Question: Critical Analysis of DriveImpact Ventures: Strategic Recommendations for Financial Sustainability

29 Dec 2024,9:49 AM

 

Navigating Through Challenges: The Story of DriveImpact Ventures

In a small former textile town in Lancashire, a group of compassionate individuals from a local church founded DriveImpact Ventures (DV) in 1984. The town had seen better days, especially before the collapse of the textile industry in the 1970s. The charity was born out of a need to support the community, providing furniture and transport for children attending the distant grammar school.

Over the years, DV grew significantly, reaching its peak in 2018 with operations across Lancashire, Cumbria, and Merseyside, and annual revenues of around £2.5 million. However, the charity faced financial challenges due to austerity measures and reduced grant funding. Despite their resilience and accumulated assets, the impact of the COVID-19 pandemic forced the charity to close operations in Cumbria and Merseyside, focusing solely on Lancashire.

Today, the charity operates four furniture stores in Lancashire, selling donated used furniture and a small percentage of bought-in items. A recent pilot pop-up shop[1] project in a major city proved successful, generating £5,000 in revenue over a weekend with a 70% gross margin. More pop-up events are planned. Sales in the retail outlets are 100% cash or card payment. Additionally, the charity continues to provide transport services in Lancashire, earning revenue through contracts in the health and education sectors. Transport sales are invoiced monthly with on a 30-day credit basis. The average payment time is 40 days with aged debtor balances averaging £140,000. The head office remains in Merseyside, housed in a freehold building owned by the charity. The charity is governed by a Board of Trustees, consisting of a chairperson and four trustees.

The executive team have considerable experience and have strong networks in the local community, along with the strong organisational reputation of DV. Whilst not explicitly stated in the financial information, there is precedent that this can be leveraged to create breathing space at critical moments. DV’s landlords and suppliers have in the past been willing to discuss temporary arrangements to assist with cash flow issues. These have been primarily deferred payment options over a short time scale (extra 30 days credit).

Following a meeting today (4^th November 2024), the board was informed of the current trading and financial position. Despite the restructuring that has already been undertaken, the current financial situation has not improved as was envisaged. Consequently, the board is seeking to move swiftly to turn the situation around. They have instructed you as the CEO to review the financial situation and present options to address the accelerated financial decline at an emergency Board meeting due to be held on 25^th November.

 

Head Office: You have a report from the recent restructure that the Board had previously considered which included a possible relocation of the head office.

• Relocation to Lancashire: This could be achieved with a mixture of redundancy and outsourcing, costing £125,000 in redundancy and relocation costs, which would occur in the month of the move. If a relocation is completed, the future head office cost is forecasted to be £65,000 PCM.
• Deferred Decision: The board previously deferred this decision, hoping to reduce head office costs and avoid economic disruption to employees during the Christmas period, in line with the charity's ethical policy.

 

Board Policies:

• Cash Reserves: The charity’s policy requires cash reserves equal to three months' fixed costs.
• Ethics Policy: Major changes must reflect the charity's founding articles of alleviating poverty and providing opportunities to the low paid and disadvantaged.
• Trustees' Duties: The trustees must manage the charity's resources responsibly, ensuring assets are used to support its purposes, avoiding undue risk, and not over-committing the charity.

 

Additional Information:

• Financial Data: September and October actual results:

Drive Impact Sept-Oct24	September	October
Transport Sales	40,073	51,234
Retails Sales	26,481	27,737
PopUp	5,000	0
Total Sales	71,555	78,971
Cost Of Goods Sold (COGS)	3,578	3,949
Gross Margin	67,977	75,022
Payroll Costs (combined)	23,000	28,000
Fixed Costs	21,000	21,000
HQ Costs	125,000	125,000
Total Costs	169,000	174,000
Net Cash	-101,023	-98,978

 

• Opening Cash Balance on 1^st September 2024      £380,000

 

 

• Forecast information up to August 2025.

Drive Impact Forecast Information	Calendar Month
Transport Sales	80,000
Retails Sales	30,000
PopUp	5,000
Cost Of Goods Sold (COGS)	5% of Total sales
Payroll Costs (combined)	35,000
Fixed Costs	21,000
HQ Costs	125,000

 

PLEASE NOTE

 

• Transport sales in December 2024 and August 2025 forecasted at £70,000 due to low school services during the holidays.
• Retails sales in December 2024 forecasted at £25,000 to reflect store closures for the Christmas Period.
• PopUps are forecasted to take place each month January – August 2025.

 

Financing Options: Your CFO has provided you with the following information to assist in the preparation of your report.

Overdraft Agreed if required	£100,000	Available Immediately
Commercial 25-year Mortgage agreed on freehold property. 75% of freehold value. Estimated time for earliest receipt of funds January 2024	£412,500	Repayable at £4,125 PCM.	NOTE: Any overdraft taken would be included in this mortgage amount. Overdraft would be settled on receipt of the £412,500.
Vehicle Cost £60k per vehicle 50% available as a vehicle HP agreement.	£60,000	Available from 1st March 2025. Repayable at £1,875 PCM (36 payments)	NOTE: New vehicles are required due the contract specification. The dealer will consider a part exchange of two old vehicles. Current value range for these would be High £15,000 – Low £5,000
Freehold Valuation	£550,000	Estimated time for a sale to complete end of May 2025.

 

Following the board meeting on the 4^th November, a new offer of four transport contracts in Lancashire was received from a local education trust. The board are not aware of this development.

• New Contracts: Require formal approval before the 29^th November, or they will be offered to the next supplier identified by the education trust. Internally these contracts would need official Board sign off. The contracts are scheduled to commence on the 1^st April 2025. They have a combined revenue of £25,000 per calendar month. Invoices will be settled on a 30-day credit payment regime. There will be no increase in payroll cost as these routes can covered by existing staffing levels. Disappointingly though it has been identified that 2 new minibuses will be required at a cost of £60,000 each. Fortunately, DV already has good vehicle funding arrangements, and an asset finance company would be willing to fund 50% of the cost with a 50% deposit. They have quoted a monthly payment schedule of £875 (36 months) for the 4 vehicles if this option was taken.

 

The Task: Using the provided information, as CEO you must construct a cash flow forecast showing the worst-case scenario if the trustees do nothing, identifying when they will:

1. Break their cash reserve policy.
2. Run out of cash.

You are asked: To write your answer (1,000-1,500 words) explaining your reasoning for the options you present to the board. You should consider the following in your analysis:

• The financial impact of each option on the charity's cash flow.
• How each option aligns with the charity's ethical policy and founding principles.
• The potential risks and benefits associated with each option.
• The feasibility of implementing each option within the given timeframe.

Recommendation: You should make a recommendation to the board of your preferred option, including your reasoning. You should explain how the financing options chosen to provide a solution align to the identified problems and ensure the charity's survival and future sustainability.

In this assignment, you will be evaluated on your ability to navigate complex, real-world scenarios often encountered by CEOs and Boards. Your response may involve:

• Ambiguity: Addressing areas where information is unclear or incomplete.
• Asymmetry: Managing situations where information is received unevenly.
• Communication: Effectively conveying your thoughts and decisions.
• Synthesis: Integrating diverse pieces of information.
• Timing: Considering the impact of timing on decisions.
• Critical Awareness: Demonstrating an understanding of trade-offs and compromises.

Your task is to showcase your skills in these areas, reflecting the dynamic and challenging environment of executive decision-making.