A group of friends have formed a new business called Look Ahead, in
which they have invested £100,000 of their own capital. They are
intending to manufacture and sell web-cams. By the start of July 2007,
they have spent £50,000 on fixed assets and currently have the
remaining £50,000 in their business bank account.
They provide you with the following forecasted figures for their first six months of trading:
£
Sales for the next 6 months 1,200,000
Cost of the materials used up in sales 480,000
Labour costs for the 6 months 360,000
Other expenses for the 6 months, including £10,000 depreciation of fixed assets
280,000
Materials purchased during the 6 months
520,000
Their cash receipts and payments are estimated as follows:
Month Sales Receipts Payments for Materials Labour and Other Expenses
£ £ £
July 100,000 120,000
August 80,000 120,000
September 100,000 40,000
October 140,000 40,000
November 240,000 40,000
December 300,000 40,000
Totals 960,000 400,000
These payments are divided equally over each of the six months.
All transactions will go through the business bank account.
You
are asked to provide a Business Report for the friends who have
invested in Look Ahead, commenting on the business’ prospects and
including the following four statements. Since none of the investors
have a financial background, you should also explain what each of the
four statements means, as a part of your Report.
1. An opening Balance Sheet at the start of July.
2.
A monthly Cash Flow Forecast, showing the bank balance at the end of
each of the six months and indicating what level of overdraft
facilities the friends need to negotiate with their bank manager.
Explain what additional expense they should take into account as a
result of needing this financial assistance (overdraft).
3. A projected Profit and Loss Account for the six months.
4. A projected Balance Sheet for Look Ahead at the end of its first six months of operations.
HINTS:
1.
Using a spreadsheet may help you to produce your Cash Flow Forecast and
remember that £50,000 of the initial £100,000 has already been spent.
Refer back to the Test Your Knowledge examples to see a pro forma for
your balance sheet and your profit and loss account.
2. Think
carefully about the £10,000 depreciation charge when working out your
monthly cash outflows for labour and other expenses.
3. Also think carefully about the figures for closing stocks (inventories), creditors (payables) and debtors (receivables).
4.
Please remember that your qualitative analysis and explanation of your
four statements are JUST as important as the calculations themselves.
These, together with your presentation of a professional report, will
contribute towards your Grade for this assignment.
Solution
From the forecast figures provided by Look Ahead, this business report analyses the future financial health of the company. The analysis is based on the four statements prepared from the given estimates. The statements formulated for the analysis are
• Opening Balance Sheet – July 2007
• Monthly Cash Flow Statements
• Profit and Loss Statement at the end of the 6 month period – December 2007
• Projected Balance Sheet at the end of December 2007
These statements provided valuable information on the financial health of Look Ahead based on the estimates. Suggestions are provided based on the findings to maintain a strong financial position.
No. of Words:
867 words
References:
5
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