Feasibility study of setting up a business - Assignment Example

A2 Business Studies work - Feasibility study of setting up a business Content Page Section Introduction The feasibility Information Primary Objective Secondary Objectives Section 2 Methodology and Research Primary Research into the target market Analysis of primary research Secondary Research into the local economy Secondary Research into the market Analysis of secondary research Portfolio - Boston Matrix Location - Investment Appraisal Section 3 Finances Need for investment Credit plan Cash Flow forecasts Break-Even Analysis Product Portfolio Section 4 Evaluation Final Evaluation Section 1 Introduction There are two ways to purchase nutritional supplements: at a retail store or online. Ordering online offers difficulties because you don't get as much individual consultation as you would in person, plus the long delivery times can make it more troublesome. However, a retail outlet offers consumers the opportunity to purchase quality supplements, on demand, with the assistance of a qualified nutritionist. The proposed location, in Solingen (Northwest of Germany), has got quite a few gyms but no single gym shop. The proposed gym shop would mainly include supplements and the right nutrition for both advanced and less advanced sportsmen and bodybuilders as well as equipment, dietery plans, trainers and magazines. Staff in the shop will have the appropriate knowledge to give advice to potential customers. This is a study of the feasibility of setting up a gym/fitness shop in Solingen. Solingen accomodates 164,205 residents and the population is increasing steadily. Fifty-two percent of the population are male. This demographic is favourable as my main target audience are men. Solingen lies in North Rhine Westphalia, which is the state with the highest gross national product in Germany. All in all there are 24 fitness centres with an average of 320 members. This leads to the conclusion that there are approximately 7680 people with a gym membership. This is a good base figure for potential customers. There are two districts that have a higher amount of gyms in town than the others. Those two districts are Solingen-Mitte and Solingen-Wald, each with seven. Primary Objective The primary objective of this study is to find out if it is feasible to set up a fitness/gym shop. Secondary Objectives: The secondary objectives are mainly research, analyses and evaluations. The following types of research will be undertaken: Research into the local economy. Household incomes, unemployment rates as well as demographics within the local area have a significant influence on the success of the proposed business. Finding out and analysing those figures will be necessary to evaluate as accurately as possible. Primary Research into the target market. This is a vital part of the whole study, as it will tell about consumer needs and wants. It will reveal whether there is an interest in such a shop and hence be helpful in order to decide if setting this business up will be feasible. Analysis of primary research. The findings of the different types of research will provide this study with an overview of the demand of the proposed business. However, financial limitations will lead to outcomes that are not completely reliable. Therefore it is necessary to justify the conclusions made. Research into the market. Analysing this market will be of use to decide on which strategy is most appropriate. Assessing the competition the proposed business is going to face will help to adopt suitable marketing strategies. Spending habits as well as holes in the market will hopefully be spotted. Analysis of secondary research. The secondary research gathered will be vital in order to create a marketing plan. The findings about competition and demographics will reveal where it is most suitable to set up the shop. Investment Appraisal. In order to decide where to locate the proposed shop an investment appraisal will be carried out. Qualitative factors are going to be considered. Section 2 Methodology and Research Primary Research into the target market To actually find out if there is a demand for such a shop a survey was carried out in a fitness centre that