Making Sense of Change Management: New Foot Ware Product - Case Study Example

Running Head: Breeze Shoe Ware Financial plan for New Foot Ware Product Name: Course: Tutor: 9th December 2011. Financial plan for New Foot Ware Product Introduction In regard to this case, Breeze Shoe Ware is wishing to design a new athletic rubber shoe that is designed to be air-cooled putting into consideration cost and performance edges over and above existing products. This financial section of the business plan provides a clear blueprint for the launch and growth of the new foot ware product (Kenen, 1986). It will also serve the capacity to reveal the operational and financial viability of the strategy to diversify the firm’s products. Breeze deals with the business of commercializing shoe wares for the sports events, leisure and recreational markets. Breeze’s launch product is newly-designed footwear with ventilation technology that is applicable to all sports’ closed shoes. Breeze Shoe wares will first enter the athletic shoe market in which the technology to be used can be applied instantaneously (Kenen, 1986). The cooling technology in sports’ shoes will later be diffused all the way through the entire assortment of footwear products offered by Breeze as ongoing research; product development and market analysis identify supplementary avenues for profitable application of this technology. Financial section of the business plan This section is at the end of the business plan. However, it is the section that establishes whether or not the business idea in question is viable, and forms a key constituent in deciding whether or not the business plan is going to be capable of attracting any investment in the business idea in question. The financial section of the business plan basically relies on the forecasted financial statements in regard to the new product to be developed in this case. Forecasted financial projections help the entrepreneur involved to determine the feasibility of the given business venture (Easterly, 2001).  They assist in estimating the amount of capital to be needed so as to successfully launch and develop the proposed product. In addition, the projections assist the investors to determine the feasibility of the plan and its potential prosperity. It is for these reasons that entrepreneurs refer the financial section of the business plan as the "heart of the business plan". Basically, the financial plan segment of the business plan consists of the introduction to the financial plan, financial forecasting and notes to the forecasted financial aspects. The planning requires the use of three main financial statements including the income statement (statement of financial performance), the cash flow projection and the statement of financial position (balance sheet) and a brief rationalization/analysis of the contents of the three statements (Kenen, 1986). This paper will give a guideline on the preparation of each of these three forecasted financial statements and the analysis notes to the forecasted financial statements. However, we need to gather together forecasted financial data that we will need to prepare these financial statements by examining the expenses. Breeze’s Introduction to the Financial Plan The financial plan outlines Breeze’s forecasted financial statements and any assumptions put in place when developing them. The firm's capital requirements, manner of utilizing this capital and the repayment plan are also illustrated (Kenen, 1986). For the introduction of the new athletic shoe ware, the following financial statements and analysis have been predicted over a three year period; Income Statements Balance Sheets Cash Flow Statements Break-Even Analysis Sensitivity Analysis Ratio Analysis The forecasted financial statements considered assume the product development stage will commence on January 1, 2012 and end on April 30, 2012. In the month of May, Breeze will begin its operations in the new product’s introduction. The financial year is assumed to end on April 30. This is to allow full year of operations to be shown for the three year forecasted period. Forecasted Financial Statements The next component of the financial plan involves the compilation of the forecasted financial statements. This section will include the forecasted income statements, balance sheets, cash