FInance Case Study

Business Finance Case Study
-- Ted’s Taxis (TT) to Ted’s Transport Ltd. (TTL)
Ted’s Taxis: Key words Concept
Ted set up his business as a sole trader 10 Sole trader

years ago in country X. He used his own His own
savings and a
savings and a bank loan to finance a long- bank loan
term capital requirements of equipment and
Crowdfunding
vehicles for his taxi business. He decided NOT
Overdraft
to consider crowdfunding or take out an
overdraft.
The business is located in Main City and has

been very successful every year since the
business was started. Ted has retained some
of his profit each year to re-invest back into
the business.
a. Define “retained profit”
b. Identify two short-term sources of finance that Ted could use.
c. Outline one advantage and one disadvantage for Ted if he has used
crowdfunding to start his own business.
d. Outline the Pros vs. Cons for bank loan vs. overdraft.
Ted’s Taxis (TT) now has 10 taxi cabs, as

Merger or
Ted has bought a new taxi each year since the economies of
scale
business started.
However, Ted has leased two trucks to expand

his business into a different type of market.
He wants to transport materials and finished
goods for other businesses. However, this will
Customers
mean that he will have to wait a long time to are able to
buy goods on
be paid, as other business will expect to get credit, and
trade credit arrangements from TT. Ted wants suppliers
can attract
to grow this other side of the business and is more
customers by
changing the business to a private limited not
demanding
company called Ted’s Transport Ltd. cash up
front
e. List all the types of private firms in general.

Sole proprietorships, limited liability corporations (LLCs), S
corporations (S-corps) and C corporations (C-corps)
f. Define “leasing”
Leasing the hiring out by one firm (the lessor) of an ASSET such as
a factory building, piece of machinery or vehicle to another firm
(the lessee) in return for the payment of an agreed rental.
g. Identify two reasons why micro-finance would NOT be used by Ted to

expand his business
Harsh Repayment method. Microfinance companies adopt a harsh
repayment method in absence of legit protocol and compliances. As
these companies work with strict compliances, they can manipulate
their customers for repayment.
h. Do you think a private limited company should take out a loan or sell
more shares when expanding the business? Justify your answer.
Ted changes the business into a private An income

statement is
limited company called Ted’s Transport a financial
statement
limited (TTL). Ted’s family and friends that shows
bought shares in TTL. you the
company's
income and
expenditures
The taxi part of the business is doing well but .
it still has three months in the year when the
number of customers is reduced. The revenue A
shareholder
from the truck transport part of the business also
referred to
has continued to increase as Ted has attracted as a
many new customers from business located stockholder,
is a person,
around Main City. company, or
institution
that owns at
Ted has produced the following income least one
share of a
statements for this year and last year for his company's
stock, known
shareholders. as equity.
Calculate the figures missing.
A
B
C
D
E
F
i. Define “income statement’
j. How is revenue calculated?
k. Identify two examples of expense for TTL.
l. Explain two reasons why stakeholders of TTL would want to look at its
income statement.
m. Explain two reasons why making a profit is important to TTL.
n. Do you think a business should focus on increasing profit or increasing

revenue? Justify your answer.
o. Outline two reasons why retained profit might have increased over the
two years shown in TTL’s income statements.
p. Do you think a business owner should reduce dividends or increase its

prices if the owner wants to increase retained profit?
Ted has produced the outline of a cash flow
forecast for TTL. For three months of the year
the cash inflow becomes very low. During
these months there are few tourists visiting
the country and so demand for taxi services
falls. However, the demand for trucks to
transport goods is still high and stays the
same all year around.
To operate the trucks as well as taxis is

expensive and the cash outflows are high all
year round. The cost of leasing is high and has
to be paid, whether the trucks are being used
or not. The business customers who pay TTL
to transport their goods in trucks are given
trade credit of three months in which to pay.
Ted pays for fuels on one month’s trade
credit.
All the taxi customers pay cash.

