Rug Bug Corporation - Assignment Example

Entrepreneurship - Rug Bug Corporation This memo is addressed to Mr. Al Young in response to his queries with regard to the wheelchair project You face a problem typical to all start-ups - you have developed a brilliant product, but do not have the resources to bring it into the market. The wheelchair designed by you for children with impaired mobility has many advantages over the competition. To reiterate these: The wheelchair weighs half the weight of the closest competitor, It has safety features that make it absolutely the best product in the market, and It will retail at half the price despite including a handsome margin for the firm as well as the trade. Having gone over the entire information provided by you and after due consideration of the facts I provide my response in the following passages. The Industry: Wheelchairs are marketed in the US by a number of companies. The market is dominated by Sunrise and includes other players like Orthokinetics, Everest & Jennings, Guardian, Theradyne and Invacare. There are presently more than 70,000 children in the 6 to 14 age-group in the country using wheelchairs. However, this is a small number when compared with the reported 4.5 million children who suffer from disabilities. So why do wheelchairs not sell to more children who need them The primary reason seems to be the high cost and the short period of usefulness of the equipment. If we consider the total number of children using wheelchairs and the age span of 8 years (14-6) that translates to less than 10,000 additional purchases each year, excepting of course, the replacements. As against this you have projected sales of 340; 5400; and 22,400 units in the first three years of operations - in a market that is growing at three percent anuually. This is not likely to go down well unless substantiated by other arguments. The points that need to be highlighted in your report to the investor group are: With the introduction of the Rug-Bug the market size will expand exponentially as a cheaper, lighter and safer machine becomes available. Within the market for wheelchairs, the market for wheelchairs for children does not appear to be a well defined market. This definition will be given substance by Rug-Bug. Increased safety and lower cost will bring in large numbers of customers who do not presently purchase a wheelchair for their wards. The additional market for children suffering from muscular dystrophy needs to be explained in greater detail and supported by data. In the meanwhile, you ought to consider revising the investment proposal by reducing projected sales in the 2nd and 3rd years. Critical Factors for Success: The wheelchair is a sign of ability impairment and may result in a lowering of self esteem and this will deter potential customers. The findings and recommendations of Doctors in that powered wheelchairs actually provide an impaired child with a sensory experience close to that of a normal child and improves their spatial skills and relations need to be highlighted in the promotion part of the marketing mix strategy. However, the projected sales and the promotional activity required to bring this message across require a spread over the entire US. This will be impossible to achieve within the small fund flow projections. The second factor will obviously be the backing of the medical fraternity for the product. Information about the unique qualities of the product followed by demonstrations would be required. The Business Plan You have made and presented the business plan without supporting most of the information with details of how these figures have been arrived at. These will definitely be required to be included. There is a need to clearly state the assumptions made and highlight the strengths of the organization that will be responsible for the operations of the company. Financing This is the most important part of the presentation and must be developed on a more realistic basis. I wish to point out that in addition to the overestimates of the sales in the coming years the plan needs to be changed in the following major aspects. First, there is no mention of banking finance and costs associated. It is usual for companies to operate with a debt-credit ratio of 2:1. This means that for every dollar that is invested as equity into the business you can borrow two from a bank or similar financial institution. If the investors are to invest 150,000 dollars that presents an opportunity to get an additional 300,000 dollars as credit. Another important source of money is sellers' credit, which may be negotiated with the suppliers of parts and machinery to overcome the initial shortages in fund flows. Second, the projections do not place any value for the goodwill generated through the patent of the excellent machine that you have developed. This will become a major consideration when deciding on the share of the business that will have to be given to the investors as equity for their investment in your proposal. Third, the investment by the proposed investors has to be divided into two parts. One, representing the equity shares in the corporation and the second as a bridging loan. The former will be in the form of participation in the risk-taking of the business and will yield returns as dividend earnings in the future. The latter will have to be returned in pre-agreed instalments. Both of these are cash outflows and need to be shown in the cash-flow projections. The first after tax liability has been met and the latter before tax. Fourth, I see a constant cost of manufacture of $436 per machine over three years. This needs to be revised using a cost escalation of 5% every year. Lastly, the bank loans taken as proposed above will also attract interest and will also have to be repaid in a predetermined period. It is possible to obtain a moratorium on the repayment but interest has to be paid on schedule as it becomes due. These payments must reflect in the cash flow projections. The financial projections must therefore begin with a capital financing plan which gives a detailed break-up of the capital required both for start-up as well as to finance the working capital requirements. Then a plan must be indicated as to how these requirements shall be met; through equity, margins as well as borrowed capital form financial institutions and also sellers' credit. In view of all the above I certainly believe that $150,000 is a bit on the higher side and needs to be brought down once the other possible sources of funds have been fully explored and quantified. The less you ask of the investors the more confidence they will have in you while simultaneously reduce your long term commitment of giving up a part of the company in terms of equity participation; which looking at both viewpoints could be limited to 25 percent of the business. Less, and the investors will not be attracted - more will become a permanent liability. Your description of the business and different aspects, otherwise seem to be fine, except for the earlier issue of giving more supporting evidence to the assumptions made. Read More