flow statements, break-even analysis, sensitivity analysis and ratio analysis. Forecasted Income Statement The Income Statement shows the new product’s revenues, expenses and the overall profit for a particular time period. It is a simple snapshot of the business which shows whether or not the business strategy is profitable at that particular point in time (Kenen, 1986). The bottom stroke of the income statement is the net income of the firm from the introduction of the new product (Kenen, 1986). The net income may be either retained by the business for growth and development or shared among the firm’s investors depending on the firm's dividend policy. We may in this case think of business expenses to be incurred as broken down into two categories; Start up expenses Operating expenses. Start up expenses category will include; New product registration fees Product licensing and legal permits Starting inventory Leasing and rent deposits Any down payments on property and equipment Utility set up expenses Operating expenses will be composed of the costs of keeping the business running and establishing the required growth. They may include: Salaries and wages payments Rent and mortgage expenses Raw materials expenses Telecommunications and utilities’ expenses Products’ storage, distribution and promotion expenses Any loan payments Office supplies and maintenance Once we get the operating expenses, the total cost figure will show what costs will be incurred in order to keep the business running. The forecasted Income Statement for Breeze’s new product may be as follows; BREEZE SHOE WARE FORECASTED INCOME STATEMENT FOR YEARS ENDING...   Ending April 2013 Ending April 2014 Ending April 2015 Total Revenue from Sales (note 1) $582,401 $673,775 $784,411 Cost of Goods Sold (note 2) $130,191 $146,378 $152,846 GROSS MARGIN ** $452,210 $527,397 $631,566       OPERATING EXPENSES: Advertising Expense (note 3) $130,000 $150,000 $170,000 Wages & Benefits (note 4) $122,366 $136,153 $167,421 Casual Labor (note 5) $ 2,400 $ 3,000 $ 3,600 Office Supplies (note 6) $ 1,500 $ 1,715 $ 1,908 Rent Expense (note 7) $ 12,000 $ 12,600 $ 13,230 Telephone/Fax Expense (note 8) $ 3,600 $ 3,840 $ 4,080 Professional Services (note 9) $ 7,000 $ 3,500 $ 4,000 Insurance Expenses (note 10) $ 1,500 $ 1,650 $ 1,815 Toll-free Charges above Variable Cost (note 11) $ 15,685 $ 20,706 $ 25,408 Bad Debt Expense (note 12) $ 5,824 $ 6,738 $ 7,844 Interest on Operating Loan (note 13) $ 2,000 $ nil $ nil Internet Storage & Accounts Expense (note 14) $ 2,550 $ 2,700 $ 2,865 Miscellaneous Expenses (note 15) $ 2,400 $ 2,600 $ 2,800 Depreciation Exp. - Equipment (note 16) $ 3,142 $ 4,392 $ 6,392 Depreciation Exp. - Furniture (note 17) $ 606 $ 906 $ 1,306 Amortization of Initial Development Costs (note 18) $ 15,924 $ 15,924 $ 15,924 Amortization of Future Development Costs (note 19) $ 24,720 $ 55,215 $ 86,575 TOTAL OPERATING EXPENSES ** $353,218 $421,638 $515,168         Net Income Before Taxes $ 98,992 $105,759 $116,397 Less: Taxes (note 20) $ 29,698 $ 31,728 $ 34,919   NET INCOME AFTER TAXES $ 69,294 $ 74,032 $ 81,478   The numbers after each item refer to the notes of analyzing the financial statements as given in the third section of the plan. The investors are able to predict the earnings and expenses attached to the product for a period of three years thus giving them morale to invest in the company. The Forecasted Balance Sheet The Balance Sheet presents a representation of your business' product’s net worth at a given point in time and summarizes all the financial data of the firm, breaking this data into three main categories of assets, liabilities and equity (Kenen, 1986). In this case, such will only be limited to the extent in which these aspects are determined by the introduction of the new product. The forecasted balance sheets for three years in this study will show investors the items that the business anticipates to possess at the beginning and end of each of the forecasted years. They will also show investors the much that the business hopes to owe at the beginning and end of the fiscal years used. In addition to the three year period forecasted balance sheets, the investors will desire to see an opening statement of financial position giving the businesses' assets, liabilities, and investors’ investments into the product. Below is an example of Breeze Shoe Ware forecasted Balance Sheet.   