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General accounting

II. 4. Toy manufacturer (part 1)






In order to get a feel for the operations of a firm, and all the information that is produced and which we must monitor in some organized way, let us look at the beginnings of a small manufacturer of wooden toys called Chinese snakes.



chinese snake
A Chinese snake.

Selling to wholesalers, or retailers or directly to the public

It is a real example, just a bit simplified. I found this toy in France at a small handicraft producer in Burgundy, a guy who had decided to live in the countryside and earn his living making wooden toys that he sold mostly to wholesalers and retailers and, occasionally, to visitors to his small workshop like myself.

The choice of which market we shall try and sell to is an important one. Running a firm selling to wholesalers is different from running a firm selling to retailers, or to end consumers. The job of the salespeople is not the same. The costs are not the same. The gross margins are not the same either.

In "strategic" analysis, these various markets are generally viewed as different "strategic segments". A "strategic segment" is a competitive arena. If you manufacture and sell bicyles and television sets, you are active in at least two distinct segments; this is true too if you manufacture and sell bicycles and motorcycles. The "rules of the game" are not the same. The collection of trades you must master in each segment are different. Sometimes it is not rational to combine both activities in the same firm. Sometimes it is.

Therefore the same manufucturing activity serving different markets is usually viewed as consisting of different activities, at least at the commercial level.



Detailed description of 18 steps

Let us imagine and jot down all the important events from the outset until the end of the fourth month of the Chinese snake mfr. (Mfr stands for "manufacturer", and "Mfg" stands for "manufacturing".)

1) First we need to gather some money, because we shall have plenty of expenses to set up the firm and to launch the production and the selling organisation before we earn our first euro from sales. We want to start with, say, 50 000 €. Usually we will not be able to get this initial money from a bank. So, first of all, we gather 50 000 € from our own savings (10 000 €), from our family, it is called "love money", (20 000 €), and from friends (20 000 €), either as a loan, or as participation of partners.

2) Next we open a bank account and put the 50 000 € on the new bank account. We could of course put the money into our own personal bank account we already have, but it would be a bad idea because we would soon mix up personal expenditures from expenditures for the firm. And anyway it is legally mandatory.

3) We need premises. We rent a place and pay up front six months of rent, 5000 €.

4) Let us take care of "human resources". We hire two people to work with us. One will be in charge of manufacturing, and the other will be in charge of selling. You, as the boss, will be in charge of the administrative chores, relationships with the authorities, with the bank (you will be the one "having the signature" for the checks), and you will organize the work of the two other people. Each employee, including yourself, will cost 2000 € per month. One person has to be in charge of purchasing. Suppose this is you, the boss, who will take charge of that too.

5) We need to purchase office equipment: a table, a file cabinet and a desktop computer. This, plus some expenditures for fixtures, amounts to 3000 €.

6) We are at the end of week one. We purchase a used van, 4000 €.

7) We purchase a mechanical saw, 2000 €.

8) We purchase raw materials, wood planks, tape and glue, 2000 €. Let's keep track of how much money we have spent so far: at the end of the second week, we spent 16 000 €. We still have 34 000 € in the bank account of the firm.



9) The manufacturing employee begins to make toys. The salesperson sets up a selling program, and begins to call potential clients (these are called "prospects").

10) At the end of month one, we have to pay salaries, and the charges that go with them (social security, etc.), 6 000 €, the telephone line (we also got a telephone) 1000 €, and we also spent 1000 € in gasoline and hotel expenditures. So we are down to 26 000 € at the bank.

11) At the end of the second month, we have to pay the same expenditures plus, say, electricity and maintenance expenses in the workshop: altogether 10 000 €. We are down to 16 000 € at the bank.

12) We also make a note that we have wood wastes of 20 percent: that is 80 percent of the wood we purchase ends up in our toys and 20 percent are wastes or rejects.

13) We also note that the manufacturing employee produces 50 toys per day, about 1000 toys per month. And the salesperson visits on average two prospects per day in France.

14) At the end of month 3, a great news: our first sale. Carrefour orders from us 2000 toys. The final price of these toys will be 20 € per toy, on Carrefour's shelves. But we sell to Carrefour at the price of 10 € per toy: a first sale of 20 000 €! We celebrate in a restaurant, 100 €.

15) Carrefour will pay us in 45 days. In the meantime we have a "bill" signed by one of Carrefour's chief purchasers (a piece of paper called an IOU; more technically, it is called a 45 day draft - in French, "une traite" or more generally "un effet de commerce") certifying that we shall get paid in a month and a half.

16) At the end of month 3, we have to pay the usual salaries, 6000 €, and various other expenditures 2900 € (of course we have a detailed list of these expenses). We ship the 2000 toys to Carrefour. They no longer belong to us.

In the next lesson we shall first make an important recap of where the firm stands at the end of the third month, and then see the subsequent steps.

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