Ranjan, the promoter of Real Infinity, had sought your help for the preparation of the financial statements on the basis of the information set out below. He had to also pay a tax of 25% on the profit if it exceeds Rs 5,00,000.

Real Infinity - Eternity in every bite

Real Infinity was a multi-cuisine A/C family restaurant located in Greater Noida, close to Delhi. It was started and operated as a partnership between Rashmi Ranjan Parida and Hemant Senapati. Both of them were childhood friends from Baripada, an emerging city in the eastern state of Odisha. The city enjoyed the reputation of being the cultural hub of northern Odisha and its varied natural attractions were a magnet for the tourists. Both Ranjan and Hemant had studied in the same school and had even gone on to the same college to do engineering.

Ranjan was a Robotics engineer by profession. After completing his education from Bubaneswar Institute of Technology (BIT) in 2012, he joined a multinational company and got the opportunity to work abroad in Germany, the seventh largest country in Europe. Ranjan was the only son of his parents and so after staying in Europe for five years, he decided to leave his lucrative job and return home. Hemant, on the other hand, after completing his engineering degree in 2012, continued his MBA from a business school in Greater Noida. As a part of the campus recruitment process, he got an offer from a multinational company to work in its plant located in the same city. He worked in the automobile industry for about 2-3 years till he reunited with Ranjan in 2017.

Greater Noida was fast emerging as a metro center in the national capital region to decongest Delhi and provide a quality urban environment for the burgeoning middle-class of Indians with aspirations for a higher quality of life. The integrated township was shaping up as one of India's smartest cities boasting all modern amenities and superior town planning. Of late, Greater Noida had attracted a lot of interest from major corporate houses to set shop in the city. In November 2016,Patanjali Ayurvedaannounced that it would be investing Rs. 20billion in greenfield investment in Greater Noida. The project had been approved bythe statecabinet.A clutch of mobile manufacturers too had shown similar interest, for instance,Taiwan Electrical and Electronics Manufacturers' Association had committed to develop a 210-acre greenfield electronic manufacturing cluster in Greater Noida with an investment of US$200million.Many major auto companies too had their presence in the city and at least two dozen education and training institutes had opened up by the year 2017.

Both Hemant and Ranjan were foodies and so one of their favourite past times was to explore various restaurants and eateries in the city. Given the large-scale development that Greater Noida was witnessing they wanted to explore the possibility to set up their restaurant and catering business. The city had numerous B-Schools and corporate offices presenting enough opportunity for them to find their target audience. They could also cater to various events such as birthday parties and corporate events, and offer home delivery services.

Real Infinity - The Beginning

With the Indian economy looking up, business was booming and a large number of corporate houses and office complexes had come up in Greater Noida, which had in turn, stimulated the growth of the food industry, including both the organized and the informal sectors. Ranging from street food stalls to food courts in shopping malls, there was opportunity for a complete range of players to set shop and grow. It is precisely with this in mind that Ranjan and Hemant decided to set up their restaurant in Greater Noida. Hemant put in his papers on April 30, 2018 with a notice period of three months. Both friends set their target to start the entrepreneurship venture: Real Infinity by July 01, 2018. They decided to pool in the capital, amounting to Rs 250,000 each from their savings to begin with and borrow an interest-free loan of Rs. 2,00,000 from Annie, a close friend of Ranjan, to set up their start-up fund. Annie agreed to extend her support with a condition that they would repay the amount in two equal instalments due at the end of December 2018 and 2019, respectively.

Ranjan took the lead and set the ball rolling. He approached Professor Shiv Narayan Gupta, who had taught him law in the business school to prepare the partnership deed and other legal documents. He would have had to pay Rs 10,000/- in the market but Prof. Gupta did not charge him a single penny. Simultaneously, he was also on the lookout for an appropriate space to set up the restaurant. For the space, he had to make a security deposit of Rs. 2, 40,000 and pay a monthly rental of Rs 40,000 at the beginning of every month. On June 7, 2018, they opened a bank account and deposited the equity contribution along with the borrowed amount. A week later on June 15, 2018, they signed the lease agreement by paying the security money.

Ranjan arranged to procure the initial assets and make the restaurant operative on the pre-decided date. The long-term assets included furniture Rs 110,000; Air Conditioners Rs 60,000; Inverter Rs 32, 000; Motor pump Rs 8,000; Cash Register Machine Rs 15000; and Kitchen equipment for Rs 90,000. While the air conditioner, inverter, cash register and motor pump had an expected economic life of 5 years, the furniture and kitchen equipment had a much longer life of 10 years. For interior designs and ambience, the partners had to spend another Rs 54,000 including a flex board which cost them Rs 12,000. The interiors and flex boards had to be changed in every three years.

