3. Introduction
It is very important for starting up any type of business to understand, what is Business
venture, how to describe it, understand Risk capital, where to get emergency cash if
company will need it, advantages and disadvantages from potential investors or banks,
and to understand how to avoid any risk and cash flow issues.
This report has been written for University of Bolton, by student Iveta Ermane, and will
introduce readers with all this main aspects.
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4. Company name: Bolton cars
Companies address: Bolton
Business type: Used cars buying and selling
,
Task A:
Company: Bolton cars provides the best valued cars and car services, such as car
wash, body shop; paint shop, tire shop and mechanic work in Bolton area.
Property: After searching for property for Bolton cars in local state agents and internet,
has been found property where had before already Motor garage. Company is asking
£23.500 for all machinery and fixtures. There is very good parking place and even
acceptable price for rent - £600 per month and Business rates to Bolton council is £400
per month. With starting Business has been paid to state agent £1500 (include deposit).
Company owner: Owner to this company is Business ideas author Iveta Ermane. Miss
Ermane is sole trader and that mean that she will own and control a business and have
unlimited liability. Advantages of sole trader is that it is easy to set up Business and
don’t have lots of formalities. Also as a sole trader author will can make all decisions
and keep all profits. Self employment also defers income tax and reduces National
insurance contributions.
Personal resources: £75 000 assets. Business ideas author got degree in Business
management. She has knowledge about how to run Business, knowledge about finance
aspects and will work together with manager who has 20year experience about buying
and selling cars.
Market research: Company Bolton cars have wide range with different style and type
of cars for anyone. Whether customer is looking for easy car, van or minibus, we will
always have choice for anyone. Customers also can choose between convertible cars,
diesel or automatic cars.
Also company offer services such as Body shop, tires shop, auto mechanic services
etc.
Risk: As a sole trader shortage of capital makes increase difficult. To borrow money will
may be expensive and to get more capital sometimes may mean to take a partner. That
may bring company to loss of control because decisions will need to be shared. Also
self employed national insurance entitlements have less benefit. Also as self employed
there is tax relief on pension contributions restricted.
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5. Recruiting people: In start up:
2 persons for car wash, 1 mechanic, 1 person for body shop, 1 for paint shop, 1 for tires
shop and middle manager who has 20 years experience with selling cars. Wages is
National minimum wages or higher depending on previous experience. Working Hours
Monday- Saturday 8.00- 17.00.
Task B:
There is 3 different types of loans: Short term (1-2 years), medium term (3-10 years),
and Long term (11-30 years).
The more money company will borrow then more interest it will have to pay back.
Banks always set up percentage above on the current Base rate.
At moment it is lots different options how to borrow £50 000 for Business. Example
overdrafts, Bank Business loans, friends, family, private investments etc.
Overdraft always is short term borrowing on a bank current account. It’s always small
amount of money, and will not help in this situation, but company will take overdraft in
future, if will need some short term financial help.
Some people borrowing money from friends or family, but some borrowing from banks.
The main advantage borrowing money from friends or family is that usually it is low
interest, but disadvantage is that if company will can’t pay back then it can spoil
relationships with them.
There are lots of advantages to borrowing money from bank, main reason it is quick.
Companies can get additional capital even in less than an hour and sometimes banks
may offer help and advice for businesses.
Main disadvantage borrowing from bank is interest pay and its can lead to decreased
cash flow. Interest pay to all banks is various. Also if Company can’t repay back loan
then can lose everything what had been given to bank as a security (example house,
car etc.) This Business author is sole trader and from this point of view it may be risky,
but from second side author to this Business don’t own any property, that is why there is
nothing to lose, therefore if will need author will take additional capital from bank,
because don’t have any friends or family with so large amount of money.
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6. Business ideas author is long time Lloyds TSB customer and for that reason Lloyds
TSB bank was first where had been asked for £50 000 loan. Lloyds TSB bank is very
friendly bank and with different options, where customers can choose from fixed or
variable payments, what suits companies’ Cash flow.
