COST ANALYSIS ON A SMALL BUSINESS START-UP IN CHINA (B)

List the major management decisions that Sindy made. Explain what effects these decisions have on the financial performance of Easy Business.

Based on the case, our group managed to identify a few of management decisions that Sindy made and what are the effects of those decisions to the financial performance of Easy Business Company Limited: 1. Recruiting job focus only on blue collar and junior staff positions (low level positions)
When Sindy first started her business, she decided to focus only on low level position market segmentation as she felt that there was a greater hiring need and market for front line operators. This is a good management decision taken by Sindy because she knew that as a new hiring agency in the job hiring industry, is was not easy for her to compete with other well-established hiring agency. Thus, it was easy for her by focus on low level positions where most of hiring agency are not interested with because it may seems unprofitable and not aligned with their reputation of well-known hiring agencies. As a result, Sindy faced with minimum competition in the market.
In addition, the fact that most of Sindy clients were supermarkets and food courts which consistently searching for people for various low level positions such as shop assistants, cashiers and others also benefited her as she able to have fifteen positions per week to be advertise, and that was three times higher than the number of positions she was estimated in her budget which is five positions per week. Refer to Exhibit 4: Cost Recovery Comparison.

Estimations-Low Operating Cost Scenario | Actual | 5% Charge | 10% Charge | 30% Charge | Registration Fee Per Position | 160 | 160 | 160 | 160 | Success Fee Per Position | 300 | 500 | 1,000 | 3,000 | Total Revenue Per Position | 460 | 660 | 1,160 | 3,160 | Number of Positions Advertised Per Week | 15 | 5 | 5 | 5 | Annual Revenue | 358,800 | 11,600 | 301,600 | 821,600 | Operating Costs Excluding Depreciation | 168,230 | 191,600 | 191,600 | 191,600 | Operating Income | 190,570 | (20,000) | 110,000 | 630,000 | Interest Payment to Sindy’s Father | - | 8,245 | 8,245 | 8,245 | Income Tax (30%) | 57,171 | - | 30,527 | 186,527 | Net Income | 133,399 | (28,245) | 71,229 | 435,229 | Fixed Asset Investment | 19,540 | 112,500 | 112,500 | 112,500 | Year(s) Required to Recover FAI | 0.15 | N/A | 1.58 | 0.26 |
Exhibit 4: Cost Recovery Comparison

When Sindy focus only on low level positions, she can forgo the cost of hiring HR professional. As she do not have experience and expertise in handling recruitment or interviews, hiring HR professional is a must in order to ensure the ability and credibility of applicants for those positions are refine and only selected people can apply for the job positions. This is totally opposite to low level position where everyone can apply, whether they educated or non-educated, as long as they have basic skills and need jobs. Sindy also do not need certain knowledge or skills in order to conduct interview for low level position as it is an open position for everyone and no special requirements imposed to the applicants. Sindy also considered lucky as she able to hire staffs that not only cheap but also have experience working at the hiring agency. Although not qualified as professional, but it was sufficient in order to conduct first level interviews. 2. Leasehold Improvement & Furniture Cost
As Sindy went through her start-up cost, it was decided that she might be able to reduce cost in both leasehold improvement cost and furniture and fittings cost. She was able to rented a place where the previous tenant already made an improvement to the space and left all the partitions. Luckily for Sindy, she found that the partitions built by previous tenant were useful and handy, and thus enable her to reduce the cost for improvement as she can just continue use whatever left by previous tenant and took a cost advantage there. She only have to incurred RMB 1000.00 for new wall paint and carpet, compared to her leasehold improvement estimation of RMB 40,000.00. This was one of major beneficial management decision taken by Sindy as she able to save RMB 39,000.00 from the total start-up cost and thus reduce the amount to be borrowed from her father. In addition, he decision to just use secondhand furniture also gives her good cost benefit. Because her focus applicants and clients only come from low level market segmentation, she realized that there were no needs for fancy or brand new furniture in order to impress her clients and job applicants as both of them come from the same life standard like her and not very concerned or impressed by high quality furniture and settings. She was able to incurred RMB 18,540.00 only for furniture and fittings compared to her estimation of RMB 72,500.00, with major saving of RMB 53,960.00. Refer to Exhibit 1. | Actual Cost | Estimated Cost | Furniture | 4,190 | 55,000 | Fax | 6,000 | 4,000 | Computer | 5,000 | 10,000 | Telephone Equipment | 3,350 | 3,500 | | 18,540 | 72,500 | Leasehold Improvement | 1,000 | 40,000 | | 19,540 | 112,500 |
Exhibit 1 Investment in Leasehold Improvement, Furniture and Equipment 3. Marketing and Promotion Cost
Marketing and promotion is one of the most important things in the business especially during the earlier period of business operation. At first, Sindy had planning to use Hiring News and job fair to advertise the positions which being estimated to RMB 26,000.00 and RMB 12,000.00 respectively. During the first year operation, she had made some changes including to these cost estimation. She had decided to use the special package offered by Hiring News only and avoided job fairs for this period. Hiring News was the most popular information source for jobs in Shanghai News and also seems more efficient as they can update the advertisement weekly which increased probability for people to be exposed easily with information advertised. This decision affect the costing as it would be reduce the cost by RMB 12,000.00 from what being estimated earlier. | ACTUAL(RMB) | ESTIMATION(RMB) | DIFFERENCES(RMB) | HIRING NEWS | 26,000 | 26,000 | | JOB FAIRS | - | 12,000 | | TOTAL | 26,000 | 38,000 | Save 12,000 |

