BACKGROUND

The Company was registered as Cheetah Investments Limited on 3rd June 2015 and was incorporated as a limited liability company on 7th May 2016. It received its certificate to commence business on 25th September 2016. The company was registered with 20,000,000 shares of no par value out of which 5,000,000 shares has been issued equally to the initial shareholders or promoters, Asebu Amanfi and Asebi Boakye. They decided that each shareholder should nominate his adult child to be appointed as a member of the Board of Directors. They will at all time maintain four individuals as members of the Board and the Chairmanship will alternate between the two shareholders every two years. Asebu Amanfi decided to nominate his daughter aged 18 years, who has just been admitted to a University to be appointed as a member of the Board of Directors. Asebi Boakye decided to nominate his daughter aged 25 years, who has finished a course in animal husbandry in a college in Guanduanaland and has just returned to Ghana, to be appointed as a member of the Board of Directors. They appointed a mutual friend who has been the lead person in assisting them to set up the Hotel as Company Secretary. The question of who should be the Managing Director has come up in most of the shareholders discussions but no firm decision has been taken. They are of the view that the Hotel does not need a Managing Director at this stage of its development. Each of them can play that role as and when needed.

The company was certified and licensed to operate as a Hotel under the name GHANA GOLDEN ONYX HOTEL (GGOH) by the Ghana Tourist Board on 1st January 2017. GGOH became operational on 1st January 2019.

The company’s vision is to be the leading business destination hotel in Ghana and indeed in Africa providing world class hospitality services to its clients. Its marketing catchword is “Local in Character, International in Outlook”. The mission of the Hotel is to offer unforgettable home away from home lifestyle experience to their guests and all who find themselves on its premises.

GGOH became the preferred lodging place for staff of International Organisations and pleasure seekers because of its unique brand of Chalets and Water Front standard rooms.

SERVICES

GGOH provides the following services: Rooms, Bar and Restaurant, Conferences and Meetings, Fitness Centre, Health Spa, Business Centre and other services.

Rooms
There are two (2) exquisite executive deluxe with each consisting of 3 bedrooms and two bathrooms, including a master suite bathroom with Jacuzzis/shower combo. There are also two (2) Apartments available to clients.

There are Nine (9) fully furnished business executive rooms or Villas and each consists of 3 bedrooms, 2 bathrooms, guest washroom, spacious living area, modern open-plan appliance-fitted kitchen, formal dining area, basement garage, combined laundry & storage room, and backyard space for relaxation and entertainment.

The Upper Level of each fully furnished business executive wing has a porch, a walk-in closet with full-length mirrored doors, a spacious end suite sky-lit bathroom, with a two-seater Jacuzzi, and a separate shower. The upper level houses a storage facility, and also features a vaulted ceiling, with wood beams, elegant chandelier lighting, and a beautiful balustrade staircase leading to the lower level.

Each fully furnished Business Executive house has broadband Internet, as well as terrestrial, satellite and pay-per-view television. A telephone and an intercom system, independent air conditioning, water storage and a prepaid utility system (electricity and water) are part of the standard features in each house.

There are 18 serviced suites consisting of 4 standard suites, 4 superior suites, 2 executive suites, 4 deluxe and 4 premium deluxe suites. All suites have appliance fitted kitchenettes, a closet with full length mirrored doors, writing desks, wired and wireless internet and terrestrial, satellite and pay per view flat screen television.

The GGOH Food & Beverage team assist guests who need groceries for self-catering. They help guest prepare a list of items they require, within their advised budget, and have the items delivered to their suite, apartment or executive house. The complete grocery shopping service includes preparation of ingredients by a member of the cuisine team, to make self-catering session truly hassle free.

Bar and Restaurant
This 40 seater restaurant overlooks the picturesque swimming pool. The Restaurant provides an intimate atmosphere for lunch and dinner experience. With an array of delectable dishes, sumptuous salads and divine desserts, it offers food for every mood and occasion.

Notable among the menu are Shrimp Cocktail – a hors d’oeuvre of spicy shrimps in an aromatic cocktail sauce, sublime Chicken Aurora – a delicately spiced serving of boneless chicken, in a creamy mushroom and carrot sauce, served with sauté potatoes or curried rice and an unforgettable Fish Menuniere – fish fillet in a garlic-lime sauce, together with pineapple rice. Another unique feature is a rich menu called Black Lives Matter – a rich chocolate dessert that takes clients on another journey of culinary and gastronomic discovery.
The Restaurant also provides Buffet services for the working class who want a change to a reasonably priced luxury location.

Conference and Meeting
The meeting room is set up to accommodate up to 20 people for board meetings, but is also easily reconfigured for other uses. The 2 Conference rooms with seating capacity of 40 each have audio-visual facilities and Internet services.
GGOH Courtyard is used as a Car Park. Outdoor events are therefore not possible and as such request for such services are turned down.

Fitness Centre
With industry-leading fitness equipment, GGOH’s state-of-the-art fitness facilities provide the perfect opportunity to get in shape, and stay in shape. Opened 7 days a week, the gym has membership plans varying from individual monthly to corporate annual memberships. Residents of GGOH have complimentary use of the gym.

A team of experienced fitness coaches guide clients through a systematic regime of training, advice on the most effective weight loss, muscle toning, muscle gain and cardio programs. They monitor client’s progress carefully, and vary the regimes accordingly to fitness expectations.

Health Spa
GGOH’s Spa provides a distinctive combination of beauty services and body therapy. The tranquil spa environment offers guests an opportunity to pamper both body and senses. Experienced beauty therapists provide guidance to help clients choose the appropriate therapy.

