You have been approached by your friend, jessica, who is thinking about opening
ID: 2595208 • Letter: Y
Question
You have been approached by your friend, jessica, who is thinking about opening a toy store in the High Street.
Jessica’s mother, Margaret, is willing to invest £20,000 in the business in return for a share of the profits of the business. However, Jessica believes she will also require a business overdraft from her bank and has a meeting next week with the bank manager to discuss this.
The bank manager has requested that Jessica produces a written business plan for discussion at the meeting. Jessica is aware that you are studying finance as part of your degree and would like your help.
At a recent networking event, Jessica met two other shopkeepers in the High Street who have each provided her with their latest income statement to give her an idea of costs that she might incur (see income statements)
Bargain Foods
Income statement for the year ended 31 December 2014 and 31 December 2015
2015
2014
Revenues
770,000
808,000
Cost of sales
(555,000)
(550,000)
Gross profit
215,000
258,000
Wages
(144,000)
(139,000)
Rent
(32,000)
(30,000)
Light and heat
(9,500)
(9,750)
Insurance
(4,000)
(3,750)
Advertising
(500)
(500)
Other costs
(4,000)
(2,000)
Operating profit
21,000
73,000
AJ Jewellers
Income statement for the year ended 31 December 2014 and 31 December 2015
2015
2014
Revenues
138,000
122,000
Cost of sales
(48,000)
(35,000)
Gross profit
90,000
87,000
Wages
(25,000)
(20,000)
Rent
(5,000)
(5,000)
Light and heat
(2,000)
(1,750)
Insurance
(1,000)
(750)
Advertising
(4,000)
(6,000)
Other costs
(500)
(500)
Operating profit
52,500
53,000
AJ Jewellers is jewellery store which operates from a shop which is a similar physical size to Jessica’s. The shop opens five days a week.
Bargain Foods is a supermarket operating from a much larger premise. This shop is open seven days a week.
Jessica expects her weekly turnover to be £1,000 in the first six months of trading, increasing to £1,500 in the second six months of trading. She expects her gross profit margin to be 45%. Her shop will open five days a week.
Jessica’s initial cash expenditure will include: £10,000 on inventory, £5,000 on shop equipment and £2,500 on advertising. She will also pay a deposit of £2,500 to her landlord which will be refundable after her first year of trading.
Produce a forecast on an accruals (not cash) basis showing expected income and expenditure in the first twelve months of trading. Explain clearly any assumptions you have made. Ignore taxation.
2015
2014
Revenues
770,000
808,000
Cost of sales
(555,000)
(550,000)
Gross profit
215,000
258,000
Wages
(144,000)
(139,000)
Rent
(32,000)
(30,000)
Light and heat
(9,500)
(9,750)
Insurance
(4,000)
(3,750)
Advertising
(500)
(500)
Other costs
(4,000)
(2,000)
Operating profit
21,000
73,000
Explanation / Answer
1. Preparation of Forecasts of income & expediture statement.
Income & Expenditure
Particulars
Amount
Revenues (1,000 x 26 weeks + 1,500 x 26 weeks)
65,000
Less: Cost of Sales (55% of sales)
(35,750)
Gross Profit
29,250
Less: Wages (Note 1)
(15,500)
Rent (Note 2)
(2,500)
Light & Heat (Note 3)
(1,125)
Insurance (Note 4)
(650)
Advertising Cost (Note 5)
(2,500)
Other Costs (Note 6)
(500)
Operating Income
6,475
Note 1: Wages of AG Jewellers is increasing at (5,000 / 20,000 x 100) = 25% rate on per annum basis, therefore, next year wages of AG will 31,250. Since the sales of our business is almost half of the revenues of AG, wages will also be halved. As an estimate, wages will be 15,500.
Note 2: Rent deposit is generally equal to 12 month rent and therefore, rent is assumed to be $2,500 for business.
Note 3: Since our business is in the initial years and business is also half of AG jewellers light & heat cost is also half. Since increase in light & heat cost of AG is almost 14% (2,000-1750 / 1750 x 100), inflation is also considered at 14% for our business.
Note 4: Insurance is almost increasing at 33% and therefore, next year insurance cost will be $1,330 for AG jeweler. 50% of same is considered for our business.
Note 5: Advertising Cost is given in actual figures.
Note 6: Other costs is same for all the years and is therefore assumed to be depreciation on shop equipment. For our business we have considered, depreciation at 10% of the shop equipment i.e. 5,000 x 10% = 500
Particulars
Amount
Revenues (1,000 x 26 weeks + 1,500 x 26 weeks)
65,000
Less: Cost of Sales (55% of sales)
(35,750)
Gross Profit
29,250
Less: Wages (Note 1)
(15,500)
Rent (Note 2)
(2,500)
Light & Heat (Note 3)
(1,125)
Insurance (Note 4)
(650)
Advertising Cost (Note 5)
(2,500)
Other Costs (Note 6)
(500)
Operating Income
6,475
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