Computer Retail and Service Industry - Example

Computer Savers B U S I N E S S P L A N Prepared by: I. General Company Computer Savers is a computer assembly and repair business intended to cater to small business owners as well as home PC users. It is engage in the selling of computer parts and software and is also engaged in the customization, upgrade, repair, virus removal and hard disk data recovery of computers. The company intends to create a niche in the computer retail and service industry by providing customized computers as well as providing repair service at a significantly lower cost than competition. II. Products and Services Computer Savers offers customized computers and repair service to its customers. To enable Computer Savers to offer customized computers to its customers, it will sell computer parts for ease, convenience and easy availability of the necessary hardware to assemble a computer. It will also sell licensed softwares to make the assembled computers usable after leaving the outlet. The repair service component of Computer Savers will complement the computer customization business by offering repair service after the computer’s warranty coverage has elapsed. It will work in synergy with the computer customization business as the skills needed in the repair component of the business can also be used in the assembly of computers. III. Rationale of business plan Computer Savers will make a niche in the computer retail and service industry by offering computer products and services that is significantly lower than the competition. It will cater to the specific segment of a market where end users prefer to customize the specification of their computers. Computer Savers will also offer an after sales support through its repair business component. Combining these elements of offering customized computers at a lower price with an after sales support will make Computer Savers very competitive in its niche. Computer Savers will be directly competing with branded computers. Branded computers are typically priced at a premium whose specifications do not exactly match the customer’s preference. Computer Savers will have its competitive advantage by significantly cutting the cost by removing the brand out of its computer which added to its cost and provide the customers the latitude to dictate their preferred specifications by selecting the specific computer parts that can perform the desired speed and function of their computers. IV. Staffing plan Management shall be composed by its owner who will also serve as the Business Manager. He/She will be responsible for overseeing the daily operation of the business. The owner is an expert in computer assembly and repair being a serious hobbyist in computer assembly. There shall be three personnel in the first year of operation who would serve as technicians and sales person. As orders increases in the coming year, additional personnel shall be added in the succeeding year. The following is Computer Saver’s personnel plan. Personnel Plan Personnel Plan Year 1 Year 2 Year 3 Owner $48,000 $48,000 $48,000 Employee 1 $36,000 $40,000 $44,000 Employee 2 $36,000 $40,000 $44,000 Employee 3 $36,000 $40,000 $44,000 Employee 4 $36,000 $40,000 Employee 5 $36,000 Total People 4 5 6 Total Payroll $156,000 $204,000 $256,000 V. Chart of Accounts Account Classification Account Type Sub Account Name Account Number Sub Account Name Balance Sheet Assets Current Assets 100 Cash on Hand 101 Cash on Bank 102 Petty Cash Non Current assets 200 Furniture and Fixture 201 Equipment 202 Inventory Liabilities Current Liability 300 Account Payable –suppliers 301 Creditors Long Term Liability 302 Long Term Loan Income Statement Revenue 400 Sales 401 Payment for service Cost of Goods sold 500 Purchases of computer parts Expenses - Fixed 600 Rent 601 Utilities 602 Wage Expenses - Variable 603 Advertising 604 Gas 605 Freight 606 others VI. GAAP or IFRS Based on the nature and needs of the business, GAAP would be more suitable than IFRS. There are several considerations why the business is required to use GAAP over IFRS. First is the location of the business which is in the United States where firms are required to use GAAP than IFRS which is more suitable for a global business. The inventory estimate in GAAP is also suitable for the business which allows FIFO method or First In, First Out where spoilage can be avoided by disposing of older computer parts first. It also provides relevant information to its various stakeholders which is very important in today’s stricter accounting reporting. While GAAP is used by Computer Savers in its accounting system, it is cognizant that US SEC will be switching the required accounting framework from GAAP to IFRS by 2015 (www.differen.com, nd). Thus, its accounting system is also made compatible with IFRS such as treatment of inventories where FIFO is also allowed in the IFRS. Inventory reversal is not practiced by the business consistent with GAAP and this is considered more liberal compared to IFRS which allows inventory reversal under certain criteria (www.differen.com, nd). VII. Proforma balance