revealed that there is in fact a demand for a gym shop. The survey includes 100 people. The questionnaire was set up as follows: Name (optional): _____________________ Do you buy Supplements (e.g. Protein, Creatine,..): Yes No If so - where do you buy those (ignore if previous answer was "no") On the internet In the Gym In a fitness shop Elsewhere If not - would you like to get consultation in this area Yes No Would you appreciate sport/gym belongings as well (apart from supplements) like magazines, vitamins, dietary plans etc. Yes No Do you know a shop offering the listed products Yes No If yes - what is the shop called ___________________ Analysis of primary research The outcome of the first bit of the questionnaire is as follows: The result of the first part of the survey reveals a lot. It shows that those who buy supplements purchase them on the Internet, which concludes that there is no or hardly any competition in the area. The result that 99% would like to get consultation in that area explains why there are only 20% buying those products. There is a lack of knowledge about supplements like why it should be taken, by whom, when and how much. From the result that 96% of those buying these products get it from the Internet it can be concluded that they received little if any consultation. As the intention is to employ staff with knowledge about nutrition this can be seen as a good selling point. The 4% who buy supplements elsewhere got them from the fitness centre they are member of. However, those studios are very limited because you need a nutritionist's degree to sell them. The results of the second part of the survey revealed important information as well. The main idea was to create a whole fitness/gym shop, not just a supplement supply business. Hence, the interviewees were asked whether they are interested in products that belong to fitness sports. The survey revealed that there is a certain interest in those products, which can be seen as another opportunity for potential customers. The very last bit of the survey showed that this shop would in fact be the only one of its kind. The 2% knowing a shop offering the listed products mentioned the same one--the American Fitness Shop-however, this shop is located in Cologne, which is a good 45 kilometres away from Solingen. This underlines the fact that there is very little competition in this market. At this point one may wonder why there is so little competition. First of all, a lot of people in Germany still think that supplements have a bad effect on you and often compared with steroids. However, this is an obsolete fact which is proven wrong. In fact, nutritionists even advise eating supplements. This wrong statement about supplements has never been successfully out promoted by a business. Supplements are promoted more in other countries like the United States. Also the rights to sell those products are slightly stricter in Germany as you need a certain degree in nutrition science to be allowed to sell these products. All those factors held entrepreneurs back from opening a gym shop. Instead, most of them decided to set up a business on the Internet, which has very low set-up costs and decreases the risk. Summing this up, marketing is vital in the process of setting up the proposed shop. A proper marketing plan has to be carried out in order to satisfy as well as to create customers' wants. The owner of one of the biggest Fitness Centres in town was interviewed to get more necessary facts about the market. The following questions were asked: Who is the largest supplier of fitness products in the local region Multipower is the biggest supplier and pretty much outcompetes everyone else. What is the expected Profit margin in this market Our profit margin is 60%-70% on almost every product. When bulk buying it even goes up to a 100%. However, the profit margin is less for protein because the resources are fewer and so it becomes more expensive. Which products are the most popular Powerdrinks from Multipower as well as protein from Multipower. Why do you hardly sell any products inside the fitness centre Because you need a license to prove that you have a good working knowledge about nutrition. This gives you the right