Question

Business Plan – toy merchandise sales

Invest $150,000 cash savings for capital equipment and "working capital. "

Buy Capital Equipment (vehicle of transportation, computer, storage unit) during organizing period for business $50,000

Buy toy units (1 type only) for cash on delivery - $3/unit after receiving bulk order for toy units

Additional variable cost per unit for fuel, labor, packaging, transportation, etc.. to deliver toys to retailer is $2/unit

Average time from order to delivery is 1 month

Rent, Utilities, Insurance, Bookkeeping, etc.. (fixed costs) - $12,000/month

Sell packaged, and delivered toy units to retailer for $9/unit

Average time from delivery until when retailer pays is 3 months (Typical "Net 90" Payment Terms)

Sales prediction:

1000 units per month for months 1-3

2500 units per month for months 4-6

1000 units per month for months 7-9

3000 units per month for months 10-12

First sale in January, First delivery in February, First payment received in May, and so on.

To do:

1)      Prepare monthly preliminary income statement and cash flow statement for the first year in spreadsheet.

2)      Determine if there are any external funding requirements

3)      What are the business’s profit margin, return on assets, debt to assets, debt to equity, and asset to equity ratios?

4)      According to the integrated reporting framework, what kind of capitals are the most relevant in this business context?

5)      Calculate the sustainable growth rate for the business at the end of year 1

6)      Recommend two dynamic metrics for this business and explain briefly why.

Answer 1

A) Monthly Income Statement:

Particulars	Jan	Feb	Mar	April	May	June	July	August	September	October	November	December
Units	1000	1000	1000	2500	2500	2500	1000	1000	1000	3000	3000	3000
Selling Price	9	9	9	9	9	9	9	9	9	9	9	9
Total Sales	9000	9000	9000	22500	22500	22500	9000	9000	9000	27000	27000	27000
Less:
Toy Cost@5	5000	5000	5000	12500	12500	12500	5000	5000	5000	15000	15000	15000
Other Cost	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000	12000
Net Profit	(8000)	(8000)	(8000)	(2000)	(2000)	(2000)	(8000)	(8000)	(8000)	0	0	0

Cash Flow Statement:

Since payment from retailer is received in 90 days, thus only sales till September will be considered.

It has been assumed that payment for toys and variable cost is made on cash basis.

Particulars	Amount
Amount Invested	150000
Sales	112500
Total Cash Inflow	262500
Less: Capital Equipment	(50000)
Toy Cost	(112500)
Other Cost	(144000)
Cash Balance	(44000)

B) Yes there is external funding requirement since cash balance at the end of the year is negative to the extent of $44000.

C) Profit Margin= Profit/Sales

                      =(54000)/202500

                      =(26.67%)

Return on Assets= Profit/Total Assets

                         = (54000)/231000

                         = (23.37%)

Debt to Assets= Debt/Total Assets

                      = 44000/231000

                      =0.19

Debt to Equity= Debt/Equity

                     =44000/150000

                     =0.29

D) Looking at the framework of the business, working capital requirement is more relevant to this type of business.

E) Dynamic Matrices of business are:

External Debt: Since the amount of internal funding is not sufficient to cater the needs of the business, thus the firm has to resort to the external funding for fulfilling its requirements.

Working Capital: In such type of business, working capital requirement is more essential than fixed capital requirement as we have to the creditors on cash basis but receiving the payment from the retailers on credit basis.