen itwillhavea lotofcash, it can timemajornon-urgent

purchasesforthistime.§ Ifitknowswhentherewillbeashortageofcashinadvance,itcantrytodelaysomepayments

orseekanoverdraftfromthebank.§ Asaresultofbettercashmanagement,thecompanywillneedtoborrowlessfromthebankin

loansandoverdrafts.Thismeanslowerinterestpayments,andthereforehigherprofits.§ Whenabusinessneedstoborrowmoney,thelenderwillwanttoseeacashflowforecastthat

showwhetherandhowthebusinesscanaffordtopaybacktheloanandinterestpayments.

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Activity1:RudolphHucker’sCashFlowForecast

Rudolphissettingupanewburger/kebabjointbyhimself.Hewillneedtoborrow£2,000fromthebank to financehis fast food restaurant. Thebankhas askedhis to submit a cash flowforecastofallhisincomeandexpenditureoverthefirstsixmonthsoftrading.Hehasestimatedthefollowingrevenues:Forecastrevenues

Jan Feb Mar Apr May Jun

Burgersales£

1,025 1,300 1,500 1,600 1,600 1,600

Kebabsales£

1,350 1,450 1,500 1,550 1,600 1,650

Otherreceiptsinclude:AnEnterpriseGrantwhichhereceivesinJanuaryof£3,000Hisowncapital,inJanuaryhepays£500intothebusinessandinAprilanother£500Expenditure:Freezers-£1,350purchasedinJanuaryGrills-£1,850purchasedinJanuaryMarketresearchfee-£1,000doneinDecemberbutpaidforinFebruaryWages-£500everymonthAdvertising-£100payableinJanuary,MarchandMayBusinessRates-£450inMarchandJuneOwner’sdrawings-£100permonthRent-£1,000permonthAdditionallyshepays: Jan Feb Mar Apr May JunStocksoffoodstuffs 1,700 1,200 1,000 1,200 1,300 1,000Sundryexpenses 70 60 50 90 10 50Usingtheinformationonthispage,prepareacashflowforecastinexcelforRudolph’sforthefirstsixmonthsonthefollowingpage.TheopeningbankbalanceinJanuaryiszero.A.Thefirstsituationisashortfallinsales:DuringMay,itisunusuallyhot,andsalesofburgersare£1000andkebabsare£1200aspeoplewantlesshotfood.1.Whathappenstotheendofmonthbankbalances?2.WhatcouldRudolphdotoimprovethesituation?

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B.Hedecidestotakeoutlessindrawings–thatisthemoneyhetakesoutofthebusinesstoliveon.Hermonthlydrawingsdecreasefrom£100to£50.1.Whathappenstotheendofmonthbankbalances?2.Whatcouldhedotofinancetheextrastartupcosts?C.Lookattheenterprisegrant.TheLocalauthorityareslowinpaying,andhereceivesitlate,inApril.1.Whathappenstotheendofmonthbankbalances?2.Howcouldheovercomethisshortageoffunds?D.Finally,weassumethatRudolphgetsamonth’screditwithhisfoodstuffssuppliers.Thiswillshiftallhisfoodpaymentstothefollowingmonths.1.Whathappenstotheendofmonthbankbalances?

Activity2:Norfolk&Chance’sCashFlow

Norfolk&Chancearestartingafast-foodbusinessinJuneofthisyear.Theyhaveworkedouttheirsourcesoffinanceandcosts.Sourcesoffinance§ Theyareputting£15,000ofcapitalintothebusiness§ Thebankislendingthem£10,000§ Theyhavealocalauthoritygrantof£2,500§ TheyestimatesalesincomeinJune,JulyandAugusttobe£5,000Start-upcostsN&Calreadyownsthepremisesandestimatesthestart-upcoststobe:§ conversionofpremises:£15,000

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§ purchaseofequipment£10,000§ advertisingthelaunchofthenewbusiness£500RunningcostsN&CreckontherunningcostsinJune,JulyandAugustwillbe:§ Buyinginstocksoffood-£1,500permonth§ Wages-£1,200permonth§ Insurance–£120permonth§ Electricity-£150permonth§ Otherexpenses-£500permonthN&Chaveopenedupanewbankaccount,whichstartswithazerobalance.Allthemoneyreceivedandpaidoutwillbethroughthisbankaccount.Yourtask:

1. Fillinthe3-monthcashflowforecastandcalculatethebankbalances.Theshadedareasneednotbefilledin.

2. WhatwillthebalancebeatthebeginningofSeptember?3. Inyouropinion,howreliablearethedifferentestimatesforcostsandrevenue?

Norfolk&Chance’sFastFood:Cashflowforecastfor3monthsending31Aug2006

Item Jun(£) Jul(£) Aug(£) Receipts: Owner’scapital Bankloan Localauthoritygrant Estimatedsalesincome Totalreceiptsforthemonth

Payments: Conversionofpremises - Purchaseofequipment - Advertisingforthebusinesslaunch - Stocksoffoods - - -Wages - - -Insurance - - -Electricity - - -Otherexpenses - - -Totalpaymentsforthemonth - - -

Bankaccount:

Openingbankbalance Add:totalreceipts Less:totalpayments - - -Closingbankbalance

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EndofTopicReview

1. Whatismeantbycashflow?

2. Whatarethemaincomponentsofacashflowforecast?

3. Whatarethreeexamplesofcashinflowsforabusiness?

4. Whatarefiveexamplesofcashoutflowsforabusiness?

5. Whatarefiveadvantagesofcashflowforecasting?

6. Whatisthedifferencebetweenacashpaymentandacreditpayment?

7. Whatdoestherunningbalance(bankbalance)tellthebusiness?

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RevisionTopic6:CashFlowMonitoring

Howtointerpretcashflowforecasts-Commoncausesofcashflowproblems,includingpoorplanning,excessivetradecreditandexternalshocks(suchaschangesineconomicandmarketconditions).Actionswhichentrepreneursandmanagerscantaketoimproveacashposition;useofoverdraftsandtradecredit,factoringandsaleofassets,reschedulingpayments.

Whatisthedifferencebetweenacashflowforecastandacashflowstatement?Bothsetoutcashinflows,outflowsandthebankbalance.Theforecastisatooltominimizecashflowproblems in the future. Thestatement records theactualcash flowsthathaveoccurred in thepastmonths.Bothcanbeinterpreted.

Whatdoesinterpretingcashflowforecastsandstatementsmean?Thismeans lookingatthebankclosingbalancestofindoutwhethertheyarenegative,andwhetherthereisatrend–isthecashflowproblemgettingbetterorworse?Next,wefindoutthereasonsforthecashflowproblem.Thiscanbedifficult,andtherecanbeseveral.Sometimestheproblemistemporaryorseasonal.

Whatisacashflowproblem?Youhaveacashflowproblemifyouseeanyoftheseinthecashflowstatement:1.Yourcashoutflowsareconstantlybiggerthanyourcashinflows2.Youhavetokeepincreasingyourbankoverdraft(closingbalanceisminus)3.Youkeeptakingoutotherkindsofloanorputinmorecapitaltokeepthefirmgoing

Whatarecommoncausesofcashflowproblems?§ Bank loan toobig-There is excessiveborrowing. Does the companyhavea large long-term

loanor a big overdraft,which is gettingbigger, not smaller? This is a problem. If thebankraisesitsinterestrates,theproblembecomesevenbigger.

§ Customerspay late-Theygiveexcessive trade credit to their customers.Normally, this is 30days–1month–butsomebusinessesoffermore.CostsareincurredinJune,butpaymentforgoodsisinAugust–notgood.

§ Toomuchstock- If youbuy“inbulk” it’s cheaperbut thenyoumightendupwith toomuchstock.Itmightgooff/outoffashion.Somethingsbecomecompletelyobsolete,likeversionsofGameBoys,theSimmsandsoon.Anditcostsmoremoneytostoreinawarehouse.

§ Overtrading- This is when a business opensmore andmore shops – a continued “start-up”situationwhichincurslotsofstart-upcosts.Assaleswilltakeawhiletopickup,thebusinessisshortofcashinthemeantime.Overtradingisthemostcommonreasonforbusinessestofail.

Whydoesthecashflowhaveaneffectonworkingcapital?Workingcapitalconsistsofcash,invoicessentbythebusinesswhichcustomershavenotyetpaid,andstock.Ofthesethree,onlycashcanbeusedtopayoutstandingbills.Themoreoftheworkingcapitalis tied up in stock and outstanding invoices, themore likely it is that the business has a cash flowproblem.

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Whatcanwedotoimprovecashflowproblem?§ Buylessstock.YoucouldgoforJust-in-Timedeliveryfromyoursuppliers,ifyoucanpersuade

them.Thisiswhenthegoodsareliterallydeliveredtheminuteyouneedthem.(Unrealisticforasmallbusiness,though).

§ Make sure customers pay on time. Send them reminders, red letters etc. (Of course theymightthengosomewhereelsetogettheirgoods,andgivethatsupplieracashflowproblem).

§ Payyourownsupplierslater.Youcouldagreebettercreditterms(say,topayafter60days,nottheusual30).Oryoucoulddowhatyourowncustomersdotoyou,andjustpaylate.(Thismaymeanthatyoursuppliersdon’tselltoyouanymore).

