SNAZZY SINA’S SWIRLS: Case analysis

Sina has just completed his first year of university (most of his classes were related to business administration) and is now in the midst of making a major career decision. Since his life savings have been depleted on tuition and housing costs, he has decided to take some time off from studies to work back home in Mission, BC.

Sina’s current plan is to work full-time (six hours per day with Sundays off) as a server at a local restaurant called Paulie’s. Sina worked at Paulie’s in high school, so he has a good idea of what he can expect to earn. With tips, a $19.50 per hour average rate is reasonable for Monday through Thursday. On the weekends, higher tipping typically increases the hourly rate by 12%.

While he won’t have to pay full rent while living with his parents, Sina still expects his living costs to total $1,200 a month. To try to save up faster for three more years of college, Sina is planning on also growing his part-time online retail business. In the last year, he started painting cartoon portraits of students at the college campus, earning $60 per painting. The business concept started slowly, during a drunk Friday night with his friends in a dorm room of an art student. After a few other people approached his offering to pay for paintings of themselves, Sina decided to put some flyers up around campus. He believes he ended up selling 135 paintings at an average price of $60 each (he hasn’t kept track of the exact numbers)

Sina’s plan, in the absence of young people/potential customers all around, is to market his services online under a catchy name, Snazzy Sina’s Swirls. He plans on having friends and family follow, perhaps even share, photos of his work on social media which would hopefully help attract new customers. Being a day away from the new year, 2023, Sina has put together some projections for next year. Because of shipping costs, he is planning to increase his price to $75 per portrait. Each portrait will cost, on average, $10 to package and ship (and take an hour of Sina’s time). Additionally, Sina estimates that the supplies for creating 100 paintings last year totaled $1,700. he expects this trend to continue. Sina’s expectation is that he will sell 250 paintings in 2023 and a 8%-10% annual growth rate is realistic until December 31, 2025. Sina is open to advice on this business, especially the online elements.

Sina is also wondering about the importance about maintaining accurate records. His Uncle Mahmoud, a successful businessman, has warned his to not neglect saving and organizing paperwork. Sina also wants to make sure he has a solid understanding about how to perform important calculations to analyze profitability over the long-term, what analytical tools are most helpful, and how these tools can improve his business.

While Sina typically despises nagging from his uncle, he did get a potential career opportunity from his yesterday. Cenk, the current owner of the local Spritzy Gas Station, is retiring. Hal, a friend of his, has agreed to buy a 50% share for $300,000 and Sina’s uncle is willing to buy the other 50% share for $310,000. However, he will only close the deal if Sina agrees to work at the station for a minimum of two years. Sina’s uncle is willing to pay his half of the profits he is entitled to, or 25% of the gas station’s annual profit, if Sina’s works 30+ hours a week (paid to Sina as bi-weekly salary). Sina is wondering how his hourly rate may compare to his other options.

Hal has insisted that, since he is managing the inventory and fuel supplies, Sina should manage the bookkeeping. Sina knows the accounting basics but isn’t sure about some of the intermediate concepts, such as depreciating the fuel terminals. Considering that the terminals are used regularly but business is heaviest in the summer months and December due to the holiday season, Sina is wondering what an appropriate depreciation policy might be. Also, he isn’t sure what a depreciation journal entry looks like and how it ties into financial statements.

Mahmoud expects to see the 2022 numbers before completing the deal and says the gas station expects to tally up annual revenues of $424,000. The expenses, with the business owners working full-time, are ballparked at 45% of revenues. In 2021, the revenues totaled $428,600 and expenses were $181,300. For 2023, Hal and Mahmoud have discussed possibly hiring a part-time employee which would allow Sina and Hal to work fewer hours. However, this would push expenses up to about 56% of revenues. Sina is wondering if he should urge his uncle to hire the part-time help, as it would allow his to continue his painting business. With full working hours at the gas station (no part-time employee) and bookkeeping tasks to complete at home, Sina would not continue his art business.

Sina believes he can invest his savings in a mutual fund and earn a 6.5% annual return. Since it is significantly more than earning 3.75% annually by entering an agreement to deposit $500 monthly into a guaranteed savings account for at least 18 months, Sina is leaning towards the mutual fund option. He wants advice on the risks and benefits of each investment strategy and a recommendation on which direction to proceed in.

Sina’s parents have advised him to stay in school and take student loans to finance his studies since he doesn’t have to pay interest until after graduating. Sina’s agrees that the interest rate is low at 3.15% (0.50% below the current market lending rate), but he is still hesitant to borrow an estimated $25,000 per year to study for three more years. he is especially concerned that he isn’t sure about his career direction at this point. While getting a steady employment offer seems appealing in some respects, it is still difficult for Sina to imagine himself being committed to a career for a prolonged amount of time, even if the expected starting salary is $40,000 with 4% average annual growth for ten years afterwards.

Sina wants a detailed analysis of his career options. He wants advice on ethics, business strategies, tax implications, and other relevant matters. Sina welcomes any recommendations, as well as any questions to his which will help you better analyze his options. Please prepare a business memo to Sina, addressing all issues raised in this case.