The partners hired a local agency to print and distribute advertising materials i.e., pamphlets, and menu leaflets, mainly targeted at obtaining home orders and delivery orders for corporate offices. The agency charged Rs 10,000 for rendering services during the first week of July. A day before the scheduled operation, Ranjan acquired the starting raw material of Rs 30, 000 from a supplier on credit, which he had to repay on or before July 15, 2018. With all things in place, Real Infinity was ready for operation on July 1, 2018.

The Performance of Real Infinity

After a month's operation, the promoters found the sales figure was quite different than what they had expected. Before the start of the business, they had estimated table sales to be around Rs. 5000-6000 per day; however, in reality, they could only manage Rs. 2,500 per day on average. For the first fifteen days, they were able to make a few home deliveries using a friend's bike. Later, they bought a used bike for Rs.40, 000 with remaining life of 10 years. The average monthly sale of the restaurant for the second quarter of the financial year[1] 2018-19 was Rs. 90,000. During that time, the partners relied on table sales, birthday parties and home orders.Given the rising awareness about health and hygiene, and committed to providing the customers a clean dining experience, they invested in a dishwasher machine which cost them Rs 44,000. The purchase was made on 1^st October and the machine life was guaranteed for ten years. Apart from being hygienic, the dishwasher was also more water-efficient than manual hand washing.

Both Ranjan and Hemant had given up their lucrative jobs to invest in their business. Needless to say, they were disappointed by the initial figures. Amongst others, their target audience was the corporate offices and it is on them that they focused their marketing efforts. After engaging in talks with several offices, Ranjan could manage to get orders from two offices in Greater Noida.The restaurant would supply afternoon lunch for employees and the bill would be cleared in the subsequent month. This supply started on first of the festive month October 2018 and the sales figure was worth Rs. 2,05,000 per month. The table sales also picked up from Diwali, the festival of lights, considered to be new year for the Hindus. Diwali was celebrated with great pomp and show across the country every year and the festivities were all the more glittery and elaborate in Delhi and surrounds. In fact, the Diwali period was considered an auspicious one with many people opening their businesses during this time. Given the large-scale celebrations, there was great demand for food, and India Heritage too benefited from increased orders. From this point in time, the table sales per month went up to Rs 1,20,000 on average for the remaining period of the financial year 2018-19.

Growing revenue demanded more working capital in the form of inventory and cash. Ranjan had to raise an additional amount either through a revolver[2] loan or from a private money lender. While revolving credit was available at 14% per annum the private lenders could charge any interest rate and sometimes this was as high as 60%. Even though financing through private lenders was costly, many small entrepreneurs preferred to take this route as the money was available on call and there were no transaction costs associated with the funding. Hence, both Ranjan and Hemant decided to borrow Rs 1,00,000 from a local moneylender on January 01, 2019. The moneylender charged interest at a rate of 18% per annum and the amount had to be paid at the end of every quarter. The principal was to be repaid within a maximum of two years' time.

Besides the initial start-up costs or investments, running a successful restaurant entailed dealing with ongoing operating expenses. Restaurantshave high overheads with most of theoperatingexpenses attributable to food and labor. The inventory replenishments costing Rs 8,00,000 were delivered during the year out of which Rs 7,60,000 had to be paid by March 31, 2019. On an average, the monthly expenses of Real Infinity included staff salary- Rs. 45,000; gas- Rs.9, 000; coal- Rs. 10,000; telephone and DTH connection - Rs. 2,000; stationeries and packing materials - Rs. 4,000; transportation- Rs 5,000 for the first three months of operation and Rs 15000 for the remaining period; and electricity - Rs 10,000. Generally, the electricity bills and staff salaries were paid in the month after their occurrence.

After completing a financial year, both the friends set down to analyze their data and check the performance and health of their business. Ranjan was aware that they had been unable to pay the money lender his interest and they themselves had been unable to draw their salaries given the paucity of funds. On March 31, 2019, he found inventory of Rs 50,000 was available in the store and they had a bank balance of Rs 50,000. Had they been in regular employment, both Ranjan and Hemant would have been taking home Rs 60000 per month, the minimum salary for a junior manager. Ranjan was also left wondering why the cash balance had gone down despite revenue exceeding the expenses.

[1] Financial year comprises of the months from April through March.

[2]Revolver is an arrangement for a line of credit with financial institutions that allows the entity to withdraw, repay, and again redraw the amount sanctioned at any point of time till the arrangement expires.