You will prepare a Cash Flow Statement for Clark’s Sporting Goods and then you will calculate ratios for Sam’s Paint and Drywall.

Case 1: Clark’s Sporting Goods

Dave Clark plans to open a sporting goods store in London, Ontario as soon as he graduates from university in the spring. He did a market-demand analysis for such a store for one of his course projects and is confident the opportunity exists.

Dave’s major problem is determining the amount of funds he will require. His father, who is quite wealthy, will give him $30,000 as a graduation gift to invest. He has located a store that rents for $2,000 per month (in advance) and has made an itemized list of the start-up costs as follows:

Merchandise (4 months)	$100,000
Shelves, racks, displays	5,000
Remodeling	4,000
Cash register (used)	800
Check-out counter	500
Office supplies (4 months’ supply)	200
Telephone: $50/month, $100 deposit, $25 installation fee
Utilities: $200/month, $200 deposit

Dave has made the following estimates:

• He can completely turn over his inventory (sell everything) every four months
• In the first year, he plans a 60 percent markup on the cost of merchandise
• He can get by on a salary of $2000 per month
• He plans to hire one full-time employee at $1500 per month and one at $1000
• He plans to spend $2000 in opening promotion in the first month and $500 per month after the grand opening for advertising
• He estimates that 50 percent of his sales will be on credit and will be paid in 30 days
• The interest rate is 10 percent, payable every four months
• The depreciation rate is 10 percent

1. Estimate how much money Dave will need from outside sources to start his business. Here are the steps:
2. Calculate start-up costs

Start-up Costs
Merchandise	xxxx
nnnn	xxxx
nnnn	xxxx
nnnn	xxxx
And so on…	And so on…
TOTAL START-UP COSTS

2. Subtract what Dave already has from the amount needed (round up to the nearest $1,000) to get the amount he will need to finance.
3. Assuming Dave receives start-up financing from a bank, as calculated in question 1, will he require an operating line of credit during the first four months of operation? If so, how much? Prepare a Cash Flow Statement for the first four months, using the template given.

Month 1	Month 2	Month 3	Month 4
Sales Revenue *	xxxx
Collection of A/R	-------
Total	xxxx
Cash Expenses
Merchandise (in 4th month)	xxxx
Owner salary	xxxx
Clerk salary	xxxx
Advertising	xxxx
Utilities	xxxx
Phone	xxxx
Rent	xxxx
Interest**	-------	-------	-------
Total	xxxxx
Cash Flow for the month	XXXX
Cumulative cash flow	XXXX

*Sales Revenue

1. Start with the cost of merchandise sold in 4 months
2. Figure out the revenues (.6 x cost of merchandise)
3. Divide the 4-month sales figures by 4 to get the monthly sales figures
4. Divide the monthly sales figure by ½ to yield the cash sales amount
5. Remember that in the next period (month 2), Dave will receive the other half of the revenue (the part that was in credit is the Accounts Receivable).

*Interest

1. Start with the amount Dave needed to borrow
2. Multiply by the annual interest rate
3. Divide by 12 to get the monthly interest and then calculate the amount needed to be paid every 4 months.

3. Should Dave pursue debt or equity sources of funds to get started?