You are required to produce a report on Stage IV of the Small Business Start-up Case (details provided below). Your Report should cover the following: 1. Review and analysis of the present position of the business and the future prospects 2. Identification of the key issues and risks facing the business and the likely consequences of these 3. Recommendations to the owners of the business as to how best they might develop their business in the future. 4. You will be expected to draw on evidence and information from the course, the various web sites for the small business support agencies and other resources in supporting and justifying your answer. You are required to produce your answer in a report format and the word limit is 2,000 words. Assessment Criteria The outline criteria that will be used in assessing your answer include you ability to: • Demonstrate a clear knowledge and understanding of the key issues facing the SME both currently and prospectively • Display evidence of extracting and using data from different sources (e.g. reports, databases and journals) to support the analysis. • Recognise and evaluate some of the key issues, risks and possible solutions • Recommend appropriate solutions for the given case situation • Structure coherent, critical and balanced argument to support the analysis and recommendations • Present your discussion and analysis in an appropriate report format. • Reference sources appropriately (Harvard Referencing System). Although financial and other data are provided as part of the case study you are not required to undertake any detailed financial appraisal as the case is more concerned with the problems and issues in general. Note : The information concerning the first three stages of the business start-up have been reproduced and attached to the end of this document for information. You may refer to these if you feel it necessary in answering the case study questions. Jenny and Davey have now completed the fourth year of running their business and although this has proved a very challenging experience they are still very much committed to continuing the development and growth in the coming years. The key developments over the last year and prospects for the coming year include: 1. Sales for the 12 month period have been variable and the total sales of £210,000 have failed to achieve the £300,000 anticipated. There are clear indicators of adverse trends. Initially, sales were quite buoyant but the impact of the global financial crisis has had an impact on the sales in the high street, both in their own retail outlet and the department store they supply with designer jewellery. The split in terms of income was £95,000 from their own retail outlet, £30,000 from private sales (i.e friends and family jewellery parties) and £85,000 form the contract with the department store. The last three months have seen sales decline by around 25% on the same period last year. Davey reckons that at best the total sales revenue for next year will be £150,000 from all three sources. Sales have now slowed a little and are expected to grow by only 10% in the next year and maintaining this rate of increase for the foreseeable future. The decline in sales in their own retail outlet is expected to show the highest decline and the jewellery party sales are expected to be maintained at the same level. Almost 25% of the sales are still generated through these more informal routes of friends and family and jewellery parties hosted by individuals who get a small commission in the form of jewellery for their efforts. Although Davey has still to finalise the accounting paperwork for the Accountant to prepare the final accounts for the year, initial estimates indicate a decline in profits to around £40,000 before charging taxation, financing costs and their personal incomes. On this basis profits might be expected to fall to £10,000 in the next year with falling sales revenues. 2. The small retail outlet in the shopping mall has continued to be reasonably successful although sales have stabilised before falling significantly in the last 3 months. They have retained their original opening hours for six days per week, although as before certain days are clearly less busy than others. The minimum wage requirements has meant that the friend of Jenny who was running the shop for her on two days of the week giving Jenny the chance to produce the jewellery for stock is no longer employed as the business could not justify the new costs involved. This has reduced Jenny’s free time and also meant that Davey is spending more time in the shop. There is some question about whether this part of the business is cost-effective. 3. Davey has continued to develop the web site to advertise the jewellery but has made limited progress. The site is still a bit basic and generally quite difficult to navigate through and pricing information and delivery lead time information is still missing. However, the major issue yet to be resolved concerns the availability of on-line ordering and payment systems. The costs associated with contracting a payment agency (e.g. pay pal) are too high, especially the fixed minimum monthly charge to be affordable in terms of the sales potentially available from this source. The site continues to experience around 70 hits per week, although only about 10% of these result in further e-mail enquiries around 30% from overseas. Developing this aspect of the business in the future would involve more work on the website and arranging other associated services (e.g. on-line payment system). An initial estimate for the professional development of the website is around £7,500 for the development and technical support and maintenance for the first 2 years. 