Abby’s Blinds, Curtains, & Dining Essentials - Business Expansion, Financing, and Accounting

Pros and Cons of Hiring a Partner vs Employee

Last January, Abby started a new business named Abby’s Blinds, Curtains, & Dining Essentials, or ABC&DE for short. In her business, Abby, who has always loved arts and crafts, designs unique items which are eye-catching highlights around her customers’ homes. She started her business selling to friends and neighbours out of hergarage, and demand quickly spread to the point where everything she made sold within a day. Several customers had made special requests which Abby had been struggling to fulfil since she was so busy. Some of them have already paid her and Abby isn’t sure what the accounting treatment is for a prepayment.

Abby is considering acquiring help to help her expand her business. Her friend, Mel, is a talented tattoo artist who has shown interest in working with her. Mel has offered to buy a 40% stake in the business for $5,000 and commit to working equal hours as Abby (currently 30 hours a week). However, Abby is wondering if it may be better to hire Mel as a $24 per hour employee for 20 hours per week. Abby wants a pros and cons analysis of a new partner versus a new employee, including what she might need to do as the business owner.

Abby is also thinking about hiring someone to help with the administrative side of things. This person would work 15 hours a week (at a rate of $16 per hour), handling customers during peak hours, completing orders of supplies such as dishes, wine glasses, and beer mugs, and noting down special customer orders. Abby is considering getting a website made, and feels that an administrative assistant would be a must with added traffic.

Last year, Abby sold 360 pieces at an average price of $72 each. She estimates she purchased the supplies for $21 per piece. This year, with a larger customer base, Abby believes she can increase her average price to $82 per piece and still sell 100 more units. If she gets help from Mel, Abby believes she would be able to sell 500 pieces at the $82 price.

A website would cost $1,000 this year and $2,000 per year after that. Abby feels that having a website would increase her top sales volume projection by 50%. However,she would need a bigger space to sell in, so fixed costs would jump by $400 per month on top of everything else.

Abby fears that online retailing might result in major growth requiring additional financing. To raise funds, she would be willing to sell a 30% stake in the business (equally taken from business partners at the time) for $20,000 and promise to pay out 20% of the business’s future profits as dividends. She would also be willing to borrow $15,000 at a rate of 7% per year. She wonders what the impact of each financing option is, including the effect on ratios such as earnings per share and debt to assets. Also, Abby invested a small amount of money in cryptocurrency which boosted her personal income. She is wondering if she can report the gain as part of her business profits to secure equity and debt financing. She wants to know specifically the accounting concepts which relate to recognition of capital gains and inclusion of income in a business.

On January 1stof year 2, Abby noticed that her cash records don’t quite match up with bank statement. Furthermore, she noticed that her deposits on her books total $6,400 while the bank statements add up to $6,900. Her issued cheques add up to $5,100 but her bank has only withdrawn a total of $4,600. Abby wants an explanation of these issues and what she should be doing to resolve them.

Finally, Abby just purchased some new equipment for $2,000. She plans to use the equipment heavily immediately, but perhaps not later- its possible she upgrades to bigger and better machinery which would result in this current equipment being used less heavily. Abby is wondering if she should expense this equipment in the month of purchase and how it should be reported on her balance sheet. In your own words (plagiarism is NOT tolerated), advise Abby on her business. Include detailed analysis and recommendations which tie into the specific issues raised in the case.