Small Business Planning - Assignment Example

Title: Small Business Planning Name of Student: Registration ID: Course Code: Name of Professor: Date of Submission: Assessment Activity 7 1. Jana runs a business manufacturing toy sheep for export. This year she hopes to generate £400000 in sales. Her estimates on average include: 10 days of raw materials inventory 10 days of work in progress inventory 8 days of finished goods inventory Payments are: 20 days for suppliers 14 days for customers She also calculates that raw materials make up 50% of the sales price of the finished sheep In order to determine the number of days that will be financed, the following approach will be used: Raw materials days to be financed:50%*10= 5 days Work in progress days to be financed: 50%*10 = 5 days Fiished goods inventory days to be financed = 50%*8= 4 days Supply days to be financed = 20*50% = 10 days Customer days to be financed = 50%*14 = 7 days Total number of days to be financed = 5+5+4+7-10 = 11 days Mean sales per day £400000/365= £1096 Working capital = 11* 1096 = 12056 2. Working capital ratio will be obtained by the following method: Current liabilities = £ 24000 Assets = 36000 WC ratio = 36000/24000 = 1.5:1. Assessment Activity 8 1. Identification of current assets and non-current assets i. Petty cash: current asset ii. Tractor: non-current asset iii. Logo: non-current asset iv. Inventory held by delicatessen: non-current asset v. Shop fit-out: non-current asset vi. Accounts receivable: non-current asset 2. For the business of distribution of soft drinks to shops a. Non-current assets will include the following Vehicles Warehouses Offices b. There are various options that the business can use to utilize the above non-current assets. For instance, vehicles can be used to transport soft drinks from the stores to retail shops and also to transport staff from one location to another (Cockburn 2012). The advantage of this is that the business will be able to rely on its own transport during delivery of the drinks to its customers. The disadvantage of this function is that the business will incur costs such as cost of fuel and repair and maintenance costs. Warehouses can be used by the business to stock soft drinks so that they can be distributed to customers whenever they are needed (Hall 2004). The advantage of this is that it ensures the business keeps the stock safe from intruders, thus preventing losses. The disadvantage is that there is a high cost of warehouse renting which affects the profitability of the business. Assessment Activity 9 1. Explain the difference between cash flow statement and cash flow projection Cash flow statement is a summary of expected cash to be received and spent in a particular period. On the other hand, cash flow projection refers to statements showing the expected cash receipts and expenditures in future (Kirwan 2009). 2. Complete this 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 when the business is likely to experience a cash shortfall? The fourth month where there will be a shortfall of $10000 3. Choose a business idea in which you are interested. Prepare a six-month cash projection based on your best guess of likely cash inflows and outflows. Create a detailed table which specifies the anticipated cash receipts and payments. Provide details of the projected monthly cash balance. The business whose cash flow projection is shown below is a newspaper distribution outlet Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Opening balance $7000 $12000 $16000 $13000 $14000 $18000 Cash revenues $15000 $9000 $4000 $7000 $15000 $12000 Cash payments $10000 $5000 $7000 $6000 $11000 $15000 Closing balance $12000 $16000 $13000 $14000 $18000 $15000 Assessment Activity 10 1. Create a flow chart of the business life cycle. Label each operational period with the name of the type of capital investment which is required. Describe each type of investments. In the below diagram, capital investments refers to initial capital that was invested during the commencement of the business. In the second phase of business growth, capital investments are used because the business investments have not peaked. In the expansion stage, the main acidity is expansion using the funds of the business. This is because the business is now able to fiancé its activities. 2. Make a list of factors which will affect the amount of capital investment a business might require i. The willingness of the business owner to invest in a large business ii. The willingness of the business owner to create a unique service to customers through increased promotion. iii. The expected cost of production until the product reaches the market iv. The ability of the businessman o provide sound cash projections and statements that attract large amounts of investments v. The willingness of the business owner to incur high expenses to expand his business. Assessment Activity 12 1. Tracey and Lauren have formed a partnership and intend to open a florist shop. Using the table, list a minimum of three items they should include as part of their start-up costs. Business set-up Business premises Marketing Materials supplies/consumables Personnel Laying foundation Office Building Promotion Staff Breakfast Human resource Purchase of cement and sand Parking area Direct sales Raw materials Maintenance technicians Obtaining license Warehouse Advertising Fuel Office staff Obtaining insurance Office reception 2. What factors might impact on the ongoing financial requirements of a business? Give examples i. Increase in raw materials requirements: When raw materials cost increase, the business may need to invest more on purchase of raw materials (May and Business Expert Press 2010) ii. Increase in product demand: when product demand increases, there will be the need to produce more of the product. This can only be achieved by employing more staff and also investing in more machinery and raw materials for production. iii. Change in cost of processing: An increase in processing cost may require a business to spend more resources on processing activities while the reverse is true when there is a decrease in cost of processing. Summary The booklet explains the significance of cash flow statement and profit and loss statement in understanding the financial position of a business. The article shows that when these financial statements are used, the business owner is able to determine whether the business expects to make profits or loss in the future. Furthermore, various sources of capital are explained. The booklet focuses mainly on pre-seed capital. These are funds