§ Sell assets (perhaps cars, or land) which you don’t need. You could even factor out theamountscustomersoweyou–Factoringcompaniestakeondebtsowingtoyou,payyouabout75%oftheirvaluestraightawayincashandthensendtheBailifftoyourcustomers.

§ Factoring out old invoices. Some invoices may have been sent a long time ago yet thecustomershavenotpaid. Rather thancarryingonchasing thecustomers forpaymentwhichmayneverhappen,thecanbesoldtoafactorycompany.Thiswillpayapercentage,say30%of50%dependingonthechancesoftheinvoicebeingpaid.Theadvantageisthatthebusinessdoesnothavetoworryaboutthedebtanymoreandgetsapartpayment immediately. Thedisadvantage is that ifpayment ismade in full, itgoes to the factoringcompanyandnot thebusiness.

EndofTopicReview

1. Whatismeantbyacashflowproblem?2. Whatisanoverdraft?3. Whatdoestheprocessofinterpretingcashflowstatementsandforecastsinvolve?4. Whatismeantbyovertrading?5. Whatismeantbyworkingcapital?6. Whatismeantbyoutstandinginvoices?7. Whyisworkingcapitalthatconsistsmainlyofstockandunpaidinvoicesaproblemforafirm?8. Whatismeantbyfactoring?9. Whataretheadvantagesanddisadvantagesoffactoring?10. Whatwouldyoudotosolveacashflowproblemforwhichyouhaveidentifiedthefollowing

reason:a. Excessiveborrowingbythebusinessb. Thebusinesshasgrantedexcessivetradecredittoitscustomersc. Thebusinessholdstoomuchstockd. Thebusinessisovertradinge. Acompetitorhasopenedupandtakenawaymarketsharefromthebusinessf. Cheapforeignimportsleadtogreaterpricecompetitionforthebusiness’productsg. Thebusiness’productsarelargelyobsolete

11. Theminimumwagehasincreased,causingexpensestoincrease

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RevisionTopic7:SettingBudgetsandMonitoringBudgets

Settingbudgets:Theuseofrevenue(orsales)budgetsandexpenditurebudgets.

Examplesofthestructureofsalesandexpenditurebudgets.Theprocessofsettingbudgets,startingwithsalesforecasts.Thereasonsforsettingbudgetsandthebenefitsfromthisprocess.MonitoringBudgets:Theuseofforecastedandactualbudgetdataandtheanalysisof

variances,includingfavourableandadversevariances.Expectedrelationshipswithinbudgetsandactualdata,eghighersalesfiguresleadingtoadverseexpenditurevariances.

C:\Users\GMartin\Desktop\Roade 09-10\Roade 09-10\Roade 08-09\Currently working on\bus03home.html

Whatisabudget?Abudget looks similar toa cash flow forecast in that it forecasts salesandexpenditureby categoryover future months. It does not show a bank balance. Instead, it compares actual with forecastexpenditure.

Whatcanabusinessbudgetfor?Everydepartmentinthebusinesscanhaveitsownbudgetforsalesandexpenditure.Thebusinesscanalso forecast sales for each individual product it sells, or individual stores it owns. Internationalcompanies forecastsalesbycountryor region. Budgets forexpendituresarealsobrokendown intosalaries,energycosts,rentalcosts,etc.

Howdoweknowhowmuchsalesandexpendituretobudgetfor?The business needs to base its forecasts on past years’ sales and expenditure, any trends it hasobserved,marketresearchitcarriesoutandanyspecificknowledgeithas. Forexample,followingarecent rise in oil prices a business must factor this in even if last year’s prices were much lower.Equally, if the business knows that theminimumwage has increased, this must be reflected in itsemploymentexpenditure.Ifabusinesshasgivenitsemployeessalestargetsthenthesewillbeinthebudget.Attheendoftheperiod, sales targets budgeted for are comparedwith the actual revenue the sales department hasachieved.Ofcourse,ifthebusinessbudgetsforanincreaseinsalesthencostswillalsohavetorise.Forexample,commission earned by sales people will go up, as may some variable and semi-variable costs liketelephone charges and electricity. The businessmay expand by employing extra people or rentingmoreofficeorwarehousespacetobeabletocopewiththeincreaseinrevenue.Anybudgetedincreaseincostsmustbejustifiedbytheincreaseinsalesandprofitswhichthebusinesswillachieve.

Whatisamasterbudget?From the individual budgets for salesof differentproducts andexpenses, thebusinesswill create amasterbudgetwhichreflectstheforecastprofitandlossaccount.Thisshowshowoverallsales,costsandprofitswillbeaffectedbychangesintheindividualbudgets.

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Howdobusinessesbenefitfrombudgetingforsalesandexpenses?The main benefit of budgeting is that when a manager wants to raise expenditure for particularexpenses,perhapsincreasethenumberofpeopleinhisdepartment,theeffectofthisonprofitswillbeapparent.Budgetingshowswhetheradditionalexpenditureisjustifiedbyincreasingsalesorprofits.Sales staff are usually given a target to achieve; this target will be in the budget. This is used tomotivatethemtosellmoreandearnmorecommission.When comparing the outcome with the budget, managers can see whether increased costs havecausedanincreaseinprofits.Inlargerbusinesses,itispossibletocomparetheoutcomeofdifferentbusiness areaswith thebudget and try to analysewhich some sectionsof thebusiness have raisedsalesandprofitswhileothershavenot.

Whatisavariance?Attheendofthebudgetperiod,thebusinesscancomparetheactualoutcomefigureswiththoseithasbudgeted. Forexample, in themonthof January, thesalesbudgetmighthave forecast£10,000butactualsaleswere£9,000.Thedifferenceisthevariance.

Whatisafavourablevariance?Actualsaleswerebetterthanforecastinthebudget,orActualexpenditurewaslowerthanforecast.

Whatisanadversevariance?Actualsaleswereworsethanforecastinthebudget,orActualexpenditurewashigherthanforecast.

Whyareweinterestedinthevariances?Itispossibletospotatrendorthereasonforvariances,andthentrytoremedythem.Forexample,abusiness might not have been able to get the shop staff it needed and this caused a favourablevarianceonsalarycostsbutanadversevarianceforsalesrevenue.Employingmorestaffnextyearwillsolvetheproblem.AnotherexamplemightbewhereabusinessconstantlyexceedsitssalestargetsinthemonthsofJulyandAugust.Thiscouldleadtoshortagesofstockinthosemonths.Nextyear,thebusiness can prepare for the two busy summer months by buying more stock. With the extracustomers,thisshouldleadtoevenhighersalesascustomersnowhavemorechoicethanbefore.

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Endoftopicreview

1. Whatisabudget?2. Whatitemsdobusinessesbudgetfor?3. Explainfourdifferenttypesofinformationabusinessneedstoforecast:

a. Salesb. Expenditure

4. Whatismeantbyamasterbudget?5. Explainthreewaysinwhichbudgetscanbenefitbusinesses.6. Actualsaleswere£10,000,forecastsaleswere£11,000.Isthevariancefavourableoradverse?7. Actualsaleswere£12,000,forecastsaleswere£11,000.Isthevariancefavourableoradverse?8. Actualexpenseswere£15,000,forecastexpenseswere£11,000.Isthevariancefavourableor

adverse?9. Actualexpenseswere£10,000,forecastexpenseswere£11,000.Isthevariancefavourableor

adverse?10. Afavourablevarianceonexpendituredoesnotalwaysmeanthebusinessbenefits.Giveone

examplewherethisisnotthecase.11. Explaintwowaysinwhichthecomparingbudgetedandactualfiguresbenefitsabusiness12. Freda’sbudgetedandactualfiguresforlastyear

Item Budget(£) Actual(£) VarianceDirectproductioncosts

Buns 300 250 Beefpatties 500 600 Sauces 45 50 Wrappings 60 50 Expenses Electricity 450 400 Rent 6000 6000 Rates 1800 1800 Total

§ Completethevariancecalculations.Calculatethevariancefortheentireyear.§ Suggesttworeasonswhythevarianceforbunsisfavourable,yetthevarianceforbeef

patties,whicharesoldinequalquantities,isadverse.§ Discussthereasonwhythevariancesofthebudgetsforexpensesareminor,while

variancesfordirectproductioncostsaremuchlarger.HowcouldDoreenoimprovetheaccuracyofherforecastfornextyear?

