Small Business Finances - Assignment Example

Smаll Businеss Finаnсеs Author’s Name: Instructor’s Name: Course Details: Institutional Affiliation: Date of Submission: Assessment Activity 1 1. The business to be operated is a catering business a. Start up costs will include the following: Recruitment of staff Purchase of cooking facilities Renting the business premises Electricity and water costs Utensils costs Furniture and interior design costs b. Operating costs of the business will include the following: salaries for employees (fixed) raw food materials to be cooked (variable) Ingredients (variable) transport costs (variable) water and electricity (variable) 2. considering the statement: Small businesses require money to operate. As long as you are careful with your spending there is no need to keep track of business costs. If money needs to be spent you have to spend it. Do you agree? Answer, No. this is because there is a possibility that some costs can be neglected and it can be difficult to plan for costs in an accurate manner based on the current understanding of costs. Assessment Activity 2 Job Sheet Employee: Tom Smith Date: 11/10/2010 Mario Services Plumbing Job Sheet Start/Finish Job Name Task Client Admin hrs Direct Labor hrs 8.30 am 9.00 am administration n/a n/a 0.5 0.5 9.00 am 1.00 pm plumbing Install hot water service Mr. Green 4 1.00 pm 5.45 pm plumbing Fix leaks in internal plumbing Mrs. Jones 4.75 TOTAL 0.5 8.75 Job Cost form for Job 1 Date: 11/10/2010 Mario Plumbing Services Job Cost Form Refer to form Direct labor Direct materials Applied Overhead Total Hours Total Rate Qty Cost per unit Total Bases Qty Rate Total JS 0934 TS 4 £900 £225 £900 Job cost form for job 2 Date: 11/10/2010 Mario Plumbing Services Job Cost Form Refer to form Direct labor Direct materials Applied Overhead Total Hours Total Rate Qty Cost per unit Total Bases Qty Rate Total JS 0935TS 1 £50 £50 £50 Assessment Activity 3 1. calculation of breakeven point BEP = Total fixed cost/(unit sales price-unit variable cost) Where: Total Fixed Costs= £15000 Total Unit Sales price= £24 Total unit variable cost=£6 BEP=15000(24-6) = 833.33 or 834 units. 2. The owner is considering increasing the selling price of his 3-D glasses. How many units would need to be sold to allow his business to break-even if the price was raised to £30? Let selling price = x BEP =834, Fixed Cost=£15000, Unit cost price=£30 15000/(x-30) =834; 15000=834x-25020 40020= 834x X= £47.98 3. Is there a reason why the owner might not raise the price of the 3-D glasses? There is no reason because the cost of a unit product has risen which will result into a change in break-even point if the cost is not raised. 4. What is the contribution margin? Contribution margin= (834*24 – 834*6)/ (834*24) = 0.75 or 75%. Assessment Activity 4 1. The business to be used will be a soft drinks sales business. The pricing strategy that will be used is a cost-based strategy. This is where the sales price of the product will be raised to a certain level higher than the cost price so that profit is obtained. 2. Suggested pricing strategies for: a. One kilogram packet of no name washing powder Perceived value pricing b. French perfume Premium pricing c. Items to be sold in a new supermarket in a shopping center with a competitor close by Market-based pricing 3. Give an example of these types of discounting strategies a. Quantity/volume discount When goods are bought in large quantities such as from wholesalers b. Cumulative quantity discount When a customer buys goods in large quantities on regular or continuous basis c. Seasonal discount When a seller sells goods to a customer at a low price so that sales can be improved during low season. Assessment Activity 5 1. Consider this statement: A projection is only as good as the assumptions on which it is based. Do you agree? Explain. I agree because the assumption acts as a measure of the target that a business hopes to achieve based on the assessment of the capability of the business to meet a particular target. 2. Describe the benefits to a small business owner of preparing a statement which projects profits over three year time frame. i. The business will be able to determine the targets it is supposed to achieve so that efforts are made to achieve this target. ii. The business will be able to determine areas where focus need to be put so that a particular profit target is achieved. 3. When projecting income for the small business, some of the factors that Hillary needs to put into account include; conducting research on competitors and customer surveys to understand their attitudes and possibility of making purchases in the business. In addition, Hillary needs to determine the effects of increasing marketing activities in the future and the possible impacts on sales of the business. He also needs to estimate expected costs of raw materials, storage and distribution costs as well as market trends so that these costs can be factored in calculation of income. He also needs to study market trends such as whether there is a possibility of his products being in demand by consumers so that sales can increase or whether there will be a low demand that can affect sales of the products in his business. He also needs to establish the development of the economy in general. If the economy is growing well. There is a possibility of success in his business as well and this can enable him gauge the sales of his business in future. The article also explains how profit goals should be set. Assessment Activity 6 1. Explain why it is important for an owner of a small business to establish profit goals. It ensures business activities are carried out with the focus on achieving those goals. This ensures the business owner outs more effort to conduct business activities to ensure competitiveness of the business. 