Establishing Money Exchange and Transfer Business - Research Proposal Example

Establishing Money Exchange and Transfer Business Executive Summary INTRODUCTION Dubai, UAE is regarded as multicultural because 90 percent of the population of Dubai comprises of emigrants or citizen from other countries. Amount these 90 percent only 12 percent are from the other Gulf countries, and the rest are mostly from Asian countries such as India (Schulte-Peevers, 2010, p. 28). This statistics is stated to clarify the importance and demand of money transfer and exchange services in Dubai, UAE. This feasibility study would be of a money exchange and transfer business called Quick Money Exchange that would be established in Dubai UAE to offer various products and services related to remittance and exchange. The objectives of Quick Money Exchange are stated below: Objectives To become the first choice of remittance for the emigrants and also for the locals To offer exchange and remittance services round the clock Offering new products and providing high quality services by taking into account the changing requirements of the customers To ensure the development and welfare of the employees Establish a close relationship with the partners Accomplish the social obligations towards the society The feasibility study would be having three major parts; firstly, market analysis, which would be including the study of the money transfer and exchange industry in UAE, the business trend, competitor in this industry, and product differentiation strategies that Quick Money Exchange can apply to grab market share. Secondly, the operational plan, which would include the structure of the organization, capital requirements, core operations, and recruitment strategies. Lastly, the financial plan would be focusing on the start-up cost summary, three year income statement, cash flow and balance sheet projection, working capital and break-even analysis to assume the financial aspect associated with the initiation of the new business in Dubai, UAE. MARKET ANALYSIS In order to develop marketing strategies for Quick Money Exchange for designing unique products and grab market share, a critical analysis of the industry, market trends, and competitors are necessary. This section would be presenting a foresight of the market or money Industry Analysis UAE has an extensive record of the money changers who are involved in exchange of foreign currencies and remittance. The process of remittances took place in the form of a third party money payment system, where the person may pass on the currency to the second party located within or outside the country. This service was utilized heavily by the emigrants in UAE. In the other countries money changers are prohibited, while in UAE and the other Gulf countries they are regulated, licensed, and supervised by the central bank. The money exchange and transfer industry in UAE comprises of more than 212 offices. These money changers utilize the banks, exchange houses, and even agents to take and receive remittances (International Monetary Fund, 2003). This system might appear to be informal, but they are formal contractual agreements, and their business is legal and well-established in UAE. The currency of UAE is Dirhams which is linked to the US Dollar. However, Dirham has remained constant more than a period of 20 years (Campbell, 2007, p. 354). Even the foreign exchange market in UAE is not centrally controlled by specific exchange. It is mainly run by the bank through ‘over-the counter’ and by the companies who trade in currencies. The currency brokers are there in the market to offer good deal in foreign exchange because the exchange rate is not the same. There are different prices on which currency is traded depending on the rates offered by the banks or companies into trading and fund transferring business. The remittance market in UAE grew by 11 percent in the year 2010, compared to the growth of the money that is transferred by the emigrants in other countries, which is only 6.1 percent. The money transferred by the foreign workforce in Dubai, and other parts of UAE increased by $10.54 billion in the year 2010, than the last year which was $9.51 billion (Gulf News, 2010). The remittance size in the country increased to $63.75 billion the year 2010, which was $60.03 billion in 2009 (Hoath, 2010). The size of the world remittance market size has $325 billion from $317.23 billion in the year 2009, while in 2011 it has increased to $483 billion, and is expected to grow to $593 billion by the year 2014, as stated by World Bank (Stanley, 2012). The UAE money transfer network comprises of more than 510 branches which is spread across 23 countries. The workers working in UAE were the 64 percent customers of the money transfer business in 2010. A steady growth in the volume of the business has been recorded in this industry. India is the largest recipient of money transfer and exchange in UAE (UAE Exchange, 2013b). Competitor Analysis There are over 200 formal and informal money transfer and exchange companies and firms in UAE. The Prominent companies in UAE are UAE Exchange, Al Fardan Excahnge, ADIB, fxcompared.com, Western Union Money transfer, HSBC, RationalFX, AFEX, Halifax, Moneycorp, Dahabshiil, UKFOREX, Al Rajhi Exchange, Asia Exchange Centre, City Exchange, Dubai Exchange Centre, Emirates India International Exchange, Habib Exchange Co LLC, and many more. The major player in the UAE money transfer and exchange business is UAE Exchange, which offers various services to the customers ranging from credit cards, airline tickets, utility bills, foreign exchange, money transfer, to wealth management services. They also offer products like Xpress Money, which is an instant money transfer facility. They have around 135,000 offices in around 125 countries, which cater to a customer base of more than 3.5 million (UAE Exchange, 2013a). Al Fardan Exchange is the next well-known player in this industry having its headquarters in UAE. It offers various outward and inward remittance services. Other than that the instant money transfer facility is offered to the customers through tie-up with other renowned money transfer companies like Western Union, which is world’s biggest money transfer company. Other than this supplementary