One of your friends, Chris, knows that you are studying accountancy and that you have acquired basic spreadsheet skills. She has decided to start a business of printing bespoke pictures on to a limited range of standard size jigsaws primarily aimed at the gift market. However, she needs to produce a business plan for the bank manager in order to raise a loan. Chris has already formed (incorporated) a private limited company and has introduced 7,000 in to the business bank account. Of this 7,000, 2,000 is to be the initial share capital and the balance of 5,000 is an interest-free short-term loan to the company from her. It is her intention to start trading as from 1 January 2024.

Chris is aware that the gift market is very competitive and that the volume of sales is very price sensitive. She has explained to you the importance of being able to use the model to see the effects of changing her assumptions (variables) including, as a minimum, the average sales volume and price.

You have agreed to produce the financial projections for her based on the information provided by Chris.

1. The first quarters volume of sales is forecast to be 500 units with an average selling price of 10 per jigsaw. The volume of sales is expected to double every quarter during the year.

2. The gross profit margin on sales is expected to be 45%.

3. Of each quarters sales, 12% are cash sales.

4. Bad debts are on credit sales, and are anticipated to be 8% each quarter.

5. 60% of the credit sales are paid in the quarter in which the sale is made. The remaining debtors, after bad debts, are collected in the following quarter.

6. Sufficient stock is purchased to cover the next quarters sales e.g. the stock for the sales in the fourth quarter are purchased in the third quarter. In the first quarter assume the first two quarters purchases are made and assume the final quarters purchases are 25,000 (the sales for the first quarter of 2025 are unknown).

7. Purchases are paid for in the quarter bought (i.e. there are no trade creditors).

8. Each part-time member of staff will be paid a gross salary of 1,000 per quarter and this is paid in the quarter incurred. During the first two quarters Chris expects to employ two members of staff rising to three members of staff in the third and fourth quarters. Chris does not expect to receive a salary.

9. Distribution costs are 10% of sales and are paid in the quarter of the sale.

10. Bank interest charged is 3% per quarter calculated on the balance at the end of the previous quarter. It is payable in the following quarter i.e. the quarter in which it is charged. No interest is receivable on credit (positive) balances.

11. The company buys machinery costing 8,000 in the first quarter.

12. A van costing 12,000 is purchased in the third quarter.

13. The company depreciation policy is to depreciate assets at 30% per annum on a straight-line basis.

14. The company incurs a quarterly internet and website cost of 600, which is usually paid in the quarter it is incurred. However, the fourth quarters cost is 1,000 and will not be paid until January 2025.

15. Include any other expenses Chris has obviously omitted from the above information.

16. Ignore the effect of corporation tax, VAT, PAYE and inflation.

Technical hint:

Remember that Cost of Sales = Opening Stock + Purchases Closing Stock and so the figure for purchases can be calculated using this formula.

REQUIRED:

Construct a concise financial model that includes, as a minimum, the projected cash flow, trial balance, profit and loss and balance sheet figures for the first year of trading i.e. the year ending 31 December 2024. The statements should show quarterly figures with annual totals, where appropriate.