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PRACTICEQUESTIONS

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LegalStructure1. TowhatextentdoyouagreethatSYSshouldhavestartedasaprivatelimitedcompany

insteadofapartnership(10marks)

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2. AnalysethebenefitstoSYSofstartingupasapartnership(8marks)

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3. ExplainonereasonwhySYSshouldcompleteadeedofpartnership(4)………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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4. AnalysethedrawbackstoSYSofstartingupasapartnership(8marks)

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ProfitsandBreak-Even

1. SYSmadeaprofitofjustover£100,000.

ExplainwhyitisimportantforSYStomakeprofits(6marks)

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2. Selectedfinancialforecasts(year1)forSYS

Annualfixedcosts £602,000

Variablecostperstoragebox £1

Averagepriceperstoragebox £5

Expectednumberofsalesofstorageboxes 180,000

(a) Usingtheaboveinformationcalculatethenumberofstorageboxesrequiredperyeartobreakeven(6marks)

………………………………………………………………………………………………………………………………………………………………………………….………………

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(b) Usingtheaboveinformationcalculatetheexpectedannualprofitorlossmade(6marks)

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3. SomedatafromMatt’sfinancialaccountscanbefoundbelowforSYS:

Purchaseof4vans £132,000

Annualfixedcosts £120,152

Averagerevenuepercustomer £200

Variablecostspercustomer £16

Expectedcustomersperyear 1200

(a) Usingtheaboveinformationcalculatethenumberofcustomersrequiredtobreakeven(6marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

(b) Usingtheaboveinformationcalculatetheexpectedannualprofitorlossmade(6marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

4. Thepartnershavenoticedafallinthecostofcardboardandotherpackagingmaterialwhichisavariablecost.Explainwhateffectthiswouldhaveonthebreakevenpoint.(4marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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5. SYSisconsideringwhethertocarryoutbreakevenanalysisinordertohelpwiththemanagementofthebusiness.Considertheargumentsforandagainstproducingabreakevenchartandusingbreakevenanalysisforthisbusiness.Justifyyourfinaldecision.(10marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

6. SomeforecastedfinancialdataforSYSisprovidedbelow(somemonthlyandsomeannualdata)foryear1 £000

Annualrevenueforlargeitems 223

Annualrevenuefromstandardstorageitems 660

Annualfixedcosts 345

Monthlymaintenancecosts 19

Othervariablecosts(permonth) 15

Calculatetheforecastannualprofitorlossmade(6marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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7. SomeforecastedfinancialdataforSYSisprovidedbelowforthefirstyear

Fixedcostspermonth £45,000

Typicalvariablecostperstoragebox £3

Averagerevenueperstoragebox £18

Usingtheinformationabove,calculatehowmanystorageboxesneedtobestoredperyearinordertobreakeven.(6marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

8. AbdulhaswarnedMattaboutthehighfixedcostsofsettingupafurtherwarehousebusinessinBirmingham.Witheachcustomeraveragingarevenueof£180andhavingvariablecostof£40percustomerheisunsureifthiswillbeenoughtocomfortablybreakeven.

FixedcostinformationforSYS–projectionsforyear1inBirmingham £000Insurancecosts 30Maintenance 18Rent 600Depreciationonvans 40Marketingexpenditure 52Otherfixedcostsincludingtraining 72CalculatethenumberofcustomersthatSYSneedstoachievetobreakeveninBirmingham(5marks).

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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Sourcesoffinance

1. AbankloanwillbeusedtofinancetheexpansionintoBirminghambutanalternativecouldbetorelymainlyonsellingsharesandconvertingtoalimitedcompany.Thefirmhasanexistingloanof£1.9m.Analysethecaseforeachviewanddecidewhichshouldbeused.Youshouldjustifyyourdecision.(10marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

2. AbankloanwillbeusedtofinancetheexpansionintoBirminghambutanalternativecouldbetotakeonanextrapartner.Thefirmhasanexistingloanof£1.9m.Analysethecaseforeachviewanddecidewhichshouldbeused.Youshouldjustifyyourdecision.(10marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

3. AnalysetwowaysSYScouldraisethenecessaryfinancetofundtheexpansionintoBirmingham(8marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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Settingandmonitoringbudgets

1. LookcarefullyatthebudgetprovidedbelowforthefirstthreemonthsofthenewexpansionintotheBirminghamareaandanswerthequestionsthatfollow:

August August September September October October

Budget Actual Budget Actual Budget Actual

Incomefromstorage 36500 39800 37890 40010 40100 42150

Totalincome 36500 39800 37890 40010 40100 42150

Wages 12500 13100 12500 13300 13600 14010Insurance 4600 4850 4600 4850 4750 5050Marketing 2100 2100 2500 2900 3000 3150Loanrepayments 5100 5100 5100 5100 5100 5350Othercosts 8900 9500 9670 12450 14600 17900Totalcosts 33200 34650 34370 38600 41050 45460

Profit/(Loss) 3300 5150 3520 1410 -950 -3310

CalculatethefollowingvariancesforSYS.Ineachcaseyoushouldstatewhetherthevarianceisadverseorfavourable(10marks):

I. TotalIncomeforAugust

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… II. TotalcostsforSeptember

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… III. LoanrepaymentsforOctober

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… IV. WagesforAugust

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… V. Profit/(Loss)forAugust,SeptemberandOctober

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

2. AnalysethepossiblebenefitsthatSYSmightgainfromtheuseofbudgetstohelpmanagetheproposedexpansionintotheBirminghamarea.(7marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

3. ExplainonebenefitthatSYSmightreceivefromusingvarianceanalysistomonitortheperformanceofthenewexpansion.(4marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

4. Analysethepossiblebenefitsthatthepartnersmightreceivefrommonitoringthebudgets

thattheyhavedrawnupforexpansionofactivitiesbySYS.(7marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

5. MattthoughtthatsettingbudgetsforexpenditureandrevenueforSYSwasthemostimportantactionforthefuturesuccessofthenewexpansion.Towhatextentdoyouagreewiththisstatement?Youshouldjustifyyouranswer.(10marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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6. AfterupdatingtheirbudgetfortheproposedexpansionofSYSintotheBirminghamarea,Mattfeltthatitwasvitalforbudgetstobepreparedandmonitored.Explainwhyhemayhavefeltthisway.(6marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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7. (a)Thebudgetforthenewexpansionhasbeendrawnupbythemanagers.Completethebudgetbelow,byfillingintheshadedboxes.

January–March

April–June

July–September

October-December

Incomefromstoragefacilities 46000 47000 46500 45600Totalincome 46000 47000 46500 45600

Costs Interest 4500 4980 5000 5250

Wages 21560 22300

25700Insurance 1750 1750 1800 1900

Marketing 7500 2670 2890 3010Othercosts 11900 12100 13100 14500

Totalcosts

43800 48490 50360

Profit/(Loss) -1210 3200 -1990

(b) Using the information above, analyse why it is essential for SYS to set budgets for the newexpansion.(8marks)

………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

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Cashflowforecastingandmonitoring

1. CompletethefollowingcashflowforecastforSYSfortheexpansionintoBirmingham.

Totalinflow–AugustNetcashflow-SeptemberTotalOutflow-OctoberClosingbalance–November(4marks)

August September October November

Income

36500 76000Loans 2000000

Investment 500000 Totalinflow

0 36500 76000

Vehicles 220000 Insurance 32500 32500 32500 32500

Premises 125000 135000 140000 140000LoanRepayments 5600 5780 6000 6000Marketingcosts 46500 5200 5000 5000Otherassets 1670000

Othercosts 67000 Totaloutflow 2166600 178480

183500

Netcashflow 333400

-147000 -107500

OpeningBalance 0 333400 154920 7920

ClosingBalance 333400 154920 7920

2. ExplainthebenefitstoSYSofdrawingupacashflowforecastforthefirstyearoftradingfortheexpansionintoBirmingham.(6marks)

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3. ExplainonepossiblereasonwhySYScashflowforecastfortheproposedexpansionmightprovetobeinaccurate.(5marks)

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4. ExplaintworeasonswhySYSmighthaveproblemsinmanagingtheircashflowforthenewexpansion.(6marks)

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5. SYSisconcernedaboutthecashflowpositionfortheproposedexpansionandisconsideringwhatactionstheycouldtake.

ExplaintwoactionsthatSYSmighttaketoimprovetheirforecastcashflowposition.Selectthebestchoiceandjustifyyourchoice.(10marks)

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6. Despitetheirresearchpriortothisnewexpansion,Mattisworriedthattheircashflow

forecastmaybeoflittlevalueinmanagingSYS.DiscusswhetherornotMattisrighttobeworried.Justifyyouranswer.(10marks)

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7. ExplaintwopossiblereasonswhySYSmighthaveexperiencedcashflowproblemsduringtheearlymonthsoftradingintheexpansionofactivitiesinBirmingham.(6marks)

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8. (a)Youhavebeenprovidedwiththecashflowforecastforthefirst12monthsinBirmingham.

August-October

November–January

February–April

May-July

CapitalIntroduced 2500000 0 0Revenue 0 108500 119500 132000

TotalCashflowinflow 2500000 108500 119500 132000

Purchaseofassets 2200000 0 0 0Loanrepayments 56500 58900 58900 58900Wages 118000 121000 121000 117600Marketingcosts 46500 7500 6750 4790Othercosts 112000 32000 14500 6500Totalcashoutflow 2533000 219400 201150 187790

Netcashflow -33000 -110900 -81650 -55790

OpeningBalance 0 -33000 -143900 -225550

ClosingBalance -33000 -143900 -225550 -281340

Shortlyafterproducingthecashflowforecast,Mattrealisedthatsaleswereexpectedtobe10%higher(intheperiodMay-July)andMarketingcostswere£2500more(fortheperiodMay-July).

