Financial assignment

Trevor Rade, who is in his early thirties, has maintained a personal account at your branch for a number of years. Early last year, he introduced Rob Venables, a colleague at his work. They were being made redundant and had decided to set-up their own business; a new company, Radeven Ltd, had just been incorporated.

They proposed to assemble components for the electronics industry, selling to contacts they had developed over the past five years. A business plan had been prepared which they submitted to you. The plan indicated increasing sales and profitable trading during the initial two year period.

They had £15,000 cash available between them, including the redundancy payments, and both of their fathers had agreed to lend £5,000, interest free and with no repayment terms. You agreed to support with an overdraft facility of £20,000 secured as follows:

Debenture, giving a fixed and floating charge:

Joint and several guarantee by Rade and Venables for £20,000 supported by

i) second mortgage by Mr & Mrs Rade, equity £12,000

ii) second mortgage by Mr & Mrs Venables, equity £14,000

Additionally you indicated that you wished to receive quarterly reports on progress.The account operated within the facility for most of the first year but the management information you received was inadequate, although you were satisfied with the accuracy of the quarterly sales report, which was as follows:

£

March - June 17,600

July - September 36,800

October - December 54,700

January - March 68,200

At the end of April, you interviewed the directors. They advised you that they were to meet a local accountant in May to prepare accounts up to 31 March. They asked you for an increase of £5,000 in the overdraft facility to assist with the expansion of the business. You agreed to this request but only for a period of three months, and insisted that the management information should be improved and submitted monthly. You let them have a format for the information. The directors accepted this condition and have produced the reports more regularly - the August figures were received last week. However, there has been a delay in producing the first year's accounts; these were sent to you by the accountants only last week.

Required:

Assume it is now mid-September. You have arranged to meet Rade and Venables tomorrow. Prepare notes for the meeting, including a discussion of the key aspects of the information available to you and the relevance of that information to your view about whether to continue to provide financial support to the company. Indicate any additional information you may require from the directors.

RADEVEN LIMITED Balance sheet as at 31 March this year

£ £ £

Plant and machinery ................ 15,000

Motor vehicle/office equipment ..... 6,000 21,000

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Debtors ............................ 72,000

Stock/work in progress ............. 14,000 86,000

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Trade creditors .................... 46,000

other creditors taxation ........... 12,000

Bank ............................... 21,000

Hire purchase ...................... 8,000

Loans .............................. 10,000 97,000

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Net current liabilities ............ 11,000

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Net tangible assets ................ 10,000

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Financed by:

Share capital .................... 15,000

Profit & Loss .................... (5,000)

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10,000

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Profit statement

Sales .............................. 176,500

Materials used ..................... 91,300

Wages .............................. 14,200

Net profit (loss) .................. (5,000)

After: Depreciation ................ 5,000

Directors' remuneration ..... 22,000

Management Figures

April May June July August

£'000 £'000 £'000 £'000 £'000

Debtors ..... 75.1 80.3 85.2 87.3 85.2

Stock/work in progress ..... 14.9 15.0 14.9 15.8 15.8

Trade creditors ............ 45.2 46.9 48.1 44.2 43.8

other creditors ............ 13.5 10.4 12.5 14.5 11.5

Hire purchase .............. 7.6 7.0 6.5 12.0 11.5

Bank ....................... 21.8 25.3 25.1 25.4 25.3

Sales ...................... 24.3 26.2 27.4 26.8 25.3