to sell those kinds of products. The intention is to act as a sole trader as it is the simplest legal structure. Acting as a sole trader is easy and cheap to set up. Problems that might occur have to do with growth, as borrowing money may be hard. Sole traders need security and the loan potential is limited. Research into the local economy: The age groups in Solingen are as follows: 0-10 11-15 16-25 26-40 41-55 56+ 4.9% 11.2% 9.5% 30.2% 29.1% 15.1% Average age of people going to a fitness centre or to a gym: 11-15 16-25 26-40 41-55 56+ 3.1% 38.7% 39.3% 13.9% 5% The main age targeting is 16-40, which is 78% of the fitness centre goers. About 45% of Solingen's population match this age group, which is a good basement for potential customers. With an 8% rate of unemployment, Solingen is slightly below Germany's mean value (8,6%). Existing firms, medium-sized in particular, use the good location conditions for growth. In 2006 Solingen recorded a growth in business foundation of approximately 7000. As unemployment is low in Solingen, this should indicate a high level of consumer spending, as households have higher disposable income. However, this low rate of unemployment might cause problems when it comes to employing staff because of the inelastic supply of labour. This might be one of the biggest problems the business start up is going to face, as the proposed shop needs staff with a certain degree as well. Further secondary research shows that Solingen has more than 300.000 square metres of disposable business space, which means that there is not going to be a problem to rent premises. Secondary research into the market Supplementary products as well as most of the other sport products are not season conditioned, which is favourable as you don't have to hold much stock and you can get them delivered weekly. This reduces stock holding costs and it lowers the risk of not selling existing stock. However, a discount for bulk buying will be out of question in this case. Portfolio The product portfolio consists of the following main products: Protein drinks Creatin tubes Trainers Magazines Vitamins Consultation (know-how) In order to analyse the position of the proposed business in the actual situation of the market a Boston matrix plan was carried out: The cash cow can help fund the development of the stars and the problem children. Location - Investment Appraisal There are two districts that offer great potential for a start-up business. Those two districts are called Wald and Mitte. Both have seven gyms each. In order to decide which one to invest in, an investment was carried out. The payback method is used as it is easy to calculate and quickly done. However, the accuracy might not be as high as it doesn't take qualitative factors into account. Starting up in Wald is favourable as it is better located and has a better infrastructure and parking facilities. However, the investment costs are 21,000. The expected monthly return is approximately 1,800. (see page .. ) Starting up in Mitte is less expensive as the investment costs are only 15,000, however the expected monthly return is less - 1,200 - as it not as well located. Payback method Project Mitte Project Wald 15,000 Payback reached Capital cost () 21,000 Payback reached net cash inflow () 1,200 No Month 1 1,800 No 2,400 No Month 2 3,600 No 3,600 No Month 3 5,400 No 4,800 No Month 4 7,200 No 6,000 No Month 5 9,000 No 7,200 No Month 6 10,800 No 8,400 No Month 7 12,600 No 9,600 No Month 8 14,400 No 10,800 No Month 9 16,200 No 12,000 No Month 10 18,000 No 13,200 No Month 11 19,600 No 14,400 No Month 12 21,600 Yes 15,600 Yes Month13 The tables show that: Payback period project Mitte: 12 600/1200 = 12.5 months = 13 months Payback period project Wald: 11 1400/1800 = 11.8 months = 12 months As the payback period of project Wald is less, it seems to be more favourable to open up the business there. Section 3 - Finances Need for investment In order to get information about the investment costs before the launch of the business the "Business Set up Support - Solingen" company was consulted. Their figures are based on practical knowledge; however, there is no assurance of total accuracy. The estimations are as follows: Investment