BUS 280 Week 9 Assignment This week the assignment is about financial management. You will prepare a Cash Flow Statement for Clark's Sporting Goods and then you will calculate ratios for Sam's Paint and Drywall. You may choose to do this assignment with a partner. If so, please indicate the name of your partner, and be sure to submit the assignment separately. Case 1: Clark's Sporting Goods Dave Clark plans to open a sporting goods store in London, Ontario as soon as he graduates from university in the spring. He did a market demand analysis for such a store for one of his course projects and is confident the opportunity exists. Dave's major problem is determining the amount of funds he will require. His father, who is quite wealthy, will give him $30,000 as a graduation gift to invest. He has located a store that rents for $2,000 per month (in advance) and has made an itemized list of the start-up costs as follows: Merchandise (4 months) Shelves, racks, displays Remodeling Cash register (used) Check-out counter Office supplies (4 months' supply) Telephone: $50/month, $100 deposit, $25 installation fee Utilities: $200/month, $200 deposit Dave has made the following estimates: $100,000 5,000 4,000 800 500 200 . . He can completely turn over his inventory (sell everything) every four months In the first year, he plans a 60 percent markup on the cost of merchandise He can get by on a salary of $2000 per month He plans to hire one full-time employee at $1500 per month and one at $1000 He plans to spend $2000 in opening promotion in the first month and $500 per month after the grand opening for advertising He estimates that 50 percent of his sales will be on credit and will be paid in 30 days The interest rate is 10 percent, payable every four months The depreciation rate is 10 percent . Questions: 1. Estimate how much money Dave will need from outside sources to start his business. Here are the steps: a. Calculate start-up costs XXXX Start-up Costs Merchandise nnnn nnnn nnnn And so on... XXXX And so on. TOTAL START-UP COSTS b. Subtract what Dave already has from the amount needed (round up to the nearest $1,000) to get the amount he will need to finance. 2. Assuming Dave receives start-up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so, how much? Prepare a Cash Flow Statement for the first four months, using the template given Month 2 Month 3 Month 4 Month 1 XXXX Sales Revenue Collection of A/R Total XXXX XXXX XXXX XOOXX XXXX Cash Expenses Merchandise (in 4th month) Owner salary Clerk salary Advertising Utilities Phone Rent Interest Total Cash Flow for the month Cumulative cash flow XXXX XXXX XXXX XXXXX XXXX XXXX *Sales Revenue a. Start with the cost of merchandise sold in 4 months b. Figure out the revenues (6 x cost of merchandise) c. Divide the 4-month sales figures by 4 to get the monthly sales figures d. Divide the monthly sales figure by to yield the cash sales amount e. Remember that in the next period (month 2), Dave will receive the other half of the revenue (the part that was in credit is the Accounts Receivable). "Interest a. Start with the amount Dave needed to borrow b. Multiply by the annual interest rate c Divide by 12 to get the monthly interest and then calculate the amount needed to be paid every 4 months 3. Should Dave pursue debt or equity sources of funds to get started? Case 2: Sam's Paint and Drywall 41 Sam's Paint and Drywall For the year ended December 31, 2019 (In thousands of dollars) Assets Liabilities and Net Worth Cash $12 Accounts Payable Inventory Notes Payable-Bank Accounts Receivable 18 Other Total Current Assets 71 Total Current Liabilities Fixed Assets: Long Term Liabilities Vehicles Equipment 15 Building 22 Land 23 Total net worth (Owner's Equity) Total fixed assets 70 Total Fixed Total assets $141 Total Liability and Net worth $15 4 20 39 41 man wb29 10 61 70 $141 Income Statement for Dec. 31. 2019 (In thousands of dollars) 280 186 94 Sales Less Cost of Goods Sold Gross Margin on Sales Less Operating Expenses Net profit (before taxes) 81 Less Operating Expenses 81 Net profit (before taxes) 13 Questions: 1. Determine each of the 5 ratios listed in the table below. Note also that a list of ratios and the equations are included in this document (at the end). 