Small Business Accounting - Honora and Eddie - Case Study Example

Small Business Accounting Group Members: Student Number 1. 2. 3. Course: Tutor: Date: Executive Summary Introduction Honora and Eddie is a bakery retail establishment located in Melbourne Street, North Adelaide. Honora and Eddie should captivate interest and loyalty of the targeted customers in the quality and taste of the various bread varieties offered. The bakery should brood a strong market position in North Adelaide to counter the stiff competition in town. However, they should offer competitive price for its product, this will meet demand of average and high income earners in the town; that is business people, various classes of employees, the various groups of residents and tourists. The Company Honora and Eddie should be registered as a corporate with the registrar of corporate. The business should be managed by Eddie because of his experience in dealing with the industry. Honora having equal commitment towards running of the business should come second in command, so that she will be involve in daily running of the business. The sibling should join them at the point of their individual specialization as they finish their courses in college. On top of that, the corporation should hire another five employees to assist in baking and other day to day operations. In future, if need arises, some other employees may be solicited on contractual basis. Products and Services There is need for Honora and Eddie’s business to offer freshly prepared cakes and bread during operational hours. Enough bakery products are prepared during the day, for fresh baked goods to be available always. The Market Hot beverages are consumed throughout the year due to the cool marine climate in Melbourne Street, North Adelaide. Honora and Eddie should concentrate in business and marketing on local residents, to establish a large regular customer base. This will ensure stability of the business due to the healthy, consistent revenue base. Financial Considerations Honora and Eddie expects to raise $150,000 as capital; this will be raised by contribution of $25,000 from their saving and borrow $125,000 guaranteed by the bank Oz as a 15-year loan. This sets the base for the financial capital for the business. Honora and Eddie business projects sales of $400,000 the first year which should increase to, $520,000 in the next year and $620,000 in the third financial year ending June, 2014. Honora and Eddie should have broken even by the end of 4 months as a result of steadily increasing its sales. Profits for this time period are expected to be approximately $10,000 in year 1, $32,000 by year 2, and $43,000 by year 3. The company does not anticipate any cash flow problems in the near future. 1.1 Mission Honora and Eddie should endeavour in offer high quality products at a competitive prices to meet the demand of the middle income local market area residents. 1.2 Keys to Success Honora and Eddie’s business should measure their success using the following: 1. Providing quality services that meet the customer needs. 2. Using lower prices compared to other firms to attract customers 1.3 Company Summary Honora and Eddie is a bakery managed by directors; a managing director and a deputy managing director. The directors oversee sales, finance and management, administration and Human Resource. The capital shall be from the savings of both the directors and a loan which shall be borrowed during the operational period; this will be paid for a period of 15 years. 1.4 Initial Summary Honora and Eddie‘s business is a business at its start up stage. Financing will be raised from the tow company directors and capital borrowed from Bank Oz. initial Expenses $20,000 Initial Assets $200,000 Total Funding Required $220,000 Assets Initial Non-cash Assets $79,000 Cash Requirements from Start-up $71,000 Starting Cash Balance $71,000 Total Assets $221,000 Capital and liabilities Liabilities Long-term Liabilities $125,000 Accounts Payable (Outstanding Bills) $1,000 Total Liabilities $126,000 Capital $25,000 Planned Investment $125,000 Products Honora And Eddie Bakery provides a range of baked goods, they include: Bread Eddy and Horora is use wheat to bake bread, this should be supplied to the market using the container that can easily sell. There shall be a yeasted free bread that is provide for people who have an allergy to yeast, or have been warned by their doctors not to eat it. Cakes Cakes should be baked only for different t occasions and on order so that they can be tailored to suit the particular organizations. Such occasions include by not limited to