services like credit card bill payments, wage protection, and corporate services are also offered (Al-fardan Exchange, 2008). Strengths and Weaknesses COMPANY OVERVIEW Market Share Product Differentiation OPERATIONAL PLAN Operation planning is a part of the strategic planning framework. It includes the objectives of the company, activities, quality standards, human resource requirements, etc. Organizational Structure The business of money transfer and exchange is quite lucrative and prevalent in UAE, so entry barriers are less in this case. However, extensive amount of risk is also involved in this business because money is the core product of this business, which is the most volatile element in the present economic scenario. As far as the organizational structure is concerned, an individual can start the business by first acquiring a license, registering with the Department of Treasury, opening a merchant account with the bank for initiating transaction. The money transfer and exchange also requires a good amount of start-up capital, so it would be better to get into a partnership form of business. The company Quick Money Exchange would be having a core team under the partners, who would be specifically handling departments like global operations, marketing, human resource and administration, dealing, financial, and information or customer services. Since transferring and exchanging currency for emigrants and local customers is a global business and it requires resources to manage every aspect. Under this core team, there would be workforce to handle the operation effectively. The company would begin its journey with a single office in Dubai, UAE. Apart from this, the technological aspect would be also paid attention because IT plays important role fast and safe money transfer. Nowadays physical transfer of money is almost non-existent, IT department is also a part of the core team of Quick Money Exchange. The organizational structure of Quick Money Exchange is explained in the Figure below: Figure 1: Organizational Structure of Quick Money Exchange Core Operations Quick Money Exchange would begin with remittance and money exchange services for the customers. After establishing the business successfully in Dubai and other parts of UAE, Quick Money Exchange can also expand its retail services like wealth management, prepaid cards, bill payments, and extend to corporate services like cash payout, or cash payment, etc. Quick Money Exchange would offer value to the customers by offering them instant money transfer facility to different countries from UAE. The foreign currency exchange to the customers would be offered at attractive rates, so that the company can not only assist in transferring the money of the customers. The dealing department would be handling the remittance, which would include transfer of international and local currency. It would also offer online transfer or remittance services. The company must ensure that it monitors and evaluates the risk associated with the agents handling the credit and fraud risks. The company would be exposed to the credit risk from receivable balance, which is handled by the agents. Quick Money exchange would also have to consider the risks associated with the customer transactions through online payment services. Risk is also there when the transaction is done through ways other than currency or cash. These are subjected to risks of chargeback. Fraud cases such as insufficient funds, etc are also prevalent in this type of business. So bad debt associated with money transfer and exchange business is common. So in order to deal with the credit and customer transaction risks of the company, Quick Money Exchange would regularly review the investments, credit spreads, credit ratings and trading levels. Another method to avoid risk would be diversification of investments to different financial institutions round the world. Capital Requirements The assumption of the capital requirements has been made in accordance to the agreements between the partners, and considering the essential obligations that would be required to start the money exchange business. The services that Quick Money Exchange would be offering are currency oriented, so an initial capital requirement is there along with the requirement of incurring expenses for setting up online and physical platform of money transfer. Cash requirements of the company would be for setting up the office in Dubai, IT framework, Legal expenditure, operational functions and miscellaneous costs, as can be seen in Table 1. Table 1: Capital Requirements Start-Up Cost Particulars Amount (in $) Stat-up Capital 30000.00 Cash Requirements 15000.00 Other Current Assets 5000.00 Office Furniture and Equipments 130000.00 Legal Expense 15000.00 Website 3000.00 Recruitment Expense 5000.00 Capital Requirements 203000.00 As can be seen in Table 1, the legal expense is considered to be $15,000 because the legal framework is the most complex and involves heavy expenditure in this business, as this would involve gaining several permission and licenses from regulatory bodies in Dubai, UAE to deal in foreign currencies, and also start a new venture. Further, legal expenses for setting up an online business platform for remittance and foreign exchange are also required, along with opening up of merchant bank accounts for inward and outward remittance and payments. Apart from this, cash requirement for floating currency business is necessary. A high start-up capital to gain trust from the banks, regulatory bodies, and win confidence of the customers would play a significant role for the company. Human Resource Procurement Human Resource is the most important asset of the company. Quick Money Exchange would be structured on this belief. So, dedicated professionals would be recruited from diverse nationalities to ensure diversity within the company. Moreover, the human resource manager of Quick Money Exchange would ensure that team members in the company not only utilize their skills for the growth and development of the company, but also add value and train their subordinates like transformational leaders. In order to ensure the best minds manage and monitor the operational functions at Quick Money, the top level management in the core team would be recruited