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Keith Siilats R11

Spiro's Case Study.

 

a. Assuming an average month, ignoring wages, overhead and material costs, and rounding all figures to the nearest 1, show that Spiro's company created a cash surplus of 3800 per month.

Without the contract Spiro sold 12 cars per month. So total inflow was 27600. He created 30.45% profit margin on that. So the profit was 8404. As he bought 2 more cars with that money (worth of 2x2300=4600) the total cash surplus generated was 3804 approximately 3800.

b.(i) Make and state any assumptions necessary about cash flow forecasting.

1. Spiro will make profit first time in December.

2. Spiro will own maximum amount of 58700 in august, so he needs that much of overdraft.

3. Spiro will generate total profit of 44000 in January.

(ii) Was Maria right with her forecast?

Generally yes. Without contract cars Spiro generated a loss of 1240 per month. But it should not be forgotten that he bought two more cars each month, so the situation was not so bad as it looked like at the beginning (when Spiro would have stopped buying 2 extra cars he could have made profit)

c. Spiro might need to increase its overdraft limit. What could the bank manager think of that.

a. Spiro would like an extra overdraft not more than 10000 extra (8700). This is not very big sum compared to sales figure.

b. Spiro had a contract which generated profit and was guaranteed.

c. Spiro (and her wife) were good accountants and had drawn up a beautiful forecast.

d. Spiro had a huge stock to guarantee his overdraft.

e. Spiro was not exceeding its overdraft before.

f. Spiro could buy the contract cars not so many months earlier but after the first payments are starting to come. Then he would not need that amount of overdraft.

g. Car business depends on seasonal factors. Winter was coming and probably sales could decrease and Spiro will not sell 12 cars per month.

h. All figures were average and not precise, the costs could increase due to increase in stock etc.

i. Spiro was a sole trader with unlimited liability. So if something could happen Spiro must sell its property (he will go to live in one car as in the picture) and bank can get its money back.

j. Spiro does not have any other liabilities (debts, credit) so bank has bigger chances to get its money back.

k. Spiro's business depends on other uncertain things beside the contract as well. E.g. when Ron would leave the job Spiro would be in trouble.

l. None of the cars were insuranced. Spiro's business was in area with "bad reputation".

d. Using this case study to support your argument, outline the difficulties of running a sole trader business.

a. Unlimited liability. If something would happen to this contract Spiro would have to sell its own property.

b. Hard to expand. When Spiro wanted to deal with bigger contracts he was running short of cash.

c. All the business decisions had to be taken by himself.

d. Hard to borrow money. Usually higher interest rate.

e. He could not employ any special labour. Poor Ron had to wash cars and buy them etc. A bit bigger business could have affords to a manager.

f. Business was coming to Spiro's private life and disturbed him.

g. If something had happened to Spiro the firm would go into liquidation.

h. Always problems with labour, hard to employ (nobody wants to come to such a small business).

i. Sales are very uncertain in small companies. Many seasonal factors can affect them.

j. It was hard to forecast future because of the uncertainty. All the numbers in forecast were approximations which make investments to future hard to determine.

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