Ms. Betty Lambchop of 10 Feet Farms, Cutchogue, NY has found a way to productively use the fleece derived from the grass fed lamb1 operation run by her husband. In the spring of 2016 she had the business plan for her new venture, Wool Vests Plus. The marketing, production and management components are prepared. She asks you to help her to finish the financial section of her business plan and to answer the questions provided in Microsoft Word. Background of the Business Betty's husband, Bradley Lambchop, runs a full-time market-lamb operation, which yields, as a by-product, 1000 lbs. of unprocessed wool annually. The unprocessed fleece was sold to local wool processing mills. However, only $600 to $700 a year, total, was obtained from these sales. By comparison, a sweater knitted from approximately 2 lbs. of 100% wool yarn could have been sold in a retail outlet for prices ranging from $60 to $200, depending on the design and quality of the product. Betty wanted to find a more profitable use for the unprocessed wool. Two years ago she bought a used knitting machine for sale. Betty's previous experience with knitting enabled her to learn how to use the machine. After twelve months of learning how to use the machine by designing sweaters and making samples, Betty realized that the knitting machine could be a way to productively utilize the wool by-product generated by her husband's business. The knitting machine meant that she could produce sweaters quickly and with the consistency offered by the machine she could ensure quality control. With the knitting machine, the business could provide a livelihood instead of merely supplementing income. Initially, Betty anticipated operating the business on a part-time basis. However, a major downsizing by the Computer Technologies plant in Islandia resulted in the loss of her full-time position. During her seven years with Computer Technologies, Betty acquired computer and time management skills that would help her in establishing a business. She had come to appreciate the importance of quality control and a good reputation based on quality, fair 1 A market-lamb operation has a constant flock of adult breeding sheep which are sheared in the spring. The profit of the market-lamb operation comes from the sale of lambs for meat. 2 price and consistency. The loss of her own job accelerated her own business. She registered the business as a sole proprietorship. It was operated as a home-based, production craft business in a rural community in Suffolk County, New York. Betty anticipated working a minimum of 50 hours per week on her business. 3 The Craft Industry When Betty investigated the craft industry, she found that its economic performance was largely undocumented. Until recently, craftspeople did not seem to be regarded as members of a business sector. The data that was available had been collected by specific studies conducted by craft associations or the government. As the participants in such surveys provided the financial information, most studies contained a warning that the information might not be accurate and/or complete. Often the participants declined to respond to questions regarding sales and profits. While conducting research on the craft industry, Betty made a visit to the New York State Craft Association. An "unofficial" estimate for 2016 of $100,000,000 of total retail sales in the craft industry was provided. Someone at the Craft tradeshow indicated that industry information could be found at www.bls.gov. Betty thought someone studying finance would be best at seeking that information. Product Line Wool Vests Plus would have offered both original and custom designs in garments, fashion accessories and items for home decor. All products are made from 100% wool. The custom product service line will be available to individuals as well as to organizations. Betty is a very experienced specialty sweater knitter, in all sizes. She can customize for different holidays and occasions. If the orders are larger and less detailed she can use a loom or the knitting machine. She intends to hand craft the socks and sweaters. Quality will be her top priority. Production and Management Plan Ideally, Betty would have preferred to use the unprocessed wool from the farm. This would have entailed sending the raw fleece to a mill to be washed, carded and spun. Two processing mills exist locally but neither one does custom orders. After investigating woollen mills, she found one in Riverhead that did custom work. 4 Initially, Betty would have handled all of the production and marketing. As the business grew, she would hire employees to assist with production and marketing. The business initially would operate out of her family home, on the sheep farm. During the 2016 year the room became tight, particularly as orders increased. Therefore in the middle of the year she expanded the operation by renting a one-room space, which was an office and maintained inventory. It allowed the customers to pick out their wool blends and the yarn, which she would use in the production of sweaters and socks. Because she had the rented space she could also sell wool to local knitters who would use it in their crafting. The rural setting added an air of "authenticity" to the handcrafted character of the products and this was reflected in the advertising. As the farm was less than 2 miles from Greenport Harbor and the Shelter Island Ferry, a main tourist traffic route, a reasonable amount of customer traffic was attracted. Marketing Plan The principal market for Wool Vests Plus products would