Plan B
Plan B is a marketing agency in Saudi Arabia. It is not your conventional agency as it does not deal in above the line marketing. It is an agency that does on the ground activities by catering to client’s needs through consumer insights.
The Cash Flow Scenario
They system and procedures a marketing agency like Plan B needs to go through in terms of its cash flow management is relatively complex and provides countless headaches along with it. In terms of the cash flow, I will explain how Plan B undergoes its accounts payables and accounts receivables when a project starts and finishes.
To depict the situation of how the system works here in terms of Accounts Payable (AP) and Accounts Receivables (AR), I will provide an example followed by an actual income statement, balance sheet, and cash flow statement from January 2015.
In the agency business, clients generally enforce 60-90 days of credit terms once the project is completed. Meaning that Plan B only get its full payment within 90 days of the project’s completion.
Plan B needs to pay 40% of the projects cost upfront to its suppliers in order to launch the project. The remaining Balance to the suppliers must be paid within 30 days of the project’s completion. Plan B also needs to invest 40% of the total cost up front which includes the following
• Paying for rentals,
• Set-up of project,
• Promoters and HR.
• HR being the training of promoters hired for specific client activities.
The tables below show the income statement of Plan B from 2014 and 2015 along with the Balance sheet of years 2013, 2014, and 2015 and a Cash Flow statement from 2015 highlighting the issue. It shows the company operated in loss, but also grew significantly in two years as well. The Raw Data for all 3 statements will be in the appendix. Below I will show graphs and tables indicating current trend and make an analysis.
Table 1
Table 2
1,200,000
Assets 2013
1,200,000
Liab & Equity 2013
1,000,000 1,000,000
800,000 800,000
600,000 600,000
400,000 400,000
200,000 200,000
– –
1 1
Table 5
1,000,000 1,000,000
500,000 500,000
2,500,000
Assets 2014
2,500,000
Liab & Equity 2014
2,000,000 2,000,000
1,500,000 1,500,000
– –
1 1
Table 6
Income Statement analysis
Table 1 and Table 2 indicate trends in Plan B’s income statement for the years 2014 and 2015
• Sales and the total cost of goods sold have marginally increased over the year
• A positive sign was the doubling in the Gross profit for Plan B
• However, the key issue the two tables highlight is the significant increase in the operating expenses. They jumped from 1.6M to 3.7M
• Thus, the loss for Plan B in one year increases by $265,727
• The level of Operational Leverage for Plan B in 2015 was much higher compared to 2014. Thus, Plan B becomes a riskier business as they rely heavily on the fixed expenses.
• Although the Operational leverage has looked positive in the last year, it has not been able to be absorbed by enough sales increase, hence still incurring losses.
• A commercial evolution can be noticed by increase in the Gross profit from 19% to 31.6%
• This was the combined effect in increase in sales along with a decrease in the COGS both in absolute and relative terms to sales.
• The Decrease in COGS has resulted from increase in client volume, bargaining power with the suppliers, and increasing proportion of high income solvent client base.
• The most significant and impactful numbers from the income statement are the 200% increase in Salary expenses. This was caused by the doubling of employees from 6 to 12 people. The volume increase aforementioned was accompanied by the price increase of high salaried managers
• Plan B’s financial expense and rent are the other 2 most significant income statement changes as well.
• Rent expense increased due to use of an extra warehouse for the storage of products from my father’s distribution business.
• The operating expenses of 2015 need to reach a consolidated point. From future onwards, Plan B must maintain 2015’s operating expenses as the maximum to be incurred; upon which they should look to reach critical mass to fully leverage on the level of operating expenses incurred in 2015.
Balance Sheet analysis
Tables 3.4,5, and 6 showcase the key aspects and ratios taken and summarized from the balance sheet.
• We can see from tables 5 and 6 that the assets of Plan B are being financed heavily from debt and not much from the equity. This means that there is less money being invested by the owner as form of equity; most investment is enabled from borrowed money.
• This can be negative as all these investments from debt will need to be paid back; which is further made difficult by company’s losses in 2015
• Plan B is highly leveraged as it relies mostly on the creditors. As can be seen from table 3, the debt ratio of Plan B kept increasing from 73% to 119%
• Another indication of Plan B’s poor performance is highlighted in Table 4 by the company’s current ratio
• In the year 2015, Plan B is in a critical situation and facing technical bankruptcy
• This is due to the company owing more money in the short term than it possesses in the same time frame as well as long term. Indeed, negative income and reimbursement of “account of owner” have eroded retained earnings and overall equity into negative territory.
140%
120%
100%
80%
60%
40%
20%
0% Debt ratio : risk measure
1 2 3 4
• As depicted by the detailed balance sheet in the appendix, most of the company’s liabilities consist short term obligations, due within less than a year. The issue that the company faces are also in the short term ability to meet liquidity obligations.
• The current ratio shows how Plan B cash or cash equivalents and assets collectable within less than a year do no suffice to honor payment obligations in the short term.