2. A scenario where a business is set up for the sales of skate plates a. Methods that could be used to enable setting up appropriate goals/targets. i. Desired return on investment: this is the desired amount of returns in comparison to amount of investment by the business. ii. Break-even point: this is where the business is able to generate an income equal to the amount of initial investments. iii. Sales turnover/ gross fees: this refers to the amount of sales before deduction of costs. It acts as a guide to the knowledge of volume of money flowing into the business, and does not put much emphasis on profitability of the business. b. Profit goals/targets to be used in the short term, in two years and in five years. Assessment Activity 7 1. Calculation of days that will be financed 10 days of raw materials: 50%*10 = 5 days 10 days of work in progress: 50%*10 = 5 days 8 days of finished goods inventory: 50%*8= 4 days 20 days of suppliers: 20*50%= 10 days 14 days for customers = 50%*14= 7 days Days that will be financed =5+5+4-10+7 = 11 days Average sales per day will be £400000/365 = 1096 Working capital 11*1096 = £12056 2. Calculation of working capital ratio for a designer boutique where; Current liabilities = £ 24000 Assets = £ 36000 Working capital ratio= current assets: current liabilities 36000:24000 = 3:2. This means that the working capital ratio is within the acceptable level for the business to ensure its funds are circulating. Assessment activity 8 1. State whether these items are current assets or non-current assets: a. Petty cash: current asset b. Tractor: non-current asset c. Logo: non-current asset d. Inventory held by delicatessen. : non-current asset e. Shop fit-out: non-current asset f. Accounts receivable: non-current assets 2. Choose a type of business in which you are interested. i. Noncurrent assets for a roads constriction company Office buildings Tractors and forklifts Maintenance workshop ii. Three non-current assets and two options that the business can use to utilize them. Office buildings can be utilized to carry out administrative duties such as procurement of tenders for road construction and organizing staff activities. The advantage of this asset is that it ensures the company managerial duties are carried out effectively. The disadvantage is that it cannot be easily converted into cash when the company is insolvent. Tractors and forklifts can be used to construct roads. The advantage of this asset is that it ensures the company constructs roads and generates revenues from similar activities. The disadvantage is that it undergoes depreciation and thus a loss of value. Maintenance workshop can be used to maintain vehicles and machinery used by the company. 3. The statement: there is never a good reason for a business to buy their non-current assets outright. This statement is true because there are a number of methods that are applicable in the purchase of noncurrent assets. These include obtaining them on hire purchase and leasing. 4. Consider the statement: businesses should always buy their noncurrent assets outright: This statement is not true because there are cases where a business does not have finances but can still borrow the noncurrent assets from other similar companies. In addition, they can obtain the assets through leasing and hire purchase terms. Assessment activity 9 1. Explain the difference between cash flow statement and cash flow projection Cash flow statements provide an inward and outward movement of cash as a result of sales of a product or service. Cash flow projections are statements which show cash inflows from sales forecasts. 2. Complete the following cash flow reconciliation: Month 1 Month 2 Month 3 Month 4 Month 5 Opening balance $10000 $35000 $40000 $15000 (10000) Cash revenues $40000 $25000 $25000 $20000 $55000 Cash payments $15000 $20000 $50000 $45000 $20000 Closing balance $35000 $40000 $15000 $(10000) $25000 a. What is the closing cash balance at the end of the fifth month? $25000 b. Are there any months where the business is likely to experience a cash shortfall? The fifth month will result into a shortfall of $10000. 3. Cash flow projection for a cosmetics production and distribution company. Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Opening balance $ 10000 $18000 $18000 $19500 $16500 $17500 Add: Expected sales $25000 $15000 $20000 $18000 $22000 $20000 Less: Expected purchases $12000 $10000 $14000 $15000 $17000 $14000 Less: Expected operating expenses $5000 $5000 $4500 $6000 $4000 $5000 Closing balance $18000 $18000 $19500 $16500 $17500 $18500 Assessment activity 10 1. Create a flow chart if business life cycle, label each operational period with the name of the type of capital investment required. Describe each type of investment. Start up investment is the initial capital which will be required to start the business. Expansion capital will involve investments I activities such as improving premises. 2. Factors which will affect the amount of capital investment that a business might require. Ability of the business to attract a large number of customers Level of demand for the product or service required Amount of input required to produce a product o service Summary This document explains the processes involved in small business planning. It achieves this by explaining job costing technique for estimating cost of production as well as various costs that must be accounted for during a business such as manufacturing costs, direct labor costs and overhead costs. It also explains costs such as fixed costs, variable costs and semi-variable costs when starting a business. The document also explains the manner in which journals are kept to illustrate the general expenditures of a small business. The document also explains how costs of jobs done can be determined by filling jobs cost forms and job sheet forms. Furthermore, it explains the processes and procedures involved in calculating break-even point when a business is in operation. The book also explains various pricing strategies that a business should consider when setting the sales prices for its products. References Fullen, S, L, 2005, How to write a great business plan for your small business in 60 minutes or less. Ocala, Fla: Atlantic Pub. Group. Knowles, R, A, & Castillo, C, 2011, Small business: An entrepreneur's plan. Toronto: Nelson Education. Zacharakis, A, Spinelli, S, Timmons, J, A, & Timmons, J, A, 2011, Business plans that work: A guide for small business. New York: McGraw-Hill. Read More