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

  2022 2021 2020 2019 2018
Service income R2 188 800,00 R1 575 936,00 R1 050 624,00 R1 365 811,20 R1 297 520,64
Depreciation R124 687,50 R117 812,50 R117 812,50 R113 125,00 R113 125,00
Labour R806 400,00 R596 252,15 R425 894,39 R608 420,56 R553 109,60
Fuel R345 600,00 R133 843,71 R127 470,20 R196 108,00 R178 280,00
Disposal fee R230 400,00 R218 880,00 R186 048,00 R197 045,63 R187 662,50
Operating profit R681 712,50 R509 147,64 R193 398,91 R251 112,02 R265 343,54
Repairs R96 000,00 R119 000,00 R69 000,00 R80 000,00 R62 000,00
Vehicle Service R24 000,00 R23 200,00 R22 000,00 R20 400,00 R19 600,00
Office space R21 879,11 R20 837,25 R19 845,00 R18 900,00 R18 000,00
Insurance R21 057,45 R20 247,55 R19 468,80 R18 720,00 R18 000,00
Registration and Licensing R3 500,00 R3 430,00 R3 361,40 R3 294,17 R3 129,46
Interest expense R29 561,11 R26 393,85 R29 326,50 R29 925,00 R28 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 tax R420 050,82 R248 760,91 R(1 121,51) R38 898,51 R77 188,46
Profit available for distribution R168 020,33 R99 504,36 R            – R15 559,40 R30 875,38

Five-year Comparative Statements of Income for CIU

  2022 2021 2020 2019 2018
Non-current assets R1 032 500,00 R1 044 500,00 R1 058 000,00 R977 500,00 R1 000 500,00
Current assets R179 520,00 R170 544,00 R102 326,40 R122 791,68 R128 931,26
Accounts receivables R149 760,00 R142 272,00 R85 363,20 R102 435,84 R107 557,63
Bank R29 760,00 R28 272,00 R16 963,20 R20 355,84 R21 373,63
Total Assets R1 212 020,00 R1 215 044,00 R1 160 326,40 R1 100 291,68 R1 129 431,26




R630 583,79



R563 375,66



R523 573,91



R523 573,91



R517 350,15

Capital R80 000,00 R80 000,00 R80 000,00 R80 000,00 R80 000,00
Accumulated profits R550 583,79 R483 375,66 R443 573,91 R443 573,91 R437 350,15

Non-current liabilities


R547 800,00


R628 880,00


R631 6010,00


R557 800,00


R588 500,00

Long term loans R498 000,00 R570 800,00 R565 800,00 R510 000,00 R535 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 liabilities R1 212 020,00 R1 215 044,00 R1 160 326,40 R1 100 291,68 R1 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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