BSBFIM601A: Management - Start up Capital - Assessment Answer

Management Assignment

Assignment Task

The main objective of the organization would be to provide a single platform to all the people where they can meet their clothing needs at an economical price. In order to ensure the attainment of the objective a clothing store would be opened which would cater to the clothing needs of the people.

Keeping in mind the above factors, the opportunities exist for opening a fashion store in the city. The store would cater to the fashion needs of the public. The attire would be available for all the age groups and separate sections would be present for them. The store would deal in men’s clothing, women’s clothing, kids clothing and sportswear.

The retail clothing industry has experienced a growth of almost 4% for last year. The revenue of the industry has also increased. Even though the main contributors for such growth have been the online portals, the inclination of the mass towards the fashion industry has not lessened and therefore, it can be assessed that investment in the store would be lucrative.

The start-up capital of the company would be $200000. The owners funding for the stated capital would be 25% and 75% of the amount would be financed by borrowings in the form of loan. In order to ensure sufficient working capital and efficiency in the operations of the business, the business will start the repayment of the loan after the first year of the start-up. The interest on the loan however, would be paid as and when they fall due. The stock and the ownership documents of the company would be hypothecated for the purpose of obtaining the loan. The loan can be expected to be available to the company at the rate of 8% based on the current market rate. The start-up amount has been explained hereunder:-

The company intends to invest a considerable amount for inventory as it would be dealing in the garments of all the sections of the society and it proposes to ensure ample choices to all its customers. As a policy the company would be reordering its inventory amounting to $35000 when the inventory reaches an aggregate amount of about $40000. In order to promote the brand of the company the company will resort to intensive marketing. It intends to spend an amount of $120000 the benefits of which are expected to be present for the next 5 years. The company intends to maintain sufficient working capital therefore, it has initially planned to keep its working capital at $10000. The premises that will been taken on lease by the company was previously as well a garment store therefore, the company would be able to effectively start its set-up in the available furniture and fixtures of the premises with minimal expenses. This has been implemented by the organization so that the business can be started initially by investing reasonable amount of capital. The organization intends to make the further capital investment in the subsequent years of operations where it would rely more on the internal financing rather than financing it through the external resource. The capital expenditure intended to be made for the next 5 years has been briefly explained here:-

The above schedule can be studied in detail in the budget. The organization would initially start up its work in the given infrastructure after intensive marketing. It would acquire the required furniture and fixtures in the subsequent years. The store currently does not have the facility of in-house alteration. It will acquire the necessary equipments from the second year. The premise in which the store is operating is currently satisfactory. However, the store intends to make it premium by renovating it in the fourth year which can be expected to trigger sales in the subsequent years. The firm will also be able to increase the margin on merchandise after renovation.

Statement of Profit and Loss

Assumptions:

• The sales have increased constantly at the rate of 10% per month for 1 year.
• The margin has always remained constant therefore, the cost of goods sold have always remained 30% of the sales for the corresponding month.
• The one time advertisement expense of $120000 is expected to benefit the company over the next 5 years therefore, this investment has been recognized as deferred revenue expense.
• The rent has remained constant because the company has signed a 12 month lease contract with the lessor and therefore the rent of the premises would remain constant for the next 12 months.
• The system of annual increment is applicable for the employees therefore, the wages have remained constant throughout the year.
• The company has signed an annual insurance contract and the premium payable has been divided over the 12 months for the computation of profit of the given month.
• The administrative expense refers to the day to day expense which is expected to increase gradually therefore, it has been assumed that it increases constantly at the rate of 5%.
• Interest expense refers to the interest on the loan borrowed. Since the company intends to start the repayment after 1 year the amount of interest has remained constant.
• Approximations for the figures have been made in the financial statements in order to ensure better clarity and understanding of the figures.

The profit of the organization can be observed that it is on an increasing trend as the moths have passed. This is attributable to the factor that the sales of the company have constantly increased over the months while some of the major expenses have remained constant. Therefore, in the subsequent year we would experience a decline in the margin where the sale would increase at a constant rate in the first month but the other major expenses that have remained constant over 12 months would increase.

Statement of Cash Flows

The cash flow has been both positive and negative at various point of time in the first year. The reason behind the same is the lower margin on which the organization is operating and the fixed investments that are required at regular interval of time. Initially, the organization would experience negative cash flow where it would utilize the initial working capital for the working of the business as the business would not be able to generate any cash inflow itself.

The major risk that would be faced by the organization would be penetrating the market in the presence of various leading cloth stores and online portals. Therefore, in order to overcome the risks the organization aims to acquire premium quality merchandise from suppliers, rely on intensive and effective advertisement and initially offer the products at a lower margin in order to build customer loyalty.

The company is expected to earn a rate of return of 39.23% in the first year of its operation considering its profits and initial investment. The high rate of return can be attributable to the economical initial start-up capital where the capital has been kept at minimum in order to reduce the amount of external borrowings.

