Harry Kane Manufacturing

Harry has an electronic computer components business in Isando. His accountant immigrated during the last financial year and he has not yet been able to find a replacement. As he is not familiar with the financial side of things, he has come to you for help in finalising his accounts and advice on a new venture he is considering. Firstly, the accounts for the year ended 28^th February 2022 need to be completed to keep SARS happy and give him a starting point for next years budget. Harrys bookkeeper was able to offer the following information: -

1. Sales for the year had been R1,570,000 all of which had been on credit.
2. All sales were of their only product, which had a consistent Cost of Sales of 46%.
3. When Harry set up the company ten years ago, he issued himself with 6,000 shares of R1 each. There have been no new share issues since then.
4. The prevailing tax rate in South Africa at the time was 40% and Harry always paid out half of the earnings after tax as a dividend to himself.
5. As Harry understood the benefit of taking suppliers up on early settlement discounts, he paid most of his creditors within 7 days. Thus, creditors outstanding at year-end were only R12,300.
6. Harry hated debt, so had no L-T borrowings at all. Interest paid to finance the overdraft during the year came to R2,500.
7. General and Admin costs for the year totaled R109,000 and Staff costs amounted to R178,800.
8. Harrys powerful corporate customers were extremely slow at paying. The year-end debtors figure of R285,600 worried him a great deal.
9. Depreciation for the year came to R45,900 and the NBV of fixed assets at the end of the year was calculated to be R324,000
10. Sales and Marketing costs for the year were 8% of turnover.
11. Last years balance sheet showed retained earnings as at 28^th February 2021 to equal R553,900.
12. Stock holding of raw materials amounted to an average of 32 days of production.
13. Cash in the safe at year end amounted to R72,300 and the companys only bank account was overdrawn, but Harry was not sure of the exact amount.

After sorting out last years accounts Harry wanted you to help him budget for the following year and highlight the financial implications of a new deal he wanted to undertake. He had found a computer wholesaler who promised him big orders if he started manufacturing the new 5^th generation Supergig and he was excited about the prospect of substantial growth for his business. He would need to acquire some fairly costly new machinery to manufacture the new product and realised that such growth levels could not be funded internally. After lengthy meetings with yourself and his production & marketing teams, he felt sure that the introduction of the new product would bring about the following for the year ended 28^th February 2021: -

1. Sales would nearly double to R3,000,000. That was based on sales of the old product staying exactly the same and the Supergig making up the rest. All sales would still be on credit.
2. In return for guaranteeing such volumes, the wholesaler had fought hard for discounts. While C of S on the old product would remain at 46%, that of the Supergig was projected to be a much higher 70%
3. The higher volumes being purchased would enable Harry to negotiate better terms with his suppliers. He felt that he could probably keep the settlement discounts and run creditors up to R100,900 by year-end.
4. His bulk buying would mean that stock holdings would need to be a lot higher. Harry predicted that they would probably grow to R139,900.
5. The tax rate was not due to change and Harry did not want to alter the existing dividend policy.
6. To finance this growth Harry had spoken to Godfrey, who was keen on investing in the business with his old classmate. They had agreed on Harry issuing 4,000 new shares to Godfrey for the price of R180 each.
7. This new injection of cash would enable Harry to spend the R1,200,000 required to purchase the new manufacturing equipment. He planned to depreciate this equipment over 10 years this would push the depreciation expense for the year up to R165,900.
8. The new product was expected to double General & Admin costs for the forthcoming year. However, staff costs were only expected to go up to R199,000.
9. Harry was still adamant that he would not take on any long-term debt. He knew that he would have to rely quite heavily on overdraft funding though and predicted that the overdraft would grow to R128,700 and attract financing costs of R17,570 during the year.
10. Credit terms with the wholesaler would be far tighter than in the past. Harry was determined to bring the average debtor days down to 28 by 28^th February 2021.
11. As the deal had already been struck, Harry felt that Sales & Marketing costs need not remain so high. The budget was to be set at 5% of turnover.
12. Harry always liked to have some cash on hand and hoped that the above trading conditions would still leave him with some cash in the safe for emergencies.

40 Marks