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Management accounting is the process of ascertaining meaningful accounting reports and analysis for assisting in managerial decision making process. Management accounting can be successfully applied in complex business situations to come up to an optimal managerial decision (Zayed and Liu 2014). In the given case study, a new café business has been proposed along with a gift shop expecting a significant demand as the location is very convenient for such type of business. Estimations have been made for projecting the revenues and expenses. The business will be financed by own capital of $10,000 and a loan of $10,000. Taking all such given information and assumptions, following projections and analysis can be made for helping in making a decision of whether to set up the business or not, and its feasibility (San 2015).
Billie and Jeanne, two cousins graduated from the university, and they have planned to open a new café business along with a gift shop at the historic Chateau de Vincennes. They Billie is a commerce graduate and hence he is having a wide knowledge in managing business and he expects that the proposed business will have significant demand and they will be making significant amount of profit from there. Based on certain historical data, they have forecasted that, almost 450,000 visitors will be visiting the place in next year and as the number of visitors depends on certain seasonal factors they have assigned the proportion to the months accordingly. It has also been assumed that, 10% of the visitors will be visiting the café shop. They have to lease the property for starting the business and need to incur certain fixed costs initially to setup the business. To run the business they have to pay certain fixed expenses as well as variable expenses. Based on such information and forecasting about expected sales, a detailed cash flow projection has been made to evaluate whether the proposed business is feasible or not (San 2015).
Billie and Jeanne will be contributing 5,000 Euro each which can be considered as the equity capital of the business and they will also require a bank loan of 10,000 Euro to start up the business. Moreover, they are having a bank overdraft facility to draw up to 7,000 Euro if required. It can be observed from the case study, they will be paying the lease expenses and other expenses as and when required and they are having enough amount available cash to meet all those expenses (Zayed and Liu 2014). The loan term is for five years at an annual interest rate of 10%. Hence, the monthly installment payment for the loan would be 212.47 Euro. It can be further observed from the cash flow projection that, there is no requirement of the overdraft as they are having significant amount of liquidity (San 2015).
Liquidity refers to the ability of an entity to meet its short term expenditures with the immediately convertible assets available with it. It is an important aspect of a business because the lack of liquid funds tends to increase the debts of a firm in the short run and the costs incurred due to the lack of non-payment of the same is not good for the business (Holden, Jacobsen and Subrahmanyam 2014).This may result in the business becoming bankrupt due to the non-payment of the payments that are due to the customers or the employees. In this case, the business is expected to generate sales up to $280000 in a financial year. On the basis of the given information, these are the sales that can be generated even in a worst case scenario. This has been segregated into $196000 while $84000 worth of sales are expected to be generated from the gift shop. Other inflow of funds that are available to the owners are $5000 as capital that is obtained from their grandparents on the occasion of their graduation. Other inflows for the business that are available are the bank loan worth $10000 that is being taken to fund the operations of the business (Glaum, Schmidt and Schnürer 2016).
As the bank is providing overdraft funds up to $7000, the business can choose to conduct the operations by spending an amount of $7000 over the funds available to it. The stock worth $2000 is being kept by the business as a backup for the next month of business. In this case, it should be noted that these are the only viable inflows available to the business. The business may have more customers visiting it during the year. However, it may so happen that the number of customers visiting the business may change during the year and it may so happen that the sales conducted by the business can increase to a significant extent. The outflows that are being incurred by the business during the year are significant and large. The cost of the sales that are being incurred in the café are worth $78400. The costs of the sales being made in the gift shop have been calculated to be $54600. These include all the costs incurred to makes the sales of the company. Other outflows of cash include the $20000 bid made for the purchase of the land on lease (San 2015). The redecorations and refurbishments incurred by the business are worth $8000. Other expenditure in relation to the café and the gift shop are the electricity expenses worth $6800. The staff expenses paid in the form of payroll taxes in the year are worth $24500 for the café. The expenses in relation to the gift shop are $8400 for the sales made during the year. Other expenses include the $30000 rent paid for the premises being used as a part of the business. As the business also plans to store inventories of two months’ worth, this also increases the carrying costs incurred by the business in a given year. An additional expenditure of $1000 is also required by the business for the payment of the additional inventory purchased by it. The loan taken by the business is not only an inflow but it is also an outflow as the funds need to be transferred in the form of payment of interest. Taking the above explanation into consideration, it can be suggested that the business is sufficiently liquid on an annual basis. This is because it generates sufficient revenue in a given year to meet the expenditure incurred by the business (Ehiedu 2014). This is without the usage of the overdraft facility in the business. If the overdraft facilities are also taken into consideration, it can be suggested that the business is in a much stronger position and can easily meet all of its payment obligations in a given financial year (Glaum, Schmidt and Schnürer 2016).
