Background

Sacha Fieerce is a commodities broker in the City of London who has grown tired of her highly paid but very stressful job. Recently, her aunt died, leaving her, her house which is situated in a seaside resort. At first, Sacha was inclined to just sell the house. However, when she was clearing away her aunts personal belongings, she realized that it could represent a good business opportunity for her. The house is large with several good-sized bedrooms, and Sacha could see its potential as a small hotel. She has never had anything to do with hotel management, but she thinks it cannot be that difficult.

Costs of setting up the hotel

The house was valued in its unconverted condition at 1.2 million, and Sacha has spent an additional 600,000 on the conversion. Even after spending all the money on conversion Sacha is still a wealthy woman, and she expects to finance the working capital of her business from her savings.

Purchase of bedroom furniture, restaurant fittings and kitchen equipment total a further 100,000. Finally, Sacha plans to place 30,000 in the business bank account at the beginning of her financial year in January 20X5. The total value of the house, fittings and opening cash represents her capital introduced into the business. Before Sacha hands in her notice to the company which she works, she sits down to work out a set of budgeted accounts for her first six months in business.

Revenue and expenditure projections

Sacha makes the following projections in relation to revenue and expenditure:

1. She will organize an advertising campaign with a budget of 35,000. The new business will start on 1 January 20X6 and Sacha expects to pay 20,000 in the first month and 15,000 in the second month in respect of advertising.

2. He has already picked up some conference business through her vast network of contacts.

A conference is booked for three days in March for ten people at a cost of 600 per person. 20 per cent of the fee will be received in January as a deposit, and the rest in April. However, Sacha doesnt know whether or not she will be able to secure any other conference business during the rest of the six-month period. To be on the safe side she assumes that no other business of this type will be obtained.

3. Sacha is aiming for an average 50 per cent occupancy rate in the first year of trading, although she knows that there will be a slow start to trading until the hotel becomes well known. Cash flows from sale of rooms are estimated as follows:

Month Days Rooms Hotel occupancy rate

Price per room

Cash inflows

January 31 3 30% 145 13,485 February 28 4 40% 145 16,240 March 31 4 40% 145 17,980 April 30 4 40% 145 17,400 May 31 5 50% 145 22,475 June 30 5 50% 150 22,500

Although some of the cash will be received in advance in the form of deposits, Sacha decides to assume that all the cash will be received within the month (so, for example, 16,240 will be the cash receipt from room lettings in February).

4. The small hotel bar will be open for non-residents. The expected bar takings (from both residents and non-residents) are expected to be 5,000 in the first month rising after that to 6,000 each month from February to June inclusive

5. Sacha is prepared to spend a substantial sum on staffing to ensure that her guests are comfortable. She has reached an agreement with a well-known London chef who will act as menu consultant and will assist him in hiring high-quality staff. For this the London chef will charge a consultancy fee of 1,500 per month. Excluding this charge, the staffing costs are expected to total 12,500 each month for January to April inclusive, rising to 14,000 in May and June. Sacha assumes that she will pay consultancy and staffing costs in the month in which they are incurred.

6. The cost of food, wine, and other consumables is expected to be 6,000 per month in January and February, rising to 7,500 in March (because of the conference booking). 6,000 is budgeted for April and May, and 7,000 for June. Sacha expects to be able to obtain most of these goods on credit and will pay in the next following month (so, e.g. Januarys costs will be paid for in February).

7. General administration, telephone, electricity and premises costs will average out at 3,000 per month, paid in the next following month.

8. The house is to be depreciated at a rate of 4 per cent per year with an assumption of nil residual value at the end of 25 years.

9. Fixtures fittings and equipment are to be depreciated rate of 10 per cent per year on the straight-line basis over 10 years with an assumption of nil residual value at the end of that period.

For Sacha Fierces business prepare:

a budget cash flow statement for the six months to 30 June 20X5 showing the bank opening and closing balances each month

1. In addition to the cashflow statement you create in a) you are provide with the following statement of financial position/balance sheet for Sacha.

ASSETS Non-current assets Hotel at cost 1,800,000 Less: depreciation - 36,000 1,764,000Fixtures, fittings and equipment at cost100,000 Less: depreciation -5,000 95,000Current assets Bank balance 12,580 1,871,580CAPITAL AND LIABILITIES Capital introduced (1,800,000 + 100,000 + 30,000)1,930,000Loss for the six months -68,420 1,861,580Current liabilities Accrued expenses (7,000 + 3,000) 10,000 1,871,580

Please prepare a brief commentary on the first six months budget.