Clients can take a relaxed bath in a Jacuzzi, and enjoy Swedish massage to feel energized. It’s full body super scrub, followed by a thermal clay mud with foam wash and body butter massage leaves a client in a blissful state of relaxation. The signature Facial treatment combines double cleansing, double exfoliation and extra extractions with a blissful micro-buff back polish, and is great for clogged pores, dull lifeless skin and fine lines. Manicure and pedicure treatments, together with styling by hair stylists, nail technicians and make-up artists give clients a dazzling appearance and blooming radiance.

The Spa also offers male grooming services. One can expect a look that is sharp and refined from barbers and stylists. The Groom Facial, with its customized double mask, exfoliation, steam treatment, and face and neck massage, is an absolute must before that once-in-a-lifetime occasion, all in all- a truly royal spa experience.

The Spa Boutique retails skincare, make-up and hair products from premium brands. Also available here are top brands in male grooming. The boutique is the reception for bookings, appointments and information on spa services. The Spa Gift Certificates are also sold at the reception. Spa assistants help clients select the appropriate spa gift treatment or customize a unique one.

Business Centre
GGOH Business Centre handles any Secretarial service from photocopying, printing (black and white and colour), lamination etc. GGOH in addition operate the following business lines: Swimming, Laundry and Patisserie.

MANAGEMENT TEAM

GGOH is managed by the following management team:

Shareholder: Asebu Amanfi
Asebu Amanfi, a self-styled successful businessman, studied Civil Engineering at KUMASI LEGON. He started his career with an IT Consulting Company in the United States after securing an opportunity to work in an exchange programme. He later joined an IT Company in India before branching into IT accessories dealership. He successfully owned and managed this business and made good money until he met his friend, Asebi Boakye. In a conversation with the friend, he realised that they both have a passion for the hospitality business.

Shareholder: Asebi Boakye
Asebi Boakye is a highly successful entrepreneur and business mogul who studied Graphic Designing at KUMASI LEGON. He left for the USA just after school and started a car export and import business. He also undertook short courses on entrepreneurship and mentorship in a business school in the United States.

Marketing Manager: Abdulai Alhassan
Abdulai Alhassan is an experienced Business Development/Marketing professional with several years of Service and Product development experience gained in Multi-national organisations with increasing level of seniority. He has a Bachelor of Science degree in Economics and also holds an MBA in Finance. He also has expertise in Trade valuation/classification of goods and general cargo surveys, customer service training, motivation, research and development, resource planning, performance monitoring and review.

Finance Manager: Nutifafa Amenuveveye
Nutifafa Amenuveveye is a Chartered Accountant (CA) and has obtained professional experience from both public practice and industry. He managed the day-to-day activities of the accounting and finance department of a key player in the IT business sector. He also spent five years in an International audit practice, where he obtained an in-depth understanding of both internal and external auditing procedures and issues, both locally and on the international sphere. He is a seasoned trainer and teacher with a track record of delivering excellent training courses.

HOSPITALITY INDUSTRY IN GHANA
Ghana’s hospitality industry is 4th in ranking for profitability in Africa. Ghana is located on the West Coast of Africa between Cote d’Ivoire and Togo. Although the country has a good economy, aspects of the hospitality industry are rather expensive, especially hotel accommodation and internal and external flights. The reason they are expensive is due to the cost of electricity and water and Investors need to recoup their investment as soon as possible. However, since there are a lot of international travelers who fly into Ghana for training and meetings, this has become a serious market for Ghana.
One of the main reasons for the growth in the hospitality business is the growth of the mining industry in Ghana. Workers who come into the country to work in the local mines and galamsey (illegal mining) business are starting to look for food and entertainment in these areas, which is creating a spin-off business boom. The natural resource mining has brought wealth domestically, creating a larger middle class, which is rare in Africa. Other reasons why this industry has taken off are the stable government and economy, which infers more safety, and the growing middle class in Ghana. Due to the tourism potential and the ability for growth, large hotel chains opened hotels in the year 2016 in Ghana, with other chains opening hotels in 2017. The government has intensified its efforts to clamp down on illegal mining due to environmental concerns and with the support from Civil Society Organisations, this economic activity has seen a downturn in outlook.
The advantages right now for Ghana are that the economy is in a serious growth trajectory. New hotels are being built, investments are being received, and domestic and international travels have been on the rise. All of these aspects are conducive for a large hospitality future. Ghana earns almost the same amount of business from international travellers as it does from domestic travellers. This means money is being spent and earned equally in Ghana, which is a positive sign.
Additionally, Ghana has a variety of tourist attractions such as natural attractions, parks and waterfalls, and they also have castles that can be visited. For foreign travellers, Ghana is also a safer way to visit Africa, since it is not known for high levels of corruption or violence, and the Ghanaian people are friendly and outgoing in helping others. They have love for foreigners. Ghana’s democracy has been stable since 1992 and the country practise multi-party democracy.

The hospitality industry in Ghana covers a diverse range of establishments providing hospitality services in the form of accommodation, food and beverage, conferencing and entertainment. The industry is a vital and important component of the Ghanaian economy. It has gained popularity over the past decade when Ghana became the gate way to Africa and has contributed immensely to the Ghanaian economy.

The accommodation subsector includes hotels, Motels, Apartments and similar places providing short-term accommodation which covers all aspects of the provision of accommodation at camping grounds, caravan parks, guest and holiday houses, flats, student residences and youth hostels.

