Hannas Handbags

Hannas handbags Inc. (HHI) is a small business that is planning to begin operations on July 1, 2020 in Dartmouth, Nova Scotia. Hanna MacDonald recently graduated from the Nova Scotia College of Art and Design (NSCAD) and is keen to set up her own business. She believes there is a market in the area for quality handbags using natural and local materials along with her own talent for design and craftmanship.

Hannas general assessment of the market demand included a phone survey of 200 randomly selected residents in the area, an analysis of the Statistics Canada information on population, incomes and spending habits of consumers in the area, as well as an assessment of the competition in the Halifax-Dartmouth region. She has incorporated HHI and signed a lease for a downtown location for her retail sales and manufacturing operations effective July 1, 2020. She believes that with the recent growth and development in downtown Dartmouth there is potential demand for her products.

Hanna plans to sell a variety of items from diaper bags to evening bags and to source as much of the materials as possible locally. All of the design work will be done by Hanna and until there is enough demand to generate the need for additional help, all of the manufacturing will be done by her as well.

Given her understanding of the market Hanna has made detailed plans for her first year and a half of operation. She estimates that 70% of sales will be from the retail storefront location and the other 30% from internet sales and phone orders. All internet and phone orders will be paid by credit card but in person sales will be split 10% cash; 30% debit; and 60% credit card. Her bank will deposit the full amount of any debit or credit sales on the same day as the sale but all of the credit card sales will have a 5% bank fee for handling credit card transactions. There is no fee for the debit transactions since it is included in her $100 per month regular banking charges.

Because of the care that Hanna takes in making her bags and the colouring and aging process that she uses for the materials, it takes approximately two months from start to finish to make each bag. Of course, she can make more than one bag at a time however. To take advantage of fabric and material discounts, as well as minimum quantity order requirements, Hanna plans to order her supplies well in advance and enough to last for several months. She plans to order in July 2020 enough to last her until the end of February 2021. In January and February of 2021 (50% in each month) she plans to order enough for the following 12 months. Hanna plans to start off with four types of bags: diaper, shopping, school and evening. The material cost of each are $20, $10, $10, and $50 respectively. These material costs must be paid at the time of ordering so that she can get the discounts.

To start the business Hanna has contributed $1,000 from her own savings and has secured a personal line of credit with the bank for $10,000 at a 5% annual interest rate, paid monthly. Borrowings from the line of credit are to be taken in $1,000 increments, as needed. Anticipated sales prices, volume, and sales patterns are presented in Exhibit 1. Expected monthly expenses, all paid in the month incurred, are presented in Exhibit 2.

Required

Hanna has asked you, a professional accounting consultant, to provide advice concerning her business plan. This advice should discuss her overall strategy as well as address any operational issues you consider important or parts to the plan that you think she has missed. In particular, she needs a monthly set of projected cash flow statements for al least the rest of 2020 and all of 2021. These will be used to help negotiate with the bank if there is a need for additional financing than the $10,000 line of credit that has already been established. She would also like annual Income Statements and Balance Sheets for Dec 31, 2020 and 2021. Finally, be sure to include in your report your overall assessment of whether Hanna will likely be able to eventually make a reasonable living from this enterprise. She is hopeful that sales will grow by approximately 20% per year beginning in 2022.

Note: To aid in your cash flow analysis, a monthly template is available on Brightspace.

Exhibit 1 Budgeted Sales Information for 2021

Product Type Selling Price Sales Volume Sales pattern

Diaper Bags $150 100 50% in December, 25% in April and 25% in July

Shopping Bags $ 40 250 10% per month (0 in Dec. or Jan.)

School Bags $ 40 150 90% in Aug. and 10% in Jan.

Evening Bags $175 25 100% in December

Note: These estimates are for the full calendar year 2021. Hanna assumes that monthly 2020 sales will be 30% of 2021. Note that there will be no sales in July or August 2020 since it takes two months for production before sales can begin

Exhibit 2 Budgeted Monthly Expenses for 2021

Type of Expense Cost

Rent (includes utilities) $ 1,000

Office supplies 100

Phone and internet 200

Postage and courier 100

Marketing and public relations 300

Banking fees 100

Total $ 1,800

Note: Monthly expenses for 2020 are expected to be the same as 2021 except for Marketing and Public Relations. Hanna plans to spend double the 2021 rate in 2020 to build up her brand.