used during expansion of the business concept so that product development can be achieved. The main forms of pre-seed sheets that are discussed include seed capital, start-up, expansion and expansion. Another form of funding that is explained is IPO. These are funds that are used before the sale and distribution of the company’s shares to the public for the first time. The article also explains that budgeting is an important activity for any business. The main budget types that are explained include fixed budgets and flexible budgets. In addition, the article explains methods that can be used during forecasting and operations budgeting. Various reporting tools and budgets are also explained in the booklet and it is found that a business must budget for all its revenues and expenditures so that it does not spend its resources in another location apart from the most critical areas in a business. The process of calculating and estimating ongoing financial requirements can be achieved using three components such as start-up expenses, start-up assets and start-up financing. The article also explains costs that are likely to be incurred during start up of a business. For instance, it illustrates costs such as employment costs such as costs involved during hiring process and insurance costs during protection of the business from risks. In relation to business operation, it illustrates two types of insurance costs that a business may incur. Another classification of costs that is explained in the article is fixed costs, variable costs and semi-fixed costs. Fixed costs are those that a business incurs at a certain amount irrespective of the level of production while variable costs are those that change as the level of production change. An example is compulsory insurance that are required by states so that a business can operate such as public liability, worker’s compensation and third party bodily injury on motor vehicle. It also explains optional insurances that can be obtained by businesses at their own decisions such as burglary theft, usability insurance, product liability and property insurance. The booklet also shows that working capital can be of great importance to determine whether the business is able to finance its activities. It illustrates approach that a business owner can use to determine the value of working capital suitable for his business. It is found by dividing current assets of a business with current liabilities. It is suggested that a business should maintain a working capital ratio of 1.5:1 in order to be able to finance its activities. Other documents that a business needs to create to show its financial position include income and expenditure statement and a balance sheet. A balance sheet can be important in understanding the net worth of a business by enabling outside stakeholders know the assets and liabilities of the business. The booklet also puts emphasis on the need for businesses to be aware of non-current assets that exist within their premises. The businesses need to determine whether it can operate without these assets and also establish whether the assets are appropriately located to enable efficient delivery of products and services. In the process of buying a product, it is suggested that a business owner should use either cash or bank loan. However, outright ownership is not the only priority and the booklet recommends that a business can acquire assets through leasing. This is because the business can generate enough income to pay the lease charges as well as acquire new sets of assets that it can have full control over. The document also states that fixed assets of a business are subject to depreciation and there is the need to account for this when valuing assets and liabilities. Understanding depreciation is important because it enables the business owner know the accounting value of an asset. When an asset is poorly maintained, accounting assumes that they depreciate at the same rate as a well maintained asset. However, when they are sold, their monetary values are usually different. Licensing is another method of financing an asset. It is suggested that a business may need a license before it can use an asset. For instance, businesses involved in the use of software are required to get software licenses so that they have the rights to use the software under particular conditions. Leasing is also explained as a method of acquiring assets. The main types of leasing that are explained include a chattel mortgage which is suitable for funding vehicle, plant and equipment acquisitions so that cash flow is optimized. A business can also benefit from operating lease. This is where a rental agreement is reached and when the business operations end, the owner of the premises repossesses it. In addition, finance lease is also an option available for a business. This is where a business acquires an asset at fixed interest rate and repayments can be budgeted throughout the leasing period. The booklet also suggests that the type and number of resources required by a business must be effectively researched so that an accurate forecast can be reached. The main resources that a business may have include premises, personnel, stock, consumables and cash. The booklet also suggests that the business owner should be aware of legal requirements that determine activities of a business. The information should be translated to a business plan to ensure it is not overlooked in the process of accomplishing business objectives. There are various sources of information regarding legal requirements that a business needs to comply with. These include federal government department agencies, local chamber of commerce, professional associations and support agencies for small businesses. Finally, the article suggests that the business must observe Work Health and safety (WHS) at the work place. This is where the employees of the business are provided with safe working conditions free from injuries or physical harm. References Cockburn, R. 2012. Small business tax planning: All you need to know from start-up to retirement. Petersfield, Hampshire: Harriman House Ltd. Hall, R. E. 2004. Strategic planning for a small business: Everything you need, including: instructions, tips, techniques, examples and worksheets. West Conshohocken, PA: Infinity Publishing.com. Kirwan, J. 2009. Good small business planning guide: How to make a successful business journey. London: A. & C. Black. May, G. L., & Business Expert Press. 2010. Strategic planning: Fundamentals for small business. New York: Business Expert Press. Read More