CompletetheshadedspacesinthecashflowforecastbelowfortheperiodMay-July,takingintoaccountthechangesabove.(5marks)

May-July

CapitalIntroduced Revenue TotalCashflowinflow

Purchaseofassets 0Loanrepayments 58900Wages 117600Marketingcosts Othercosts 6500TotalCashoutflow

Netcashflow

OpeningBalance -225550

ClosingBalance

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8. (b)Usingtheinformationabove,explainwhyitisimportantforMatttoprepareacash

flowforecastforSYSforthefirstyearofthenewexpansion.(6marks)………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….……………… ………………………………………………………………………………………………………………………………………………………………………………….………………

ANSWERSTOREVISIONQUESTIONSLegalStructure

1. TowhatextentdoyouagreethatSYSshouldhavestartedasaprivatelimitedcompanyinsteadofapartnership(10marks)

AprivatelimitedcompanyisownedbyshareholdersandregisteredwithCompaniesHouse,butsharescannotbetradedonthestockmarketPossiblebenefitsmightincludethefollowing:

• Morefinancecanberaisedbysellingshares.AsapartnershipSYSwouldnotbeabletoissuesharestoraisetheextrafundingrequiredtosetupinBirminghamwhichrequiresa£2.5minvestment.YetasanLtdtheycouldsellsharesprivatelyperhapstofamilyandfriends.Bysellingsharesthisavoidstheneedforfurtherborrowingwhichisriskygiventhatthefirmalreadytookouta£1.9mbankloan.

• Limitedliability.Withalimitedcompanytheownerscanonlylosetheamounttheyhaveinvestedinthebusinessbutcannotlosepersonalpossessionsoranymorethanthesharecapitalinthefirm.Thismaybeveryimportantgiventheriskofowing£1.9mtothebankalreadyandpossiblymoreinfuturewiththeBirminghamexpansion.IftheydefaultedontheloanrepaymentsthebankwouldbeabletogetthedebtsbackfromthepersonalassetsofMatt,AbdulandSaraasthepartnerscurrentlyhaveunlimitedliabilityasapartnership.Thelecturerswouldnotwanttolosealltheirlifetimesavingssolimitedliabilitywouldbeveryimportant.ExpandingintoanunknownmarketcarriesrisksoSYSmaybebetterprotectingtheownerswithlimitedliability.

Possibledrawbackscouldincludethefollowing:

• AccountswouldbeavailabletoanyoneatCompaniesHouse.RivalslikeLovespacewouldbeabletolookatSYS’saccountsandseehowtheirrevenuesandcostscomparewhichmaygivethemacompetitiveadvantageeg.calculatingSYS’sprofitmargins.

• Therearemorerulesandregulationstocomplywith.ForexampleifSYSdonotsubmittheiraccountsinthecorrectformattoCompaniesHousebytheendofthefinancialheartheycanbeheavilyfined.IfMattandtheotherpartnershavenotstudiedcompanylawtheymayendupbreakingimportantregulationsontheactionsofcompanieswhereaspartnershipshavemuchlessregulationstofollow.Thiscarriesextracostincomplyingwiththelaw–giventheexpensiveexpansionextraSYSwouldbekeentoavoidanyfurthercosts.

• Lossofcontrolifsellingalargeamountofshares.GiventhatMatthasthemajorityofcontrolatpresenthemayhavenotwantedtoissuefurthersharesinthebusinessifitmeanshelosescontrol–thiscouldhavebeenakeyreasonwhyhedecidedtotakeoutalargeloan–toavoiddilutingcontrol.

Evaluationmayinclude:Giventhelargefinancialsetupcoststhebusinessmayhavebeenabletoavoidthe£1.9mloanwhichcomeswithsignificantriskiftheycannotrepayit.Sellingsharesmayhavegiventhemaccesstocapitalwithouttheriskofinterestratesrisingmakingloanrepaymentsmoredifficult.Themostimportantpointwouldbetheprotectionfortheownersoflimitedliabilitythataprivatelimitedcompanywouldgivethemasthelecturersdon’twanttolosemorethantheyhaveinvestedinthebusiness.Alimitedcompanywouldthereforehavebeenabetterformofownership.

2. AnalysethebenefitstoSYSofstartingupasapartnership(8marks)

Apartnershipisabusinessownedby2-20ownerswhohaveunlimitedliabilityforthedebtsofthebusiness.Possiblebenefitsmightincludethefollowing:

• Easytosetup.Thereisnoneedtoregistertosetupapartnership(althoughitwouldbeadvisabletowriteadeedofpartnershipinordertohavealegaldocumenttoshowwhohasmostcontrol,howprofitswouldbesplitandsoonespeciallyasMattisinvestingconsiderablymorethanAbdulandSarah).

• Morecontrol.Thepartnersfullycontrolthedecisionsinthebusiness.IftheyweretosetupasalimitedcompanytherewouldbepotentialtosellsharestoraisefurthercapitalbutthatwoulddilutecontrolinthebusinesspotentiallyleadingtothelecturersbeingoutvotedonimportantdecisionssuchastheBirminghamexpansion.

• Moreideas/specialisation.Withasoletraderitisdifficultforanownerastheyhavetocarryoutallactivitiesandmakealldecisionsthemselves.Thethreelecturersmighthavespecialistskillsincertainareaseg.MattmayhaveknowledgeaboutthefinancialsideofthebusinesswhileAbdulmayhavestrongmarketingskills.Differentpartnerscanspecialiseinpartsofthebusinessthatsuittheirskillsandexperience.

• Lessregulations.ApartnershipisnotcoveredbytheCompaniesActanddoesnothavetoproduceformalaccountsthatwouldbesenttoCompaniesHouse.Assuchitiseasiertooperateandsetupespeciallyforthreelecturerswhomaynotunderstandtheformalitiesneededtosetupandrunacompany.

• Moreprivacy.AccountsdonothavetobesenttoCompaniesHousesothereforerivalslikeLovespacecannotaccessthesemakingitimpossibleforthemtoknowhowmuchborrowingtheyhave,whatprofitmarginstheyareachievingandsuchlike.

3. ExplainonereasonwhySYSshouldcompleteadeedofpartnership(4)Adeedofpartnershipisalegaldocumentwhichsetsoutthevotingrightsandprofitdistributionforapartnership

• ThiswouldbeimportantforSYSsinceMatthascontributedmorecapitalthantheotherpartnersthereforesincehecontributed55%ofthecapitalhewouldwant55%controlinthedecisionmakingaspectsofthebusiness.ThiswouldbeimportantsincebothotherpartnersareopposedtohisexpansionplaninBirminghamsoheneedstobesurethathealwaysgetstomakethemajorityofdecisionsiftherewasalegaldispute.WithoutadeedofpartnershipthelawstatesMattwouldonlyhavea33.3%voteinthecompany.

• Itwouldalsobeimportantsoprofitsaredistributedcorrectly.SinceMatthascontributed55%ofthecapitalhewouldexpect55%ofanyprofitsdistributed.Againifadeedofpartnershipwasnotcompletedhewouldonlybeentitledto1/3ofprofitsasthelawwouldrevertbacktothehistoricPartnershipActof1890.

4. AnalysethedrawbackstoSYSofstartingupasapartnership(8marks)

Apartnershipisabusinessownedby2-20ownerswhohaveunlimitedliabilityforthedebtsofthebusiness.Possibledrawbacksmayincludethefollowing:

• Unlimitedliability.Atpresentthethreepartnerscouldlosetheirpersonalbelongingswhichtheyhavesavedupoverthelifetimesastheytookearlyretirement.Giventheriskofhavingsuchalargebankloanof£1.9mthereisariskthatifthefirmcouldnotrepaythisdebttheywouldlosepersonalassets.

• Lackofcapital.Betweenthepartnerstheyraised£900,000butthenborrowedmorethantwiceasmuchfromthebank.Iftheyhadsetupasalimitedcompanytheycouldhaveraisedsharecapitalbysellingsharesprivatelymeaningalowerloanamounttakengivinglessriskifforexampleinterestratesweretoriseleadingtomuchhigherrepayments.

• Disagreements.MattseemsdeterminedtosetupinBirminghamwhiletheother2partnersthinkthisisariskystrategyastheylackknowledgeonthismarket.HoweverMattcanoutvotetheothersgivenhishighershareholding.Thiscouldleadtoseriousresentmentfromtheother2partnerswhichcouldthreatenthepartnershipgiventheirverydifferentviews.Mostpartnershipsendduetosuchdisagreements.

ProfitsandBreak-Even

1. SYSmadeaprofitofjustover£100,000.

ExplainwhyitisimportantforSYStomakeprofits(6marks)

Suggestedanswers:

Matt’sobjectiveistoincreaseprofitsby25%andexpandthusthefirmneedstogeneratehealthyprofitability.

Thethreepartnersneedtoberewardedwithashareofprofitssincetheyhavetakenriskininvestingtheirownfinanceintobusiness(£900,000betweenthem)andhavestartedthebusinessinordertoboosttheirpensionsafterretiringearly.Thehighertheprofitsthemoretheywillbeabletotakeoutofthebusinesstoboosttheirpensions.

Profitscanbereinvestedintoexpansionofthebusiness.WithMatt’sproposedexpansiontoBirminghamalargeinvestmentof£2.5misrequired.Themorefundsthatcancomefromretainedprofitsthelessthepartnerswouldneedtoborrowwhichisriskygiventhatrepaymentsonaloanaddedtoanalreadyhigh£1.9mloanwouldbedifficulttomake.