4. Davey decided to leave his previous full time job as a car mechanic and now devotes his time solely to help running the jewellery business. He undertakes the administration and internal accounting etc. although a local Accountant finalises their accounts for the year and submit the tax returns etc. 5. The couple accepted the contract to supply jewellery to the major high street fashion retailer. The 12 month contract was for the design of a special range exclusively for the retailer and the manufacture and delivery. The contract has been reasonably successful although has not achieved the sales levels anticipated, achieving £85,000 and not the £125,000 anticipated. The customer is keen to continue the relationship and has offered a further 12 month contract on a similar basis as previously in terms of volume and supply arrangements. However, the retailer has indicated the need for a further reduction on the profit margins down to around 20% on the basis of the extreme pressure on prices across the whole of the retail sector. The minimum contractual order would be for 100 units per week though the forecast could require the small business to increase this to 200 units per week and possibly more if really successful. The business has employed two people on a part-time basis to handle the increased production work and Jenny has needed to train these staff and closely supervise the quality of the work. Davey has taken o the role of dealing with the orders from the purchasing office for the retail stores and to manage the stocks and despatch of items etc. The couple are not certain about the level of profits they are making on this contract but are worried by the potential loss of income if they do not agree to the 12 month contract being offered. 6. The business has increased its borrowing to £20,000 and in addition has an overdraft facility of a further £5,000. The overdraft facility is used to cover the difference in payments between paying for materials and the receipt of payments from customers including the credit card company. The couple have withdrawn very little money from the business, less than £10,000 in the last year preferring to reinvest the money into the business. The aim has been to plough the profits back in to the business to achieve growth for the future. The lease on the High Street unit has a further 4 years with rental arrangement set to increase in line with inflation. The value of the business is now estimated at £40,000 including stocks of materials and finished goods, equipment, computers and other assets. 7. The business is experiencing considerable difficulties with suppliers of the materials needed for the production of the jewellery, especially the precious metals such as gold and silver which have seen significant increases in price. Suppliers still demand cash on delivery or restrict the amount of credit that they will extend to the business. This continues to cause some disruption to production due to the absence of particular materials. There are other suppliers but establishing links with these takes some time and the credit arrangements, at least initially are likely to be very constrained. Increasingly, there is much less flexibility to negotiate with suppliers in terms of price, quantities and discounts. There are evident upward pressures on raw material costs and downward pressures on retail prices which inevitably squeeze the profit margins. Stage I Jenny and Davey, a young couple in their mid thirties have two young children aged 5 and 6. Jenny, who has no formal educational qualifications beyond her GCEs worked in a supermarket prior to finishing work to look after their children. Davey is a car mechanic with the local Honda dealership in Preston and has been on a number of company courses designed to improve his technical skills and supervision abilities since he was promoted to a supervisor in the vehicle workshop two years ago. Jenny has always wanted to run her own business, the thought of ‘being one’s own boss’ appealed to her after the supermarket experience. Although never having formally qualified in art or design, she believes that she is quite gifted in designing jewellery and other fashion items. Having experimented with making costume jewellery for friends and family in the last two years which was generally considered a success, Jenny now wishes to start her own business. The plan is for Jenny to work on designing and making the jewellery when the children are at school. There are several possible ways of selling the jewellery – via 1. high street stores – difficult to gain contract and profit margins would be reduced by around 25% 2. renting a stall at the local outdoor covered market – operates three days per week, rent for stall irrespective of sales and currently a waiting list for the stalls 3. renting stall at special regional and national events 4. personal selling via jewellery parties – either in person or through friends 5. special commissions for individuals Although she currently has very little stock of finished items she reckons that in a good week she could make around 30 items (i.e. roughly about one per hour on average), depending on the nature, complexity and detail of each item. If she were copying previous designs she could increase the output to around 40 per week and if designing something entirely new then the production rate might fall as low as 15 to 20 items. She reckons that she would need a finished stock of around 50 items at any one time for display and sale. It would be possible also to take orders from customers for specific items, possibly modifying the basis of the design or the colour of the stones and other materials used. The selling prices of the jewellery will vary according to the nature of the item, the cost of the materials used and the time taken. Jenny plans initially to add up the materials used and her time, costed at around £10 per hour to set the prices. She plans to add a further 10% to this figure to represent the profit margin on each item. Average prices are likely to be in the range of £15 to £55 per item and the hope is to sell around 20 per week initially, rising to around 40 per week after the first few months. Production of the jewellery itself is posing a problem for Jenny, as there is no spare room at home for her to store her equipment and to work. Previously she has done this on the kitchen table at nights when the children have gone to bed. Basically, what is needed is a workbench to hold her tools (e.g. small electric polishing