Community Service #1 Assessment - Example

CS#1 Business Plan Name: Tutor: Course: Date: Table of Contents Table of Contents 1 1.1 Introduction and project background 2 1.2 Financial aspects of the business plan 2 1.2.1 Assumptions of the business plan 2 1.2.2 Costs 3 1.2.3 Breakeven point 4 1.2.4 Projected cash flow for the financial year 2017 4 1.2.5 Projected profit and loss statement (ECE project) 5 1.3 Analysis of the plan 6 1.3.1 Cost benefits analysis 6 1.3.2 Limitations of only using financial figures 7 1.3.3 Assumptions and impact of changes in the assumptions 8 1.4 Conclusion 9 References 10 1.1 Introduction and project background Community Service #1 (CS#1) incorporated as an association in 1987 is a non-government and not-for-profit community based organization. The organization delivers and manages a number of community targeted services such as disability and aged care, children, training, family support and community development. Operational mainly in the ACT community, CS#1 objective includes relief of destitution, suffering, sickness, distress and poverty (Community Services Initiative, 2016). The CS#1 principle objects are; to relieve from disadvantage, distress or poverty Individuals and families; protect and support people throughout their lives; support people to achieve and build their future goals. The organization also engages stakeholders, communities and individuals to create opportunities and connections and builds resilient communities. CS#1 is a professional calendar and offers training to the Canberra community as a Registered Training Organization. This project involves preparing a business case to expand day trip excursions for seniors and the aged people living in social isolation within the community or in managed aged-care facilities. The new service is also anticipated to generate income by providing commercial group tourism offers for domestic and international visitors (CSI, 2016). This business plan will evaluate the financial aspects of the project and analyze the business plan. The financial aspect constitutes cost-volume analysis, and project cash flow and profit and loss statements. Furthermore, the analysis of the business plan will involve cost benefit analysis, limitations, and assumptions made in the project. 1.2 Financial aspects of the business plan Cost-Volume-Profit is a financial analysis that determines the changes in volume and costs and how those changes will affect the net income and operating income of the project (Kelly, 2014; Briciu, 2012). In the Expansion of Current Excursions (ECE) project, this analysis will identify the activity operating levels required to achieve targeted profits and avoid losses. 1.2.1 Assumptions of the business plan The following assumptions will be made in the business case; i. Except volume, all variables remain constant: Changes in profits and costs are a result of volume. This means that price levels, changes in sales mix and production efficiency increase are not considered. ii. There is constant sales mix or one product is produced: We assume that the tourism package products is the only one produced or produced in similar combinations or proportions iii. Total revenue and total costs are linear functions: This means that discounts will not affect the selling price per unit and variable cost per unit iv. Variable marginal costing will be used to calculate profits: Fixed costs will be treated as periodic expenses while fixed and variable costs are separate v. Accurate division of variable and fixed cost elements: High-low method may be applicable to accurately split semi-variable costs vi. Analysis applies to short-term horizon only: The analysis applies for a period of one year when there will be no changes in fixed costs, variable costs and selling prices 1.2.2 Costs Fixed costs (FC): These are costs that do not change over the short-term. Fixed costs are costs related to the production of the service mainly production, selling and administrative costs (Boardman et al., 2006). These include; salaries, rent, telephone, insurance, tourism fees e.t.c. These costs have been assumed to be constant over time. Variable costs (VC): These costs vary with output and increases with a constant rate relative to capital and labor. These are expenses associated with the production of each unit of service or good mainly production, selling and administrative expenses. The expenses vary with the quantities of the product generated such as fuel, repairs and maintenance, purchases of new buses among others. Total variable costs are obtained through a product of unit variable cost (UVC) × total quantity (Q) (Chen & Koebel, 2013). Profit is any excess of total revenue over total costs. Total costs = Total Fixed Costs + Total Variable Costs Profit = Total revenue – Total costs Contribution margin: The amount of profit or income made by ECE project before deducting the fixed costs will be represented by the contribution margin. In the year 2016, ECE project had the following; sales=$AUD300, 000; Variable costs=$120,000; Number of tourism package units sold = 100,000; Fixed costs=$AUD90, 000. The following formulas apply; Contribution Margin = Sales – Variable costs Contribution Margin Ration = Contribution Margin/Sales Contribution margin $AUD Per unit ($AUD) Sales 300,000 3 Variable costs 120,000 1.2 Contribution Margin 180,000 1.8 Contribution margin ratio 180,000/300,000=60% 1.8/3=60% From the above table, the contribution margin is arrived at by subtracting variable costs from sales which gave $180,000. On the other hand, contribution margin ratio was obtained by dividing contribution margin with sales giving 60 percent. 