Instructors' notes: Sweet peas stitchery: A case of a start-up merchandiser - Part B

CASE DESCRIPTION The primary subject matter of this case concerns accounting. Secondary issues examined include entrepreneurship, marketing, retail management, and merchandising. The case is appropriate for sophomores or juniors who are in a core financial accounting course or entrepreneurship, retail management, fashion merchandising, and marketing classes that include financial analysis of a merchandising firm. This case will take approximately one class hour. It will not require students to do any outside preparation. It will challenge their logical thinking skills, knowledge of Balance Sheets, and financial ratios while applying their basic business knowledge. It will also require the students to recognize the implications of a challenging financial situation. CASE SYNOPSIS Imagine quitting your secure job to open a new business on a mere $10,000 in a time of economic uncertainty. Neither you nor your partner has any experience in the industry or as entrepreneurs. You are running on blind faith that your initial capital investment will be enough for the business to survive and generate enough revenue to draw a paycheck within the first six months of operation. This case provides an overview of the operations of such a business that opened in 2011. Several things are considered in this case, including the risks of an inexperienced entrepreneur starting a new business during a time of high unemployment and difficult economic times. The odds of success are against the owner because of her limited funds, unemployment rates, and high failure rate, what the Small Business Administration calls the death rate, of new businesses. With no experience in and little knowledge of accounting, it's easy for the owner to fail to recognize when her "accountant" and "CFO" submit financial statements that are incorrect and do not make sense, which happens in this case. It requires students to recognize the strengths and shortcomings in the information provided in the company's Balance Sheets. The owner is finding it difficult to operate on current cash flow and is seeking external investors to supplement the poor cash situation. One such potential investor, Becky Bartlett, needs guidance in understanding the Balance Sheets and ratios. She specifically needs to understand if they indicate that investing in the company is a good or bad financial decision.