TO:

YOU

FROM:

CLIENT

SUBJECT:

STARTING A SMALL BUSINESS

Part $1$ Small Business Advising $($before the start of the business$)$

Thank you for agreeing to be my accountant this year. As discussed, I am eager to start my small business this Spring. Here are the particulars of my business idea:

$$ To open a small boutique shop that sells unique clothing for professional women in the Ottawa area, with specialized fitting services.

$$ Some fashions will be my original work, others will be purchased from other designers.

$$ To secure a storefront in the downtown area around the market, no more than $600-1,000$ square feet.

$$ To operate as a sole$-$proprietor for the first year and then reassess whether I should incorporate the business.

$$ I plan to invest $$80,000$ of my own funds to start the business on May $1,2023,$ including paying for first month$$s rent and inventory, as well as equipment for the store.

$$ I will hire a part$-$time sales clerk to assist on weekends. Within a few months, I plan to hire a full$-$time store manager to manage the day$-$to$-$day operations.

$$ I forecast sales of approximately $$400,000$ in the first year $($by end of $2023)$ with expenses$/$costs of approximately $$280,000.$

Can you please advise on the following:

$1.$ How do I account for the $$80,000$ investment into the company? How do I get that back eventually?

$2.$ Do I need to register with Canada Revenue Agency $($CRA$)$ for any reason? If so$,$ what do you I have to do specifically?

REQUIRED:

$1.$ Answer the following questions via a memo back to the client. Put a heading for $$Part $1$ within the memo body.

$2.$ Continue on with Part $2.$

Part $2$ Small Business Financing $($after $2$ years of operations$)$

I have a meeting with the bank in a few days and require your assistance in order to prepare for the meeting. I need to secure some additional funding from the bank. Right now I am looking at arranging a bank line of credit for $$150,000$ max. The bank has informed me of the following restrictions on operating lines:

$3/4$ of receivables less than $80$ days old, and

$1/2$ of finished goods inventory.

Here are the details of our accounts receivables, inventory and debt$-$to$-$equity information:

Accounts receivable, $$120,000$ of which $20\%$ are over $79$ days

Raw materials inventory, $$22,000$

Finished goods inventory, $$87,000$

Total liabilities, $$177,000$

Total equity, $$236,000$

Would you please calculate the maximum the bank will lend us through an operating line? Also, assuming the bank requires us to have a debt$-$to$-$equity ratio of no worse than $0\mathrm{.}75,$ would we qualify?

Can you also explain how I go about paying off a line of credit? They seem a bit risky for a small business.

If you could summarize these three things in the same memo as Part $1($add $$Part $2$ heading to memo body$)$ and get back to me$,$ I would greatly appreciate it$.$ I need it for $8$pm today. Please send me your calculations in Excel so I can show the bank. Thanks!

SUBMIT:

$1.$ Word document $$ memo addressed to client $($same memo for parts $1$ & $2)$

$2.$ Excel file