Instructions
- Prepare a detailed financial analysis, making clear any assumptions that you make.
- The report should demonstrate skills of critical reflection, effective communication and balanced judgement; note that this is not a market report. Scripts that are excessively long (i.e. exceeding the page limit) will not be read beyond the point of the word limit; there is no minimum word limit.
- The data in your answer should be clearly laid out in tabular format so that your approach and answer are both plainly evident.
- Submissions should be in MS-Word only; submit only one file, and include any Excel analysis as images, not embedded files. Include Excel files for all tables and data sheets as support.
- The analysis should not exceed a total of 25 pages (everything included), and must include:
- A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate;
- A break even analysis;
- A Profit and Loss Statement for the first year of operations and Balance Sheet at the end of the first year; You should clearly explain any assumptions in this P&L Statement and you may, if you wish, make any changes to that P&L Statement for your subsequent Unit 6 final assessment submission.
- Monthly cash flow for the first year of operation;
- Annual cash flow thereafter;
- A clear explanation, in plain English, of how much cash the venture will need to get started;
- Any sensitivity analysis that you think would be helpful;
- The most that Hattie could offer Colada Geodes as an upfront fee for the exclusive rights for the six year period (which does not include any geode purchases) which would leave her no better or worse off than if she had not undertaken the venture, and the amount you suggest she should actually offer them;
- Conclusions and recommendations;
- A critical reflection of the analysis that Hattie has asked you to prepare; how you have evaluated the attractiveness of the venture and what, if anything, would you do differently in a financial analysis of this opportunity, and why?
- The overall structure should be as follows:
- Table of Contents/List of Exhibits
- Executive Summary
- Main Report
- Critical Reflection
- List of References (Harvard)
- Grading
- Assumptions, estimates and sensitivity analysis
- wide range of key and peripheral assumptions, demonstrating critical evaluation and understanding of the issues
- Cash flow, DCF and financial viability analysis
- Excellent understanding of the theory and its application and subtleties
- Other financial details (P&L Statement, Balance Sheet, Cash Flow statement, break even, etc.)
- Excellent understanding of the theory and its application and subtleties
- Critical reflection
- Excellent understanding of the strengths and limitations of the required analysis, with clear ideas on areas of improvement
- Referencing and presentation
- Excellent piece of writing, well-structured, coherent progression of argument, well-articulated and accurately referenced, with excellent summary and clear conclusions and recommendations
- Assumptions, estimates and sensitivity analysis
Case Study
- Note that this is a fictional case focused on assessing your understanding of management accounting; you are not expected to comment in any way on aspects such as the market feasibility or actual rates of tax in the UK.
You have been asked by your 65-year-old aunt Hattie to help her assess a new venture. It is Friday night, and she needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that she will not be able to give you any more information than she already has (and you will be unable to contact her over the weekend), and therefore you may need to rely on your own assumptions and estimates for some of the analysis where appropriate.
Hattie lives near Manchester, England, and recently took early retirement (from a university she joined 30 years ago), leaving them with a lump sum (after tax) payment of £450,000. Surprisingly, rather than being depressed by her new state of independence, she is tired of the bureaucratic life and excitedly contemplating a new career as a retailer of geodes (a geode is a spherical rock with a hollow cavity lined with crystals) and other decorative stones. She is confident that she can set up a business to import geodes from Uruguay and sell them in Europe. Her husband, who she met in the USA at business school, is pleased with her passion for this possible new venture, but concerned that it might turn into a financial disaster. He has suggested that she develop a financial plan to evaluate the venture and its viability.
- After a couple of hours with Hattie you have assembled the following information from her:
- Colada Geodes, an established supplier of geodes and similar stones based in Artigas (and owned by one of Hattie’s university colleagues), is prepared to give her exclusive rights to sell their products in the UK for a six year period in exchange for an upfront payment for those rights;
- The geodes sell in Uruguay for an average of 350 Uruguayan Peso (or $U for short) per kg, and Colada Geodes is prepared to sell them to Hattie at a 45% discount to this price;
- Colada Geodes would ship to Hattie on receipt of payment for each order;
- Hattie has found out that freight from Artigas to Manchester, via Montevideo by truck and air freight, would cost on average $U 200 per kg and that the time from her placing an order to receiving the goods in Manchester would be four weeks (including the preparation and packing time in Uruguay);
- Hattie plans to order from Colada Geodes monthly and intends to maintain a minimum stock of one month’s worth of sales to ensure that she will be able to supply a suitable range of products to customers;
- She will buy a special jig and tools at a cost of £ 3,500 to break open and polish the geodes, and has found a small industrial room she can rent nearby at a cost of £ 300 per month (payable monthly in advance, plus an initial security deposit of three months’ rent, refundable at the end of her tenancy if there is no damage);
- Hattie will sell the geodes throughout the UK by internet only, and is planning to spend £ 4,000 with a website designer to develop the site;
- She has already spent £ 3,000 on a market study that told her that once established, demand would be about 750 kg a month, although in the first year sales would start at only 50 kg in the first month before building up slowly to the full level at the end of the first year;
- The above study assumed an average selling price of £ 35 per kg (ignore any impact of sales taxes in your calculations);
- Packaging and shipping in the UK would average £ 5.50 per kg, and Hattie is not intending to charge that to the customer;
- All sales would be by credit card, with the credit card company taking 1.2% per sale and remitting the monthly total to Hattie two weeks after the end of each calendar month;
- She believes that two part-time students could run the geode operation at a total cost to her (including employer’s social charges) of £ 1,500 per month;
- Hattie believes that, if necessary, she could borrow up to an additional £ 40,000 at 7% p.a.;
- The effective overall marginal tax rate on income from a company set up to undertake this activity would be 28%, payable one year in arrears; Hattie has also told you that she can invest any available cash at an after tax 3% per annum.