2. Selectedfinancialforecasts(year1)forSYS

Annualfixedcosts £602,000

Variablecostperstoragebox £1

Averagepriceperstoragebox £5

Expectednumberofsalesofstorageboxes 180,000

(a) Usingtheaboveinformationcalculatethenumberofstorageboxesrequiredperyeartobreakeven(6marks)

(b) Usingtheaboveinformationcalculatetheexpectedannualprofitorlossmade(6marks)

Answer:

a) 602,000/(5-1)=150,500boxes

b) Profit=revenue–totalvariablecost–totalfixedcost

=(180,000x5)–(180,000x1)–602,000

=£118,000

3. SomedatafromMatt’sfinancialaccountscanbefoundbelowforSYS:

Purchaseof4vans £132,000

Annualfixedcosts £120,152

Averagerevenuepercustomer £200

Variablecostspercustomer £16

Expectedcustomersperyear 1200

(a) Usingtheaboveinformationcalculatethenumberofcustomersrequiredtobreakeven(6marks)

(b) Usingtheaboveinformationcalculatetheexpectedannualprofitorlossmade(6marks)

Answers:

a) £120,152/(200-16)=653customers

b) Profit=revenue–totalvariablecosts–totalfixedcosts

(1200x200)–(1200x16)–120,152=£100,648

Or

200-16=£184unitcontributionx1200=£220,800contribution

Minusfixedcosts120,152

=£100,648

4. Thepartnershavenoticedafallinthecostofcardboardandotherpackagingmaterialwhichisavariablecost.Explainwhateffectthiswouldhaveonthebreakevenpoint.(4marks)

Answer:thiswouldlowerthevariablecostsofeachstoragebox;asaresultthetotalcostswouldfallandthereforetherewouldneedtobelessstorageboxesandlesscustomersneededtobreakeven–inotherwordsthebreakevenpointwouldfall

Analternativeapproachwouldbetostatethatthetotalcontributionwouldincreasesolessboxeswouldbeneededtoprovideacontributionthatcoversthefixedcosts

5. SYSisconsideringwhethertocarryoutbreakevenanalysisinordertohelpwiththemanagementofthebusiness.Considertheargumentsforandagainstproducingabreakevenchartandusingbreakevenanalysisforthisbusiness.Justifyyourfinaldecision.(10marks)

Answerideas:

For:

• HelpsseeiftheexpansiontoBirminghamisviablei.e.dotheyexpecttosellenoughstoragetogetpastbreakevenpoint,otherwisethereislittlepointinstartingtheventuregiventhehighstartupcostsof£2.5m.

• Theycanconduct“whatif?”scenarioseg.WhatifpriceshavetofallwiththearrivalofnewlocalandnationalbusinesseslikeLovespace–willtheystillbeabletobreakeven?

• Theycanshowthecharttoabankorpotentialnewshareholderinordertopersuadethemtoinjectfinanceintothefirm–importantgiventheneedtoraise£2.5mfortheexpansionideaintoBirmingham.Itwillbeanessentialpartofthebusinessplanforexpanding.

Against

• Iftheestimatedcostsareincorrectthentheanalysisisinaccurateandfairlyworthless–ForexamplethepartnershaveneversetupabusinessinBirminghambeforesothislackofexperiencecouldmaketheestimatedcostsandrevenuesinaccurate.

• Changingmarketconditionssuchasnewcompetitorsexpandingnationallyeg.Lovespacecouldmakerevenueforecastsveryinaccurate.

• Breakevenanalysisisasimplisticmodelandmoreusefulwhenthereisasingleprice.Withpricesvaryingdependingonthesizeofstoragecontainerusedbythecustomeritisverydifficulttogiveonepriceandonevariablecostperunitasitwillvarysomuchdependingontheclient.Becauseofthisanaveragepricewillhavetobeestimatedperstorageparcelwhichwouldbefarfromaccurate.

Overallevaluation

Anyfirmshouldhaveanideaofitsbreakevenpointanditisdefinitelyworthwhiletoconsiderhowmanystorageboxestheywillneedtoselltocoverthefixedcosts.TheanalysismaygosomewaytoconvinceaninvestororbanktoinjectfinanceintotheBirminghamexpansionwhichrequires£2.5minvestmentandthebreakevenanalysiscanbeusedaspartofabusinessplanforthisproject.Theyshouldbecarefultokeepthecostsandpricesuptodatehoweverasitemslikepricesareconstantlychangingduetoincreasingcompetitioninthemarket.

6. SomeforecastedfinancialdataforSYSisprovidedbelow(somemonthlyandsomeannual

data)foryear1 £000

Annualrevenueforlargeitems 223

Annualrevenuefromstandardstorageitems 660

Annualfixedcosts 345

Monthlymaintenancecosts 19

Othervariablecosts(permonth) 15

Calculatetheforecastannualprofitorlossmade(6marks)Answer:Revenue–Totalvariablecost–Totalfixedcost=883–(34x12)–345= £130,000

7. SomeforecastedfinancialdataforSYSisprovidedbelowforthefirstyear

Fixedcostspermonth £45,000

Typicalvariablecostperstoragebox £3

Averagerevenueperstoragebox £18

Usingtheinformationabove,calculatehowmanystorageboxesneedtobestoredperyearinordertobreakeven.(6marks)Answer:Breakeven=fixedcost/unitcontribution=45000/(18-3)=3000boxespermonthtobreakevenx12=36000storageboxesperyear

Or(12x45000)/(18-3)=36000storageboxesperyear8. AbdulhaswarnedMattaboutthehighfixedcostsofsettingupafurtherwarehousebusiness

inBirmingham.Witheachcustomeraveragingarevenueof£180andhavingvariablecostof£40percustomerheisunsureifthiswillbeenoughtocomfortablybreakeven.

FixedcostinformationforSYS–projectionsforyear1inBirmingham £000Insurancecosts 30Maintenance 18Rent 600Depreciationonvans 40Marketingexpenditure 52Otherfixedcostsincludingtraining 72CalculatethenumberofcustomersthatSYSneedstoachievetobreakeveninBirmingham(5marks).Answer:Totalfixedcosts=£812000Contributionpercustomer=£180-£40=£140812000/140=5800customerstobreakeven

Sourcesoffinance

1. AbankloanwillbeusedtofinancetheexpansionintoBirminghambutanalternativecouldbetorelymainlyonsellingsharesandconvertingtoalimitedcompany.Thefirmhasanexistingloanof£1.9m.Analysethecaseforeachviewanddecidewhichshouldbeused.Youshouldjustifyyourdecision.(10marks)

Suggestedanswers:

Forloan:

• Nolossofdecisionmakingandcontrol–Mattcurrentlyhas56%ofthecapitalinvestedandtheothertwopartnershave22%eachsothisshoulddictatehowmuchsaytheyhaveinanydecisions.Afurthershareissuewillleadtofurtherlossofcontrolfortheexistingpartnerssoitmaybebettertoraisemoreloancapital.ThepartnersarealreadyindisagreementoverhowbesttoexpandthebusinessasMattwantstosetupinBirminghamandtheothersarereluctantto.Therewouldbepotentialformoredisagreementsifmoresharesareissuedtooutsidersgivingthemcontrol.

• InterestratesintheUKarelowatpresentsoaloanmayworkoutcheaperthanpayingdividendsonsharesifthefirmmanagestoachieveMatt’sobjectiveofraisingprofitsby25%bytheendof2017.

• Ashareissuewouldlowerdividends.Partnersarealreadyfrustratedwithprofitabilityasithasbeenaround£100,000since2014.Iftherearemoreshareholderstheywouldallreceivelowerdividendsasprofitswouldbedividedbetweenmoreshares.

Forshares:

• Toomuchborrowingalready.Profitabilityiscurrentlystaticaround£100,000whichmaybeduetointerestbeingpaidonthelargeexistingloanof£1.9m.EvenifsalesrevenuewastobehighinBirminghamwithanextraloanof£2.5mtheinterestwouldbeveryhighleadingtohighcostsandlowprofits.Thisloaninterestwouldalsobeadrainonthecashflowofthebusiness.

• Nointeresttopay–crucialwhenstartinganewventureasitwilltaketimetodeveloptheclientbaseinBirminghamastheydon’tyetunderstandwhothecompetitorsareandthebestwaytotargetthemwithpromotionsandadvertisingnordoSYShaveanybrandrecognitioninBirmingham.Dividendsdonotneedtobepaideveryyearwhereasiftheytookaloantherepaymentswouldstartverysoonbeingadrainonthefinancesofthebusinessasitwouldleadtohighcashoutflows.

• Itwouldgiveownerslimitedliability.TheexpansionintoBirminghamcomeswithriskastheyhavenoexperienceofthismarket.Asthefirmtakesonmorecustomerstherisksbecomehigher–forexampletheownerscouldgetsuedforlosingexpensiveequipmentorforacollisioninoneofthevans.Beingalimitedcompanywouldmeantheownerscouldonlylosetheamountinvestedinthebusinessandnottheirbelongingsandpersonalassets.

Overall

Giventhat£2.5misrequiredacombinationofborrowingandsharesmayneedtobeused.AclearbusinessplancontainingfinancialprojectionsfortheBirminghamventuremaygosomewaytoconvincepotentialinvestors.Overallitdependshowmuchcontrolthepartnersarewillingtolosetonewshareholdersbuttheyshouldperhapsusemoresharecapitalsincetheycannotaffordtopayhugeamountsofinterestonloansasprofitsarealreadystaticandtheyhavealargeexistingloan.Thekeywillbewhethertheycanconvinceshareholderstobuysharesasitseemsthecurrentperformanceisfairlyaveragewithnoincreasesinprofits.

