Sharon, a long-time classmate, contacted you recently. She is thinking of setting up a business with two other ex-colleagues, Mandy and Terence, to design and sell a specialized posture corrector belt for women. All three of them are expected to be involved in running the day-to-day operations and will fund the business with their own savings. They do not wish to lose more money than the amount they invest.
If the business goes according to plan over the next 12 to 18 months (where sales and customer-based have grown significantly, and payments to suppliers are voluminous), she envisages that a finance manager will need to be recruited. Several months down the road, certain decisions relating to the procurement of new machinery and renovation of a factory in Tuas will need to be made. Based on her preliminary computations, the cash flows from assets in the first three years is estimated to be -$360,000.
While there is a vision to expand into neighboring countries like Malaysia, Thailand, and Vietnam (where significant funds need to be raised externally), this is not an immediate priority. At some point in time, Sharon would like to divest a portion of her business interest, and donate the proceeds to Singapore Children’s Society, a charitable organization.
You have been appointed by Sharon as a consultant. She has requested you to draft a memorandum to advise her on the matters set out below.
(a) Examine which of the three (3) forms of business should be used.
(b) Prioritize the roles and responsibilities of the finance manager who will be hired within the next year or two.
(c) Discuss why negative cash flows from assets during the first three years is not necessarily a bad sign for the business