A group of friends have formed a
new business called Fashion Clothing, an online and mail-order clothing
business, in which they have invested £200,000 of their own capital. They
intend to manufacture and sell quality clothes. They have set up the business
and are selling direct to the final consumer, using a combination of aggressive
marketing across a range of different media and also with the use of an
automated Web site that accepts online orders. To support this, they also have
a department of telephone sales and support staff ready to help customers. The
sales staff work in teams and receive a basic salary plus commission for each
successful sale. By the start of July 20X5, they have spent £150,000 on
tangible non-current assets, and they currently have the remaining £50,000 in
their business bank account.
They provide you with the
following forecasted figures for their first 6 months of trading:
|
Sales for the next 6 months |
1,350,000 |
|
Cost of the materials used up in sales |
390,000 |
|
Labour costs for the 6 months |
480,000 |
|
Other expenses for the 6 months, including marketing costs and |
345,000 |
|
Materials purchased during the 6 months |
520,000 |
Their projected cash receipts
and payments are estimated to be as follows:
|
Month (20X5) |
Sales Receipts |
Payments for Materials |
Labour and Other Expenses |
|
£ |
£ |
£ |
|
|
July |
150,000 |
120,000 |
These payments are divided equally over each of the 6 months. |
|
August |
120,000 |
100,000 |
|
|
September |
150,000 |
60,000 |
|
|
October |
210,000 |
60,000 |
|
|
November |
260,000 |
60,000 |
|
|
December |
285,000 |
60,000 |
|
|
Totals |
1,175,000 |
460,000 |
In addition to the above, they
expect to have to pay a tax bill of £20,000 in December 20X5 and also plan to
buy (and pay for) £30,000 additional tangible non-current assets in that same
month. All transactions will go through their business bank account.
You are asked to provide a Business
Report (1,000 words for the main body of the report) for the friends
who have invested in Fashion Clothing, commenting on the business’ prospects
and including the following five financial statements:
Since none of the investors have
a background in accounting and finance, you should also explain what each of
these statements means as a part of your report.
An opening statement of financial
position at the start of July 20X5.
A monthly cash flow forecast,
showing the bank balance at the end of each of the 6 months and indicating what
level of overdraft facilities the friends need to negotiate with their bank
manager. Explain what additional expense they should take into account as a
result of needing this financial assistance (overdraft).
A projected income statement for
the first 6 months of trading.
A projected statement of
financial position for Fashion Clothing at the end of its first 6 months of
operations.
A projected statement of cash
flows for the first 6 months of trading and using the indirect method.
Keep the following in mind:
Using a spreadsheet may help you
to produce your cash flow forecast. Remember here that £150,000 of the initial
£200,000 has already been spent. Hence, your opening bank balance should be
£50,000. Your closing bank balance should be included in your statement of
financial position as at 31.12.20X5.
Think carefully about the £15,000
depreciation charge when working out your monthly cash outflows for labour and
other expenses.
Also think carefully about the
figures for closing stocks (inventories), creditors (payables) and debtors
(receivables).
Please remember that your
qualitative analysis and explanation of your five statements are just as
important as the calculations themselves. These, together with your
presentation of a professional report, will contribute towards your grade for
this assignment.
Ideally a business report should
be produced with a suitable structure and quality of discussion around the
following key areas:
Executive summary
Table of contents
List of figures
2.1 Summary of the first 6 months
business operations
2.2 Financial accounting
statements
3.1 Initial analysis in context
of the three financial statements.
3.2 Investigations to increase
efficiency
Introduction
Main financial findings.
Analysis
Conclusion
References
ANNEX I: Statement of financial
position Fashion Clothing – 01.07.20X5 and 31.12.20X5
ANNEX II: Income statement
Fashion Clothing – 6 months to 31.12.20X5
ANNEX III: Statement of cash
flows Fashion Clothing – 6 months to 31.12.20X5
ANNEX IV: Projected cash flow
forecast for the first 6 months of trading