2. AbankloanwillbeusedtofinancetheexpansionintoBirminghambutanalternativecouldbetotakeonanextrapartner.Thefirmhasanexistingloanof£1.9m.Analysethecaseforeachviewanddecidewhichshouldbeused.Youshouldjustifyyourdecision.(10marks)

Suggestedanswers:

Forloan:

• Nolossofdecisionmakingandcontrol–Mattcurrentlyhas56%ofthecapitalinvestedandtheothertwopartnershave22%eachsothisshoulddictatehowmuchsaytheyhaveinanydecisions.Afurtherpartnerwillleadtofurtherlossofcontrolfortheexistingpartnerssoitmaybebettertoraisemoreloancapital.ThepartnersarealreadyindisagreementoverhowbesttoexpandthebusinessasMattwantstosetupinBirminghamandtheothersarereluctantto.Therewouldbepotentialformoredisagreementsifanotherpartnerisbroughtinwithyetanothersetofideasonhowbesttoexpandthebusiness.

• InterestratesintheUKarelowatpresentsoaloanmayworkoutcheaperthanpayingashareofprofitsouttoanotherpartnerifthefirmmanagestoachieveMatt’sobjectiveofraisingprofitsby25%bytheendof2017.

• Profitsarefairlystatic.Mattandtheothersarealreadyfrustratedwithprofitabilityasithasbeenaround£100,000since2014.Iftherearemorepartnerstheywouldallreceivelowerprofitsastheywouldbedividedupbetweenalltheowners.

Foranewpartner:

• Toomuchborrowingalready.Profitabilityiscurrentlystaticaround£100,000whichmaybeduetointerestbeingpaidonthelargeexistingloanof£1.9m.EvenifsalesrevenuewastobehighinBirminghamwithanextraloanof£2.5mtheinterestwouldbeveryhighleadingtohighcostsandlowprofits.Thisloaninterestwouldalsobeadrainonthecashflowofthebusiness.

• Nointeresttopay–crucialwhenstartinganewventureasitwilltaketimetodeveloptheclientbaseinBirminghamastheydon’tyetunderstandwhothecompetitorsareandthebestwaytotargetthemwithpromotionsandadvertisingnordoSYShaveanybrandrecognitioninBirmingham.Partnersdonotneedtobepaideveryyearwhereasiftheytookaloantherepaymentswouldstartverysoonbeingadrainonthefinancesofthebusinessasitwouldleadtohighcashoutflows.

Overall

Giventhat£2.5misrequiredacombinationofborrowingandanewpartnermayneedtobeused.ThefirmwillneedtoconvinceanewpartnerthattheprojectwillraiseprofitswithaclearbusinessplancontainingfinancialprojectionsfortheBirminghamventure.Overallitdependshowmuchcontrolthepartnersarewillingtolosetoanewpartnerbuttheycannotaffordtopayhugeamountsofinterestonloansasprofitsarealreadystaticandtheyhavealargeexistingloan.Sincetheexistingpartnersputin£0.9mtheassumptionwouldbethatraising£2.5mvianewpartnerswouldgivetheexistingpartnersaminoritystakeinthebusinesssotheywouldbeagainsttakingonnewpartners.Themostsensiblethingwouldbenottogoaheadwithexpansionorusedifferentsourcesoffinancesuchasleasingtofundthevehiclesratherthanbuyingthemoutright.

3. AnalysetwowaysSYScouldraisethenecessaryfinancetofundtheexpansionintoBirmingham(8marks)Answersmayinclude:

• Leasingofvehicles.Bypayingamonthlyleasingfeeinsteadofbuyingthevehiclesoutrightthiscouldmeanthat£2.5mwillnotberequiredtostarttheventuresoloweringanyfurtheramountsoffinancerequiredsuchasaloanornewpartner.Thevehiclescouldbereplacedattheendoftheleasingperiodandupgraded.However,inthelongtermleasingcanbemoreexpensiveduetotheconstantlongtermmonthlyrepayments.

• Takingonanewpartnerorventurecapitalist.Butsince£2.5misrequiredifanypartnercontributesmorethanMatt’s£500,000theyarelikelytohavethemostdominantcontrolandoverallsayinanydecisions.ThereforetheexistingpartnerscouldbeoverruledonanybusinessdecisionsuchashowtoexpandintoBirmingham.AnewpartnercouldgoagainstthisandsuggestadifferentcitylikeManchester.Yetanewpartneravoidstheneedtotakeextensiveloanswhichcomeswithhighriskastheymaynotbeabletorepaysuchalargeamountgiventheiralreadyhighloanof£1.9m.

• Aloancouldbetakenoutwithabank.TheloancouldbesecuredagainstexistingassetssuchastheLondonfirm’svehiclesorthepersonalassetsofthepartnerswhichkeepsinterestdownandhelpscashflow.ThisisveryimportanttospreadouttherepaymentsastheywouldneedtimetogettheirbrandrecognisedinBirmingham.Aloanwouldavoidanylossofcontrolthatmightcomewithshareissueortakingonanynewpartner.

• Sellingsharesisanotheroptionsincesharescanbesoldprivatelyoronthestockmarkettothepublicraisinghugeamountsoffinancewhichisneededfortheexpansion.ThisinvolvesnointerestanditmaybepossibletodelaydividendsifinvestorscanbepersuadedaboutthemeritsofthemoveintoBirminghamorbeyondiftheobjectiveistoestablishanationalstoragefirmlikeLovespace.

• Retainedprofit.Theremaybealittleretainedprofitbutgiventhatonly£100,000profitwasmadeannuallysince2014someofthiscouldbeputtowardsthenewventureandthiswouldreducetheamountofnewloancapitalrequiredortheamountneededfromanewpartner.

Settingandmonitoringbudgets

1. LookcarefullyatthebudgetprovidedbelowforthefirstthreemonthsofthenewexpansionintotheBirminghamareaandanswerthequestionsthatfollow:

August August September September October October

Budget Actual Budget Actual Budget Actual

Incomefromstorage 36500 39800 37890 40010 40100 42150

Totalincome 36500 39800 37890 40010 40100 42150

Wages 12500 13100 12500 13300 13600 14010Insurance 4600 4850 4600 4850 4750 5050Marketing 2100 2100 2500 2900 3000 3150Loanrepayments 5100 5100 5100 5100 5100 5350Othercosts 8900 9500 9670 12450 14600 17900Totalcosts 33200 34650 34370 38600 41050 45460

Profit/(Loss) 3300 5150 3520 1410 -950 -3310

CalculatethefollowingvariancesforSYS.Ineachcaseyoushouldstatewhetherthevarianceisadverseorfavourable(10marks):

• TotalIncomeforAugust• TotalcostsforSeptember• LoanrepaymentsforOctober• WagesforAugust• Profit/(Loss)forAugust,SeptemberandOctober(10marks)

Answers:

• TotalIncomeforAugust£3300Favourable• TotalcostsforSeptember£4230Adverse• LoanrepaymentsforOctober£250adverse• WagesforAugust£600Adverse• Profit/(Loss)forAugust,SeptemberandOctober£2620Adverse

2. AnalysethepossiblebenefitsthatSYSmightgainfromtheuseofbudgetstohelpmanagetheproposedexpansionintotheBirminghamarea.(7marks)Possibleanswersmightincludethefollowing:• BudgetswillhelpSYStocontrolandmonitortheirexpenditure.Thiswillbeespecially

importantduringtheexpansionintoBirminghamwhenset-upcostscouldbeunknownandveryhigh,especiallygiventhecostsofinvestinginvehicles,staff,leaseforpremises,storagecontainersandITequipment.

• UsingbudgetswillalsohelpSYStoidentifyanypartsofthestart-upthatareunderperformingandwherecorrectiveactionmayberequirede.g.ifextrapromotionisrequiredtogeneratesalesfortheBirminghamexpansion,whichmaybeaverycompetitivemarket.

• Thesumsinvolvedinthestart-upe.g.investinginvehicles,staff,leaseforpremises,storagecontainersandITequipmentarelikelytobeveryexpensive,soabudgetisessentialtohelpSYStomanagetheirfinancesandhelppreventoverspending.

• SYSmayneedtoraisemoneyfromexternalsourcestofundtheexpansion,soanyprospectiveinvestor/bankwillwanttoseeabudgetandwhethertheexpansionislikelytomakeaprofit.Lenderswillrequireevidenceoffinancialplanningbeforegrantingloanstothebusiness–thiswillenablethemtojudgethedegreeofriskinmakingloans.Withoutsuchevidencetheyareunlikelytograntsuchalargeloanormaychargeveryhighinterestrates.AsSYSdoeshaveconsiderabledebtalready,thisissomethingtheywouldbekeentoavoid.

• SettingbudgetswillmakeSYSconsidercarefullytheexpenditurethattheyintendtoundertakeandtodecidewhetherornotitisnecessary.Thismayhelptoreducethecostoftheexpansionortofocusexpenditureonthemostimportantelements.

• SYSwillbeabletousethebudgetstomonitortheprogressofitsplansandtomakeanynecessaryadjustmentsinatimelymanner.Thisisimportanttoavoidunnecessaryexpenditureandavoidthreatstoprofitabilityasfaraspossible.

3. ExplainonebenefitthatSYSmightreceivefromusingvarianceanalysistomonitorthe

performanceofthenewexpansion.(4marks)Possibleanswersmightincludethefollowing:• VarianceanalysiswillenableSYStoidentifywhereanycorrectiveactionneedstotake

placerelatedtotheexpansione.g.perhapstheyneedtoalterpricesofstoragefacilitiesduetounderperformanceorcompetitoractionsoradjustcostse.g.ifoverspendingonstaff,rent,vehicles.

