CASE STUDY
Imagine it is now 31st March 2022.
When Mark left university, he decided to run a business selling and repairing computers. In order to do this, he set up a limited company, Datahelp Limited.
He planned to deposit £100 in the company’s bank account on 1 January 2022 and issue 100 shares, with a nominal value of £1 each, in his own name. He also planned for the company to borrow £8,000 from his father
Mark planned to rent premises for his business at £2,000 a month and lease test and IT equipment for £600 a month. He would pay £4,000 for signage and furniture.
For each of the first two months he would spend £7,500 on computers for resale and components for repairs. In the third month he hoped to buy £7,000 of computers on credit.
At the outset, he would hire a technician, at a cost of £2,000 a month, to do the repair work, whilst he mostly dealt with selling and administration. He would pay himself £1,000 a month in salary and planned to take further income as dividends.
He estimated that he would use £200 worth of electricity per month and expected to get the first bill at the beginning of April. He would pay £1,200 for 12 months’ insurance.
Other expenses paid for during the first 3 months would be:
£ per month
Rates 333
Utilities (excluding electricity) 300
Advertising 300
Mileage (not deliveries) 250
Each month he hoped to sell computers for £8,667 and charge £2,500 for repairs
At the end of 3 months he estimated that he would have inventory, of unsold computers, which would have cost him £10,000
He estimated that wear and tear on the long-term assets of the business would amount to about £800 a year, so they would need replacing after about 5 years (5 x £800 = £4,000)
Now that he has been trading for 3 months, Mark has produced a budgetary control report and cashflow statement for the 3 months and a Statement of Financial Position for 31st March and he has calculated some key financial ratios. These are shown below.
He spent an extra £1,000 on advertising, which increased the volume of both sales and repairs by 20%.
Mark’s father would very much like his £8,000 back, so Mark needs to consider how he might be able to repay the loan. He has no other family or friends able to provide funding.
Question
Read the case study about Datahelp Ltd, at the end of this question, and produce a report on the risks and rewards of the business.
Your answer should not exceed 1,500 words.