Caroline is starting an art gallery business in part of a converted mill building. She sold her house, making £40,000 profit on the transaction, and she is planning to put the money she has made into the new venture. £30,000 was used as a deposit on the purchase of her space in the mill, and she obtained a commercial mortgage of £118,000 for the remainder of the purchase price. The interest rate on the mortgage is 5.7 percent and Caroline has negotiated a deal with the lender whereby she does not have to start paying off the capital sum until the third year of her business operation. The monthly interest-only payments are £561.

Caroline will stage one exhibition each month, and her plans for the first three months of her business are as follows:

January – an exhibition of prints by major European artists of the 20^th century. Caroline expects to sell about 50 percent of the exhibits, which would produce total sales of £52,000, the cash received immediately. £36,000 of this would be payable to the owner of the prints in February.

February – an exhibition of the work of five sculptors. Working, again, on the expectation that 50 percent of the work will sell, total sales are likely to be £48,000. Caroline will retain one-third of this sum; the balance will be paid to the artists in March.

March – exhibition by renowned artist, Pasha Quigley. Pasha rarely exhibits his work and it is a major coup for Caroline to have his paintings on show. Caroline expects to sell £85,000 of work, of which she will retain commission of £20,000. The £85,000 will be received from purchasers within the month of March, and Pasha will be paid in April.

Expenses include the following:

1. Cost of exhibition catalogues. A catalogue for each exhibition will cost £5,000 to produce. The catalogue for the first exhibition will have been paid for in December out of Caroline’s remaining £10,000. The catalogues for the second and third exhibitions will also be paid for one month in advance.
2. Gallery premises costs. Business rates are to be paid monthly; the cost is £750 per month. Electricity costs will average out at £60 per month and Caroline expects to receive a bill for the first three months' electricity in March, and to pay it in April.
3. Wages. Caroline will pay a part time assistant £550 per month.
4. Other expenses. Caroline estimates that a total of £1,000 in other expenses will be paid each month.
5. Drawings. She plans to draw £700 per month in cash.
6. Private view expenses. In each of the three months Caroline will have to spend an estimated £450 on buying in wine and other refreshments for the private view. This figure also includes the cost of hourly-paid waiting staff to take drinks round to guests.
7. Advertising. The initial round of press adverts will appear in December, and the £3,000 cost will be paid for out of Caroline’s remaining £10,000. Each month £400 will be paid for brochures and postage costs to send out to people on the gallery’s mailing list.

The bank balance at 1 January 20X4 will be £2,000 after advertising and catalogue costs have been paid for. The advertising and catalogue costs form part of Caroline’s start-up capital.

The gallery premises are to be depreciated over 25 years on the straight-line basis, with an assumption of nil residual value.