have been an individual consumer, many of whom would have been tourists. Betty had identified her major market segments as handcraft purchasers, and consumers who prefer to purchase environmentally friendly/natural products. Selling was to be done through craft markets and direct to the consumer through custom orders. Betty conducted a telephone survey of retail outlets in the Eastern Long Island area to determine if her price range was acceptable. Of the businesses contacted, 3 expressed an interest in buying the product and specified items for which they did not 5 have a supplier. They also provided her with information on acceptable price ranges. The possibilities of selling through the Long Island Trade Show and through an on-site studio/sales outlet was to be investigated. These possibilities would likely have occurred in conjunction with the addition of employees. In addition, Betty always had aspirations of becoming a retailer, by owning a store. She thought it would be good to have a brick and mortar establishment. She wants you to help her learn of any addition things to consider if she were to open a shop. Advertising and promotion utilized business cards, brochures, newspapers, and magazines. Materials and work were guaranteed, providing that the care instructions on the garment tag were properly followed. If a sweater was found to have a significant flaw, the purchasing customer was to be offered a refund or a new sweater. Quality control was very important to Betty; she did not anticipate that such refunds or replacements would be necessary. Financing Requirements Betty planned to purchase sales tags, business cards, brochures, and stationery, all of which a local printer would supply at a cost of $675, this is her advertising expense. Also, investment in inventory and accounts receivable would have been necessary as collection of sales lagged production. She felt that equipment; promotional/office supplies and inventory would constitute her financing requirements for the first year. If her cash flow was not adequate, a line of credit may be needed. She knew she could get a loan at the local bank and that she would be paying interest on the loan. Financing Options Betty knew because she was laid off from her job at Computer Technologies after having worked there for years she would be entitled to some unemployment compensation. Given that she was earning a substantial income from Computer Technologies, given her 6 years of experience and skill she thought she could earn the maximum unemployment weekly for the maximum number of weeks. An equity contribution by Betty consisted of cash of $5,000, a computer of $2,000. Equipment and furnishings were valued at $25,000. Betty planned to apply for a local loan from the Southold Savings Bank for $10,000, which would have been received January 1, 2017. This loan was for a 5-year term with interest at 9%, annually paid monthly (60 monthly payments). Line Items 2016 2017 2018 Accounts Payable 5,000 7,000 5,000 Accounts Receivable 10,000 20,000 40,000 Accumulated Depreciation 5,400 10,800 Advertising Expense 675 700 800 Cash 5,000 15,000 15,000 Computer 2000 15000 1000 Cost of Goods Sold 10,000 20,000 40,000 Depreciation Expense 5,400 5,400 5,400 Equipment 25,000 20,000 15,000 Interest Expense XXXX XXXX XXXX Insurance Expense 1120 1120 1120 7 Inventory 2,000 2,000 2,000 Legal Expense 1500 1500 1500 Loan, Southhold Savings 0 10,000 8,200 Registration Expenses 1000 1000 1000 Rent 3000 3000 3000 Sales 35,000 60,000 80,000 Salary Expense 1000 4000 5000 Telephone Expense 500 500 500 Transportation Expense 1250 1500 2000 Conclusion Betty was determined that Wool Vests Plus succeed and was well aware of the time required to operate her own business. She thinks that you could help her greatly by answering the questions below. 1) In Excel prepare the Balance Sheet and the Income Statement for Wools Vest Plus. Make sure to include the proper items on each statement. You need to compute the Interest Expense Amount annually. Go to www.bankrate.com. Compute the Owners Equity for the Business and the Net Income or Loss for the period 2016, 2017 and 2018. The computer and equipment decline in value each year why? How does that relate to the Depreciation expense, explain? What happens during 2018 with the net income and the Accounts Receivable? Explain in a 8 small paragraph what this means. 2) Explain one limitation to the Balance Sheet, think of a qualitative feature of Betty that is not depicted by the financials. 3) Go to www.bankrate.com and compute the total amount of interest Betty will pay Southold Savings Bank. If Betty were to shop around before she got this loan, the Cutchogue Bank offers small business loans at 6% for $10,000 over 5 years. What would Betty save on interest alone if she had secured this loan instead of the loan she did take out? 4) How does her production (income) compare to the few hundred dollars earned when the Lambchops sold the wool? Should she stay in business? How can you collect the Accounts Receivable? 5) What do you think of Bettys decision to open the Business as a Sole Proprietor? Give two good reasons for the establishment of a sole proprietorship. Should she consider a partnership with her husband Bradley? Give two reasons not to form a partnership with Bradley. 6) What are some other ways that Betty can increase her marketing for the business? Explain what you might consider and the costs with these options. 7) Can you think of other products that Betty could consider making other than her wool sweaters that could be profitable?