The hotel subsector comprises hotels, resorts and serviced apartments. Hotels and resorts are establishments which are licensed to operate a public bar and which provide accommodation on a room/suite basis, with a bath/shower and other facilities in most guest rooms, but which do not have full cooking facilities (i.e. hot plates and oven/microwave) in most guest rooms.
Serviced apartments are establishments which mostly comprise self-contained units at the same location and which are available on a unit/apartment basis to the general public for a minimum of one night. The units have full cooking facilities (i.e. hot plates and oven/microwave), refrigerator and a bath/shower and other facilities. All bed linen and towels are supplied and daily servicing (cleaning and bed making) is available through the on-site management.

The subsector also includes private hotels and guest houses with facilities which are not licensed to operate a public bar and which provide accommodation on a room/suite basis, with a bath/shower and other facilities in most guest rooms, but which do not have full cooking facilities (i.e. hot plates and oven/microwave) in most guest rooms.

MARKETING STRATEGY

The Marketing Manager Mr. Abdulai Alhassan penned down the following as their marketing strategy.
GGOH will aggressively market to both international and local clients. At the moment our client base is heavily tilted towards the needs of foreign clients especially Americans who are used to the Villas and Apartment hospitality services.
Our customers are now looking for a different lodging experience that is less expensive in a beautiful ambience. There is therefore the need to build enough suites to meet the increasing demand from our patrons. GGOH will therefore like to secure funding to expand facilities to cater for the need for at least 60 suites and a 100 capacity multipurpose conference facility.
The suite will cost a little more than what is currently being charged but we will offer our customers all the services they need to make their stay memorable. We will offer a food shop that will be able to take special orders daily. Each evening, guests can gather in the GGOH’s compound where there is a swimming pool, drinks and light music.
The competitive edge of GGOH is the service. Our team is properly service oriented and some among the management team have many years’ experience in service delivery.

Each member of the management team has had training in customer service. The staff members have also been trained on all aspects of customer service to make our guest feel pampered.

Customer service is an issue of concern for visitors to third world countries like Ghana and this has been noticed by management and has been placed on a high priority. The culture of not paying attention to details sometimes upset foreigners. Giving preference to foreigners over locals also upsets the middle class.

The Restaurant will add local dishes to the menu. GGOH will also consider outsourcing the non-core business units and concentrate on rooms, bar and restaurant activities. The Car Park will be converted to an outdoor conference set up to cater for large capacity events. Customers will be asked to park outside the GGOH.

GGOH‘S FINANCIALS

Cheetah Investments Limited (CIL) in January 2017 contracted a foreign currency loan of $3,000,000 from ABSTRACT Bank Ghana Limited (ABGL) to complete the GGOH building project. This was after the initial promoters, Asebi Boakye and Asebu Amanfi, had invested $1,000,000 ($500,000 each) in the GGOH building project. However the project took two more years before completion.

Meanwhile the interest and principal payments accrued before the business could commence and also earn enough to pay back its financial obligations. This loan has accrued to a total of $3,500,000 as at December 2018 when the GGOH Project was completed. To secure enough funds to pay back part of the loan, CIL has proposed to sell three (3) of the nine (9) villas to ABSTRACT Investments Ltd (AIL), an investment wing of ABGL for $1,000,000. AIL has proposed to dispose of the three Villas to ready buyers at $400,000 per unit. CIL having the first right of purchase has negotiated with AIL to buy back the three Villas at $350,000 per unit, a total of $1,050,000 if after two years, there is no ready buyer.

Operations for the first year have been very difficult. To maintain good customer service, Management decided to purchase supplies from first class groceries and supermarkets. These are mostly purchased on cash and carry basis. The GGOH Management System has no inventory component. The store keeper uses both manual and excel spreadsheet to manage inventory items.

The Rooms, Food and Beverages components of the GGOH Management System have inadequate controls over access rights. GGOH had struggled within the year 2019 to pay salaries regularly because of cash flow challenges. ABGL in consultation with their shareholders and the promoters of GGOH, decided to freeze interest payment for the year 2019 and spread the interest payment over the remaining credit years thus extending the period from 5 years to 6 years.

Assumptions
The Finance Manager, Nutifafa Amenuveveye has prepared the following financial projections based on the 2019 actual financial performance. The underlying assumptions are:

The year 2020 financial performance would be significantly different from 2019 financial results. This is as a result of effective and efficient internal control systems to be put in place by management. For example occupancy rates and revenue for the years 2020 to 2025 are as follows:

Rooms
The rooms are currently made up of 31 with 50 beds. To be very conservative, he used the average occupancy rate of 55% to project revenues for rooms for the years 2020 to 2025. Below is detailed occupancy rates per day used per room:

OCCUPANCY RATE

This will translate into total revenue of $1,396,656 in 2020. This will rise over the years until the expansion project becomes operational in 2025. The increase year on year will rise significantly as more rooms are added.

The above targets will be achieved through a concerted marketing strategy detailed in a comprehensive marketing plan.

Bar and Restaurant
Bar and Restaurant income is made up of Food and Beverages, Events i.e., Conferences and Meetings and Pool Bar Sales. Income from Bar and Restaurant is projected to be 17% of Room Revenue. This is because the performance of this business unit depends on occupancy. The first year 2019 figures suggests that Food and Beverages Income will be 40% of Bar and Restaurant. By the same projections, Events – Conferences and Meetings income is expected to be 50% of Bar and Restaurant income. Also Pool Bar Income is projected to be 20% of Events – Conferences and Meetings income.