with specifically strong educational, who have good industry exposure to the particular field in money exchange, transfer or financial services. The remuneration for these team members would be at par or above par to the industry standards. The employees working under the core team would be recruited by the human resource team. However, the final selection would be done by the chief of the particular department, so that he/ she can ensure that the right person is recruited for the position vacant. There would be six departments, as can be seen in Figure 1, which would be handling specific functions in the company. There would be agents too who would be dealing with the foreign exchange and remittance, cash payments and receipt, etc. These agents would not be in the payroll of the company. They would be working on contract basis, so that the company can save its internal cost. FINANCIAL PLAN This section would be discussing the financial projections of Quick Money Exchange in Dubai, UAE, for a time span of three years. This cost and expense figures considered has been assumed keeping in mind the size of the business and the considerations that would be required in the currency transfer and exchange business in Dubai, UAE. The income statement, cash flow, balance sheet, working capital analysis and the break-even analysis has been discussed in the study to conduct a feasibility analysis of the money transfer and exchange venture. Income Statement The Income statement or profit and loss statement for three years has been prepared for Quick Money Exchange. As can been seen in Appendix 1, the revenue that can be generated from the sales of remittance and exchange related services or products is $245,120, in the next year it would should a increasing trend that is $273,790 due to establishment and growth within Dubai and other parts of UAE. In the third year considerable growth can be expected, so the sales would also increase leading to an approximate revenue generation of $302,449. The company would also have to bear certain cost associated with the sales of the products or services because money remittance and exchange business involves expenses related to legal proceedings, exchange or transfer charges, and also paperwork expenses sometimes. The operating expenses would be more in the first year. In the first year the company would be incurring a loss, which can be seen in Appendix 1, due to high expenditure that the company has to incur to establish the business. The trend that can be seen in Figure 2 predicts that an upward or increasing profit percent can be expected in the third year. Figure 2: Trend from Income Statement Cash Flow Statement The cash flow statement represents the cash and cash equivalent transactions that are incurred in the business during the financial year. It would assist Quick Money Exchange to get an idea regarding the solvency and liquidity aspects of the firm. Moreover, the firm can also estimate the cash requirements for the future through the projections. The cash inflow for the first years has been estimated to be $250,120, while the cash outflow is $267,340, as can be seen in Appendix 2. This signifies that net cash flow of the firm may be negative in the first year, due to extensive cash flow for business establishment. However in the second year the net cash flow is positive because of the reduction in cash spending and bill payments. Long-term assets would be also purchased in the second year, as the company would be looking forward for expansion and further development of business in UAE other than just Dubai. In the third year, a considerable increase in cash sales, which is estimated to be $302,449, would lead to an increasing cash inflow. Further, due to the decreasing cash outflows, the firm would be able to cross its operational break-even point and generate revenue and profit. The trend of the projected cash flow that can be seen in Figure 3 shows an increasing cash balance with the company in the second and third year, which reveals financial liquidity. After a negative cash flow in the first year, the second and third year also indicates a positive net cash flow. Figure 3: Cash Flow Trend Balance Sheet Balance sheet assists in understanding the financial health of the company. It mainly summarizes the shareholder’s equity, assets and liabilities of the firm, which assists the investors to draw an inference regarding the economical health of the firm. The projected balance sheet of Quick Money Exchange can be seen in Appendix 3. It is based on the projected income statement and the cash flow in Appendix 1, and 2. The current asset of the firm for the first year is assumed to be $255,120, which would be showing an increasing trend due to the increasing cash sales and receivables. The firm would be financed by the partners and bank term loans would be also taken in order to start the business. The long term liability mainly consists of the bank loans that the firm would be taking for initiation and growth of the business. An increasing trend in the current assets indicates that the cash or cash equivalents would appreciate within the three years. This also indicates an increasing liquidity position of the company. While the fixed assets have also increased, this reveals the growth and development of the business in terms of its size or establishments. Working Capital Analysis Break-Even Analysis The break-even point is specifically the point when the company lies in a no profit and no loss zone. For example, when the revenue and the expense of the company equal, it regarded as a break-even point. The break-even analysis is a simple, which present a dynamic outlook of the cost, profit and sales. As can be analyzed from the cash flow in Figure 4, the firm would achieve its breakeven in the second year. As can be seen in Figure 4, the trend line indicates the breakeven point ($0.00), which the firm would be able to achieve in the second year of its business. The trend line indicates a negative figure in the first year, while in the third year; an upward movement can be expected. So in the second year Quick Money Exchange would be able to achieve a positive cash flow balance. Figure 4: Breakeven Analysis CONCLUSION Appendix Appendix 1 Appendix 2 Appendix 3 Appendix 4 Read More