birthday, wedding and anniversaries among other occasions. Market Analysis Since bread is a basic requirement for most families, Honora and Eddie’s business should always focus on meeting market demands regularly demand for local resident hence becomes a supplier of choice 4.1 Market Segmentation Honora and Eddie’s business should look forward to maintaining the middle income market because this is the market segments that consumes its products. Local Residents Honora and Eddie’s business should concentrate in supplying it’s to the surrounding community and should always adjust its quality and taste to meet the demand for the customers; this is aimed at establishing a stable market position. This will facilitate stability of the business revenue returns 4.1.1 Market Analysis The chart and table below outline the total market potential of the above described customer segment.  4.2 Competitive Strategy The main target market for Honora and Eddie’s business should be local residents. Quality personal service for the customer and quality on bread should be the competitive edge for the business. 4.3 Competition and Buying Patterns Competition is not very strong and doesn’t provide product quality and customer service Honora and Eddie’s business should be providing in the market. Customers are always looking for a high quality product. Strong competitors are restraints that bake cakes along with coffee and other beverages which sell the more. Honora and Eddie’s business should introduce some beverages along the way to best cater for those customers who are looking for a place to relax and take a cup of coffee. This will add the scope of revenue as well as introduce a new class of customers on top of those customers who buy commodities to use consume at home. Online advertising and marketing should be utilized to exploit maximum capacity; where necessary, cakes and other orders should make online so that can be repaired and delivered hence avoiding customer wastage of time and resources for travelling to go and order the cakes as well as travelling to go and pick the cake. Implementation and Strategy Summary Honora and Eddie’s business should succeed by supplying the consumers with high quality bakery products along with more personalized service at a competitive price. 5.1 Competitive Edge Honora and Eddie’s business competitive edge is supported by the fact that the competition Melbourne Street, North Adelaide is not so high hence easily capture customer’s attention in this particular niche. 5.2 Sales Strategy Honora and Eddie anticipated sales for the first year is $491,000 and $567,000 in the second year, which should rise to $655,000 in the third year of the plan ending June 2014. Table 2 Income Statement Units of sales Year ended June 2012 Year ended June 2013 Year ended June 2014 Bakery Items 200,000 200,000 248,000 Total Unit Sales 200,000 243,100 267,410 Unit Prices Year 1 Year 2 Year 3 Bakery Items $2.00 $2.60 $2.50 Direct Unit Costs Year 1 Year 2 Year 3 Bakery Items $0.30 $0.35 $0.40 Direct Cost of Sales Bakery Items $60,000 $70,000 $92,200 Subtotal Direct Cost of Sales $60,000 $70,000 $92,200 6.0 Management Summary Eddie Bull, the company managing director has been working as a pastry chef in hotels and restaurants for many years and therefore has firsthand experience in the industry. Honora Bull the deputy managing director on other hand been working as a taxi control room operator and courier logistics organiser for many years, and therefore experienced though not in the field but can use her knowledge on logistics to support the husband in management of the organization. 6.1 Personnel Plan According to the table below (personnel plan), Honora and Eddie expect a significant investment in sales support, sales, and product personnel. Personnel Plan Year ended June 2012 Year ended June 2013 Year ended June 2014 Managers $90,000 $110,000 $125,00 Bakers $30,800 $40,500 $44,000 Other $10,000 $12,000 $9,000 Total People 8 10 12 Total Payroll $130,800 $162,500 $178,000 7.2 Projected Profit and Loss As per the Profit and Loss table shows, Bull’s should expect a continuous and steady growth in revenue generation over the next three years. Excel file attached has more information on financial analysis of the company Pro Forma Profit and Loss   Year ended June 2012 Year ended June 2013 Year ended June 2014 Sales $400,000 $520,000 $620,000 Direct Cost of Sales $60,000 $70,000 $92,000 Gross Margin $340,000 $450,000 $528,000 Gross Margin % 85.00% 86.54% 85.16% Expenses       Payroll $130,800 $162,500 $178,000 Sales and Marketing and Other Expenses $25,000 $40,200 $65,500 Depreciation $59,000 $65,000 $74,000 Utilities $2,200 $1,000 $1,300 Payroll Taxes $19,500 $24,375 $26,700 Total Operating Expenses $236,500 $293,075 $345,500 Profit Before Interest and Taxes $103,500 $ 156,925 $182,500 EBITDA $162,500 $221,925 $256,500 Interest Expense $32,406 $54,638 $78,424 Taxes Incurred $48,750 $55,481 $64,125 Net Profit $81,344 $110,119 $113,951 Net Profit/Sales 20% 21% 18% Pro Forma Cash Flow Pro Forma Cash Flow Year 1 Year 2 Year 3 Cash Received Cash from Operations Cash Sales $400,000 $520,000 $620,000 Subtotal Cash Received $400,000 $520,000 $620,000 Expenditures Year 1 Year 2 Year 3 Expenditures from Operations Cash Spending $133,000 $163,500 $179,300 Bill Payments $103,500 $129,575 $166,200 Subtotal Spent on Operations $236,500 $293,075 $345,500 Net Cash Flow $163,500 $226,925 $274,500 Cash Balance $234500 $461425 $735925 Pro Forma Balance Sheet Assets Current Assets Cash $234,500 $461,425 $735,925 Total Current Assets $234,500 $461,425 $735,925 Long-term Assets Long-term Assets $38,250 $273,263 $390,550 Accumulated Depreciation $59,000 $65,000 $74,000 Total Long-term Assets $(20,750) ($208,263) ($464,550) Total Assets $213,750 $253,163 $271,375 Liabilities and Capital Year 1 Year 2 Year 3 Current Liabilities Accounts Payable $32,406 $54,638 $78,424 Subtotal Current Liabilities $32,406 $54,638 $78,424 Long-term Liabilities $125,000 $117,406 $114,000 Total Liabilities $157,406 $172,044 $192,424 Paid-in Capital $25,000 $25,000 $25,000 Retained Earnings ($50,000) ($54,000) ($60,000) Earnings $81,344 $110,119 $113,951 Total Capital $56,344 $81,119 $78,951 Total Liabilities and Capital $213,750 $253,163 $271,375 Net Worth $56,344 $95,456 $141,381 Conclusion With a profitability of an average of 20%, there is great room for adjusting prices to keep off potential competitors off the target market. This could be strategy in the short run but if the company does not face any potential threat anytime soon, it may enjoy the large profit margins in the meanwhile. The long term strategy is to gain and maintain good economies of scale in the market and strive to maintain it high to discourage others from entering the industry therefore maintaining the market balance. Having the above facts, the likely hood of success of this company is so high, the opportunity should be seized and the profit maximised. It is therefore advisable that you seize it now, this will be advantageous on your part because by the time the other business minded people will realize the opportunity existence, you will have stabilized and gained economies of scale in the business and therefore stand firm is supplying quality goods at very low prices. The most obvious advantage it that those companies which exist in the market currently are not aware of the strategy and therefore you will have a competitive edge which will grant you the advantage in pricing you products. If at the point of entry you can manage to secure a good market position as outlined in the business plan, this should be maintained and ensure that no other business entering the industry is able to penetrate the market and offer better quality and more competitive prices. This should be achieved by making sure that you ‘Bulls’ as the management continuously try to improve the quality of the product as well as strive in make the customer satisfied with you series and products. A good research should also be constantly contacted to make sure that any advantageous technology is utilized as it arises to ensure that those entering the industry do not see loopholes in your business and find a point of entry by maximizing on your weakness. [In text citation have been avoided maintain a professional look for this document] References 1. Alic, J. A., et al,. 1992. Military and Commercial Technologies in a Changing World. Boston: Harvard Business School Press. 2. Arrow, K. 1962. The Rate and Direction of Inventive Activity: Economic and Social Factors. Princeton, NJ: Princeton University Press. 3. Audretsch, D. B. 1995. Innovation and Industry Evolution. Cambridge, MA: MIT Press. 4. Baron J. 1998. Comments at the Methodology Workshop on the Assessment of Current SBIR Program Initiatives; Washington, D.C. 5. Lerner J. 1995. “Venture capital and the oversight of private firms” Journal of Finance. 6. Link, A. N. 1998 “Public/Private Partnerships as a Tool to Support Industrial R&D: Experiences in the United States”. Paper prepared for the working group on Innovation and Technology Policy of the OECD Committee for Science and Technology Policy. 7. Sohl, J., Freear, J. and Wetzel W. J. 2002. 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