Due to seasonal variations and fluctuations, the number of customers visiting the stores will be changing accordingly. Taking that into consideration, the sales and receipts or collection from sales has been computed. It can be observed from the given case study that, average spending per customer would be 7Euro of which, 70% of the customers will be spending in café and rest of the 30% of the customers will be spending in the gift shop. The cost of sales would be 40% of sales for the café and 65% for the gift shop. Considering the projected number of customer visit and the average spending per customer along with the assumption of the product mix, there will be total sales revenue of 220,500 Euro from the sale in café and 94,500 Euro for the sale in gift shop. Hence, total sales would be 315,000 Euro. It has been assumed that, all the sales will be collected in the month of sales; hence, total collection from sales for the projected year would be 315,000.
The cost of materials are paid in the month in which it is incurred, a stock of 2,000 Euro has been built up in the first two months. In the first month extra 1,000 Euro of stock has been purchased and in the second month another 1,000 Euro of stock has been purchased to build up the inventory of 2,000 Euro. Electricity expenses are paid quarterly and rent is paid monthly. Wages expenses are considered to be variable in nature and are paid on a monthly basis (Kimani 2014). Incorporating all these information for projection of the cash flow, it can be observed that, in the first month there were a total receipt of 58,500 Euro and a total payment of 51,232, thereby remaining 7,268 Euro of cash balance in hand. In the same way cash flows for the subsequent months have been computed and it can be observed that, at the end of the year there will be a total cash balance of 23,250 Euro of cash in hand. It can be observed from the cash flow analysis that, there is a positive balance at the end of each of the month throughout the year and hence, there is no need for the overdraft to be taken (Glaum, Schmidt and Schnürer 2016).
Profitability is the measure of earning capacity of the business. The main source of revenue for the proposed business is the sale of coffee and gifts. It can be observed from the projected income statement, that there is a net profit of 57,073 Euro for the projected year. If the profit is compared with the total sales and a profit percentage is computed, it can be said that the business is having an 18.12% of net profit margin. Hence, the proposed business is having a good profitability over the projected year (Glaum, Schmidt and Schnürer 2016).
Breakeven analysis is measure of minimum number of customer visit which will make the net profit of the company to a complete zero. If the average revenue per customer and average cost per customer is taken and the annual fixed costs are compared with that, then the breakeven number of customer visit can be computed (Gerow et al. 2014). In the given case study, the average revenue per customer visit is 7 Euro and average variable cost per customer is 4.76 Euro. Contribution margin per customer visit is 2.24 Euro. Annual fixed costs are 41,727 Euro. Hence the breakeven number of customer visit can be computed by dividing the total annual fixed costs by the contribution margin per customer visit, and the breakeven number of customer visit is 18,628. Hence, if there is more number of customer visits than 18,628 numbers of customers then the business will be making a significant amount of profit and if the number of customer visit is less than the breakeven number of customer visit then, the business will be making a significant amount of loss (Afuah 2014).
In a worst case if the number of customer visits becomes only the 5% of total visits, then there will be a profit of 6,673 Euro only for the year and if the number of customer visit moves up to 15% of the total visits, then there will be a profit of 107,473 Euro for the year. Hence, the profitability of the business and respective cash flow associated with that mostly depends on the number of customer visits and it changes significantly with the change in rate of customer visits (Johnson 2015). Hence, it can be said that the profitability and cash flow of the business is mostly sensitive towards the number of customer visits. It can further be concluded that, the break even number of customer visit do not changes with respect to change in project rate of customer visit (Afuah 2014).
From the above analysis and discussion, it can be concluded that, the proposed business is having a good profitability and liquidity. The breakeven number of customer visit is easily achievable and it is within the limit of the worst case. Hence they can go for startup of the business. Further, sensitivity analysis and liquidity analysis suggests that, if there is a fifty percent fall in rate of customer visit, then also the business is able to recover all the expenses and make a decent amount of profit. Hence, the proposed business is a profitable one and can be adopted.
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