Case study: The store turned over £480,000 in 2018, but cost of goods sold was £360,000 and staff and other operating costs were £140,000. The only good news is that it appears that while the previous manager had run down the stock, he had increased the cash at the bank and there is a positive balance of £136,000 in the store’s bank account. Only £10,000 is due to suppliers who provide the feed and agricultural supplies on 30 days credit terms. Customers of Aggro also receive 30 days credit and the debtors balance is currently £80,000. The manager meets with the Chairman of the Board and discusses the following: Stocks and margins: The manager observes that stocks have been run down and that the store cannot sell what it does not have. Additionally, the lack of stock is reducing customer interest in the store and leading to less footfall in the premises. Further, the focus on agricultural products, particularly animal feed has led to very low margins as the market for these products is very competitive and particularly so with the haulage contractors undercutting them on the feed. The manager would like to introduce a wider range of stock lines, such as hardware and other goods, which have much higher margins. The manager calculates that the animal feed has an average margin of 10%, with the other agricultural products having an average margin of 35%. The current product mix is 40% animal feed and 60% other agricultural products. The manager argues that the goods he would like to introduce carry margins of 60-100% with an average of 80% envisaged. He estimates that any such stock introduced will turnover every six months, but accepts that there is uncertainty as they have never sold this type of thing before, so he suggests that there is a 20% chance that stocks might turn over every four months and a 30% chance that they might only turn over every 12 months. The Chairman acknowledges the problem and concedes that there is a market for other products as the islanders currently have to order many things on the internet and wait for their delivery by sea. This is expensive as mainland companies always charge a premium for delivery to the islands. Nevertheless, he is unsure of diversifying in this way. He has been chairing the board for the last 15 years and feels strongly that there is a need to ensure a retention of focus on the agricultural side as that was the original purpose of the business. He also argues that to bring in these new lines would require the purchase of a lot of new stock, which would be very expensive. Also, the store in its current configuration does not have the display racking for new lines and display racking is also very expensive. On this last point the manger observes that the large food store on the island is currently being upgraded and he has spoken to its manager about their old racks. He has got an assurance that he can have as much of the racking as he wants as the food store would otherwise have to pay for its disposal. Using staff from Aggro Stores, supported by casual workers to collect and assemble the racking could be done for about £3,000, he argues. This would allow for up to £160,000 of stock (at cost) to be carried. He also argues that some redecoration is required to the area of the store that he plans to use, but that it can be done for another £3,000. As soon as possible he would like to redecorate and refit the rest of the store at a further cost of £10,000. Buildings and infrastructure: Finally, he raises the issue of the car park. He argues that spreading gravel in the car park will stabilise the surface and make it much more pleasant for customers. This will cost £5,000, but will be good for five years and he estimates will increase footfall in the store. The additional footfall will, he estimates, increase the sales of their core animal feed and agricultural supplies (non-building) by 30% of their current level for each of the next three years, so that in 3 years time, sales will have increased by 90%. He believes that the redecoration and refitting of the part of the store that currently holds this core stock would increase footfall and sales by another 10% each year from current levels. produce a five year plan that the manager and the Chairman can present to the Board as a way forward for the business that will ensure its future prosperity. You should include budgets and cash flow forecasts for the alternatives and show clearly (in appendices) how you have arrived at the numbers that you present. Clearly justify in the report the choices you have made, discussing in particular how you think the customers and competitors will respond to the actions of Aggro.
Case study:
The store turned over £480,000 in 2018, but cost of goods sold was £360,000 and staff and other operating costs were £140,000. The only good news is that it appears that while the previous manager had run down the stock, he had increased the cash at the bank and there is a positive balance of £136,000 in the store’s bank account. Only £10,000 is due to suppliers who provide the feed and agricultural supplies on 30 days credit terms. Customers of Aggro also receive 30 days credit and the debtors balance is currently £80,000.
The manager meets with the Chairman of the Board and discusses the following:
Stocks and margins:
The manager observes that stocks have been run down and that the store cannot sell what it does not have. Additionally, the lack of stock is reducing customer interest in the store and leading to less footfall in the premises. Further, the focus on agricultural products, particularly animal feed has led to very low margins as the market for these products is very competitive and particularly so with the haulage contractors undercutting them on the feed. The manager would like to introduce a wider range of stock lines, such as hardware and other goods, which have much higher margins. The manager calculates that the animal feed has an average margin of 10%, with the other agricultural products having an average margin of 35%. The current product mix is 40% animal feed and 60% other agricultural products. The manager argues that the goods he would like to introduce carry margins of 60-100% with an average of 80% envisaged. He estimates that any such stock introduced will turnover every six months, but accepts that there is uncertainty as they have never sold this type of thing before, so he suggests that there is a 20% chance that stocks might turn over every four months and a 30% chance that they might only turn over every 12 months.
The Chairman acknowledges the problem and concedes that there is a market for other products as the islanders currently have to order many things on the internet and wait for their delivery by sea. This is expensive as mainland companies always charge a premium for delivery to the islands. Nevertheless, he is unsure of diversifying in this way. He has been chairing the board for the last 15 years and feels strongly that there is a need to ensure a retention of focus on the agricultural side as that was the original purpose of the business. He also argues that to bring in these new lines would require the purchase of a lot of new stock, which would be very expensive. Also, the store in its current configuration does not have the display racking for new lines and display racking is also very expensive.
On this last point the manger observes that the large food store on the island is currently being upgraded and he has spoken to its manager about their old racks. He has got an assurance that he can have as much of the racking as he wants as the food store would otherwise have to pay for its disposal. Using staff from Aggro Stores, supported by casual workers to collect and assemble the racking could be done for about £3,000, he argues. This would allow for up to £160,000 of stock (at cost) to be carried. He also argues that some redecoration is required to the area of the store that he plans to use, but that it can be done for another £3,000. As soon as possible he would like to redecorate and refit the rest of the store at a further cost of £10,000.
Buildings and infrastructure:
Finally, he raises the issue of the car park. He argues that spreading gravel in the car park will stabilise the surface and make it much more pleasant for customers. This will cost £5,000, but will be good for five years and he estimates will increase footfall in the store. The additional footfall will, he estimates, increase the sales of their core animal feed and agricultural supplies (non-building) by 30% of their current level for each of the next three years, so that in 3 years time, sales will have increased by 90%. He believes that the redecoration and refitting of the part of the store that currently holds this core stock would increase footfall and sales by another 10% each year from current levels.
- produce a five year plan that the manager and the Chairman can present to the Board as a way forward for the business that will ensure its future prosperity. You should include budgets and cash flow forecasts for the alternatives and show clearly (in appendices) how you have arrived at the numbers that you present. Clearly justify in the report the choices you have made, discussing in particular how you think the customers and competitors will respond to the actions of Aggro.
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