Accounting Take Away Paper

Candidate Number: 245993

Ebikum Ltd:

1. Forecast Cashflow

The following is the Cash Flow statement for Ebikum Ltd for the first three months of operations.
The forecast indicates that by the end of March, Ebikum Ltd will have a positive closing balance of
£1,560. Understanding the cash flow is crucial for businesses and forecasting plays a key role in
decision making. Thus, Ebikum having a positive closing balance means the firm is in the right track.
However, without the help from Hans father’s loan of £8000, Ebikum Ltd would have definitely had a
negative closing balance of £6440, which would mean Hans would be in a very poor situation as cash
out would have been more than cash in. Although, Hans can lower the Total Cash Out Balance for
the first three months significantly by not taking his own salary of £1000 a month. Furthermore, the
£3000 could instead be allocated into advertising which would most likely see an increase in Sales,
which was £8700 respectively in the first three months. Resulting to an increase cash in whilst a fall
in cash out, thus a positive closing balance. Moreover, the loan of £8000 was taken from Hans father
meaning there will not be significant pressure on the company for repayment. Lastly, Hans can shift
his business location to somewhere else where the rent would be much cheaper than £2000, which
is a lot of money for a start up company to pay as a rent.

2. Discounted Payback Period

The discounted payback period is used by firms to determine the profitability of a project. A
discounted payback period will give the number of months or years it takes for a company to break
even from undertaking the initial costs. For instance, the discounted Payback Period for Ebikum Ltd
is 15 months. Meaning, the following year March is when Ebikum Ltd will have a cumulative PV of
£10,232.24 and £8500 was the break even amount. It is not ideal for a firm to have a such long
payback period as a lot can go wrong within that time frame. Showing even further reasons as to
why Hans need to lower its Cash Outflows in order to run a healthy business.

3. Summary of Recommendations

Ebikum Ltd are facing some significant challenges such as high fixed costs in terms of rent,
equipment lease, insurance and technician salary. Resulting to Ebikum Ltd having significantly high
cash outflows in the initial months meaning if the revenue generated is inadequate to offset all these
expenses, the company may be forced to shut down.

However, since the market for e bikes are rapidly increasing,Ebikum Ltd will be significantly
profitable if the firm is able to handle initial losses. As forecasted by the Discounted Payback Period
it will take 15 months to reach break even. Although, the following month Ebikum is estimated to
make a further £4490.32 taking cumulative PV to £14,722.56

In Conclusion, Ebikum Ltd is of course not immune to risks but due to e bikes market growing
significantly, Hans will be reach his Break Even point relatively soon and be profitable very soon. All
of these can be achieved even earlier thank predicted if he is able to lower the Cash Outflow,
starting by not taking his own salary.

Appendix
I derived the discounted payback period by simply adding 5% of the total revenue generated on
March to get an estimated Cash In value for April and so on thus giving me the estimated Cash
Outflow. Similarly, to calculate the cash outflow I simply added 2% to the cash outflow for the
upcoming months by starting off from April which was £12500.