• ItwillenableSYStoidentifyanyunexpectedlyhighcostse.g.setupcostsrelatedtotheexpansione.g.purchaseofvehicles,storagecontainers,andinvestmentinotherequipment,suchasanITdatabase.

• VarianceanalysiswillenableSYStoassesswhethertheirsalesforecastswereaccurateandagaintotakecorrectiveactionbasedupontheactionsoftheircompetitors.

4. AnalysethepossiblebenefitsthatthepartnersmightreceivefrommonitoringthebudgetsthattheyhavedrawnupforexpansionofactivitiesbySYS.(7marks)Possibleanswersmightincludethefollowing:• Thepartnersmightknowquicklyifsalesarelowerthanforecaste.g.ifcompetitors

decidetoreduceprices,forexample.• Monitoringthebudgetswillhelpwithdecisionmaking–forexample,thiscouldbe

relatedtopriceorcostofdeliveryandreturn.• Monitoringthebudgetswillhelpthepartnerstoseewhichpartsofherbusinessare

performingbest.• TheexpansionintoBirminghamisanewopportunityforSYSandthebusinessmust

assesswhetheritislikelytobeprofitable;budgetswillenablethemtoproducetargeteddataandthencompareagainstactualfiguresandworkoutvariances.

• BudgetswillhelpSYStocontrolandmonitoritsexpenditure.Thisisvitallyimportantduringthestart-upoftheexpansionwhenitisverydifficulttoclearlyidentifycosts.Also,theymayhavecashflowissues.ThesumsinvolvedaresignificantandSYSshouldplanitsfinancesbeforestartingtotrade.

• SYSmaywishtoraisefinancefromexternalsources(e.g.outsidelenders–banksoranewpartner)andtheywillwanttoseewhethertheexpansionisgoingtoyieldaprofit.

• OperatingbudgetsthroughoutSYSwillenablethebusinesstoidentifyareasofthebusinessthatareperformingwellandthosethatarenot,whereperhapscorrectiveactionisrequirede.g.ifextrapromotionisrequiredtogeneratesalesfortheBirminghamexpansion,whichmaybeaverycompetitivemarket.

5. MattthoughtthatsettingbudgetsforexpenditureandrevenueforSYSwasthemost

importantactionforthefuturesuccessofthenewexpansion.Towhatextentdoyouagreewiththisstatement?Youshouldjustifyyouranswer.(10marks)Possibleanswersmightincludethefollowing:

ArgumentsinfavourofMatt’sview:• Needtopreventover-spending,giventhehugestart-upcosts,£2.5m.• Itisimportantforthisbusinesstomakealargerprofitinthefutureanddrawingup

thesebudgetswillhelpwiththisprocess.• Thisisanewexpansionandthepartnersknowverylittleaboutthemarketin

Birminghamandwillwanttoforecastexpenditure,revenues(andprofitsorlosses)toseewhatactionsarenecessarytoimprovethemanagementofthebusiness’sfinances.

• Settingbudgetswillhelptoreassureanylenderorinvestorthatthebusiness’sfinancesarebeingmanagedmoreeffectively.SYSneedtofindextrafinancetohelpfundtheexpansionandanypotentialinvestororlenderwouldexpecttoseearealisticbudgetandassuchthisispossiblythemostimportantfactoraffectingthesuccessoftheexpansion.

• £2.5misneededtobeinvestedinthebusinessforthestart-upandtheownersandanynewpartnerswouldexpecttoseeareturnontheirinvestment.

ArgumentsagainstMatt’sview:• Settingbudgetsisonlyoneaspectofmakingabusinesssuccessful.Thisisanewventure

forSYSandtherearemanyotherfactorsaffectingthesuccessoftheexpansionproject.TheyhavelimitedknowledgeoftheBirminghammarketandtheirabilitytopenetratethismarketwillbeinfluencedtheirresearch,pricingstrategy,servicesofferedetc.

• ThisisacompetitivebusinessandMattwillneedtowinnewcustomersinlargenumbersandquicklytomaketheexpansionsuccessful;pricingandpromotionmaybemuchmoreimportant.

• Muchmaydependoncompetitors’actions,astheymayintroduceorprovidemorespecialofferstokeeporenticeclientsneedingstoragespacefacilities.

PointsforEvaluationmightincludethefollowing:• ItdependsonhowaccuratethebudgetsareandthereliabilityofMatt’smarket

research.Anylenderornewinvestorwouldexpecttoseeabudgetbeforeinvestingorlendingandtheimportanceofproducinganaccuratebudgetforthenewexpansionisessential.

• Surely,therearemanyfactorsthatmightcontributetothesuccessofthisbusiness–settingbudgetsareonlyoneofthese,butperhapsitisastartingpoint.

6. AfterupdatingtheirbudgetfortheproposedexpansionofSYSintotheBirminghamarea,Mattfeltthatitwasvitalforbudgetstobepreparedandmonitored.Explainwhyhemayhavefeltthisway.(6marks)

• Thisisanewexpansionandhasnopasttradingrecordstodrawupon.FurthermoretheownershaveverylimitedknowledgeoftheBirminghammarketforstoragefacilities.Thereforemonitoringincomeandexpenditurebudgetstohelpmakebetterqualitydecisionswillbeveryimportant.

• Theexpansionwillrequiretheraisingoffurthercapital(£2.5m),andfinancialrecordsaswellasforecastswillbeacentralpartofthisprocess.

• Theexpansionwillpotentiallyhavecashflowproblemsintheearlymonths,untiltheyarefullyestablishedandthereforeitwillbenecessarytodrawupbudgetstoidentifyandmanagetimesofcashshortage.

• Controllingcostswillbeanimportantpartofanyfinancialsuccessthatthebusinessenjoys,especiallywhencompetingagainstrivalsinanunknownmarket.TheprocessofbudgetingwillmakeMattconsiderexpenditureplansinadvanceoftakingthemandwillhelptoavoidunnecessaryexpenditure.

7. (a)Thebudgetforthenewexpansionhasbeendrawnupbythemanagers.Completethebudgetbelow,byfillingintheshadedboxes.

January–March

April–June

July–September

October-December

Incomefromstoragefacilities 46000 47000 46500 45600Totalincome 46000 47000 46500 45600

Costs Interest 4500 4980 5000 5250

Wages 21560 22300 25700 25700Insurance 1750 1750 1800 1900

Marketing 7500 2670 2890 3010Othercosts 11900 12100 13100 14500

Totalcosts 47210 43800 48490 50360

Profit/(Loss) -1210 3200 -1990 -4760

(b) Using the information above, analyse why it is essential for SYS to set budgets for the newexpansion.(8marks)

• SYSrequiresasubstantialinvestment(£2.5m)tofinancethenewexpansionand

lenders/newinvestorswillexpecttoseeevidenceoffinancialplanning,intheformofabudgetbeforeeithergrantingaloanorfundsforinvestment.Thiswillenablethemtojudgethedegreeofriskingrantingaloan.Withoutsuchevidence,anylenderisunlikelytolendmoneyoraninvestorisunlikelytoinvestintheexpansion.

• Thebudgetabovesuggeststhatinthreeofthefour3-monthperiod,SYSislikelytomakealoss.Thebudgetwillenablethepartnerstolookcarefullyatexpenditurethattheyintendtoundertakeanddecidewhethertheycanreduceitinanyway.Thiswillenablethemtoreducethecostoftheexpansionplanortofocusexpenditureonthemostimportantelements.

• Thisbudgethasbeenproducedfortheexpansionplan,forwhichSYShaslimitedexperience;theproductionofabudgetwillenablethepartnerstomonitortheprogressoftheplansandtomakeanynecessaryadjustmentsinatimelymanner,forinstancereducethepriceofstoragefacilitiesifrevenueislowerthanbudgetedinanattempttostimulatedemand.

Cashflowforecastingandmonitoring

1. CompletethefollowingcashflowforecastforSYSfortheexpansionintoBirmingham.

Totalinflow–AugustNetcashflow-SeptemberTotalOutflow-OctoberClosingbalance–November(4marks)

August September October November

Income

36500 76000Loans 2000000

Investment 500000 Totalinflow 2500000 0 36500 76000

Vehicles 220000 Insurance 32500 32500 32500 32500

Premises 125000 135000 140000 140000LoanRepayments 5600 5780 6000 6000Marketingcosts 46500 5200 5000 5000Otherassets 1670000

Othercosts 67000 Totaloutflow 2166600 178480 183500 183500

Netcashflow 333400 -178480 -147000 -107500

OpeningBalance 0 333400 154920 7920

ClosingBalance 333400 154920 7920 -99580 Answers:

Totalinflow–August£2500000Netcashflow–September-£178480TotalOutflow–October£183500Closingbalance–November-£99580

2. ExplainthebenefitstoSYSofdrawingupacashflowforecastforthefirstyearoftradingfortheexpansionintoBirmingham.(6marks)

Cashflowforecastsareestimatesofwhencashisexpectedtoflowintoandoutofabusiness.

Possiblebenefits:

• SYSmightwishtonegotiateabankloantohelpcoverpartofthecostsoftheproposedexpansion(£2.5m);assuchalenderwillwishtoseeclearevidenceofacashflowforecasttoidentifywhethertheywillberepaid.

