You came across a business for sale advertisement on one of the media sites that you were browsing. Since you have not been working since you completed your Advanced Diploma, you decided to discuss this business opportunity with four of your graduate friends, who are also looking for job opportunities. You considered closely looking at this opportunity.
The advertisement
Clean It Up (CIU) is a private company operating in the Buffalo City Metropolitan (BCM). Its primary business is refuse collection and disposal, mainly focussing on removing building rubbles from construction sites as well as garden refuse. The business has been operating in the BCM area for the past thirty-two years. With a number of active clients with long-term contracts, including Buffalo City Metropolitan Municipality, CIU is being disposed as a going concern. The business currently owns four delivery trucks, which are all in good working condition. All trucks are currently operating at full capacity. Financial statements for CIU will only be shared with those who show serious intention of buying the business.
Your situation:
Whilst you are interested in grabbing this opportunity, you and your friends, do not have the required capital. However, one of your friends, suggested that you prepare a business plan, which can be used to source funding from prospective funders. In the business plan, each of you will have to take leadership of public relations and marketing function; human resources function; operations function; and financial management function. As you are the only one with finance related background, you will lead the financial management function.

Before applying for funding, you decided to evaluate the current business to see its viability. After convincing the owner of CIU of your solid intensions to purchase the business, he provided you with the statement of income and statement of financial position for the last five years. These are presented below:

Five-year Comparative Statements of Income for CIU

Service incomeR2 188 800,00R1 575 936,00R1 050 624,00R1 365 811,20R1 297 520,64
DepreciationR124 687,50R117 812,50R117 812,50R113 125,00R113 125,00
LabourR806 400,00R596 252,15R425 894,39R608 420,56R553 109,60
FuelR345 600,00R133 843,71R127 470,20R196 108,00R178 280,00
Disposal feeR230 400,00R218 880,00R186 048,00R197 045,63R187 662,50
Operating profitR681 712,50R509 147,64R193 398,91R251 112,02R265 343,54
RepairsR96 000,00R119 000,00R69 000,00R80 000,00R62 000,00
Vehicle ServiceR24 000,00R23 200,00R22 000,00R20 400,00R19 600,00
Office spaceR21 879,11R20 837,25R19 845,00R18 900,00R18 000,00
InsuranceR21 057,45R20 247,55R19 468,80R18 720,00R18 000,00
Registration and LicensingR3 500,00R3 430,00R3 361,40R3 294,17R3 129,46
Interest expenseR29 561,11R26 393,85R29 326,50R29 925,00R28 500,00
Marketing commission (3%) of service income 

R65 664,00


R47 278,08


R31 518,72


R40 974,34


R38 925,62

Profit before taxR420 050,82R248 760,91R(1 121,51)R38 898,51R77 188,46
Profit available for distributionR168 020,33R99 504,36R            –R15 559,40R30 875,38

Five-year Comparative Statements of Income for CIU

Non-current assetsR1 032 500,00R1 044 500,00R1 058 000,00R977 500,00R1 000 500,00
Current assetsR179 520,00R170 544,00R102 326,40R122 791,68R128 931,26
Accounts receivablesR149 760,00R142 272,00R85 363,20R102 435,84R107 557,63
BankR29 760,00R28 272,00R16 963,20R20 355,84R21 373,63
Total AssetsR1 212 020,00R1 215 044,00R1 160 326,40R1 100 291,68R1 129 431,26




R630 583,79



R563 375,66



R523 573,91



R523 573,91



R517 350,15

CapitalR80 000,00R80 000,00R80 000,00R80 000,00R80 000,00
Accumulated profitsR550 583,79R483 375,66R443 573,91R443 573,91R437 350,15

Non-current liabilities


R547 800,00


R628 880,00


R631 6010,00


R557 800,00


R588 500,00

Long term loansR498 000,00R570 800,00R565 800,00R510 000,00R535 000,00
Short-term portion of the long- term loans 

R49 800,00


R58 080,00


R65 800,00


R47 800,00


R53 500,00


Current liabilities


R33 636,21


R22 788,34


R5 152,49


R18 917,77


R23 581,11

Total equity and liabilitiesR1 212 020,00R1 215 044,00R1 160 326,40R1 100 291,68R1 129 431,26

Your friend, who is responsible for public relations and marketing, predicts the market share for the coming financial year to increase by 10%.

Q.1.1 As the financial director in the business plan, discuss the kinds of decisions you and your function will be responsible for. You need to provide various examples based on the provided business and operations. Three marks will be awarded for examples provided. (12)
Q.1.2 Provide reasons why the primary objective of your function (financial management) will not and should not be to maximise the profits of the business. (10)

Q.2 As part of the business evaluation/analysis, carry out the following:
Q.2.1 Prepare a statement of cash flows for 2022 financial year. (18)
Q.2.2 Prepare standardised financial statements for the 5-year period. How would you explain the performance of the company over the 5–year period based on the standardised financial statements you prepared? (28)
Q.2.3 Calculate and explain any three of the following ratios for the 5-year period:
Q.2.3.1 Profitability (21)
Q.2.3.2 Liquidity (21)
Q.2.3.3 Long-term solvency (21)
Q.2.3.4 Asset management (21)
Q.2.4 Based on you analysis and evaluation from Q.2.1 to Q.2.3, would you think the investment is worth the risk? Why or why not? (3)

Q.3 Prepare/calculate the following:
Q.3.1 The rate of growth required to sustain growth without seeking external funding (5)
Q.3.2 The sustainable growth rate (5)
Q.3.2 Prepare the following pro-forma financial statements using the percentage of sales approach:
Q.3.2.1 Statement of income (8)
Q.3.2.2 Statement of financial position (8)
Q.3.2.3 Discuss how the plug can be funded or be used. (4)

Answers to Above Questions on Financial Management

Answer 1: As a finance director in the business plan, the kind of decision that I need to make is to evaluate the profitability performance of the company in order to identify its viability in the long run, assist its revenues generating performance over the years, and assessment of its current assets and liabilities, and the major decision with respect to whether to acquire the business or not.

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