4. Policy of Deposit equivalent to Success Fee Other than that, one of the major decisions that Sindy made include the policy of deposit equivalent success fee. The applicants for jobs need to succeed until second interview before being accepted and need to pay the deposits to company. However, if applicant was not being hired at last, the deposit will be returned to the applicant. It is actually more or less like guarantee to ensure the applicant was not run away once got hired. The deposit can be used to cover the loss that the company needs to incur due to the applicants rejection.
Yet, the deposit also can be used as extra cash for working capital and reduce the capital needed by Sindy. She can use it as rolling capital for the business operation and maintain the cash flow smoothly. From that, she was able to reduce the need of borrowing that she needs from her father. At first, she had estimated that she will be paying the dividend for the borrowing but from the first year financial statement stated that she was not paying for the dividend which may lead to cost reduction at the same time. | ACTUAL(RMB) | ESTIMATION(RMB) | DIFFERENCES(RMB) | Dividend of borrowing | - | 8,245 | 8,245 | Total | | | Save 8,245 |

5. Staff Cost
There other decision than Sindy sin takes that effect on financial performance of Easy Business was in the staffing. She decided to hired low cost labour or worker instead of professional HR because she only focus on low level position consist of blue collar worker and junior staff therefore the need of HR professional is not needed for time being.
Besides that, Sindy also make some cost cutting in her employee compensation package whereby she apply no base salary rule for some of her worker which is for her sales person and her assistant which mean their salary only base on percentage of 15% success fee and 10 % gross revenue. Moreover, Sindy required all her staff pay their own social insurance and medical insurance which later on eliminate her cost of payroll overhead.
The effect of these decisions enables Sindy sin to reduce her start-up capital dramatically. In the case, exhibit 2 showing the comparison the estimated cost and the actual that Sindy incurred. The Estimated cost for staffing should be RMB 93,600.00, however with effects of Sindy cutting cost measures the staffing cost reduce into RMB 73,230.00. This resulted saving amounted RMB 20,370.00

| Actual | Low | High | Cost saving | Receptionist | 7,800 | 6,000 | 9,600 | None | Sales | | 72,000 | 72,000 | 6,570 | Base salaries | 12,000 | | | | Commisions | 53,430 | | | | HR professional | N/A | N/A | 120,000 | 120,000 | Payroll overhead(20%) | N/A | 15,600 | 40,320 | 15,600 | Total | 73,230 | 93,600 | 241,920 | |
Exhibit 2 Staffing Cost