Business Operations

(Variable Costs as % of Expenses                24003

+ Cost of Sales)                                81224  

(96010 x 25% = 24002.5)        

(24002.5 + 81224)                                        -105227

equals Contribution                                            89773                                

Contribution is £89774

Contribution £                 =                89774 = 359.10 Contribution per Customer

Number of Customers                250

Contribution per costumer is £359

Fixed Costs as % of expenses =        96010 x 75% =        72007.5 = 200.57

Contribution per Customer                 359                        359

Break Even Point is 201 Customers

MOS % = 250 - 201        x 100 = 19.6%

                250

MOS = 20% of costumers can afford to lose before start making a loss.

Proposal 1: Computer System

This will replace existing manual system that is used to record all business transactions at point of sale.  The initial investment required will be £8000.

Proposal 2: Advertising Campaign

The company is looking at how to raise its profile in the marketplace. It is proposed that a major advertising campaign should be launched at an initial cost of £13000.

The projected cash flow and profits are as follows:

Year                Proposal 1                                Proposal 2

                Cash flow        Profits                        Cash flow         Profits

                £                £                        £                £

1                4500                3500                        5000                4250

2                4250                3400                        4800                4050

3                4200                3200                        4900                4000

4                4000                3100                        4700                3900

Task A3: Carry out an appraisal of the two business proposals using the Payback, Accounting Rate of Return and Net Present Value methods.

Payback Method

Accounting Rate of Return Method (ARR)

Proposal 1: Original Investment £8000

Proposal 2: Original Investment £13000

The Net Present Value Method (NPV)

Proposal 1: Original Investment £8000

The Net Present Value is £5212.

Proposal 2: Original Investment £13000

The Net Present Value is £2082.

Task A4:  Using the financial information from (tasks 1, 2 and 3), assess the financial health of I-Events. You should include a discussion of the financial accounts, the benefits of break-even analysis and an appraisal of the two business proposals.

Cost of Sales         x 100 =                81224        x 100 = 41.65 % of Cost of Sales

Sales                                195000

Expenses         x 100 =                96010        x 100 = 49.23 % of Expenses

Sales                                195000

Gross Profit         x 100 =                113776 x 100 = 58.34 % of Gross Profit

Sales                                195000

Net Profit         x 100 =                17766        x 100 = 9.11 % of Net Profit

Sales                                195000

All companies keep financial papers to help run the organisation and to gather the terms with legal needs. Of particular significance are the balance sheet, the profit and loss account and the cash flow statements. These illustrate the financial strengths and weaknesses of the business in a current situation. Wolinski and Coates (2005, p. 64)

This essay will asses the financial health of the I-Events Company. It will look at the profit and loss account and its purposes, it will scrutinise the balance sheet, and focusing on its main components it will discuss the benefits of the break-even analysis and an evaluation of the two business proposals.

The information from last year’s account from I-Events has not been given however, the margin figures from above provide us reference of where the business is and how prosperous the I-Events finance is. From their analysis in addition to the accounts, I-Events is financially strong. The reasons for this judgement are as follow.

First figure to look at and a major objective is the Net Profit, in this case positive, so the company it is not making a loss. Although, it will be ideal to achieve an increase in sales revenue and decrease the costs that could be done by having the minimum closing stock at the end of the year. Moreover, predominantly elevated are the wages and salaries, which they have to be reduced as the amount (almost a 40% of the business sales), is excessively high. It will help to get a workforce planning done, which is about matching the numbers of the employees and their skills to a company’s needs. Another bill that could diminish is the telephone, as the use of other sources like the internet could probably give us the same communication across although more economical.

The fixed assets of the business are reasonable although the figure is not high; the nature of the business allows it to operate fluently. Observing the figures of the current assets, stands out the debtors, although not being a high number it can turn to a critical situation depending how quickly it can be turned into cash. As the money in the bank is very low it has to be concerned that could become overdraft very soon. This situation will be aggravated even more if payment to creditors are due shortly. Operating the current assets and liabilities give us a pleasant positive working capital and if our debtor figure is turned into cash, cash flows even more healthier.

Break even point is the point where the total costs of making the items equals the total revenue received from selling them.  In other words, the break-even point (BEP) is the figure where a business makes cero profit. Changing the selling price in the formula will give us different figures in the BEP. This will help the company plan for price changes, changes in costs, for instance a rise in electricity rates.

This formula has its benefits and its limitations. The benefits are that the graphs are easy to produce and to interpret. They represent straight lines in the BEP graph. The graph provides guidelines in relation to the quantity of product levels within profit and loss and margin of safety. It can help a company spot if their charges or fixed costs are too high.

I-Events business will start making profit when it has been sold to 201 customers. Other advantages are that can be establishing parallelisms through other comparatives situations, and the formula gives us a precise result of the break-even point. For example increasing the contribution per customer to £10 more, the business has to have 195 customers before making any profit instead of the 201. Anything higher than the BEP figure starts being a profit, anything below 201 items is a loss. Regardless of the number of items of output, fixed cost remains the same.

Some of the problems are that is very unrealistic to assume that increases in costs are always constant since not all the cost change in proportional way. Not all the cost can be so easily classified as fixed and variable. It is assumed that all the items are sold when it is not always probable. The total items or customers are expected to meet the maximum point in sales in the graph. It is unlikely that the fixed costs will remind constant at a different levels of production, given that different necessities of the business. Interpreting the Margin Of Safety (MOS), I-Events can afford to loose 20 percent of customers before it stars to make a loss.

The above matrix directs the attention to a rapid visual appraisal of which one of the proposals are the best to approve. According to the Payback Method, the shortest period is the best to invest. Therefore, proposal one having the original investment being paid in 1 year an 9.8 months versus 2 years and 7.8 months from proposal 2, it is the best investment for this method.

The Accounting Rate of Return Method shows what the proposals and projects can earn over its entire life. The higher the percentage the more striking and substantial the project is. Again, proposal 1 has a better result 41% against 31%.

The Net Present Value Method, like the Payback method, utilises the cash flow figures. It uses the discount tables for a true cash value of a project. This is most complicated of the tree methods. It takes into account the time value of money concept, which is the money earned today, has a greater value than the money earned tomorrow, because it can be re-invested to have a greater earning return. And once more, the proposal one is winning with £52112 in opposition to £2082.

Although not having been given any figures from similar or competitive business to compare with, I-Events has been proved to have a healthy and vigorous strength. Improvements can always be made to end with a much better profit, as almost all business is aiming to. “In a perfect world, the profit and loss statement would match the budget.” Van der Wagen (2001, p.93) However, this is not always up the business to have a fluent cash flow as debtors can hold that fluid. An ideal situation will be the assumption of the break-even point as every unit of output that is produced is sold. Unfortunately, it is unrealistic that this will always happen. What it is true is the vitality of I-events being a successful business.

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BA 1 lecture notes and handouts (2007) Business Operations. Semester 1, week 1, 2, 3 and 4 [i.p. 1,2,3,4,5,6,7,8]

Van Der Wagen, L. (2001) Event Management, For Tourism, Cultural, Business and Sporting Events. Hospitality Press, Melbourne, Australia [i.p. 11]

Wolinski, J. and Coates, G. (2005) Business Studies. Philip Allan, Deddington, UK [i.p. 8]