BREEZE SHOE WARE Forecasted Balance Sheets Ending April 30... April April April April 2012 2013 2014 2015 CURRENT ASSETS: Ending Cash (note 21) $ 63,314 $ 57,608 $ 61,968 $ 94,091 Office Supplies (note 6) $ 0 $ 500 $ 735 $ 476 Finished Diskette Inventory (note 2) $ 0 $ 6,683 $ 2,803 $ 1,790 Finished CD Inventory (note 2) $ 0 $ 3,103 $ 2,072 $ 2,053 Total Current Assets $ 63,314 $ 67,894 $67,578 $ 98,410 FIXED ASSETS: Net Computer Equipment (note 16) $ 7,602 $ 9,426 $ 10,034 $ 11,642 Net Office Furniture (note 17) $ 1,412 $ 2,425 $ 3,018 $ 3,712 Net Intangible - Initial R&D (note 18) $ 47,772 $ 31,848 $ 15,924 $ 0 Net Intangible - Future R&D (note 19) $ 0 $ 74,161 $140,923 $179,789 Total Fixed Assets $ 56,786 $117,860 $169,900 $195,143 TOTAL ASSETS $120,100 $185,753 $237,477 $293,553 LIABILITIES: Accounts Payable (note 22) $ 0 $ 4,975 $ 5,274 $ 6,394 Wages & Employee Benefits (note 23) $ 0 $ 1,686 $ 2,049 $ 2,336 Operating Loan Payable (note 13) $20,000 $ 0 $ 0 $ 0 Taxes Payable (note 20) $ 0 $ 29,698 $ 31,728 $ 34,919 TOTAL LIABILITIES $20,000 $ 36,359 $ 39,051 $ 43,649 SHAREHOLDER'S EQUITY: 100 Class A Common Shares (note 24) $ 100 $ 100 $ 100 $ 100 50 Class B Common Shares (note 24) $100,000 $100,000 $100,000 $100,000 Retained Earnings (note 25) $ 0 $ 49,294 $ 98,326 $149,804 TOTAL SHAREHOLDER'S EQUITY $100,100 $149,394 $198,426 $249,904 TOTAL LIABILITIES & EQUITY $120,100 $185,753 $237,477 $293,553 The Cash Flow Projection The Cash Flow Projection shows the manner in which cash is expected to flow into and out of the business due to the introduction of the new product. For Breeze, it will be an important tool for cash flow management thus letting the firm know when their expenditures are beyond the budget or when they might desire to arrange for short term investments which offset cash flow surplus. There are three sections of the Cash Flow Projection with the first part giving details of cash revenues. In this section, estimated sales figures for each month are given (Easterly, 2001). The second section is the firm’s cash disbursements in regard to the product. The third section of the Cash Flow Projection is composed of a reconciliation of the cash revenues to the cash disbursements. Once the Cash Flow Projections are made, it's time to progress on to the statement of financial position(balance sheet). Without the required cash, the product may not survive. Thus, a forecasted cash flow statement determines if the investors’ new product will earn enough cash to enable the day to day running of its docket. Below is an example of Breeze’s forecasted cash flow statement for a three year period. Since the monthly cash flows may not be shown on one page only the cash  As you can note, the forecasted cash flow statements for Breeze’s new product cash inflows including cash from customers’ bank loans and investors, and the entire expected cash outflow including cash for purchases of inventory, advertising and rent for each are shown for periods of three months. The difference of the inflows and outflows is given as the net cash flow (deficiency). The cash at the beginning of each period is then added to the net cash flow (deficiency) to get the ending cash balance for the month. Forecasted Break-Even Analysis It is a tool used to establish the level of sales that a business must earn so as to achieve neither a profit nor a loss, that is, to satisfy all its expense costs (Easterly, 2001). It relies on the forecasted incomes, costs and quantity of product produced. Below is an analysis of Breeze Shoe Ware’s new product   BREEZE SHOE WARE FORECASTED BREAK-EVEN ANALYSIS FOR YEARS... REQUIRED INFORMATION: CONTRIBUTION MARGIN: YEAR 1 YEAR 2 YEAR 3 Selling Price per unit (note 1) $73.89 $68.01 $67.61 Weighted Average Variable Cost per unit $16.50 $14.79 $12.10 CONTRIBUTION MARGIN PER UNIT $57.39 $53.22 $55.51 FIXED COSTS PER YEAR: Advertising Expense (note 3) $130,000 $150,000 $170,000 Wages & Employee Benefits (note 4) $122,366 $136,153 $167,421 Casual Labor (note 5) $ 2,400 $ 3,000 $ 3,600 Office Supplies (note 6) $ 1,500 $ 1,715 $ 1,908 Rent Expense (note 7) $ 12,000 $ 12,600 $ 13,230 Telephone/Fax Expense (note 8) $ 3,600 $ 3,840 $ 4,080 Professional Services (note 9) $ 7,000 $ 3,500 $ 4,000 Insurance