and grinding machines; soldering equipment) and her hand tools, plus magnifying equipment and space to work. Secure storage of raw materials (e.g. semi-precious stones, coloured glass, silver and gold chains), the finished goods themselves and packaging materials is required. The home insurers have indicated that they would not be prepared to cover such items on the normal domestic insurance policy. In addition, Jenny would need some normal office furniture and facilities to organise and run the business from. Stage II Almost 12 months have passed since Jenny had started to think about starting her own jewellery business. What she had not appreciated was the number of things that needed to be looked into and the amount of information available. Jenny and Davey have not been idle or wasting time in last year as they have been working out some of the details for the business. Jenny in particular has been busy developing new designs, building up a stock of items, selling to family and friends and making new contacts in terms of possible sales outlets and sources of materials. Jenny has decided the following in terms of her new business: 1. She is preparing to take out a 2 year lease on a small retail unit in one of the city centre shopping malls. The unit is around 20 square metres and provides enough space for small workshop, secure storage and retail display area. The annual cost of the lease, excluding services such as electricity, is £10,000 per year with provision for an increase in the second year in line with inflation. Other costs such as electricity, telephone etc. are estimated at £2,500 per year. 2. Although there are some fitments in the unit already, it is estimated that a further £2,000 will be required to fully fit out the unit prior to opening. 3. The purchase of office equipment such as a till, computer and printer plus accessories and stationery will add a further £2,000. 4. Insurance estimates to cover the fixed assets and stock suggest a figure of £400 per year, though this would vary if any claims were made. 5. In addition to stocking her own designed goods, Jenny has decided to stock other branded jewellery items plus a range of small giftware and craftware items. Some of these will be purchased from national companies, local warehouses and directly from local people involved in craftware. The estimate at present is that the opening stock will require an investment of £6,000, representing almost 50% of her own produced items and 50% bought in. 6. The forecast sales are expected to average £1,200 per week in the first six months and then increase to an average £2,500 per week in the second six months. Thereafter, Jenny expects to grow her sales by around 10% per annum and keep the same profit margins, around 40% gross profit margin on average but closer to 50% on her own manufactured items. 7. After considering the offering of credit to customers and taking advice from others she has decided to use one of the credit card companies. Although this will cost in terms of commission on each sale it does avoid offering credit. However, she still plans to extend credit to friends and also sales done through parties etc. 8. Jenny still plans to use other less formal routes to seek business and has offered to host jewellery parties and provide commission to others on sales. 9. The suppliers of the bought in products, including raw materials, will require cash payments at the time of sale, since the new business will not have an established credit rating. 10. They are planning to open the shop on six days per week with Davey helping out on the Saturday. Jenny expects that there will be sufficient time to make the jewellery items in the quieter periods during the week and possibly at the weekend. In terms of their personal investment, Jenny and Davey think that they are able to raise the following: 1. Money from their own personal savings, around £3,000. 2. Cash investment from their parents of around £6,000. 3. Their home is currently worth around £175,000 and the mortgage outstanding is currently £125,000 and due to be repaid in 25years time. 4. They have other various loans amounting to around £25,000 all due for repayment within the next 5 years. Stage III Jenny has just completed the third year of running her business and although this has proved a very challenging experience for her and the rest of her family she is proud of her achievements. The key developments over the last two years include: 1. Initially, sales were much lower than anticipated but after the first eighteen months the sales increased to an average £2,500 per week, around £130,000 for the year. Sales have now slowed a little and are expected to grow by only 10% in the next year and maintaining this rate of increase for the foreseeable future. Almost 25% of the sales have been generated through the more informal routes of friends and family and jewellery parties hosted by individuals who get a small commission in the form of jewellery for their efforts. 2. The small retail outlet in the shopping mall has proved reasonably successful although Jenny had hoped that the sales would have built up more strongly. They have retained their original opening hours for six days per week, although certain days are clearly less busy than others. A friend of Jenny’s is now running the shop for her on two days of the week and although Jenny is also attending at the same time it does give her the chance to produce the jewellery for stock. The friend is not formally employed by the business and is paid £25 for each of the two days. Davey and other members of the family have helped out on Saturdays and other busy days of the week and at peak periods such as Christmas. 