Costs Property lease commission 1st month 1,500.00 Property lease commission 2nd month 1,500.00 Technological features (Computer, Software, etc.) 1,000.00 Stock-receipt 9,000.00 Shop fittings 4,000.00 Advertising costs 4,000.00 Total 21,000.00 NB: The first two months of property lease commission have to be paid in advance. Assuming a present amount of money of 6000 on a bank account, a further amount of 15,000 is needed. Banks need security and evidence that loaned money will be paid back, especially from sole traders. In order to prove future liquidity a cash flow plan has to be carried out. The bank with the lowest annual percentage rate is chosen - the Stadtsparkasse Solingen (7%). A proposal instalment loan plan is calculated in order to find out how high the monthly rate is for a repayment in 5 years time. Credit plan Month Debts preceding month Instalment at the end of month Therefrom interest Therefrom extinction Level of debts at the end of month 1 15.000,00 297,02 87,50 209,52 14.790,48 2 14.790,48 297,02 86,28 210,74 14.579,74 3 14.579,74 297,02 85,05 211,97 14.367,77 4 14.367,77 297,02 83,81 213,21 14.154,57 5 14.154,57 297,02 82,57 214,45 13.940,12 6 13.940,12 297,02 81,32 215,70 13.724,42 7 13.724,42 297,02 80,06 216,96 13.507,46 8 13.507,46 297,02 78,79 218,22 13.289,23 9 13.289,23 297,02 77,52 219,50 13.069,74 10 13.069,74 297,02 76,24 220,78 12.848,96 11 12.848,96 297,02 74,95 222,07 12.626,89 12 12.626,89 297,02 73,66 223,36 12.403,53 Sums after 1st year 3.564,22 967,75 2.596,47 12.403,53 13 12.403,53 297,02 72,35 224,66 12.178,87 14 12.178,87 297,02 71,04 225,97 11.952,89 15 11.952,89 297,02 69,73 227,29 11.725,60 16 11.725,60 297,02 68,40 228,62 11.496,98 17 11.496,98 297,02 67,07 229,95 11.267,03 18 11.267,03 297,02 65,72 231,29 11.035,73 19 11.035,73 297,02 64,38 232,64 10.803,09 20 10.803,09 297,02 63,02 234,00 10.569,09 21 10.569,09 297,02 61,65 235,36 10.333,73 22 10.333,73 297,02 60,28 236,74 10.096,99 23 10.096,99 297,02 58,90 238,12 9.858,87 24 9.858,87 297,02 57,51 239,51 9.619,36 Sums after 2nd year 3.564,22 780,05 2.784,17 9.619,36 25 9.619,36 297,02 56,11 240,91 9.378,46 26 9.378,46 297,02 54,71 242,31 9.136,15 27 9.136,15 297,02 53,29 243,72 8.892,42 28 8.892,42 297,02 51,87 245,15 8.647,28 29 8.647,28 297,02 50,44 246,58 8.400,70 30 8.400,70 297,02 49,00 248,01 8.152,69 31 8.152,69 297,02 47,56 249,46 7.903,23 32 7.903,23 297,02 46,10 250,92 7.652,31 33 7.652,31 297,02 44,64 252,38 7.399,93 34 7.399,93 297,02 43,17 253,85 7.146,08 35 7.146,08 297,02 41,69 255,33 6.890,75 36 6.890,75 297,02 40,20 256,82 6.633,93 Sums after 3rd year 3.564,22 578,78 2.985,44 6.633,93 37 6.633,93 297,02 38,70 258,32 6.375,61 38 6.375,61 297,02 37,19 259,83 6.115,78 39 6.115,78 297,02 35,68 261,34 5.854,44 40 5.854,44 297,02 34,15 262,87 5.591,57 41 5.591,57 297,02 32,62 264,40 5.327,17 42 5.327,17 297,02 31,08 265,94 5.061,23 43 5.061,23 297,02 29,52 267,49 4.793,73 44 4.793,73 297,02 27,96 269,05 4.524,68 45 4.524,68 297,02 26,39 270,62 4.254,05 46 4.254,05 297,02 24,82 272,20 3.981,85 47 3.981,85 297,02 23,23 273,79 3.708,06 48 3.708,06 297,02 21,63 275,39 3.432,67 Sums after 4th year 3.564,22 362,96 3.201,25 3.432,67 49 3.432,67 297,02 20,02 276,99 3.155,68 50 3.155,68 297,02 18,41 278,61 2.877,07 51 2.877,07 297,02 16,78 280,24 2.596,83 52 2.596,83 297,02 15,15 281,87 2.314,96 53 2.314,96 297,02 13,50 283,51 2.031,45 54 2.031,45 297,02 11,85 285,17 1.746,28 55 1.746,28 297,02 10,19 286,83 1.459,45 56 1.459,45 297,02 8,51 288,50 1.170,95 57 1.170,95 297,02 6,83 290,19 880,76 58 880,76 297,02 5,14 291,88 588,88 59 588,88 297,02 3,44 293,58 295,30 60 295,30 297,02 1,72 295,30 0,00 Sums after 5th year 3.564,22 131,54 3.432,67 0,00 In total 17.821,08 2.821,08 15.000,00 0,00 The tables show that the proposed business has to be capable of paying a monthly instalment of 297,02. A cash flow plan is performed to show this. Cash Flow Plan The monthly costs are again estimated by the "Business set up support Solingen". Monthly needs Costs Personnel 3,000.00 Property lease commission 1,500.00 Telephone charges 55.00 Software, Internet charges 37.00 Depreciation 61.00 Interest 47.00 Total monthly costs 4700.00 The monthly interest rates were derived from the average amount