Also advantage borrowing money from banks is low interest pay. Interest to Business
loan usually is 2%-3% on top the Base rate.
Also some new businesses can get Grant from Government, its may be little bit more
complicated than get money from Bank, but main advantage is that Grant from
Government don’t need to repay back, and at least it worth to try. There is some key
aspects about asking grant from Government: Industry, location, and size.
Task C:
Opening balance starting up Business: £75000
Bolton cars had been identified and providing Balance sheet and Income statement for
next 12 month. (see appendices)
Balance sheet had been made based on Used Car market research in UK. Research
proved that most people buy new cars in autumn or winter. That is why in Balance
sheet from September-December is more income from car sales than in summer or
spring.
Also the same happens with tires shop. People mostly change and buy new tires in
winter. That is why in Balance sheet income from Tire shop in winter is more than
summer or spring.
Value added tax (VAT): At moment VAT is 17.5%
Wages:
NMW=£6.08
9h/day £6.08x9x6=328(p/w) (or 1312 p/m)
Wages for 7 employees is 1312x6=7872(p/m)
Rent: £600/month, £1500 first payment together with deposit
Advertising: it is very important to advertise any new organization. Company
Vistaprint.co.uk offers different type Business essentials and cards for low price. With
starting Business company will buy from Vistaprint.co.uk about 500 leaflets, some cups
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7. with companies Logo, pens, stamps etc. For opening Business company will spend
£500 for advertising and after that about as little as £100 monthly for some additional
Business cards and leaflets.
Balance sheet: In first month of Balance sheet can see that expenses is higher than
income, but closing balance is positive , reason for that is because opening balance on
first month is £75000.
Also reason for Positive balance sheet is that company Bolton cars don’t have any
liabilities. All £75000 with starting a business is Business assets.
Current ratio =
Pricing: Material costs+ Labor costs+ Overheads+ %
Tax, National insurance and pensions: The sole trader is self employed not self
employee. This has implications for tax and pension requirements.
Tax must to be paid on any profit in Business. As a self-employed the sole trader will
not pay tax as income is earned, but on retrospective basis.
National insurance contributions for self employed people are payable as:
1. A weekly rate (class 2)- £2.50/week
2. A percentage of profits (class 4) – it is 9%, between £7.225-£42.475, and
further 2% on over that amount.
Class 2 NI contributions can pay only that companies where profit is expected to
be less than £5.315, that mean Bolton cars will have class 4 NI contribution.
£76486-£42475=£34011
2%of £34011=£680
9%of £42475=£3822
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8. NI contribution together will be £680+£3822=£4502 (approximately)
Profit: Net profit = Gross profit – Expenses,
Average net profit per month to Bolton cars is £9109, but net profit per year is £76486.
ROCE (Return on capital employed) is the profit what had been made by a business as
a percentage of the capital, what was invested in Business. Can see in Business
balance sheet that company made profit for first year more than actually invested in
company.
x100= x100= 101.98%
x 100= x 100= 16.43% (Per year)
(Per year)
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9. Task D:
All Business people know that Cash is any Business “blood”. When money is not
coming into the company, then business fails. Therefore setting up any Business first
need to understand, how to avoid any cash issues and risk.
For to avoid any cash flow it is important to understand from where cash is coming and
where it goes in company’s regular balance sheet every month, or even some
companies are doing it every week. (see appendix)
It is very important to never spend more money than company can make.
Result of cash flow failure is business failure.
For to avoid any cash flow issues firstly need always keep company accounts up to date
and sorted.
In any Business it is risk in money flow. Fardon M. describes that all companies always
must be ready on different cash flow danger points, example:
What if there is no money to pay wages?
What if there is no money to pay suppliers?
What if bank will not lend any loan or overdraft?