PART B

It is important to have a clear and concise budget drafted for the success any project. The budget states the income and expenditure that the organization is expecting over a given period of time. The budgets keep on revising depending upon the conditions and trends and generally the required corrective measures are taken to ensure the organization meet its objectives.

The organization here expects an increase in the yearly sales of 20% for the next 5 years. The following expense budget states about the capital and revenue expenditure the organization intends to invest over the past 5 years.

The following has been incorporated into the budget after discussions with the assessor:

• Total capital expenditure refers to the expenditure that the organization intends to make over the 5 year span. The inventory has increased at the rate of 20% as it is expected that the sales will increase by 20% in the subsequent years.
• The revenue expenditure is the expenditure that is required o be made for the day to day working of the organization and has been explained hereunder:-

• Rent of the premises has increased at the rate of 10% keeping in mind the current market growth.
• The wages have an annual increase of 15% in order to ensure less of the rotation of the workforce.
• The insurance would have an annual renewal and the premium has been given a slight increase keeping in mind the modifications that might occur in the terms and conditions offered.
• The administrative and miscellaneous expense have increased at the rate of 7% per year keeping in mind the time value of money and also making provision for the contingency expense.
• The interest expense has decreased from the subsequent years as the company intends to gradually repay the external borrowing.

• Approximations have been made wherever required in order to increase the understanding of the report.

The inventory would be obtained from all the leading manufacturers in order to ensure the products are of premium quality. Since the store is a starter the negotiations with the manufacturers would be difficult therefore, the organization intends to make instant payment at the time of purchase for the next 5 years in order to build supplier trust and provide them an incentive to offer the products at a lower rate.

In order to ensure that there is a genuine increase in the rent over the given years the organization intends to include all the required clauses and terms and conditions in the lease agreement in order to ensure that the rents increase at a reasonable rate and the organization has the option of resorting to legal matters.

The insurance is offered by a number of enterprises therefore a competitive rate can be expected by the insurance agencies in order to retain their customers.

The accountability chain of the organization would be of pyramid shape where it would be headed by the owner. Below owner would be the managers who would be further assisted by the team members. All the important decisions would be taken by the owner after considering the opinion of the managers. The managers would be further assisted by the team members and they would be accountable for the function they are managing like overheads, marketing, sales etc.

PART C

The working of the organization along with the necessary authorizations and approvals has been explained below in order to understand the manner in which the activities would be carried on and the steps that the organization would take in case of adverse situations.

All the investment plans would be formulated by the mangers and the owners keeping in mind the strategic objectives of the organization. The amount that has to be invested at a certain point of time would be decided by the managers and owners. The proposal can be initiated at both the ends. The managers would state about the requirement keeping in mind the current market conditions and it would be the duty off the owners to assess the viability of the proposal and initiate investment. In the same manner, it can be proposed from owner’s end where they will seek the opinion of the concerned managers regarding the need f the proposed capital investment at a given point of time and it will be the duty of the managers to research and give their opinions regarding investment along with the valid reasons. The decision regarding investment would rest at the discretion of the owner.

In order to ensure the attainment of the budgeted figures a quarterly budget would be formulated by the managers in addition to the yearly budget in order to monitor the progress of the organization and assess if the quarterly budget reflect the attainment of the yearly budget. In case, the quarterly budget implies that the organization might not be able to meet its yearly budget then the factors behind it would be studied and the corrective actions would be planned.

All the projects are initiated with the expectation of profits and incomes. However, it is possible that in the case of adverse situation it might generate income for a given number of years. The main challenge faced during these stages is the decline in the working capital which makes it difficult to keep the business running. Therefore, in case of adverse situations the organization plans to offer its products on sale in order to ensure the flow of working capital for the conduct of the business. In order to improve the margin on the discounted merchandise the organization aims to curtail its revenue expense by control over administrative and miscellaneous expense and reducing the workforce in order to reduce the expense.

To ensure that the funds are utilized efficiently and in order to prevent any misappropriation of funds the accountability of the expenditure would be developed in an effective manner. All the managers would be accountable for the expense related to their department. The expense would be admissible after it has been authorized by the managers. The managers will in turn provide a fortnightly report to the owner where list of all the expenses that have been incurred would be present along with notes and explanations for the amount that are of higher quantum. A meeting would be conducted between the owner and all the managers to discuss on the expenses and the effective steps that have been implemented by other managers for the curtailment of the expenses.

The finance specialist proposes for the formulation of the fortnightly budget of expenses by the managers where they would prepare the budget keeping in mind the projected expense. The provision of the report would be more effective in such a case as the deviations can be easily identified and the reasons thereof can be assessed. Therefore, formulation of thee weekly budget by the managers would be more effective for the financial management of the organization.

The success and the failure of the projects depends upon numerous factors that have to be analyzed and assessed in conjunction therefore proper assessment and due diligence is essential to ensure the attainment of the objectives of the project. The organization is more prepared to cater to the changing needs of the industry after research.