OCR F297 (Candy Cabs) - Business Analysis

Some of the key case study issues raised in relation to Business Analysis are highlighted below:

Market analysis

- Candy Cabs’ market is defined by its chosen locality - Oakford (initially) + some activities in Upham
- Size and structure of the market closely influenced by the local authority - who regulate taxi licences + chose the contractors for local authority work
- Local authority said to have an objective of a market served by “well run but inexpensive taxis” [line 21] - which helps set the standards required by the market (LA can withdraw licences) but potentially limits the market size and growth
- Need for Candy Cabs to “review the market & environmental circumstances?” [spec]. No particularly significant. Catherine & Yvonne’s close day-to-day involvement in the business will keep them close to market developments; no international dimension either.

Forecasting

OCR Spec specifically refers to time series analysis for use in forecasting: little obvious application here for Candy Cabs

Data analysis

Some challenges for Catherine & Yvonne:
- Admission that they are “financial illiterates” [line 47]
- Lack of formal financial & management accounting information in the business, historically
- Reluctant support from Andrew Boddie when it comes data analysis
- Little experience of the disciplines of financial analysis - increases the risk that their analysis of the investment options will prove unrealistic

Data analysis role in evaluating the growth options:
- Each requires additional investment (up to £20k); but not too significant or substantial
- Information gathered will be based around a series of assumptions (how accurate / realistic?)

Decision-making

Which tools might be useful to Candy Cabs?

Ansoff Matrix: relevant to the three choices: a potentially useful model for making the choice
Decision-trees: again, a possibility; case study data suggests estimated profits and cash flows arising from the three potential investments, against which it might be possible to allocate various probabilities. Investment appraisal techniques (payback, ARR, NPV) would be a better bet based on the case study information
CPA: Case study not really about CPA

Measures of business performance

Which business performance ratios might be most relevant?

Profits: hampered by poor financial systems & experience
No profit and loss account information given, specifically
Appendix 2 shows profits from previous years (five years of trading) of £72k - but this is a balancing item (i.e. an estimate to make the balance sheet balance)
Balancing item will be affected by other estimates made by Catherine & Yvonne. E.g. estimated value of cars & office equipment (£50K) looks like a round sum or original cost. Presumably no depreciation has been charged?
Unclear how much the three partners have taken out of the business in terms of pay & profit share
Unclear what rate of interest is charged (if any) on the loan from Andrew
ROCE? Not possible to assess, because we dont have an estimate of the annual profitability of the business

Liquidity / Capital Structure
Current ratio: (£58.5k / £10.9k) = 5.3. Not too much to worry about. No need to calculate the quick (acid-test ratio) since business has minimal stocks
Main element of current assets is trade debtors - so debtor days are worth looking at (see below)
Main working capital issue is trade debtors (amounts owed on credit by account customers & local authorities) - a problem that will grow if the sales growth objective of 8% is achieved or exceeded

Debtor days? Estimate using annual sales should be treated with caution - since many sales are for cash
But the case study provides enough information to make the calculations:

The data indicates that Candy Cabs’ credit customers are paying to agreed terms (30 days for account customers; 60 days for local authority)

Not possible to calculate creditor days, since we dont have data on Candy Cabs annual costs. Balance sheet creditors (<1 year) of £9.7k relatively low & covered by available cash balances

Gearing: main issue is long-term loan from Andrew - which gives him some control over the business, since the firm would find it hard to settle the loan currently