CASE STUDY 1' B N Ltd. E A C. Hi (3 H D Ll N D Having all recently been made redundant, Ian, Bob and Nigel decide to set up a \"customer-focused" information technology services agency based in Ruritanial. The new business will design and deliver lT~enabled business solutions. They want to grow the business rapidly with minimal investment and hence they propose to co-ordinate a group of selfemployed consultants. The consultants will be completely customer focused to maximize the generation of fees, with Ian. Bob and Nigel providing a professional and efficient marketing and administrative support service. They agree some medium term goals: annual sales of E lm, at a 30% EBIT margin by 2020. They form a limited company {Bil-It'd. and me]: of them subscribe for 20,4300 E I shares in order to start the business on lst July. 'r'ou are a rm of management consultants and lan1 Bob and Nigel have sought your advice about the process of budgeting generally and about the amount of additional fmance they will need from their bank. They show you their market research and provide you with the following estimates relating to the rst ti months of trading: Ell-lllls Fees to be earned in the first ti months l Fees payable to consultants l Office expenses 24 Wages {administration and support] 43 Depreciation of cars 5 Depreciation of ofce equipment 5 Facilities [ofce rent} 2D ' Rurtmrtia is ccn'mm' mono-j.- in (Emmi Europe. IBM Ltd - Case E K. Bates. Page 1 IBN Ltd. You are also advised that the company will immediately purchase office equipment (computers, printers, a phone system) for 640,000 (half payable immediately, half on one month's credit). Bob and Nigel will deal with administration and support services and will be paid wages one week in arrears (for simplicity assume 4 weeks per month). Office expenses are paid in the month after they are incurred. The anticipated patterns of cash receipts from customers and cash payments to consultants over the first six months are as follows: Sales Payments of fees Receipts to consultants EOOOs EOOOs July 0 10 August 10 10 September 20 10 October 40 15 November 80 15 December 130 15 ---- 280 75 Ian will be paid (11,000 per month (in the third week of each month) and will be responsible for sales and marketing. Ian claims that he needs a car "that will impress consultants and customers" and so the company plans to take delivery of a (60,000 BMW on 1st August. The BMW dealer has kindly agreed to give IBN one month's credit. The car's running expenses will be (2,000 per month payable in the month they are incurred. The new business will be launched with an advertising campaign which will cost (23,000, payable in full in August. Office facilities will be rented for (10,000 per quarter, with rent payable in advance (hence payments in July, September and December) REQUIRED: Prepare a presentation and a consultant's report suitable for Ian, Bob and Nigel covering the following issues: 1. Explain why careful planning and budgeting is essential for business success and briefly advise lan, Bob and Nigel how to get the best results from the planning and budgeting process. 2. Use the pro-forma spreadsheet provided to prepare a cash flow forecast for the first 6 months of trading, and to prepare a forecast income statement for the 6 months to 31 December, and forecast statement of financial position as at 31 December. 3. The bank has agreed to a maximum overdraft facility of 650,000. On the basis of the cash flow forecast produced you are to advise Ian, Bob and Nigel. IBN Ltd - Case K. Bates. Page 2Accounting and Finance - Unit 1 IBN Ltd. Cash flow forecast for the 6 months to 31 December Jul Aug Sept Oct Nov Dec Totals Memo Receipts: EOOOs E00Os E00Os EOOOs EOOOs E00Os EOOOs From Customers Share Capital Total Receipts Payments: Commissions Office expenses Admin wages Salaries Car expenses Advertising Facilities (Rent) Capital Expenditure: Office equipment Car Total Payments Net Cash Flow Cash Balance b/f Cash Balance c/fForecast income statement for the 6 months to 31 December COOOS EOOOS Sales (Fees receivable) 100% Purchases (Fees payable) Contribution Office expenses Admin wages Salaries Car expenses Advertising Facilities (Rent) Depreciation Total Fixed Overheads EBIT (Net Profit) Statement of Financial Position as at 31 December EOOOS EOOOS EOOOS Non-current assets: Cost Acc Dep'n NBV Office Equipment Vehicles Current Assets Debtors Prepayments . .. Current liabilities: Creditors Accruals Bank overdraft Working Capital - . . Total Assets less Current Liabilities Financed By Share Capital - -. Reserves Shareholders funds