REPORT GUILDELINE

1.      Executive Summary

2.      SWOT

·         Strength/weaknesses/opportunities/threat – Sina

3.      Financial analysis – ratio or two

4.      Issues – what are all of Sina’s problems that you have to solve

5.      Analysis

6.      Issue #1 – Should Sina Incorporate

7.      Qualitative

8.      Pros/Cons

9.      Quantitative

10.  Summarizing the calculation you did. Refer Appendix 1

11.  Recommendation

·         I recommend you …… Step 1, Step 2 ~

12.  Conclusion

13.  Limitation to the calculations. And any questions for Sina

14.  References

15.  Appendices

 

1.      Financial Analysis

E

2.      Summarizing the calculations

INCOME

Income ($) from each option – after tax

Restaurant	19599.26
Full-time at gas station	41678.66
Part-time & painting	42001.46

 

 

 

Individual analysis

Projected cost of living  $
Monthly	1200
Yearly	14400
WORKING AT THE RESTAURANT
Day	Hour	Pay $	Total Per Day $
Monday	6	19.5	117		Total per week =		730.08
Tuesday	6	19.5	117		Total per month =		2920.32
Wednesday	6	19.5	117		Total per Year =		35043.84
Thursday	6	19.5	117
Friday	6	21.84	131.04		Income before tax =		20643.84
Saturday	6	21.84	131.04		Tax BC rate (5.06%) =		1044.578
					Income after tax $ =		19599.26
PAINTING
Paintings	250
Price	75
P&S cost	10	Total P&S =	2500
Supples	4250
Total cost = Supplies + P&C =			6750
Revenue	18750
Profit	12000
Tax BC rate (5.06%) =		607.2
Income after tex =		11392.8

 

WORKING AT HIS UNCLE'S GAS STATION
FULL-TIME		$
Revenue		424,000
Expenditure (45%)		190800
Profit		233,200
Sani's share		58300
Expenses		14400
Pre-tax Earning		43900
Tax (5.06%)		2221.34
Post-Tax Earning		41678.66
PART-TIME & PAINTING
Revenue		424,000
Expenditure (56%)		237440
Profit		186,560		Post-Tax Painting		11392.8
Sani's share		46640		Painting & Part-time		42001.46
Expenses		14400
Pre-tax Earning		32240
Tax (5.06%)		1631.344
Post-Tax Earning		30608.66

 

Depreciation

Appropriate depreciation policy – straight line depreciation policy should be used. This is calculated by dividing the difference between the costs of an asset and its expected salvage value by the number of years it is expected to be used. In order to calculate the straight line depreciation, the purchase price of an asset is subtracted from its salvage value (the expected sell-on value when it is no longer needed). The result is then divided by the total number of years the asset is expected to be useful, which is also called the useful line in accounting.

Straight Line Basis = (Purchase Price of Asset - Salvage Value) / Estimated Useful Life of Asset

This method was used because it allows for expensing the asset (gas terminal) over a longer period of time than when it was purchased (used). It is also easy to calculate and understand. There are no sufficient data (purchase price, salvage value, and estimated useful life of asset) to calculate for the depreciation in this work.

Mutual funds and Savings calculations

MUTUAL FUNDS	Amount	Interest rate	Earnings	Total Value per year
Restaurant	19599.26	6.50%	1273.952	20873.21
Full-time at gas station	41678.66	6.50%	2709.113	44387.77
Part-time & painting	42001.46	6.50%	2730.095	44731.55

 

SAVINGS	Amount	Earnings	Total value per year
Restaurant	19599.26	225	19824.26
Full-time at gas station	41678.66	225	41903.66
Part-time & painting	42001.46	225	42226.46

 

Decision: Based on the mutual funds and savings analysis, it is clear that mutual funds is the best option as has higher ROE.

Interest for student loan

Student Loan
Loan	Years	Total Loan	Interest (3.15%)	Repayment Value
25000	3	75000	2362.5	77362.5

 

Yearly yield on student loan

Year	Repayment
1	77362.5
2	79799.42
3	82313.1
4	84905.96
5	87580.5

 

 

3. Limitations to the calculations

The main disadvantage that comes to mind when thinking about profit and loss accounting is accuracy. The main ratio undertaken in this analysis is profit and loss as it relates to what he will earn and the alternative he must forego in order to make such earnings.

In consideration of the option to work part-time while supporting his painting business, one needs to understand that data on depreciation and asset value are usually subjective or volatile; and, it is difficult to attribute accurate values to these fields. Thus, the projected revenue might even up unattained, depending on other macroeconomic factors (like competition, new government policies, etc.) that can have direct influence on performance of the gas station.

Particularly, there was no sufficient data to determine the depreciation of the gas terminal and this imply that the obvious choice of working in his uncle’s gas station might not be the actual best option, if the depreciation is calculated.

 

 

 

 

Additional information:

Could you please provide some proof in form the calculations showing that this one is better. If you can add any calculations as per the attachment shared it would be great.

• Sina could work part-time at the gas station while expanding his painting company. This would provide him with a more consistent source of income, allowing him to cover his living expenses and save money for tuition while still allowing him to pursue his passion and grow his business. Income ($) from each option – after tax

Restaurant	19599.26
Full-time at gas station	41678.66
Part-time & painting	42001.46

 

 

 

 

• Sina should keep detailed records of his gas station earnings and his painting company expenses. This will enable him to keep track of his progress and ensure that he earns enough money to pay his expenses while also saving for tuition.

Good advice – data is not needed to support this statement