Events – Conferences and Meetings income is related to income generated by Bar and Restaurant during conferences and meetings. To attract more clients, conference and meeting rooms are for free and all catering are done by the Bar and Restaurant unit. With the expansion of facilities expected to be operational in the year 2025, income from this business unit will increase significantly.

Pool Bar stock is well patronised during Happy Hour weekly event organised by GGOH on Friday evenings. Many residents in GGOH’s catchment area have made the Pool Bar a destination of choice during evenings.

Other Income
Other Income is made up of the following: Health Spa, Patisserie, Fax, Gym, Internet Cafe, Laundry, Printing, Swimming, Photocopy and Buffet. The assumptions for the above business units are as follows:

General and Administrative Expenses
General and Administrative Expenditure assumptions are based on 2019 figures.

Payroll
GGOH is expected to reduce the number of staff from 78 to 51 for efficient running of GGOH. The following are the category of staff:

AVERAGE EXCHANGE RATE:
2016 – $1 = GHS4.20
2017 – $1 = GHS4.50
2018 – $1 = GHS4.80
2019 – $1 = GHS5.60
2020 – $1 = GHS5.70
2021 – $1 = GHS5.90
2022 – $1 = GHS6.10
2023 – $1 = GHS6.60
2024 – $1 = GHS7.20
2025 – $1 = GHS7.50

Unseen material (Additional Information)
Officials of ABGL are concerned over the lack of adequate controls and proper governance structure at GGOH and have indicated that they might be compelled to take over the running of the business to ensure the loan is paid back. Key among their recommendations are:
1. Development of a binding code of ethics to be observed by all staff including management;
2. Look for an Institutional Investor to commit funds (equity and or convertible debt) that could be used to service the debt;
3. Institute good corporate governance principles and
4. Prepare a new business plan incorporating new assumptions based on the 2019 actual financial performance.

The initial promoters of CIL also intend to embark on an expansion project which involve building new hotel block of 60 standard rooms and a 100 capacity multi-purpose conference facility which provides a new videoconferencing facility to attract more corporate clients and institutions. This they believe will be an opportunity to increase the business profitability and cash flow. It will also give guests a wide range of choice from luxury apartments and suites, family stay villas and a simple standard room thus catering for the rich, middle class and low income client base. This extension project is estimated to cost approximately $3,450,000.

It is against this background that the shareholders of CIL seek a strategic partner with the financial resources to provide financing options to make it possible for their dream to be realised.

Funding Options
The following are funding options available to any investor interested in partnering GGOH to realise its dream:
a) Pay off the loan of $3,500,000 with ABGL for a 45% equity share in GGOH.
b) In addition to option (1), embark on the expansion project costing $3,450,000 for a further 45% shares in the company bringing the total to 90% controlling interest in GGOH.

NOTE: IGNORE THE EFFECTS OF COVID IN ALL YOUR ANALYSIS

SECTION B

7) You have been asked by the Finance Manager to assist in preparing financial projections to convince ABGL that the loan will be paid within the period specified.

Required:
i) In reference to IFAC suggested model for dealing with ethical conflicts and using your judgement, explain how you will undertake this assignment with integrity.    (5 marks)

ii) Assess the impact of Transaction risk on the ability of GGOH to repay its loan with relevant calculations   (5 marks)

The beginning of Customer Focused Ltd
Customer Focused Ltd was registered to begin trading on 1 January 2017. It opened a retail food store near one of the key malls in Accra with the promise to customers to provide: ‘Low prices, great value, and high quality – every day’. The founding investors were three Ghanaians Kpakpo Armah, Akwasi Boateng and Mary Acquah. The business owners are actively involved in the management of the store. The initial equity capital of the business was provided by them. Additional debt capital was also raised at the same time.
A retail unit was rented near one of Accra’s leading malls for an initial period of five years and provided sufficient retail space to offer a range of food products. Initially, the focus was mainly on selling packaged and processed food so that customers could buy food that was convenient to cook at a time when it suited the busy Ghanaian office worker.
The business owners had all previously worked for the food retail stores in managerial roles and knew much about food retailing. However they had never consider what it meant to run a business in terms of attracting customers and dealing with the new commercial environment they faced. Even though competition was tough, the business owners realised that store location was paramount to the business’ success and in this, they had proved to be correct.

Owners
Kpakpo Armah: Age 43. Has 20 years of experience in the retail food sector, working across all functions, beginning in a large store on the outskirts of Accra.
Akwasi Boateng: Age 37. Worked first in education but later changed to a business career originally in banking operations and later in food retail in Kumasi before being invited by Kpakpo Armah to work with him in Customer Focused Ltd.
Mary Acquah: Age 25. She graduated with a degree in business and this is her second job in food retailing. She is keen and committed to developing the marketing function of Customer Focused Ltd and provides better customer relations to help grow the business.
Customer Focused Ltd has traded successfully and profitably since its launch although there are challenges ahead.
Food retail market in Ghana
The food retail market has three subsectors and the market share of total retail sales in Ghana for each subsector is estimated as follows:

Supermarkets                         5%
Convenience stores                40%
Traditional markets                55%

There is tension in Ghana and many African countries between the growth of supermarkets/convenience stores and traditional markets. When incomes rise, consumers look for convenience in their food purchases, and they are able to pay more for food that is sold in expensive retail outlets that are close to other traditional retail outlets. This means that some traditional markets are losing customers.

The competition between supermarkets/convenience stores and traditional markets often breaks down into income levels and purchasing power when a noticeable division in consumers arises. The competitive struggle has often been characterised along the lines of price, quality, and convenience.