Hattie also has a friend, Ian, who runs a small chain of gift shops in the Lake District. Ian is interested in the venture and has agreed that if Hattie would mount six different geodes in glassfronted cabinets for wall mounting, he would buy 6 such cabinets (each containing 1.5 kg of geodes on average) from her per month (which would be in addition to the internet sales outlined above, and would start immediately), at a price of £ 45 (paid immediately) per completed cabinet. To do this Hattie would need to buy-in cabinets and mounting accessories at a cost of £ 7 per cabinet and hire a part-time assistant specifically to assemble the cabinets, at an additional cost (including employer’s social charges) of £ 200 per month. Ian plans to sell the cabinets at £ 75 each.
Feedback and Templates
Key importance to understand how the main financial statements (Profit and Loss Statement, Statement of Cash Flow, Balance Sheet, and Statement of Owner’s Equity) should relate to each other. This is one of the very basic requirements for understanding financial statements.
To recap, one of the statements (the Balance Sheet) is a snapshot at a point in time, while the other three (Profit and Loss Statement, Statement of Cash Flow, and Statement of Owner’s Equity) reflect events taking place during the period of time between Balance Sheets. For example, a Profit and Loss Statement for the year 202(X) would relate to financial events in the twelve months between 202(X-1) and 202(X).
The Statement of Owner’s Equity format. Not all the elements will necessarily apply to the example:
| All values in £m | Share capital | Share premium | Revaluation reserve | Translation reserve | Retained Earnings | Total |
| Opening Balance | ||||||
| Issue of shares | ||||||
| Dividends | ||||||
| Total comprehensive income for the year | ||||||
| Closing Balance |
The net cash flows from operating activities framework
| Net cash flows from Operating Activities | Explanation (if needed) | Impact | Total in £m |
| Profit before tax | |||
| Depreciation expense | |||
| Interest expense | |||
| Increase (-) or decrease (+) in inventories | |||
| Increase (-) or decrease (+) in trade (and other) receivables | |||
| Increase (+) or decrease (-) in trade (and other) payables | |||
| Interest paid | |||
| Taxation paid | |||
| Net cash flows from operating activities |
The net cash flows from investing and financing activities framework
| Net cash flows from Investing Activities | Explanation (if needed) | Impact | Total in £m |
| Payments to acquire non-current assets | |||
| Interest received | |||
| Net cash flows from Investing Activities |
| Net cash flows from Financing Activities | Explanation (if needed) | Impact | Total in £m |
| Issue of loan notes | |||
| Repayment of bank borrowings | |||
| Issue of shares | |||
| Payment of Dividends | |||
| Net cash flows from Financing Activities |
The cash flow statement framework
| Total in £m | Link(s) to other Statements | |
| Net cash flows from Operating Activities | ||
| Profit before tax | ||
| Depreciation expense | ||
| Interest expense | ||
| Increase (-) or decrease (+) in inventories | ||
| Increase (-) or decrease (+) in trade (and other) receivables | ||
| Increase (+) or decrease (-) in trade (and other) payables | ||
| Interest paid | ||
| Taxation paid | ||
| Total net cash flows from operating activities | ||
| Net cash flows from Investing Activities | ||
| Payments to acquire non-current assets | ||
| Interest received | ||
| Net cash flows from Investing Activities | ||
| Net cash flows from Financing Activities | ||
| Issue of loan notes | ||
| Repayment of bank borrowings | ||
| Issue of shares | ||
| Payment of Dividends | ||
| Net cash flows from Financing Activities | ||
| Net increase in cash and cash equivalents | ||
| Cash and cash equivalents at Opening Balance | ||
| Cash and cash equivalents at Closing Balance | ||
Balance Sheet example
Journals and T-account entries examples
Other