sheet and income statement including start up requirements Proforma Projected Income Statement for the first 3 years of operation Year 1 Year 2 Year 3 Sales $500,000 $550,000 $600,000 Direct Cost of Sales $100,000 $110,000 $115,000 Total Cost of Sales $100,000 $110,000 $115,000 Gross Margin $400,000 $440,000 $485,000 Gross Margin % 80 % 80 % 80 % Expenses Payroll $156,000 $204,000 $256,000 Marketing/Promotion 40,000 30,000 20,000 Lease 15,000 15,000 15,000 Insurance 5,000 5,000 5,000 Delivery Vehicles 15,000 15,000 15,000 Communication 500 500 500 Utilities 6,000 7,000 8,000 Internet 2,000 2,000 2,000 Total Operating Expenses $239,500 $278,500 $321,500 Profit Before Interest and Taxes $160,500 $161,500 163,500 Interest Expense 1,500 1,500 1,500 Taxes 56,175 56,525 57,225 Net Profit $102,825 $103,475 $104,775 Net Profit/Sales 20.56% 18.81% 17.46% Proforma Balance Sheet Start-up Funding Start-up Expenses to Fund $76,500 Start-up Assets to Fund $195,000 Total Funding Required $271,500 Assets Non-cash Assets from Start-up 100,000 Cash 200,000 Additional Cash Raised $0 Cash Balance on Starting Date $ Total Assets $300,000 Liabilities and Capital Liabilities Current Borrowing $50,000 Total Liabilities $50,000 Capital Owner $150,000 Investor 100,000 Total Capital $250,00 Total Capital and Liabilities $300,000 Total Funding $271,500 VIII. Internal control to protect assets Computer Savers is a technology oriented business where majority of its assets are computer hardwares composing of parts that will be assembled that will comprise the business’ product. The nature of its assets being technology oriented is heavily subjected to depreciation and obsolescence that valuation of assets, especially in its inventory. It is a common knowledge that innovation and change happens so quickly in technology industry and thus, recognition and valuation of assets, particularly inventory must also be reflective of its value in the market. Valuation of assets during their acquisition can be misleading because the value of a computer part is never the same a year after its purchase. While valuation of assets at acquisition reflects a higher valuation value, it is misleading and in the long-run is inimical to the financial health of the business. To avoid this, two control methods are recommended in accordance to the rules of GAAP. a. Assets must be recognized at its fair market value – This control allows the shareholders to know the real value of the company. This prevents misevaluation of the company. Recognizing the assets at its acquisition date will bloat the value of the company which is not good for the long-term health of the business (Ernst and Young, 2011). This control has the advantage of compelling the business to dispose of old assets and inventories to minimize depreciation and obsolescence. b. Use of FIFO as inventory control – The use of FIFO as an inventory control will compel the management to use old inventories avoid devaluation of assets due to obsolescence. This protects not only the assets of the business but also the over-all health of the organization as business entity. IX. How to implement the recommended internal control a. Assets must be recognized at its fair market value – Depreciation of assets will be extended to inventory. This can be determining by determining the salvage value of inventory when sold at its useful life and then deduct this from acquisition value. The depreciable value can then be divided by the time it sat on the inventory (www.smallbusiness.com, nd). It is important to recognize that the useful life of computer parts depends on its marketability which is only for few years. This can be illustrated by a stating a hypothetical value of a computer part at for example $1,000 acquisition value which has a marketable life of 3 years and salvage value of $5,000. The depreciable value then is $5,000 for 3 years deducting $1,666 for each year that the inventory is stored. No resistance is expected in this form of control because it only involves the valuation of assets in the books. b. Use of FIFO as inventory control- Employees may initially resist the implementation of FIFO inventory control because it will require them to dispose inventories which came first in stock. This would require them to follow a system in inventory which may be difficult at first but beneficial to the business in the long run as it will prevent obsolescence in the products sold. References Ernst and Young. (n.d.). US GAAP vs. IFRS The Basics. Ernst and Young. Retrieved February 16, 2014, from http://www.ey.com/Publication/vwLUAssets/US_GAAP_v_IFRS:_The_Basics/$FILE/US%20GAAP%20v%20IFRS%20Dec%202011.pdf Bouwman, M.J., Frishkoff, P. & Frishkoff, P.A. 1995, "The relevance of GAAP-based information: A case study exploring some uses and limitations", Accounting Horizons, vol. 9, no. 4, pp. 22-22. How to Calculate Accumulated Depreciation of Inventory. (n.d.). Small Business. Retrieved February 16, 2014, from http://smallbusiness.chron.com/calculate-accumulated-depreciation-inventory-24847.html Temte, Andrew (2005). Financial Statement Analysis. Chicago, IL, USA Read More