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Chapter 8: FINANCE The financial model It will be very necessary to have worked out
the likely financial basis for the bookshop. Banks will ask for it and
backers will demand it - and it will need to stand up to careful examination,
despite the need to make estimates of future performance on the slimmest
of data. Essential steps to be taken first are:- † Estimate likely total turnover month
by month and for the first three years and then break it down into different
merchandize categories †Arrive at likely gross margin, by assessing
the average to be earned on each category and then make an estimate
for shrinkage (this can be as high as 2% of turnover) Produce lists of costs: occupancy, staff,
other running costs Estimate investment in stock and decide
on the rate at which it needs to be written down Arrive at net margin less depreciation
for offsetting the capital investment and decide on the criteria for
doing this. This should then be the basis for a financial
model and enable the necessary documents for a business plan to be produced.
The funding basis for the enterprise Most book store enterprises need significant
capital investment. For not only will there be sizeable set up cost
but working capital will be needed to invest in stock which may well
turn over more slowly than a normal pay back period would allow. Ideally
the stock investment ought to be more or less in balance with four times
stock turn being matched by a three month credit period from suppliers,
but in the initial period at least this is not likely to be achievable,
especially if inflation rates are high. Investment in the business The premises If a site is taken as leasehold, then it is very possible that there will need to be building works before the building can be brought up to a standard necessary to house the operation. It is very likely for example, that a new staircase will be needed and that lifts (even if only for goods) will need to be installed. This element in the package can be very capital intensive and is impossible to estimate until a specific site is found. Shop design and layout Dependant on the state of the premises. Actual background surface preparation and painting is not expensive, unless the flooring needs to be rebuilt. Floor coverings can be acquired cheaply, yet to good effect. Fixtures and fittings Once the shop is laid out, the fixturing need not be expensive, especially if bought in a ready made form. Lighting and heating and/or air conditioning can be a significant cost. Electronic equipment Computers, printers, CD-ROM drives, Audio Visual equipment, communications equipment, tills, credit transaction machines and a variety of miscellaneous items. An allowance is needed for relevant software and for installation, including dedicated lines and buffers. Stock A heavy investment in merchandize is
necessary. The costs involved can be, to some extent, deferred, subject
to negotiations with publishers about extended terms for opening stock,
and up to five months credit is possible. Sources of Investment The European Investment Bank or European Bank
for Reconstruction and Development The European Investment Bank and the European Bank for Reconstruction and Development should both be approachable. The EBRD (The Bank publishes a useful EBRD Directory of information sources, which may well be a vade mecum for the development of this project) is known to be prepared to back start-up businesses but the process of raising cash in this way is said to be lengthy. However it may well be part of the process of raising capital support to talk to the people at this bank. Charitable foundations There may well be charitable organizations whose objects would be fulfilled by supporting a bookselling venture. One such, the Soros Foundation has been active in Eastern Europe. Venture Capital organizations The Anglo American finance sector is particularly known for the concept of latter-day merchant banking or venture capital companies and a number of these operate on an international basis. An approach to one of these venture capital providers (Amongst the British Venture Capital Association members there are several companies who may be a possible source of funds, e.g. 3i, Schroder Ventures, Questor, Electra and Candover) would need the very careful preparation of a business plan put together with the assistance of one of the larger international accounting companies who have experience in presenting potential venture's business plans. The investment arms of banks European clearing or merchant banks may be interested in the idea of a long term investment, provided they can be persuaded that the prospect of a satisfactory return on the investment is a good one and realistic. Otherwise banks are good for short term funding (the 'overdraft') to cover troughs in the cash flow. Share holding by managers and staff Some form of co-operative venture is
possible, although care would need to be taken to ensure that someone
was seen to be clearly in charge Otherwise staff investment in the bookshop
is probably best arrived at by profit sharing schemes. Capital costs Interest Capital investment of any kind will cost money and some forms (e.g. a bank) the costs will be inexorable, and not capable of being delayed. Venture capital is usually provided on the basis of a twice yearly dividend, which again is inexorable if the company is actually making a profit. allowance for both these items in any forecast profit and loss account. Depreciation All items which constitute the share holders investment will require writing down at regular intervals and the amount should appear in the profit and loss account. Normal practice varies but as a general rule the following rates of depreciation can be adopted: Building and building improvements the term of the lease Fixtures and fittings over 10 years Electronic equipment over 3 years Stock in stages: 25% after 6 months; 25% after a year the remaining 50% after one year Fixed Costs Accountants vary in their treatment of the allocation of costs. Fixed costs