Expenses (note 10) $ 1,500 $ 1,650 $ 1,815 Toll-free Charges above Variable Cost (note 11) $ 15,685 $ 20,706 $ 25,408 Bad Debt Expense (note 12) $ 5,824 $ 6,738 $ 7,844 Interest on Operating Loan (note 13) $ 2,000 $ nil $ nil Internet Storage & Accounts Expense (note 14) $ 2,550 $ 2,700 $ 2,865 Miscellaneous Expenses (note 15) $ 2,400 $ 2,600 $ 2,800 Depreciation Expense - Equipment (note 16) $ 3,142 $ 4,392 $ 6,392 Depreciation Expense- Furniture (note 17) $ 606 $ 906 $ 1,306 Amortization of Initial Development Costs (note 18) $ 15,924 $ 15,924 $ 15,924 Amortization of Future Development Costs (note 19) $ 24,720 $ 55,215 $ 86,575 TOTAL OPERATING/FIXED COSTS $353,218 $421,638 $515,168   Note: all Breeze’s Operating Expenses are considered to Fixed Costs!   BREEZE SHOE WARE BREAK-EVEN CALCULATION (IN UNITS) FOR YEARS 1, 2, 3     Year 1 Year 2 Year 3           Fixed Costs divided by Contribution Margin (Break-even) = 6,155 units 7,923 units 9,281 units Forecasted Sales in units per year = 7,882 units 9,907 units 11,602 units   Forecasted Sales above Break-even = 1,727 units 1,984 units 2,321 units   Breeze is forecasting sales of 1,727 units above its break-even point in year one, 1,984 units above break-even in year two and 2,321 units above break-even in year three.   Note that Breeze calculates its break-even point and continues to provide an indication of the number of units that it plans to sell over and above its break-even point. Also note that Breeze’s break-even point is increasing over the years due to the firm's planned decrease in the selling price, its estimated rise in variable costs, and its intended rise in fixed costs (Easterly, 2001). As a result of these conditions, the firm is earning a lower contribution margin on the sales made during years 2013 and 2014. Thus less financial capability is contributing to their higher fixed costs of operation. Sensitivity Analysis The sensitivity analysis shows the effects on the net revenue when the forecasted sales are increased or decreased by different percentages. It shows investors how the forecasted net income will vary if the original sales forecast increase or decrease by given rates. Below provides an example of Breeze’s sensitivity analysis for its first forecasted year of operation in the new product. Notice, Breeze has chosen a sales percentage rise of 15% of its initial sales estimate and a sales percentage decrease of 20% of its initial sales estimate.   BREEZE SHOE WARE SENSITIVITY ANALYSIS FOR PERIOD MAY 1, 200W TO APRIL 31, 200X   Pessimistic 20% Decrease in sales Original Sales Level Optimistic 15% Increase in sales SALES IN UNITS & DOLLARS: Sales in Units 6,306 units 7,882 units 9,064 units Weighted Average Selling Price $73.89 $73.89 $73.89 TOTAL DOLLAR SALES * $465,950 $582,401 $669,739   VARIABLE COSTS: Cost of Goods Sold $104,153 $130,191 $149,720 TOTAL VARIABLE COSTS * $104,153 $130,191 $149,720   FIXED COSTS: Advertising Expense $130,000 $130,000 $130,000 Wages & Employee Benefits $122,366 $122,366 $122,366 Casual Labor $ 2,400 $ 2,400 $ 2,400 Office Supplies $ 1,500 $ 1,500 $ 1,500 Rent Expense $ 12,000 $ 12,000 $ 12,000 Telephone/Fax Expense $ 3,600 $ 3,600 $ 3,600 Professional Services $ 7,000 $ 7,000 $ 7,000 Insurance Expenses $ 1,500 $ 1,500 $ 1,500 Toll-free above Variable $ 15,685 $ 15,685 $ 15,685 Bad Debt Expense $ 5,824 $ 5,824 $ 5,824 Interest on Operating Loan $ 2,000 $ 2,000 $ 2,000 Internet Storage & Accounts $ 2,550 $ 2,550 $ 2,550 Miscellaneous Expenses $ 2,400 $ 2,400 $ 2,400 Depreciation Exp. - Equipment $ 3,142 $ 3,142 $ 3,142 Depreciation Exp.- Furniture $ 606 $ 606 $ 606 Amortization of Initial R&D Costs $ 15,924 $ 15,924 $ 15,924 Amortization of Future R&D Costs $ 24,720 $ 24,720 $ 24,720 TOTAL FIXED COSTS * $353,218 $353,218 $353,218   TOTAL COSTS $457,371 $483,409 $502,938   Net Income Before Taxes $ 8,579 $ 98,992 $166,801 Less: Estimated Tax Rate (30%) $ 2,574 $ 29,698 $ 50,040   Net Income (Loss) After Taxes $ 6,005 $ 69,294 $116,761   *      All Operating Expenses are considered Fixed Costs. **    The only Variable Cost is Breeze's Cost of Goods Sold. ***  Figures are rounded.   Note that Breeze's operating expenses forecast are considered to be the fixed costs meaning that they do not fluctuate with the sales’ change. 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