SUBJECT : FINANCIAL MANAGEMENT

CASE STUDY 1: JEANNE CLOTHING

Jeanne Clothing was set up by fashion design student Jeanne Keane in 2016. The company sold individualized, high quality clothes for the fashion conscious. Jeanne had developed a reputation while in fashion school for innovative designs and high quality finishes and had sold quite a number of his pieces to local shops. Jeanne decided to open his own company when he graduated and was sure that his business would be a success as a large number of people had expressed an interest in purchasing his designs. However, only 6 months after opening the business, with the help of his savings and a RM4, 000 short-term loan from the bank, Jeanne had to close the business, despite having lots of orders and a net profit margin of around 80%. The problem was Jeanne had to spend money on rent, electricity, phones, wages and raw materials while he was working on his clothing. However Jeanne did not receive any money until he had sold the final piece. After 6 months of paying bills and receiving little income, Jeanne simply ran out of cash. As the story of Jeanne Clothing illustrates, maintaining adequate cash flow is vitally important for the success of a business. An important element therefore of business planning is the preparation of a cash flow forecast. Like any forecast, a cash flow forecast is an estimate or prediction, and in this case of the likely cash inflows and outflows over a period of time.

Required: a. Explain FOUR (4) purpose of cash flow forecasts. (8 Marks) b. The following information showing the cash flows of Jeanne Clothing for the month of February and March. February 2017 March 2017 CASH INFLOWS New capital 9,000 O Sales 3,920 6, 364 CASH OUTFLOWS Rent 1.600 1.600 Wages 2,600 2.600 Advertising 650 230 Utility bills (telephone, water and electricity) 635 792 Equipment 1,570 3,400 Inventory 6.200 9,700 Raw materials cost 4,300 4,300 Loan payment (included interest) 152 152 Required: Forecast the cash flows of Jeanne Clothing for April and May using the following information: o Sales are expected to increase to RM9,000 in March and RM.6.200 in April o The cost of materials increases to RM5,000 in April but returns to RM4,300 in May. The business purchases a new piece of equipment in April which costs RM3,500 o All other cash flows items remain the same as in March. However there will be new capital introduce sum of RM1,200 for the month of May. (18 Marks) c. Based on your answer on (b), what advice would you give to Jeanne to help her to deal with the business situation? (10 Marks) d. What is working capital management? Discuss how working capital management knowledge will helps Jeanne to manage her business finance. (4 Marks) e. Besides acquiring the short-term loan from bank, suggest another FIVE (5) types of short-term financing that Jeanne can acquire in order to raise the business capital. (10 Marks) (TOTAL: 50 MARKS)