are regarded as inevitable if the business is to be carried forward, whereas other costs vary depending on the rate at which the business proceeds. Occupation costs Rent, local taxes and any service charges attached to the property and must be paid regardless of the level of trade. Occupation costs can amount to as much as 15% of the turnover and since prompt payment is nearly always demanded, this element of the costs can have a significant effect on planning cash flow forecasts. Note should be taken of the effect the shape and configuration of the store has on occupation costs. (The Section on starting up above refers). Administration Costs are imponderable for the necessary back-up to the retail staff in the organization, until the size and scope of the book store is established. Allowance is needed for office staff and equipment to provide accounting and other services and staff for the goods in function. Staff The core staff are a fixed cost because they are essential for the running of the shop and are therefore a predictable and steady overhead (but see also below under variable costs), Staff costs can be affected by the configuration of the space of the store, e.g. multi-floor layouts as opposed to a single floor tend towards higher staff costs. It should be reckoned that staff costs are likely to be in the region of 8 - 10% of turnover. Utilities Energy costs together with water supplies become largely predictable once the store is up and running. Obviously the must be borne and therefore represent an established fixed cost. Care must be taken to examine these costs closely, since significant savings can be made by adopting the correct tariffs from the service providers. Fees Whilst this item can be variable depending
on the commissioning of external advisors work, the fixed element is
for the fee to be paid to auditors. Variable Costs Stock is variable only in the sense that it will vary with sales achievements. A basic level of stock is obviously essential and arguments about this will continue as long as there are booksellers to interpret the rules variously. Staff - can appear as a variable item, since the management will need to increase or decrease staffing levels, depending on the level of turnover. Selling costs - marketing and promotional costs e.g. advertising, printing etc., are variable in the sense that management has the ability to plan when such expenditure be made and to manipulate commitment and payment to suit the state of the cash flow. Running costs: cleaning, maintenance - similarly running costs can be made variable in that in times of stringency they can be cut to the minimum. Taxation - allowance must be made for
this item given that it is intended that the bookshop will make a profit.
A fully detailed business
plan is now possible and the potential bookseller is ready to face their
potential suppliers of funds for the business - an another worthwhile
bookshop is launched! APPENDICES Preparing Company Accounts A proper assessment of all cost centres will enable the forecasts for the following documents to be prepared, firstly for the business plan to lunch the enterprise, and thereafter to provide management with the necessary tools to control the business and to provide satisfactory documents for the share holders. The Profit and Loss of Account Will be a product of the nominal ledger, with the proviso that some elements will have to be estimated until the statutory audit. Sales are given as are the costs, both fixed and variable, as outlined above. Capital costs appear as a depreciation figure and the purchase of stock in trade stock does not appear at all unless it is being written down. Costs are set against sales, with an estimated gross margin, being calculated on the basis of an average discount at which stock is purchased being deducted from sales for the period, less an allowance for shrinkage. The Balance sheet This document is a product of the profit and loss account and ‘takes a picture’ of the state of the business at any point at which it is cast. It is in this document the investment in the company is set against the ways in which the funds have been used.
The Statement on the Source
and Application for Funds
The Cash Flow Forecast A crucial management document, which should be kept constantly up-to-date. It shows how the income from sales is set against necessary out goings, at their point of payment. It has a direct bearing on predicting whether bills can be paid on time and what the effect on borrowing facilities is going to be. Sales that provide the income are predictable with experience, and that month by month sales forecasts of mature businesses can be estimated with a margin of error of only one or two per cent. This is not the case for a start-up business in the foreseeable future and so the management of funds (cash) will take on a crucial nature. Failure to pay suppliers within the prescribed
credit period will seriously dent their confidence in the enterprise
and may well adversely affect supplies, thus damaging the business.
account of this situation must be taken into account when raising funds
for the business. II. An Operations Manual Outline
Contents of an operations manual
1. Merchandize Policy and Practice
III. Opening a bookshop: A Conjectural Financial Model Year one might look like this:- INCOME EXPENDITURE This is clearly not yet a business, so the second year needs to be looked at differently:- INCOME EXPENDITURE IV. An Outline Business plan for the Opening of a bookshop Contents:
Management Profile Directors (short biographies) Key staff Organizational structure Size, nature and growth Demographic changes Retailing and economic situation Future trends SOURCES OF FURTHER INFORMATION ASFODEL Le Metier de libraire Editions du Cercle
de la Librarie 1995 339 pp. ISBN 2-7654-0605-7
American Book Trade Directory 1997-8
RR Bowker
Zell, Hans (ed) African Books in PrintHans
Zell Publishers/Bowker/Saur STAFF: Terms & Conditions; contents of a staff manual CONSUMER AND RETAIL LAW FOR THE BOOKSHOP
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