• AcashflowforecastwillhelpSYStodeterminewhethertheexpansionisviableandwhethertheyshouldgoaheadwiththeexpensiveproject.

• SYSwillneedtoensurethatthebusinessdoesnotsuffercashflowproblemsinthefutureasaresultoftheexpansion,especiallygiventhecost(£2.5m)andtheriskinvolvedoftryingtopenetratearelativelyunknownmarket.

• Thecurrentpartnersandanynewinvestorsarelikelytowanttomaximisetheirreturnsandminimisinginterestpaymentsandcarefulmanagementofcashflowwillhelptoachievethisaim.

• Thepartners(especiallyAbdulandSara)arestilldecidingwhetherornottostartthenewexpansionandthisinformationcouldformanimportantpartoftheirdecision.

3. ExplainonepossiblereasonwhySYScashflowforecastfortheproposedexpansionmightprovetobeinaccurate.(5marks)

Possibleanswersmightincludethefollowing:

• Itisdifficulttoestimatethestart-upcostsforanewventure(expansionintotherelativelyunknownBirminghammarket).

• SYSsalesforecastsmightprovetobeinaccurate/incorrect;salesforecastsrelyveryheavilyuponaccuratemarketresearch;marketgrowthischangingrapidly.

• Externalfactorse.g.actionsofcompetitors,economycanreducesalese.g.houseprices.

4. ExplaintworeasonswhySYSmighthaveproblemsinmanagingtheircashflowforthenewexpansion.(6marks)

Possibleanswersmightincludethefollowing:• Identifyingthecustomerbasei.e.SYSmayhavehadsomedifficultyinclearly

identifyingtheirtargetmarketandassuchtheycouldbetargetingthewrongpotentialcustomers.TheyhaveknowledgeabouttheLondonarea,wherespaceisatapremium,whereasinBirminghamthismightnotbethecaseandassuchdemandcouldverywellbemuchlower.Thisisanewexpansionplanintotherelativelyunknown.

• SYSknowverylittleaboutthemarket,especiallythecompetitivenatureofstoragefacilitiesintheBirminghamareandwecanassumethattherearealreadysomeestablishedcompetitors,soitwillbedifficultforSYStoenterandgetestablishedinthemarket.

• Veryhighset-upcostse.g.over£2.5m,leadingtohighloanrepaymentsincreasingcashoutflows.

• Salesofstoragefacilitiesarelinkedtoeconomicfactorsi.e.whentheeconomyisindeclineorinarecession,thensalesmayfall,socashflowcouldbeirregular.Thisbusinessideaislinkedverymuchtothepriceofhouses.

• Businessclientsmightexpecttradecredit(perhapsthecompetitoroffersit)socashinflowswillbedelayed.

5. SYSisconcernedaboutthecashflowpositionfortheproposedexpansionandis

consideringwhatactionstheycouldtake.ExplaintwoactionsthatSYSmighttaketoimprovetheirforecastcashflowposition.Selectthebestchoiceandjustifyyourchoice.(10marks)

Possibleanswersmightincludethefollowing:

• Anoverdraftmightbeappropriate,especiallyduringtheearlyfewmonthsoftheexpansion,whensalescouldbelowuntilSYSisestablishedinthemarket.

• SYScouldtrytotakeonabankloaninordertohelpthemfinancetheexpansion;alternativelytheycouldoptforanewpartner(orperhapsacombinationofboth)

• Insteadofpurchasingexpensiveassetssuchasvehiclesforthebusiness,theycouldleasethemandtherewouldbelessdramaticcashoutflow.Alternativelytheycouldpurchasesecondhandequipment,whichwouldreduceinitialoutgoingsimmediately.

• SYScouldtrytoreducecostse.g.findacheaperinsurancecompanyorsomewherecheapertorentpremises.

Youranswerstothistypeofquestionarelikelytocomefromtheinformationprovidedontheday(i.e.theexaminationpaperitself)andanycashflowforecastthatyoumayhavebeenaskedtocomplete.

6. Despitetheirresearchpriortothisnewexpansion,MattisworriedthattheircashflowforecastmaybeoflittlevalueinmanagingSYS.DiscusswhetherornotMattisrighttobeworried.Justifyyouranswer.(10marks)

Possibleanswersmightincludethefollowing:

• Theforecastmaybeinaccurateastheyhavelimitedexperienceofmanagingthistypeofexpansioninanunknownareai.e.thescaleandsizeoftheproject(£2.5m).Assuch,thisisahighriskprojectintoamarkettheyknowverylittleabout.

• Externalfactorse.g.competitorswhoarealreadywell-establishedintheBirminghammarketcoulddevaluetheircashflowforecastsandmakethefiguresinaccurate.

• AcashflowforecastisessentialifSYSistopersuadeabanktolend.• Intheearlyyearsoftheexpansion,surelySYSwouldexpectacashflowdeficitfor

thenewventure,especiallygiventhesumsinvolved,soforecastingisthereforeessential.Thisisespeciallythecaseasthisnewventureinvolvessomeuncertainties.

• Managingthecashflowofabusinessisanimportantpartofbusinesssuccessforanewventure;ithelpstoidentifypossibleproblemsinthefutureandtotakeanycorrectiveaction.Itwillalsohelptodecidewhetherornottogoaheadwiththeexpensiveexpansionproposal.

7. ExplaintwopossiblereasonswhySYSmighthaveexperiencedcashflowproblemsduringtheearlymonthsoftradingintheexpansionofactivitiesinBirmingham.(6marks)Possibleanswersmightincludethefollowing:

• Buyingthevehiclesoutrightisabigcosttostart;perhapsSYSwouldbebetteradvisedtolease.

• Lackofstart-upcapital–insufficientfinancetofundthenewstart-up£2.5misrequired–wherearetheygoingtoraisethatleveloffinancefromandisitenough?Iffundsareborrowedtherewillbehighloanrepaymentseachmonth,whichcouldaffectthecashflowforecast.

• SYShaslimitedknowledgeofexpansionintoBirminghammarketandtheycouldhaveoverestimatedtheirinflows.NoestablishedreputationinBirminghamunliketheirmoreestablishedrivals,whichmayaffectsalesuntilestablished.

• Theproposedexpansionisveryexpensive,sothiswouldhaveledtohugecashoutflows.Thebankloanmightprovetobeexpensive,intermsofmonthlyrepayments.

Youranswerstothistypeofquestionarelikelytocomefromtheinformationprovidedontheday(i.e.theexaminationpaperitself)andanycashflowforecastthatyoumayhavebeenaskedtocomplete.

8. (a)Youhavebeenprovidedwiththecashflowforecastforthefirst12monthsinBirmingham.

August-October

November–January

February–April

May-July

CapitalIntroduced 2500000 0 0Revenue 0 108500 119500 132000

TotalCashflowinflow 2500000 108500 119500 132000

Purchaseofassets 2200000 0 0 0Loanrepayments 56500 58900 58900 58900Wages 118000 121000 121000 117600Marketingcosts 46500 7500 6750 4790Othercosts 112000 32000 14500 6500Totalcashoutflow 2533000 219400 201150 187790

Netcashflow -33000 -110900 -81650 -55790

OpeningBalance 0 -33000 -143900 -225550

ClosingBalance -33000 -143900 -225550 -281340

Shortlyafterproducingthecashflowforecast,Mattrealisedthatsaleswereexpectedtobe10%higher(intheperiodMay-July)andMarketingcostswere£2500more(fortheperiodMay-July).CompletetheshadedspacesinthecashflowforecastbelowfortheperiodMay-July,takingintoaccountthechangesabove.(5marks)

May-July

CapitalIntroduced Revenue 145200TotalCashflowinflow 145200

Purchaseofassets 0Loanrepayments 58900Wages 117600Marketingcosts 7250Othercosts 6500TotalCashoutflow 190290

Netcashflow -45090

OpeningBalance -225550

ClosingBalance -270640

8. (b)Usingtheinformationabove,explainwhyitisimportantforMatttoprepareacash

flowforecastforSYSforthefirstyearofthenewexpansion.(6marks)

Possiblerelevantanswersinclude:

• Cashflowforecastsareestimatesofwhencashisexpectedtoflowintoandoutofabusinessoveraperiodoftime.

• SYSarepresumablyfundingthenewexpansionventurethrougheitherloan,anewpartneroracombinationofbothandassuch,anylender/newinvestorwouldexpecttoseewhetherrepaymentscanbemadebeforeagreeingtolendorinvest.

• WhilsttheyareestablishedintheLondonarea,SYSknowsverylittleabouttheBirminghamareaandacashflowforecastwillenablethemtoestimateandpredictthelikelysuccessoftheventureinthefirstyearoftheexpansion.

• Theownersareconcernedaboutthelevelofprofitsearnedinthebusiness(stablesince2014at£100,000.Managingcashflowandalsotryingtominimiseoutflowsandmaximiseinflowsisonewaytohelpthemachievetheirdesiredobjectiveofincreasingprofitsby25%inthefuture.

• Thereisstillsomeuncertaintyaboutwhethertostarttheexpansion(AbdulandSarahaveexpressedreservations),soacashflowforecastwillhelpthemtointheirdecisionofwhetherornottocarryouttheexpansion.

• Cashflowexpectedtobenegative(seeabove),soitisimportanttoestablishhowtoovercomethepotentialproblemof-270640closingbalancee.g.arranginganoverdraft.