Supermarket retailers, whilst facing higher rents, due to location, higher standards of fitting-out and presentation, are able to buy in bulk and also engage in loss leader selling and other marketing activities which are attractive to the modern consumer. Traditional markets rely on social networks and long relationships with customers to underpin their continued existence. However, an important question arises: how far does loyalty to traditional methods to sell product stretch in the face of price competition, wider product choice of high quality, and convenience in terms of hours of trading and location? Traditional markets are under pressure to sell more and have been responding by an increasing focus on fresh produce. They also ensure that their remaining customers get the choice they need rather than perhaps offering products they cannot afford.

Traditional markets have a long history in Ghana. They appear in most towns, some are open every day and offer mostly local produce. They cannot offer cold storage facilities and, so, market traders must have a very keen knowledge of their customers in order to develop a sense of what to stock and sell. For consumers, the social network that a market provides will be important as will be the low prices and local convenience. Indeed, the traditional markets may be the only source of fresh produce that is available. However, the rapid urbanisation of Ghana and growth in income is presenting a challenge to traditional markets that, conversely, supports the development of food retailers that are concentrated in the major population centres, particularly in the south of Ghana. Increases in household income growth have been associated with a reduction in spending on staple products.

Wider economic and social forces are at play in Ghana. Two are worth mentioning. Diet changes are arising from the effect of greater disposable income thus encouraging food retailers to venture into a healthier range of products, at higher prices. Health awareness concerning diets is also having an impact on what is demanded by consumers, particularly as a response to the widespread obesity crisis. The second force concerns the shift in demand towards processed foods. A processed food is any food that has had an element of treatment: for example, part-cooked, added ingredients, and even packaging. A key element of processing is designed to support food safety and the lengthening of shelf-life so that food remains edible for a longer period. However, increased consumption of processed food, throughout the world, has been associated with weight gain and has been linked to the obesity crisis.

Convenience in shopping becomes a priority in the large population centres. For example, traffic congestion can dictate that shopping frequency should fall and hence a location that offers a wide range of produce can be attractive to individuals who are substantially time-constrained. Additionally, increased urbanisation and the centralisation of business activity has led to greater employment opportunities for women who have typically been responsible for food purchases. Add child responsibilities and it becomes clear that shortage of time becomes an important factor in choosing where to shop.

Technology developments have been an important driver in retail food growth and have often under-pinned competitive advantage of one retailer over another. It has also addressed some of the issues surrounding the pressure of time that consumers face and the demand for convenience. For stores, technology provides information and can create loyalty in a market-place where competition cannot always be judged on price attractiveness alone. For consumers, the development of online ordering and even delivery has the potential to change the face of food retailing.

New methods of food retailing have developed rapidly for modern stores, particularly in the use of technology. E-commerce, digital marketing, and technology-based management of the business have become common in many stores especially the food retail sector where rapid change takes place. Moreover, increased competition means that customer loyalty cannot be taken for granted.
Loyalty schemes operated by food retailers have now become part of the landscape of shopping. There are two parts to loyalty schemes. For the consumer, loyalty schemes allow for discounted purchases either immediately or in the future. They enable direct marketing such that discounting offers are targeted to consumers according to their purchasing activity. For the business, gathering information on purchasing activity allows it to see patterns in purchasing at the store, by time, by product, and by consumer. All of this is vital in maintaining knowledge about what products should be offered and when. It facilitates flexible business operations such as inventory management and it reinforces budgeting practices if retailers can discover regularity patterns in purchasing. Loyalty schemes are offered by many retailers in Ghana and, to be without one, might place a particular store at a significant competitive disadvantage. That is, loyalty cards are likely to be essential to sustain a business as they have become embedded in retail operations in much the same way that effective inventory management is a key requirement.

Customer Focused Ltd Performance and Position
The development of supermarkets in Ghana over 30 years ago coincided with the growth of incomes and the increase in purchasing power. International food retail chains launched branches in Ghana (such as Shoprite which is South African owned) alongside the rapid development of home-grown stores and chains such as MaxMart. The building of new shopping malls across Accra and elsewhere altered the pattern of shopping and changed expectations about what was demanded from store retailers in terms of the range of products offered and the convenience of the shopping experience. For example, one key aspect of Koala’s positioning is to make available a diversity of products. There are other examples concerning differing commercial approaches to food retail such as a substantial online presence (for example, Melcom) to the very larger hypermarket run by Palace Hypermarket.

In this context Customer Focused Ltd began trading on 1 January 2017. Initial capital was created with 100,000 ordinary shares and the Share Capital amounted to GH¢300,000. The shares were owned in the proportions: Kpakpo Armah: 70%, Akwasi Boateng: 20%, Mary Acquah: 10%. Debt capital was also introduced. Customer Focused Ltd raised loan finance of GH¢100,000 which was repayable in full after five years unless renewed, subject to negotiation. The loan carried a variable interest charge which was reviewed on the anniversary of taking out the loan. The loan carried a range of covenants associated with it and these are detailed below in the summary loan documentation.

Customer Focused Ltd leased premises in Accra. The lease agreement required the company to pay a rental at the start of each year and the high expense of the agreement reflected the store’s proximity to one of Accra’s leading malls. The lease agreement was to run for five years, with the possibility of renewal.

