Financial Plan for New Energy Drink - Assignment Example

Financial Plan for New Energy Drink Introduction The primary objective of a business plan is to develop a road map for the start up venture. An ideal business plan must include an analysis of its entire operational activities. The operational activities must be planned after taking into account certain important areas like marketing, organisational structure & design and finance. A business plan should include proper planning of marketing and finance. These planning are very crucial for generating fund from different sources. In this respect, it is very important to attract the potential investors as they provide necessary fund for starting a new business. This paper will attempt to present a financial plan for a new energy drink manufacturing venture. Profitability is what that defines the success of a venture and hence financial planning is of paramount importance for the stake holders. The financial plan of this energy drink will be developed based on projected sales and costing figures. In order to present financial plan for the energy drink, four major financial statements will be prepared. These projected financial statements are marginal costing, breakeven analysis, cash budget, income statement and balance sheet. However, before presenting these financial statements, a brief overview of new energy drink will be discussed. Finally, this paper will conclude by summing up the entire financial plan. Product Feature The global beverage sector had experienced a rapid growth in the last decade. The primary reason for this growth can be attributed to the changing lifestyles and food habits of people. In recent years, beverages like cola, energy drinks, packaged fruit juice and other health drinks have become very popular in the market. Specially, the energy drinks has become a rave with the youngsters. Health consciousness has become an important determinant in the beverage sector. In this sector, Pepsi Co and Coca Cola are the prominent leaders. However, there are also other companies like Red Bull, Power Trip etc who offer energy drinks. ‘Power Health’ is the name of the energy drink offered by the new start up venture. Power Health will stand as a better alternative for the existing range of energy drinks. It will contain optimum level of protein, fat, carbohydrates, energy, vitamins, fructose syrup etc that is very vital factor for enhancing the health and energy of human body. The energy drink, Power Health will be available in 250ml can and its initial selling price is £3 per 250ml can. The product packaging design and price has been determined keeping in mind the potential consumers and existing competitors. Financial Budgeting and Analysis This section presents the projected financial planning for the new energy drink. In order to develop proper financial plan and to prepare an accurate and realistic financial statements, sales forecasting needs to be carried out with caution. There are certain factors like market size and other macro economic factors that must be considered while determining the forecasted sales. These factors influence the market demand of any particular product. The sales of Health Power energy drink has been forecasted after analysing the existing market demand. The estimated sales for the year are 50000 units of 250ml can. The following table shows the projected and estimated sales and projected revenue Table 1 Projected Sales and Revenue According to the above table, the new venture is expected to earn £150000 from sales revenue during its first operating year. After forecasting the sales revenue, it is also very important to estimate and calculate costs like fixed cost, variable cost, capital expenditure etc. The following table shows the cost of production that includes the cost of raw materials, packaging, direct labour etc. Table 2: Cost of Goods Sold The above table presents the estimated cost for each variable item in terms per unit. The total cost of production is £1.95 per unit. Table 3 shows the calculation of the net contribution per unit of 205ml can. Table 3: Contribution Calculation per unit Taking into account, the pre-defined selling price and total cost of goods sold, the net contribution per unit is £1.05. This contribution includes profit and fixed variable. For running a business, other fixed overheads are also necessary. These fixed overheads include salaries, administrative expenses etc. The following table portrays the list of expected fixed expenses. Table 4: List of Fixed Overheads The above table includes necessary overheads and their estimated costs. For establishing manufacturing plant and opening administrative offices, the new venture will lease the necessary space in proper locations where necessary resources are easily available. Leasing land and building, will help it to reduce the risk of business failure and avoid unnecessary blockage of capital. At the initial level, it is very essential to maintain sufficient amount of cash either in hand or at bank for investing in any other project. With the growth of organisation, it will acquire its own land and buildings. Apart from these expenses, other initial capital expenditures will be incurred like machineries computers, furniture etc. The following table shows these expenses. Table 5: Initial Capital Expenditures Necessary funding will be required for these expenses, and around £50000 and £20000 will be collected from personal sources and external sources respectively. The total start up cost of the first month will be around £18431. Marginal Costing Statement In a manufacturing business, the cost of per unit product varies with financial decisions taken by the finance manager. The effectiveness of decisions is directly related with the profitability of organisation. In this respect, a financial manager must analysis the fixed and variable cost. The variable cost increases with level of production and the fixed cost remain constant. Therefore, with the increasing production level, the contribution per unit increases. The contribution is nothing but summation of net profit and fixed cost. To identify the distinction between fixed cost and variable cost, marginal costing statement is an essential financial tool. Table 6 presents the marginal costing statement for the new energy drink. Table 6: Marginal Costing Statement The above table shows the marginal profit for the first operating year. In order to calculate the marginal costing statement, the marginal cost is subtracted from the total sales revenue. The marginal cost is the total cost of a product that includes direct labour cost, direct material cost, other direct cost etc. The total contribution as per estimated sales is £52500. The marginal profit for the first year is £10430 which is 6.95% of the total sales. Higher marginal cost for the first year indicates very high growth for the new venture. Break Even Analysis and Cash Budget The break even analysis helps to determine the relationship among the cost, volume and profit of a particular product. The analysis of fixed cost, variable cost, production level and profit is called the break even analysis. The break even analysis is very useful in determining the breakeven point of production. The breakeven analysis calculates the optimum production level at which the manufacturing firm does not incur any loss or profit. The following table presents the breakeven analysis for the new energy drink. Table 7: Calculation of Breakeven Analysis As per the above table, yearly breakeven point for the new venture is 40067 units. It indicates that at 40067 units, the new venture will not incur any profit or loss. In order to calculate the breakeven point; per unit selling cost, total fixed cost and contribution per unit has been used. Table 8: Budgeted Cash Flow The above table shows the budgeted cash flow for the first operating year. Due to high sales and available initial capital, the new venture is expected to retain a large amount of cash i.e. £163005. Projected Income Statement and Balance Sheet After estimating and calculating financial aspects like sales, costs, capital expenditure etc; the projected income statement and balance sheet have been prepared. Generally, an existing business organisation maintains and discloses its financial activities and financial statements to indicate its financial health. The income statement shows the total sales, total expenses, operating profit, tax and net profit available for the shareholders. The following table shows the projected income statement of the new venture. Table 9: Forecasted Income Statement The above table shows that the projected net profit after tax for the first operating year is £69863.5. The total return on sale for the first operating year is around 0.46, which indicates very high growth during the first operating year. The following table presents the projected balance sheet for the first year. Table 10: Projected Balance Sheet The above balance sheet depicts the expected net worth of the company. The owner’s equity will increase to £55000 and the retained earnings will be £64513.5 which will be used for future expansion programs. Conclusion The above presentation of financial planning for the new venture has shown an impressive result. The above projected financial statements like marginal profit and income statement indicates very high growth of the organisation during its first operating year. The overall return on sales is nearly 0.46, which is very high for a new venture. The energy drink market is expected to grow in future with increasing popularity of energy drinks. The new venture has reduced its capital expenditure by leasing the land and building for establishing manufacturing unit and offices. It is worth noting that if the new venture is successful in achieving 60% to 75% of its projected sales, it will be able to earn significant amount of profit. Bibliography Pinson, L. 2008. Anatomy of a business plan: the step-by-step guide to building your business and securing your company's future. 7th Edition. Aka Associates. Read More