Question:Required withdetailed workings:

a)Work out the monthly cash flow forecast for the first year of operation.

b)Prepare the forecasted statement of profit or loss for the first 3 financial years (show annual figures).

c)What are the problems and issues that you would foresee during the first 3 years? What are the measures that you would recommend the Board of Directors to implement to resolve these issues?

You are a management consultant and you have been approached by the Board of Directors of A-media Ltd., an advertising and communication agency, to prepare a financial plan for one of their new business venture. A-media Ltd. is planning to set-up a new strategic business unit (which will be managed like an investment centre) that will specialise in the provision of online marketing services. You have collected the following information and assumptions on the new business unit: 1 The business is expected to start its operation in January 2018, it will have an initial share capital of $250,000. 2 At the start of January 2018, the business unit will borrow $240,000 in the form of a 4year loan. The loan will have a 6-month moratorium on the principal repayment of $5,000 per month. Interest is payable on a monthly basis on the principal due at the start of the year. The interest rate is fixed at the 2% per annum. 3 The business unit will be expected to pay annual dividend of 25% of the initial capital as from its second year of operation. 4 Investment of $250,000 will be required in equipment and it will happen during the month of February 2018. This acquisition will be paid in cash. The equipment will have 3 years of useful life and will be disposed at 10% of their acquired amount. 5 Computer software worth $100,000 will be acquired in March 2018 and will be settled in cash. The computer software will be expensed during the period within which it is acquired. 6 The first customers will be contacted in the first month of trading but no chargeable work will be carried out until April 2018. 7 To market its new services and product offerings the business unit will incur marketing expenses of $30,000 per month during the first semester of the year. Marketing expenses for the second semester will drop to $10,000 per month. The marketing expenses will be paid on a monthly basis. Marketing expense during the second year is anticipated to be $200,000 and will increase by 10% in the third year. 8 The new business will employ staff who will work for a charge-out rate of $80 per hour during the financial year 2017. It is anticipated that the charge-out rate will only increase in 2020 by 5%. From April to June (both month inclusive) it is expected that they will spend 500 hours a month on chargeable work for clients, rising to 750 hours per month during the third quarter and 1,250 hours per month in the last quarter. During the second year, the business is anticipated to spend $1,300 hours per month on chargeable work for clients. This figure is expected to increase by 5% in the third year. 9 Wages are expected to $10 per hour during the first year, and will increase by 15% thereafter. Additional variable cost is anticipated to be 20% of the sale amount. 10% of the monthly wages expense will be paid in the following month and 20% of the monthly variable cost will be paid during the following month. 10 Monthly fixed cost of $15,000 is expected from January 2018. The annual fixed cost will increase by 10% from year 2 onwards. These are to be paid as they are incurred. 11 All work will be billed on the last day of the month in which the work is done - 50% of clients are expected to pay within 30 days, 48% within 60 days and 2% are anticipated to never pay (i.e. to be bad debts). 12 Ignore any effect of income tax. Required with detailed workings: a b Work out the monthly cash flow forecast for the first year of operation. Prepare the forecasted statement of profit or loss for the first 3 financial years (show annual figures). c What are the problems and issues that you would foresee during the first 3 years? What are the measures that you would recommend the Board of Directors to implement to resolve these issues