The leased unit size was sufficient for Customer Focused Ltd to offer a range of goods to attract high spending customers who prioritised convenience over price. All the initial funding was spent on creating product lines in sufficient quantity to attract these customers. Additionally, the store unit required substantial amounts to be spent on re-fitting and purchasing of refrigeration units and cash desks that were capable of maintaining inventory records and of using loyalty cards.

The owners forecast profitability from the onset and had, initially, carried out an investment appraisal that indicated that the store would make money over a five year period. There was an expectation that the business would continue after the five year period but only after a substantial appraisal was undertaken shortly before that time about whether the business was likely to be viable in the longer term. Discussions had taken place, at the beginning, concerning how the owners would exit the business should they wish to dispose of their investments in five years. The owners agreed that they would not take any dividends out of the business.

Summary loan documentation: Agreement between Customer Focused Ltd and Accra Business Bank (ABB)
Loan amount                                                GH¢100,000
Interest rate                                                 Standard variable rate of ABB
Repayable in full                                          31 December 2021
Security                                                         Fixed charge on personal property of signatories
Conditions: Customer Focused Ltd agrees to meet the following as a condition of the loan
1) Repayment interest rate, repayment schedules and final date of repayment can be altered by ABB if covenants are not met.
2) Customer Focused Ltd agrees to maintain the following covenants:

• To maintain monthly cash balances sufficient to pay the following month’s interest payment
• To maintain net working capital always at a positive amount, defined as Inventories plus Receivables less Payables
• To maintain gearing at no higher than 50%. Gearing is defined as (debt/(debt plus equity plus retained earnings)).

Notes
1) The accounts are summarised and extracted. They are used for management review purposes. Statutory accounts, which are fully compliant with reporting standards, are produced separately.
2) Within the management accounts, the company had capitalised the lease on the property to record more accurately the asset base that the company was using.
3) Accruals and prepayments are negligible and are combined into payables and receivables, respectively.
4) The business owners took only a minimal salary from the business.

Business Objective, Business Model and Product Profile
The objective of the business is to ensure sustainability by meeting customer demand in a profitable manner.
The business model is the means by which the objective is achieved. The following description of the key aspects of Customer Focused Ltd’s business model is provided by Kpakpo Armah. Customer Focused Ltd aims to:

• maintain reliable supply arrangements and good distribution to the store,
• keep adequate inventory for all product lines and sufficient storage capability, including cold storage,
• provide a small choice of perishable goods. Customer Focused Ltd concentrates on the sale of processed and dry foods that are not perishable. It stocks a small range of perishable goods that are focussed on daily needs and are therefore frequently bought,
• ensure that shelving, including refrigerated units, and presentation are good enough to deliver customer needs,
• put in place adequate staffing to monitor supplies inwards and keep the presentation of inventory at appropriate levels,
• maintain high quality staff at customer check outs (there are no self check-out registers)
• provide convenience in terms of opening hours to accommodate passers-by who can arrive at all times. The store is open from 6am to 11pm,
• gather marketing and other information collection to support business objectives. This is needed to provide information and intelligence on customers. Traditional markets gather such information based on personal relationships,
• establish and maintain a bulk-order business line. Whilst Customer Focused Ltd mostly relies on individual customers for its sales, it has a smaller additional income stream acting as a supplier for a range of events, and to other businesses for bulk orders. This is not likely to be a growth business for Customer Focused Ltd, and
• ensure adequate financing for both investment and operations. Financing is needed but such needs are supported by the business which is planned to have a strong cash flow.

The main product areas on offer at the store are as follows:

• Food and provisions: packaged or tinned goods (milk, some meats and fish, cheese, cookies, coffee, tea, sugar, salt, biscuits)
• Grains, rice and various pastas
• Breakfast cereals
• Fresh produce: milk, a small selection of vegetables and eggs
• Ready-made meals
• Soft drinks and juices
• Sweets and chocolates
  The business owners plan not take any dividends from the business and hope to either sell the business after five years or continue the business and sell at a subsequent date.

Problems, Plans and Proposals
Customer Focused Ltd was approaching its fifth anniversary and the business owners had begun discussions concerning the next steps. There were a number of areas that were discussed. The business owners recognised that there were some unresolved problems with the business that required attention. They also recognised that their planning processes were inadequate and that this had led to some underperformance of the business, but they were unsure how to respond. At some point soon the business owners agreed that a decision should be made, and a firm proposal adopted either to exit the business completely or to alter its operations or direction in some manner.

Problems
A number of problem areas had emerged which the business owners recognised would need to be addressed if they were to restore the profitability of the business to the levels they expected.

Risk management
The business owners had never introduced a risk management policy, largely because they had never identified the risks to the company. They were now concerned that this should be addressed, largely as a response to the declining profitability of the business and the business owners were concerned that they could see the value of their investments declining.

The risk areas they were most concerned with were:

• Competition: the market is highly competitive and new entrants are frequently emerging. There is a particularly challenging risk arising in the possibility of discount retailers entering the market aggressively.
• Changing preferences of customers: retailers are constantly challenged to anticipate what new trends will arise. Marketing is a vital activity in this respect since it is essential that the company knows its customers and what their changing preferences might be.
• New product lines: the capacity to respond to changing preferences by the development or offering of new products is important and so is the capacity of the business to be able to respond. Capacity constraints may be physical, financial or may arise from operational restrictions.
• Uncertainty: uncertainty is not the same as risk. With risk, key parameters of the problem are understood. With uncertainty, even these key parameters are not known. For example, uncertainty may arise because of product developments – currently unknown by Customer Focused Ltd – that are taking place by competitors which can affect how customers shop.
• Supply arrangements: it is vital that store shelves are stocked to meet customer demand. Any reduction in supplies is a risk along with the potential for price increases on those supplies.
• Customer switching: unless the business builds loyalty, the company is always at risk from customers who will shop where prices are lowest.
  Marketing and Digitisation
  The business owners were aware that they did not have enough information about their customer base to develop effective marketing campaigns. They had fallen behind their competitors in developing data capture systems that would allow them to collect and utilise information on customer spending habits. The feeling amongst the business owners was that they lacked the expertise to develop this and that funding restrictions meant that no new major initiatives were likely to take place in the short term.

