CASE STUDY: Bobs Bike & Bobs Cafe

2014/15

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Case Study: Family Business Evaluation

Scenario:
Bob Brown: Owner
Sophie Brown: Manageress
Bob Brown and his wife Sophie run two businesses - a bicycle shop called Bobs Bikes
and an internet caf called Bobs caf. They have run them for several years, both in
rented shop premises. Sophie is a computer technician and runs the internet caf.
In this shop Bob sells new and reconditioned second hand bikes and also runs a repair
service, with the help of a part-time assistant. The business has been moderately
profitable and has provided Bob with enough to live on. Bob, however, is concerned that
his business is in decline. Local parking restrictions near to his shop have increased and
people are parking in a multi-storey at the other end of town. Before the restrictions were
imposed they used to park in a large free car park in the next street to Bobs shop , and so
a lot of people would pass his shop on the way into town. This no longer happens and
Bob thinks that general awareness of the existence of his business has declined. While he
still gets a lot of trade from cycling enthusiasts, his sales of childrens bicycles have
declined and he didnt sell as many as expected just before Christmas. Bob suspects that a
lot of this trade has been transferred to the bicycle and car maintenance retailing chain
store in the towns main shopping centre.
Sales of more expensive bikes to cycling enthusiasts are the more profitable end of Bobs
business. His inventories of this type of bike are at around the usual level at 28 February,
which is Bobs year end. However, the inventory room is crammed full of the cheaper
bikes, reflecting the fact that Christmas sales were lower than expected. Furthermore,
recent recession had an impact on his sales figures as well. Bob has a few ideas on how
to improve the sales figure:
1. Providing discount for customers introducing new clients to the business
2. Offering special promotions for loyal customers
3. Sponsoring school projects promoting the benefits of cycling
It is now early March 2014. Bob is anxious to get the annual accounts prepared so that he
can assess the overall effects of the downturn in trade on his profitability. He is worried
about both the immediate and the longer-term future of his business. The business bank
account balance at 28 February 2014 is quite a bit lower than it was at the previous year
end.

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The accountants prepared the following ratio table:

LIQUIDITY RATIO
CURRENT RATIO
QUICK RATIO
EFFICIENCY RATIO
RECEIVABLE DAYS
PAYABLE DAYS
INVENTORY TURNOVER
DAYS
PROFITABILITY RATIO
GROSS PROFIT MARGIN
OPERATING PROFIT
MARGIN
NET PROFIT
PERCENTAGE
RETURN ON CAPITAL
EMPLOYED
INVESTORS RATIO
EARNING PER SHARE
PRICE EARNING RATIO
FINANCIAL RATIO
INTEREST COVER

2012

2013

0.66:1
0.58:1

0.83:1
0.74:1

356
1574
83

186
1046
29

51%
45%

39%
30%

20%

28%

22%

27%

12c
13 times

47c
3 times

4 times

2 times

Bobs Caf
Bob believes that the internet caf is more profitable the Bobs bikes business. In addition
to running the internet caf Sophie also provides computer upgrade/repair services,
including:
- Installing software
- Upgrading software or hardware
- Cleaning and reconfiguration of the computers
In addition, Sophie provides printing services, fax services and money wiring.
The caf is quite popular due to its online gaming facility. The broadband for the caf is
quite good and the computer specification allows the customers to play the online game
without any interruption. However, the recent news with regard to teenagers addicted to
online gaming (see appendix Two) has given Sophie cause for concern.
Unlike Bob, Sophie is more worried about cash flow than profitability. Although the
income statement shows a healthy profit in the statement of comprehensive income, the
company bank overdraft had been increasing for the last two years. She could not
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understand the reasons behind such increase. She has no problem in having a full house
every day in her internet caf and a couple of years ago she started selling stationery and
computer parts as well. In order to increase her sales figures she had provided credit
sales to some of her loyal customers. Generally they seem to be paying their debts on
time. However there are some who forget to pay and she has to send reminder letters. On
receiving the reminder letters, the customers either pay immediately or request a payment
plan. Sophie has not come across bad debtors who refuse to pay off the debt. The
financial report for the caf is provided below.
Statement of Financial
Position as at 31
December

2013

2012

00
0

00
0

800
1,000

500
600

1,800

1,100

1,250
900
0
2,150
3,950

800
600
20
1,420
2,520

1,200
200
400
1,800

1000
150
250
1,400

800

400

900
50
400
1,350
2,150

600
40
80
720
1,120

3,950

2,520

Non-current assets
Land and buildings
Equipment
Property, plant and
equipment
Current assets
Inventory
Receivables
Cash at bank
Total current assets
Total assets
Equity
Equity share capital
Share premium account
Retained income
Non-current liabilities
Long term loan
Current liabilities
Payables and accruals
Taxation
Bank overdraft
Total current liabilities
Total liabilities
Total equity and
liabilities

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Income statement for the year ended 31

December 2013

000
Sales
Cost of Sales

000

1,500
800

Gross profit

700
Operating expenses
Administration expenses
Other expenses
Total expenditures
Profit before tax

150
80
45
275
425
5
0
375

Tax
Profit after tax

Note: interest charge of 70,000 is included within operating expenses.

Cash flow statement for the year ended 31 December 2013
000
Operations
Operating profit (Profit before interest and tax)

495

Depreciation charges

280

Gain on land

-40

Loss on equipment

40

Increase in inventory

-450

Increase in receivables

-300

Increase in payables

300

Interest paid

-70

Tax paid

-40

Cash flow from operations

215

Investment
Capital

-1,050

Receipts from sales of non-current assets

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Financing
Equity dividends paid

-225

Issue of equity share capital

250

Issue of debenture loan

400

Decrease in cash

-340

Appendix One:
Suggested Layout
1.0 Analysis of the company: Briefly describe the problems faced by the company. You may use
point form to list the problems outlined in the case study. You may also list the problems you
foresee in the future. Remember to clearly state your assumptions
2.0 Possible solutions: outline your suggested solutions to the problems identified. Remember to
document all your assumptions.
3.0 Company performance: provide an analysis of the company performance based on the given
ratios interlink them to identify the linkage between the problem you have identified and the
impact of your suggested solutions.
4.0 Reflection: provide summary of strengths and weakness of your report. You may list the
information you would require to enhance your work.

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