You have been approached by your friend, jessica, who is thinking about opening a toy store in the High Street.

Jessicas mother, Margaret, is willing to invest 20,000 in the business in return for a share of the profits of the business. However, Jessica believes she will also require a business overdraft from her bank and has a meeting next week with the bank manager to discuss this.

The bank manager has requested that Jessica produces a written business plan for discussion at the meeting. Jessica is aware that you are studying finance as part of your degree and would like your help.

At a recent networking event, Jessica met two other shopkeepers in the High Street who have each provided her with their latest income statement to give her an idea of costs that she might incur (see Income statements below)

Bargain Foods

Income statement for the year ended 31 December 2014 and 31 December 2015

	2015	2014
Revenues	770,000	808,000
Cost of sales	(555,000)	(550,000)
Gross profit	215,000	258,000
Wages	(144,000)	(139,000)
Rent	(32,000)	(30,000)
Light and heat	(9,500)	(9,750)
Insurance	(4,000)	(3,750)
Advertising	(500)	(500)
Other costs	(4,000)	(2,000)
Operating profit	21,000	73,000

AJ Jewellers

Income statement for the year ended 31 December 2014 and 31 December 2015

	2015	2014
Revenues	138,000	122,000
Cost of sales	(48,000)	(35,000)
Gross profit	90,000	87,000
Wages	(25,000)	(20,000)
Rent	(5,000)	(5,000)
Light and heat	(2,000)	(1,750)
Insurance	(1,000)	(750)
Advertising	(4,000)	(6,000)
Other costs	(500)	(500)
Operating profit	52,500	53,000

AJ Jewellers is jewellery store which operates from a shop which is a similar physical size to Jessicas. The shop opens five days a week.

Bargain Foods is a supermarket operating from a much larger premise. This shop is open seven days a week.

Jessica expects her weekly turnover to be 1,000 in the first six months of trading, increasing to 1,500 in the second six months of trading. She expects her gross profit margin to be 45%. Her shop will open five days a week.

Jessicas initial cash expenditure will include: 10,000 on inventory, 5,000 on shop equipment and 2,500 on advertising. She will also pay a deposit of 2,500 to her landlord which will be refundable after her first year of trading.

Using your forecast (see previous question) and the historic financial performance of AJ Jewellers and Bargain Foods, advise Margaret on whether she should invest in Jessicas business. Your answer should include a number of relevant financial ratios.