Customer demographics
The business owners were unsure if they had correctly anticipated the changing profile of customers, and this is related to the fact the Customer Focused Ltd does not gather information on its customers. Younger customers have noticeably been shopping at the store, particularly during early evening, and many of them have asked for products that have been unavailable, either because they are not stocked by Customer Focused Ltd or because they product line had been sold. A number of areas had opened up as further possibilities for Customer Focused Ltd to sell, including cosmetics, toiletries, and other personal hygiene products, but these had never been a priority for what started out as a food retailing store.

If footfall was important to the business, and it unquestionably was, then Customer Focused Ltd was not servicing the needs of many of its potential customers.

Best sellers and inventory
One of the best sellers in-store were ready-made meals. However, these had limited shelf-life and, at the end of the day, the store had always sold-out. The business owners were not sure how long some of the other, non-perishable, lines had been on the shelves and it was not immediately clear to them which products were selling well and which products did not sell. Inventories were managed by staff but inventory information was neither gathered nor studied.

Plans
It was recognised by the business owners that a five year appraisal was due but that they should bring-forward some efforts immediately since a number of the problems facing Customer Focused Ltd required immediate attention.
The following notes represented the discussion that took place at a meeting held on 30 April 2020:
Kpakpo Armah: ‘I am concerned about the continued decline in our profitability even though our sales for the last 3 years have looked good. I think we should prepare forecast accounts to the end of the year to see what our position is.’
Akwasi Boateng: ‘I think we all know what the position is, but it will be useful to get the facts and forecasts. We would need to think about an appraisal of the accounts to try and understand the key areas which might need our attention.’
Kpakpo Armah: I’ll arrange to get the forecast accounts prepared but we should be ready to begin making some tough decisions, along the lines that we have already made. In addition, it is about time we started considering alternative courses of action for the company. If we wait for the five year anniversary then it may be too late to take any effective action.’
Mary Acquah: I’ve already sketched out some ideas (contained below in ‘Proposals’). They are undeveloped and we would need to work through the implications and to develop detailed plans if they were to be implemented. I fully appreciate that financing will be an issue and the prospects of our continuing in business may not be very good if we cannot arrange adequate financing for the period after the five year anniversary.’
Akwasi Boateng: That much is pretty obvious, but which of your plans is likely to be successful? Do we perhaps need another investing partner? I’m not sure that I am clear about where we go from here….’
The meeting adjourned with nothing more being said.

Proposals
The proposals tabled by Mary Acquah consisted only of a number of headline items as follows:

• Company should launch a loyalty card and develop a marketing programme
• Reduce costs: look for more secure supply arrangements at a reduced price
• Seek a further equity partner, already running a business, to make an alliance and to secure funding
• Seek an additional major investment and possibly relocate to a cheaper premise and launch either
  o a companion store in another location, or
  o increase the product range
• Exit the business with an attempted sale as a going concern.

EXHIBIT 2a

Contract proposal for the supply of fresh produce from Look and Like Ltd
Following initial discussions between Customer Focused Ltd and Look and Like Ltd we are pleased to outline a summary contract proposal for the supply of fresh fruit, vegetables and salads. We can move forward to discuss the detail once we have confirmation that the summary is acceptable. The directors of Look and Like Ltd would be proud to serve and support Customer Focused Ltd and to ensure you of our full commitment to providing an excellent service.

Look and Like Ltd proposes:
1) To supply a range of seasonal fresh produce
2) Orders to be placed weekly and deliveries to take place Monday and Friday only
3) Prices to be determined by market conditions but subject to restrictions on price changes to be charged to Customer Focused Ltd (such limitations to be agreed but are likely to be in the range of 90%-120% of weekly average market prices)
4) There is a minimum supply order each month to the value of GH¢112,300 to ensure the maintenance of supply arrangements
5) Payment terms are 30 days, strictly
6) Non or late payment penalties are to be charged monthly at the rate of 18% of outstanding monies
7) Delivery to Customer Focused Ltd’s premises in a mix of re-usable and non-reusable containers
8) Quality grading standards are to be determined and agreed, and any produce not meeting standards are subject to return to Look and Like Ltd
9) Any product returns must be notified to Look and Like Ltd on the day following delivery
10) Customer Focused Ltd is responsible for meeting regulatory labelling requirements for fresh produce (eg sell-by dates). Look and Like Ltd will supply relevant information for labelling purposes (eg delivery date, product description and type, product grading and so on)
11) Look and Like Ltd does not offer any indemnities to Customer Focused Ltd as a result of any legal action taken by Customer Focused Ltd’s customers arising from the purchase of produce supplied by Look and Like Ltd
12) The agreement to start on 1 July 2020 and end on 30 June 2023.

 

EXHIBIT 2b
Note from Kpakpo Armah regarding Look and Like Ltd

To: The Directors of Customer Focused Ltd

From: Kpakpo Armah

I have known about Look and Like Ltd for some time through meeting some of the directors at my sports club. During informal chats with them over the years, they have always struck me as being very aggressive in attracting new business and their business has grown rapidly as a consequence.