of interest that is going to be paid. Deduced from the calculation: The average monthly interest costs were derived from the total sum of interest (2.821,08) divided by 60 months, which gives approximately 47.00. The depreciation costs were deduced from the official depreciation range values. The German government says that shop fittings lose their total value in 10 years time. As the value is 4,000, the annual depreciation is 400, the monthly depreciation is therefore 400/12 = 33. A computer loses its total value in 3 years. As it has a value of 1,000, its annual depreciation is 1000/3, therefore the monthly depreciation is (1000/3*12) = 28. The total monthly depreciation is therefore 33+28 = 61. As the monthly costs are approximately 4700 - how many products have to be sold to obtain a gross profit of 4700 Primary research (see page ) revealed that retailers sell with a margin of 70%. The buying costs and the selling costs of the products are as follows: Buying costs calc. selling price (with 70% margin) Proteine 2,00 3.40 Creatine 32,35 55.00 Trainers 29,00 49.90 Magazines 2,90 4.99 Vitamines 0,40 0.69 Assumption Units sold Daily turnover Cost of sales/ material costs Proteine 10 34.00 20,00 Creatine 10 550.00 323,50 Trainers 2 99.80 48,00 Magazines 5 24.95 14,50 Vitamins 10 6.90 4,00 In total 715.65 410 Monthly (x22 working days) 15,744.30 9,020 Cash Flow Turnover 15,744.30 Cost of sales 9,020.00 Gross Profit 6,724.30 Personnel 3000.00 Property lease commission 1500.00 Software, Internet charges 37.00 Telephone charges 55.00 Depreciation 61.00 Interest 47 Trading Profit 15% taxes net asset profit 2023,30 303.57 1,719.73 Cash flow 1719.73+ Depreciation (61) Cash flow 1780.73 The outcome shows that the business will be capable of paying the instalment costs of 297,02. The cash flow plan shows it is a remunerative business. Break Even Point for one product Creatine, selling price: 55 , buying price: 32,25 Fixed costs: 4700 Contribution per unit: 22,65 Break Even Output: fixed costs/contribution per unit = 4700 / 22.65 = 207 207 units have to be sold monthly to break even. Section 4 - Evaluation Final Evaluation Based on the information received from studying an existing company and creating a similar cash flow plan, the feasibility of this venture is apparent. The need is also evident: those who visit a gym already have an expressed interest in fitness and health. By providing nutritional supplements, equipment, dietary plans and trainers, in addition to professional advice and guidance, fitness enthusiasts are provided with added benefits. They can receive a balanced gym experience that offers a spectrum of products and services. The market area and location are feasible, as well. The projected area has a high median income, as well as an interest in such products/services. Having completed a marketing survey, it is evident that there is a need as well as desire for a fitness centre that includes a nutrition shop. The desired location shows great potential. As approximately 45% of Solingen's population is in the desired 16-40 age group, there is a large number of potential customers. The area also shows great potential for such a venture because of the low rates of unemployment. Which district is best suited for the venture was another consideration. Based on the payback method evaluation, it seems to be more favourable to open up the business in Wald. Starting up in Wald is also favourable as it is better located and has a better infrastructure and parking facilities. By analysing an existing company, it shows that the start up costs as well as maintenance costs can be met. The outcome of the study shows that the business will be capable of paying the instalment costs of 297,02. These figures, taking into account expenses such as property rental, equipment, inventory and marketing and advertising, show that a start-up investment of 21,000 is needed. Assuming a present amount of money of 6000 in a bank account, a further amount of 15,000 is needed to fund this venture. Based on all information gathered on demographics, cash flow potential as well as feasibility, the possibility of opening a gym and supplement store in Wald is promising and holds great potential. Read More