• Namely, the short liquidity ratio has declined from 1,4:1 (1,4 available to 1 due) to a shortage of 0,8.1, in 2013 and 2015 respectively.
•
• The collection performance of Plan B has plaid a major role in the cash at hand issue faced by Plan B.
• Namely, the collection of money after completion of an activity or the days of sales outstanding average 86 days over the three years of analysis.
• This was combined with the suppliers and promoters increasingly demanding to receive early payments, without necessarily granting the corresponding discount for early payment. Over the years of analysis, the days of payment to suppliers average 45 days.
• In addition to the immediate tension on Plan B’s liquidity, the lack of recognition for the early payment discount becomes an opportunity cost hitting Plan B profitability. Ability to capitalize on early payment discounts would allow entering a virtuous cycle of improving profitability and liquidity.
Cash Flow Summary
1,000,000
0
Actual Financial Accounts
The evolution of the balance sheet and income statement in 2014 and 2015 articulate into a degrading cash flow and eroding cash from 397 000 to only 131 270 in 2015.
As depicted in the appendix, the capacity to generate cash by Plan B from recurrent operating activities is negative. Compensation of negative cash flows from operations with debt funding is not sustainable in the mid to long term.
Plan B is really gripped tightly by the cash situation for just one project in one month. We pay most of the cost in advance and only receive the entire credit after almost 90 days of the project’s completion. Within those 90 days, Plan B must manage its working capital on a daily basis as well.
That was not going very well and suddenly Plan B was looking to halting its operations. This was a very fragile state for the company as clients wanted more projects to be started, but Plan B just did not have sufficient cash to finance those activities.
Appendix
The Plan B
Jan – Dec ’15
Profit and Loss Standard 03/30/16
January through December 2014
Jan – Dec ’14
Income
7,558,603
8,393,417
Sales
Total Sales
Total Cost Of Goods Sold 6,125,911 5,744,740
Gross profit 1,432,692 2,648,677
Operating Expenses
Salaries Expenses 1,240,781 2,480,400
Rent Expense 104,000 141,999
Financial Expense 22,000 97,937
Employee End Of Service Benefit 43,500 69,567
Employees Annual AirFare 17,500 50,451
Insurance 50,219
Admin/HR Exp 82,105 48,230
Petty Office Expense 8,054 32,604
Other Expenses 28,755
Employee GOSI 10,529 28,617
Pictching Expense 44,800 26,110
Computer and Internet Expenses 7,164 16,161
Equipment-Depreciation Expense 3,684 10,925
Bank Service Charges 412 9,516
leasehold Improvement-Depreciat 1,086 8,688
Furniture Depreciation Expense 1,490 8,328
Travel Expense 31,096 7,897
Communication Expense 1,828 6,212
Office Supplies 25,415 5,597
Printer & Stationary Expense 975 4,905
Profit To Investors 4,800
Utilities 1,546 4,024
Repairs and Maintenance 3,919 3,203
Meals and Entertainment Expense 120 2,418
Focus AMC 1,800
Emp Health Expense 1,106 1,408
Charity & Zakat 1,275
Branding Cost 1,700 800
Services 750
Employees Annual Ticket 8,510 0
Legal and Professional Fees 5,000 0
Refreshment Expense 1,164 0
Shoppertunity 400 0
Startup Expense 2,000 0
Hassan Advance For Activity 0
Total Operating Expenses 1,671,884 3,153,596
Net Income/Loss -239,192 -504,919
Balance sheet
Note
Assets Current assets:
Cash on hand and at banks
Accounts receivable prepaid expenses
Total current assets
Non Current assets:
Fixed assets , net
Total Non Current assets
Total Assets
Liabilities and owner’s equity Current liabilities:
Accounts payable Accrued expenses Zakat
Total current liabilities
Non – Current liabilities:
Provision for end of service benefits Total liabilities
owner’s equity
capital
account of owner Profits (loss) Retained Total owner’s equity
2,014 2,015
Cash flows from operating activities
Net income -230,215 -472,667
Adjustments of reconcile net income
Depreciation of fixed assets 6,260 27,941
Provision for end of service benefits 34,523 69,567
-189,432 -375,159
Changing operating assets and liabilities :
Receivables -1,203,178 -65,860
prepaid expenses 48,757 -30,630
Accounts payable 79,607 482,019
Accrued expenses 108,121 -169,001
Operating cash -1,156,125 -158,632
Cash flows from investing activities :
Payments for purchasing fixed assets -82,683 -68,754
Disposals in fixed assets
Change in Accumulated Dep -6,260 -27,941
Investing cash -88,943 -96,695
Cash flows from financing activities
Financial debt 739,960 482,019
account of owner 304,117 -291,688
Profit transferred to Partners’ account
Financing cash 1,044,077 190,331
Net increase in cash flows -200,991 -64,996
Cash balance at the beginning of the year 397,253 196,262
Cash balance at the end of the year 196,262 131,266
http://www.theplanb.me/
*Plan B Actual Financial Accounts