3. Davey has been experimenting with setting up a web site to advertise the jewellery. The site is still a bit basic and primarily consists of a series of photographs of items of jewellery, but with no prices and a simple e-mail contact address for anyone interested in making further enquiries. Although having only been operational for a few months the site has experienced around 50 hits per week, although only about 10% of these result in further e-mail enquiries. Some of the enquiries are from overseas. At present there are no facilities for ordering on-line or paying on-line. Davey thinks that there would be scope for developing this aspect of the business in the future but recognises that it would involve more work on the website and arranging other associated services (e.g. on-line payment system). However, such website developments may require professional expertise and ongoing support and maintenance, although Davey has not made any enquiries about such services or costs. 4. The success of the business to date and the feeling that the business has the capacity to grow has led to the couple considering if Davey should leave his present full time job as a car mechanic and devote his time solely to help running the jewellery business. He could undertake the administration and accounts etc. which the couple have found very demanding in terms of the time required and the forms to complete. They have paid a local Accountant to finalise their accounts for the year and submit the tax returns etc. whilst Davey has attended to the payment of invoices and other returns required. Some of the work may require Davey to undertake short training courses which he thinks might be provided at reasonable costs locally. 5. The buyer from a major high street fashion retailer has expressed an interest in the business’s jewellery designs and has proposed the possibility of a 12 month contract for the design of a special range exclusively for the retailer and the manufacture and delivery. The range would incorporate 15 items and the plan would be to then produce these in larger quantities to meet the demands of the various stores, the small business also being responsible for arranging the delivery to the 30 stores throughout the UK. The buyer recognises that it will be necessary to commit to a minimum order but would wish the flexibility to respond to the demand from the shops and produce different items according to the demand at the time (i.e. produce quantities of the 15 items according to the actual demand rather than forecast). The minimum contractual order would be for 100 units per week though the forecast could require the small business to increase this to 200 units per week and possibly more if really successful. No funding would be provided for the design stage and the small business would need to recover these costs through the price charged per item. It is expected that the profit margin on the units sold would be considerably lower than on the normal stock sold through their own shop, probably around 25% as against 50% normally. The buyer has indicated that they may increase the profit margin to 30% for items in excess of the minimum 100 per week. This venture would require Jenny to employ another one or two people, simply to produce the items from her designs, and she would need to closely supervise the quality of the work. Another person may also be required to deal with the orders from the purchasing office for the retail stores and to manage the stocks and despatch of items etc. The couple have estimated that they could more than double their existing sales, probably reaching £250,000 from this order alone, giving total sales of around £400,000 in the coming year. Although the profit per item would be lower they anticipate that after the additional costs they could generate profits around £40,000 with the opportunity for further contracts in the future if the designs prove successful. 6. The business currently has loan of £12,000 and an overdraft facility of a further £5,000. The overdraft facility is used to cover the difference in payments between paying for materials and the receipt of payments from customers including the credit card company. The business has only lost a small amount through customers failing to pay or theft from the shop, around £1,400 last year, with all of the credit card payments being secured. Jenny has withdrawn very little money from the business, a total of £12,000 over the first three years. The aim has been to plough the profits back in to the business to achieve growth for the future. The lease on the High Street unit has been extended for a further 5 years with a similar rental arrangement and the provision of this to increase in line with inflation. The value of the business is now estimated at £30,000 including stocks of materials and finished goods, equipment, computers and other assets. On this basis the business might be able to fund a further loan of £12,000 to invest in expansion, although this would heavily commit the company to paying interest charges. The lease on the high street unit is currently £11,200 per year. 7. The business has experienced some difficulties with suppliers of the materials needed for the production of the jewellery, as either thy demand cash on delivery or restrict the amount of credit that they will extend to the business. This has caused some disruption to production due to the absence of particular materials. There are other suppliers but establishing links with these takes some time and the credit arrangements, at least initially are likely to be very constrained. Jenny often finds that suppliers are reluctant to take her seriously when she seeks to negotiate price, quantities and discounts, with some suppliers often intimating that this is merely a hobby and not a business she is running. 8. Increasing the present staffing level from the two of them plus their family and friends to a small group of possibly four additional people poses some concerns for the couple. In addition to the training of those employed and managing their workload and quality, Jenny and Davey would be involved in additional paperwork and responsibilities. Davey has had some training and experience in his present job as workshop supervisor and believes that he should be able to use this in the business. They are also conscious of the need to resolve their own roles, responsibilities and authority within the business to ensure that everyone internally and externally understands this.
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