2. Evaluate each ratio against Dun and Bradstreet's Key Business Ratios on industry norms (given on the following page) Ratios to Calculate Dunn & Bradstreet Avg. a. Current Ratio = Current Assets / Current Liabilities 2.7 b. Inventory Turnover Sales / Average Inventory 6.9 c. Profit to Sales - Net Profit (B4 tax)/Gross Sales 3.5% d. Return on Investment - Net Profit (B4 Tax) / Owners Equity 21% e Debt to Equity Total Debt / Owners Equity 4.3:1 Ratios or Liquidity - assesses the business's ability to meet financial obligations in the current period. Current Ratio - Current assets / Current liabilities A ratio of less than 1 means that the company cannot easily cover its current liabilities. A ratio of over 1 means that the company is able to cover its CAs. Over 2.0 is considered very healthy and 1:0 to 2:0 is usual. Productivity - measures the efficiency of internal management operations. Inventory Turnover = Cost of goods sold / Average inventory at cost Inventory Turnover = Sales / Average inventory at retail price This ratio shows the number of times the inventory is turned (sold) in a year. The average rate should typically not be lower than two or three times. Lower numbers reflect poor inventory buying in terms of overstocking or buying low-demand inventory. Profitability - measures the effectiveness of operations in generating a profit. Profit on sales - Net profit (before tax) / Sales This ratio typically falls within 1 to 5%. A lower than average percent may reflect a problem with pricing or with controlling expenses. Pre-tax profits are used for comparison purposes since the tax rate may vary by jurisdiction. Return on investment = Net profit (before tax)/Owner's equity This ratio is compared against similar businesses and also with alternative investments and with the bank rate of interest. Keep different risks in mind also Debt - the debt-to-equity ratio measures the solvency of the business, the firm's ability to meet its long-term debt payments Debt-to-Equity Ratio = Total debt / Total owner's equity Higher leverage ratios tend to indicate a company with higher risk to shareholders. D/E ratios need to be compared within industries as acceptable amounts of debt may vary from industry to industry. Generally, a D/E ratio of over 4:1 is unhealthy BUS 280 Week 9 Assignment This week the assignment is about financial management. You will prepare a Cash Flow Statement for Clark's Sporting Goods and then you will calculate ratios for Sam's Paint and Drywall. You may choose to do this assignment with a partner. If so, please indicate the name of your partner, and be sure to submit the assignment separately. Case 1: Clark's Sporting Goods Dave Clark plans to open a sporting goods store in London, Ontario as soon as he graduates from university in the spring. He did a market demand analysis for such a store for one of his course projects and is confident the opportunity exists. Dave's major problem is determining the amount of funds he will require. His father, who is quite wealthy, will give him $30,000 as a graduation gift to invest. He has located a store that rents for $2,000 per month (in advance) and has made an itemized list of the start-up costs as follows: Merchandise (4 months) Shelves, racks, displays Remodeling Cash register (used) Check-out counter Office supplies (4 months' supply) Telephone: $50/month, $100 deposit, $25 installation fee Utilities: $200/month, $200 deposit Dave has made the following estimates: $100,000 5,000 4,000 800 500 200 . . He can completely turn over his inventory (sell everything) every four months In the first year, he plans a 60 percent markup on the cost of merchandise He can get by on a salary of $2000 per month He plans to hire one full-time employee at $1500 per month and one at $1000 He plans to spend $2000 in opening promotion in the first month and $500 per month after the grand opening for advertising He estimates that 50 percent of his sales will be on credit and will be paid in 30 days The interest rate is 10 percent, payable every four months The depreciation rate is 10 percent . Questions: 1. Estimate how much money Dave will need from outside sources to start his business. Here are the steps: a. Calculate start-up costs XXXX Start-up Costs Merchandise nnnn nnnn nnnn And so on... XXXX And so on. TOTAL START-UP COSTS b. Subtract what Dave already has from the amount needed (round up to the nearest $1,000) to get the amount he will need to finance. 