Group Case: Marges Mirrors

Marge is thinking of leaving her position as an executive assistant at a major accounting firm in BC so she can pursue her own small business of designing unique mirrors. Over the past several months, Marge has ordered mirrors of various sizes and added interesting features so they can be sold in her community. She is currently offering a friends and family rate, basically selling at a price of double the original cost of the mirror, but she will be increasing this to 2.2 times cost if she decides to be a full-time entrepreneur. Marge is unsure about how much she currently earns after payroll deductions, but knows that she earns an annual salary of $80,000. She is not overly concerned with earning the same as she makes now, but her new business should end up yielding salary within the same ballpark in ten years. She expects her executive assistant salary to increase at a 5% annual rate, with the market interest rates remaining steady at 4%. She is aware that she would need to cover both the employee and employer portions of the payroll remittances as a sole-proprietor. The sole proprietorship will be called Marges Mirrors. Marge plans to continue selling mirrors out of her garage, but also develop an online presence. She will build a website with a cost of $2,000 initially and then $500 annually to market to a wider customer base. Additionally, she will continue to distribute flyers to the local population, which has an annual cost of $250 a month. With these measures, Marge expects her local sales to quintuple, from an estimated $3,000 in her first year to $15,000 next year. In her second year, she is expecting in-person sales volume to grow 30%. In her third year, she is expecting another 20% jump. In year four, she is planning to increase prices to 2.25 times cost (and keep them flat from there on) and sustain a sales volume growth rate of 3% per year infinitely. Marge believes she can afford to move to a physical store location downtown in year four. The rent will be about $2,500 a month and expected sales volume will double in the first year. From, there will be annual growth of 5% per year indefinitely. A friend, Apu, has offered to her use his retail location for seven years (the fourth through tenth years of Marges business) rent-free in exchange for 20% equity in the business. Marge is wondering if this is a good option in terms of maintaining better cash flow as the business gets established. Alternatively, she could borrow up to $25,000 from the bank at a 4% interest rate (she has been pre-approved for the line-of credit). With online sales, Marge expects to generate $50,000 in her first year. Of this, 5% will be shipping & handling (S&H) fees. Marge is estimating that she will generate a 30% gross profit margin on S&H fees. She plans to use the same pricing strategy as face-to-face sales, but expects stronger growth due to the larger market potential. She believes online sales will grow 25% in year two, and 30% in year three (year-over-year for both). From year 4 onwards (with the bump up in pricing), Marge is projecting a sales volume growth rate of 4% per year indefinitely.

Marge wants budgeting advice. She has heard of maintaining a disciplined cash budget and feels unsure about other budgeting elements. She wonders what a new business like hers should make budgets for, and why. She is also unsure about how to evaluate business performance, especially in a way that ties in to her budgeting. She is thinking about offering generous credit terms to her customers to help boost sales, but is unsure about the impact on her cash management- a pros and cons analysis would be helpful. She is wondering if her plan to start her business with $25,000 cash (in addition to having access to the $25,000 line-of-credit). Marge is also questioning if it makes sense to incorporate her business at some point. She wants a pros and cons analysis on this, including details on when it might make sense to incorporate. Marge wishes to use a ten-year time horizon to make her business decisions. Advise her on the proposed career move and the current outlook on Marges Mirrors. Produce a business report for Marge, including comprehensive analysis, recommendations, and any questions you may need to ask your client.