What if customers fail to pay? Etc
Author to this report suggest that one of main effects how to avoid cash flow issues is to
keep Emergency cash into company.
Cash is part of working capital and its must circulate for Business to survive.
There are some more options, how to avoid cash flow issues. Bridge P. described some
main suggestions, example, keep on later capital expenses, sell non-essential assets,
rescheduling loan payments or even defer corporation tax.
Mainly cash flow issue for lots companies is overtrading. It is very important to avoid
take more than company can actually manage.
Also, some companies have serious cash flow issues because they have too much
debt; author to this report suggests that need to stop any business when it goes into
debts.
One of main issue for Cash flow is also Overheads. Overheads are costs that are not
directly related to the cost of producing a product or services, but however they are
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10. include in company balance sheet. Overheads are indirect costs. Overhead examples
would be heating and lighting, rent, administration costs etc.
It is also very important for to avoid any cash flow issues having Good manager. Good
manager will know how to pay suppliers as late as possible (of course within agreed
terms), how to not hold on top too much stock, etc. Often period is 30 days, however
Businesses often pays on the statement issued on the end of month (approximately UK
it is 45 days).
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11. Appendices
One year cash flow
Per
Jan Feb March April May June July Aug Sept Oct Nov Dec year
Opening balance 75000
Cash from Car sales 20000 23000 25000 24000 19000 18500 18500 19000 28000 28000 28000 28000 279000
Cash from car wash 2300 2000 2300 2300 2200 2600 2600 2400 2600 2800 3000 3000 30100
Cash from paint shop 2500 2500 3000 2800 3000 3400 3400 3200 3200 3300 3200 3400 36900
Cash from body shop 2600 2700 2800 2500 2300 3400 4500 4300 3400 4200 4100 3300 40100
Cash from mechanic 4000 4300 4300 4100 4200 4100 4400 4300 4600 4200 4100 4300 50900
Cash from tire shop 2300 2100 2100 2400 2300 2100 2300 2100 2300 2800 2700 2900 28400
Total Income 108700 36600 39500 38100 33000 34100 35700 35300 44100 45300 45100 44900 465400
Machinery 23500
Wages 7872 7872 7872 7872 7872 7872 7872 7872 7872 7872 7872 7872 94464
Buy cars 45000 17000 20300 18600 13000 12400 12350 13000 22000 22400 22500 23700 242250
Utility 300 300 300 300 300 300 300 300 300 300 300 300 3600
Raw materials 3000 2800 2800 2700 2100 2500 2600 2400 2400 2100 3000 3000 31400
Business rates 400 400 400 400 400 400 400 400 400 400 400 400 4800
Entertainment 100 100 100 100 100 100 100 100 100 100 100 100 1200
Rent 1500 600 600 600 600 600 600 600 600 600 600 600 8100
Advertising 500 100 100 100 100 100 100 100 100 100 100 100 100
Insurance 250 250 250 250 250 250 250 250 250 250 250 250 3000
Total Expenses 82422 29422 32722 30922 24722 24522 24572 25022 34022 34122 35122 36322 388914
Profit 26278 7178 6778 7178 8278 9578 11128 10278 10078 11178 9978 8578 76486
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12. References
Atrill P., McLaney E. (2008), Accounting and finance for Non-specialists, Hants, Ashford
Colour Press.
Bridge P. (2011) Handout on Working Capital, Cash flow, Access to HE Business Management,
Intake 2011/12, University of Bolton
Business loans, Lloyds TSB,
http://www.lloydstsbbusiness.com/finance/businessloan.asp?WT.mc_id=43000000174214777W
T.srch=1
Fardon Michael (2001) Advanced Finance, Worchester, Osborne Books Limited
Jenkins A (1998), A-Z Business studies handbook, Kent, Greengate Publishing
National insurance- the basics.(2011),HM Revenue and Customs,
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/NationalInsur
ance/IntroductiontoNationalInsurance/DG_190048
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