q. Complete the cash flow forecast for TTL (Table 23.1)
r. Define “working capital”.
s. Outline one benefit and one problem in drawing up a cash flow forecast
for TTL.
t. Identify two examples of stakeholders who would be interested in

TTL’s cash flow forecast.
u. Outline how an increase in the number of trucks being used will affect
TTL’s cash flow.
v. Explain two reasons why TTL’s cash forecast might not be accurate.
w. What would be the best way for the owner of a business to avoid cash
flow problems as it expands? Justify your answer.
Ted has drawn up the following Statement of

Financial Position to show the Bank Manager.
He wants to arrange an overdraft and also
obtain a new bank loan. Ted intends to buy
some new equipment that will allow him to
carry out his own repairs to the taxis. This
will benefit TTL as it will not have to pay
expensive garage repair costs.
Ted believes that keeping a supply of fuel is

important so that TTL never runs out of fuel
for the taxis of trucks. It is expensive to do
this but he can always meet demand as his
taxis and trucks can always be refilled at
short notice. TTL still owns 10 taxis vehicles
but the value of them has reduced due to
depreciation.
x. Define “statement of financial position”
y. Outline the difference between an asset and a liability.
z. Identify two stakeholder groups who would be interested in TTL’s

statement of financial position and for each stakeholder why they are
interested.
Ted wants to see how well TTL is performing.

He has drawn up the following table showing
TTL’s profitability and liquidity ratios for
the latest financial year.
Ted wants to also compare TTL with other
businesses and has included the performance
ratios for another business.
ROCE: return on Capital Employed
aa. Identify the formula used to calculate gross profit margin.
bb. Identify the formula used to calculate profit margin.
cc. Explain two ways Ted could improve the profit margin.
dd. Do you think Ted should be happy with the profitability of TTL
compared with the other business shown in Table 26.1? Justify your
answer.
ee. Define “liquidity”
ff. Identify two reasons why TTL’s current ratio might be lower next year.
gg. Outline one advantage and one disadvantage of having a high acid test
ratio.
hh. Do you think Ted should be happy with the liquidity of TTL compared
with the other business shown in Table 26.1? Justify your answer.
Twelve months has passed since the year shown in Table 26.1. At the end of this
year TTL’s accounts recorded:
Revenue of $600 000
Cost of sales of $30 000
Expense of $520 000
Its current assets are $6250, of which inventory is $1250 and current liability
are $5000.
a. Explain two situations in which Ted will find a cash flow forecast useful.

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Business Finance Case Study

-- Ted’s Taxis (TT) to Ted’s Transport Ltd. (TTL)

Ted’s Taxis: Key words Concept

Ted set up his business as a sole trader 10 Sole trader

The business is located in Main City and has

a. Define “retained profit”

b. Identify two short-term sources of finance that Ted could use.

Ted’s Taxis (TT) now has 10 taxi cabs, as

However, Ted has leased two trucks to expand

e. List all the types of private firms in general.

corporations (S-corps) and C corporations (C-corps)

g. Identify two reasons why micro-finance would NOT be used by Ted to

Ted changes the business into a private An income

i. Define “income statement’

j. How is revenue calculated?

k. Identify two examples of expense for TTL.

m. Explain two reasons why making a profit is important to TTL.

n. Do you think a business should focus on increasing profit or increasing

p. Do you think a business owner should reduce dividends or increase its

To operate the trucks as well as taxis is

All the taxi customers pay cash.

r. Define “working capital”.

t. Identify two examples of stakeholders who would be interested in

Ted has drawn up the following Statement of

Ted believes that keeping a supply of fuel is

x. Define “statement of financial position”

y. Outline the difference between an asset and a liability.

z. Identify two stakeholder groups who would be interested in TTL’s

Ted wants to see how well TTL is performing.

ROCE: return on Capital Employed

aa. Identify the formula used to calculate gross profit margin.

bb. Identify the formula used to calculate profit margin.

ee. Define “liquidity”

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