2. Assuming Dave receives start-up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so, how much? Prepare a Cash Flow Statement for the first four months, using the template given Month 2 Month 3 Month 4 Month 1 XXXX Sales Revenue Collection of A/R Total XXXX XXXX XXXX XOOXX XXXX Cash Expenses Merchandise (in 4th month) Owner salary Clerk salary Advertising Utilities Phone Rent Interest Total Cash Flow for the month Cumulative cash flow XXXX XXXX XXXX XXXXX XXXX XXXX *Sales Revenue a. Start with the cost of merchandise sold in 4 months b. Figure out the revenues (6 x cost of merchandise) c. Divide the 4-month sales figures by 4 to get the monthly sales figures d. Divide the monthly sales figure by to yield the cash sales amount e. Remember that in the next period (month 2), Dave will receive the other half of the revenue (the part that was in credit is the Accounts Receivable). "Interest a. Start with the amount Dave needed to borrow b. Multiply by the annual interest rate c Divide by 12 to get the monthly interest and then calculate the amount needed to be paid every 4 months 3. Should Dave pursue debt or equity sources of funds to get started? Case 2: Sam's Paint and Drywall 41 Sam's Paint and Drywall For the year ended December 31, 2019 (In thousands of dollars) Assets Liabilities and Net Worth Cash $12 Accounts Payable Inventory Notes Payable-Bank Accounts Receivable 18 Other Total Current Assets 71 Total Current Liabilities Fixed Assets: Long Term Liabilities Vehicles Equipment 15 Building 22 Land 23 Total net worth (Owner's Equity) Total fixed assets 70 Total Fixed Total assets $141 Total Liability and Net worth $15 4 20 39 41 man wb29 10 61 70 $141 Income Statement for Dec. 31. 2019 (In thousands of dollars) 280 186 94 Sales Less Cost of Goods Sold Gross Margin on Sales Less Operating Expenses Net profit (before taxes) 81 Less Operating Expenses 81 Net profit (before taxes) 13 Questions: 1. Determine each of the 5 ratios listed in the table below. Note also that a list of ratios and the equations are included in this document (at the end). 2. Evaluate each ratio against Dun and Bradstreet's Key Business Ratios on industry norms (given on the following page) Ratios to Calculate Dunn & Bradstreet Avg. a. Current Ratio = Current Assets / Current Liabilities 2.7 b. Inventory Turnover Sales / Average Inventory 6.9 c. Profit to Sales - Net Profit (B4 tax)/Gross Sales 3.5% d. Return on Investment - Net Profit (B4 Tax) / Owners Equity 21% e Debt to Equity Total Debt / Owners Equity 4.3:1 Ratios or Liquidity - assesses the business's ability to meet financial obligations in the current period. Current Ratio - Current assets / Current liabilities A ratio of less than 1 means that the company cannot easily cover its current liabilities. A ratio of over 1 means that the company is able to cover its CAs. Over 2.0 is considered very healthy and 1:0 to 2:0 is usual. Productivity - measures the efficiency of internal management operations. Inventory Turnover = Cost of goods sold / Average inventory at cost Inventory Turnover = Sales / Average inventory at retail price This ratio shows the number of times the inventory is turned (sold) in a year. The average rate should typically not be lower than two or three times. Lower numbers reflect poor inventory buying in terms of overstocking or buying low-demand inventory. Profitability - measures the effectiveness of operations in generating a profit. Profit on sales - Net profit (before tax) / Sales This ratio typically falls within 1 to 5%. A lower than average percent may reflect a problem with pricing or with controlling expenses. Pre-tax profits are used for comparison purposes since the tax rate may vary by jurisdiction. Return on investment = Net profit (before tax)/Owner's equity This ratio is compared against similar businesses and also with alternative investments and with the bank rate of interest. Keep different risks in mind also Debt - the debt-to-equity ratio measures the solvency of the business, the firm's ability to meet its long-term debt payments Debt-to-Equity Ratio = Total debt / Total owner's equity Higher leverage ratios tend to indicate a company with higher risk to shareholders. D/E ratios need to be compared within industries as acceptable amounts of debt may vary from industry to industry. Generally, a D/E ratio of over 4:1 is unhealthy