I am concerned, however, about some of their employment practices. I have heard from other friends that they pay very low wages to their staff. Importantly, as Look and Like Ltd acts as a food wholesaler, I have heard some disquieting news about their business relationships with farmers.

I have heard that they charge farmers a fixed fee annually to be on the preferred Look and Like Ltd supplier/farmer list. I have not heard of this before and I personally find it unacceptable.

My research into perishable produce – even for well-managed businesses – indicates that there is likely, on average, to be about 20% of wastage due to damage and inventory past its sell-by date. My contacts in the industry suggest that mark-ups, as a consequence, are of the order of 40-60%. I think we can expect to sell all of the minimum order at a mark-up of 40% to be competitive. I believe that there is a risk that our wastage might be higher if our inventory management (refrigeration, shelf replenishment, careful handling, and so on) is not of the highest standard. I would expect there to be additional overheads amounting to GH¢50,000 a year in the first year.

I understand, also, that Look and Like Ltd has plans to import some fruit and vegetables that would be subject to foreign exchange currency risk that we might have to face. Whilst it is not part of our current contract, we might want to consider selling these products as they may add significantly to the attractiveness of our product offering. I am concerned, however, that Look and Like Ltd will want to ensure that Customer Focused Ltd bears the foreign exchange risk. I have been told that we could hedge such risk but I don’t know how this might be done and I definitely do not want to add any further to the costs of our operations.

 

SECTION B
Customer Focused Ltd has received a proposal from a potential supplier, Look and Like Ltd, to provide fresh produce (Exhibit 2a) and is considering whether to accept. Kpakpo Armah has written a note (Exhibit 2b) about Look and Like Ltd.

Required:
Using the information available, including information you feel relevant from your answer to Section A:

7) Explain any ethical issues for Customer Focused Ltd in accepting the proposed contract. Use an ethical decision model to support your explanation.   (8 marks)

QUESTION:

Financial issues
Ghanalux makes large payments to hotels, airlines and travel companies in Ghana to secure places for its tour customers. It also makes payments of commission to its agent (a travel booking company) in the USA, with 50% payable to the agent when a customer pays a deposit for a holiday and the remaining 50% when the customer pays the balance of the money owed for the holiday. All these advance payments to the agent are short-term assets of the company. Taken together, these prepayments are much greater than the amounts received as deposits from customers when they book their holiday. (Deposits from customers average 10% of the total holiday price.) As a result the company, although profitable, operates with a bank overdraft and the bank overdraft, although expensive, has become a permanent feature of the company’s financial structure.

The directors have discussed ways of reducing the bank overdraft, although this year has seen a reduction primarily from a sound positive net cash flow from operations, and the owners taking a reduced dividend. One approach to reducing the overdraft would be to look for ways of reducing the investment in working capital; and another would be to arrange with their bank to convert the bank overdraft into a medium-term bank loan.

There are other financial issues that the directors think they might not yet have arranged to their company’s best advantage. Customers pay for their holidays in US dollars. Airlines and most hotels used by Ghanalux for its customers also ask for payment in US dollars. Other payments are in cedis, and if the company has a short-term dollar cash surplus at any time, it converts the dollars into cedis at the available spot rate. If it arranged a loan with its bank, this would be denominated in cedis. The cash flow statement for the year ended 31 December 2018 is given below:

Organisation and governance
The directors also agree that in order to prepare for growth, the company needs to establish a more formal governance and organisation structure. At the moment, the company is managed by the two directors, although they try to keep their employees informed about their plans and what the company is doing. As the amount of administrative work has built up, they agree that they need to recruit an additional person to help them with management and administration.

Coffie has already expressed the view that they should appoint one of the company’s tour guides to a position on the board of directors. Adofo disagrees. He would like to appoint a non-executive director, and promote a tour guide to the role of senior manager in the company, with responsibility for developing new tour services. Part of the background that is of relevance in determining whether to promote from within, or appoint from outside, is that the company’s current remuneration packages are rapidly looking out-of-date, and, frankly, not offering an attractive proposition. Coffie and Adofo have both read that start-ups and early stage companies in their sector are either paying more, or introducing additional elements to the remuneration package, such as share options.

When asked by Coffie about the identity of a possible non-executive director, Adofo made two suggestions. One was to appoint a retired retail banker who is known to both himself and Coffie. The other is the managing director of a transport company in Ghana that operates a fleet of buses and other transport vehicles, and who has extensive knowledge of the tourism industry in the country. This individual is also well known to both directors.

Security and control
The company has just received a report at its Accra office from a tour guide who is currently leading a tour with a tour group of 18 people. Two of these individuals have been robbed in the street, and the police have so far been unable to catch the thief. This incident has led to a number of other complaints from members of the tour group, about the tour leader sometimes being unavailable when expected, or late for the start of daily excursions; problems with the handling of luggage and suitcases; and on one occasion missing a short sea cruise because the tour group arrived too late at the embarkation point.

Adofo and Coffie are alarmed by these reports, and think that some tour guides might be ignoring the company’s code of conduct, which puts customer care and ethical business practice at the forefront of employee concerns. The company’s marketing and promotional material boasts that customers receive five-star service and complete protection during their holiday. Coffie questions whether the company is being entirely ethical in its approach to business, and he is doubtful whether the company’s tour guides are sufficiently competent in the work they do.

Required:

Discuss whether the company is operating in an ethical manner.                                                                                    (5 marks)