1.2.3 Breakeven point The level of sales where net income equals zero is the break event point. At this point, Sales revenue = Total Variable Costs + Total Fixed costs or Contribution margin = fixed costs. From the information given above, the fixed costs are $90,000 and the net income will be expected to be zero. These details are represented in the income statement below. ECE project break-even income statement Revenues (100,000 units × $3) $300,000 Variable costs (100,000 units × $1.2) $120,000 Contribution margin $180,000 Fixed costs $180,000 Net income $0 The breakeven sales ($AUD) = Total Fixed Costs/ Contribution Margin Ratio = 90,000/60% = $150,000. Alternatively, the breakeven sales in units = Total fixed costs / Contribution margin per unit =$90,000/1.8 =50,000 units The breakeven point is shown in the graph below The chart above shows that the breakeven point is at $150,000 in sales and 50,000 in units. 1.2.4 Projected cash flow for the financial year 2017 This is the ECE cash flow forecast for the business to know whether they have the money (cash) to run the business or expansion. This forecast also indicates the flow of cash in and out of the business and whether more cash is going out than coming in. ECE project had the following cash flow for the period of January 2017-December 2017. ECE Project Projections of internal cash flows January to December 2017 The key assumptions made in the projected cash flow above are: Monthly collection is 75% of sales 25% of sales after sale will be collected in the 2nd month Payables are made within 30 days (1 month) Making the short-term payments will be inclusive of bank interest rates From the projections above, ECE has been deficit of cash from mid-year until the last quarter of the year. This is because the project took a bank loan of $50,000 to purchase a bus of $45,000 to reinforce its day trip operations in Canberra. Fortunately, the project will again be liquid towards the end of the year because of expected increase in tourism visits during the Christmas festive season in Canberra. Moreover, the added bus will generate new income which will keep the project liquid in 2018. Furthermore, owners compensation are withdrawals to finance the activities of the organization such as feeding and clothing the poor and offering guidance and counseling services to the distressed. 1.2.5 Projected profit and loss statement (ECE project) The expected profit and loss statement for the company for the financial year 2017 is generated and shown in the table below. Note: ACNC stands for Australian Charities and Not-for-profits Commission From the projected income statement above, the expected profit after tax is $36,750 which is about 6.8% of the sales for the year. The projected profit of 6.8% is favorable for the project. According to the Australian Taxation Office, community organizations registered with ACNC are accessible to charity tax concessions (Australian Government, 2016). Being a public benevolent institution, CS#1 is exempted from tax. 1.3 Analysis of the plan 1.3.1 Cost benefits analysis Estimating costs and benefits of the project helps in determining the feasibility and the potential of the project to provide positive outcomes to key stakeholders. The stakeholders in this project are; Australian government CS#1 management CS#1 employees Visitors (customers) Motor vehicle vendors Credit lenders Canberra community The cost-benefits analysis will attempt to analyze the costs and compare it with the resulting benefits using the various valuation techniques (Boardman et al., 2006). The results of cost benefit analysis are shown in the table below. Costs Benefits a) Advertising of new excursion services at CS#1 (market price estimates) b) Purchase of new bus (market prices) c) Utilities (constant pricing for one year) d) Hiring and training new employees (labor wage prices) e) Redesign of institutional website (open tender) f) Purchase of drinks and snacks (market prices) g) Tour guide compensation (weekly wage prices) Estimated costs $AUD 235,000 a) New revenue for the organization (P$L statement) b) Increased engagement of the aged and socially isolated (lowered death rates and loneliness) c) Increased knowledge and awareness of the beauty of Canberra (appreciation of local sceneries and pristine landscapes/beaches) d) Greater integration of the aged and the poor in society (positive intention to live) e) Social networks created and built through interactions and cooperation with other not-for-profit organizations f) Increased economic performance of Canberra due to influx of new income from overseas and domestic visitors (new income and revenue) Estimated benefits $1,500,000 As shown in the table above, the estimated costs are less compared to estimated benefits. Although it is difficult to quantify some of the benefits, the table shows that it is a win-win situation for the organization, visitors, employees and the community of Canberra. 1.3.2 Limitations of only using financial figures The business plan has utilized a number of financial tools to provide a projection of its financial performance in the future. So far, CVP analysis has been used to predict the breakeven point and future expectations of the business (Wang & Yang, 2004). Furthermore, it has made projections of cash flow and profit and loss to obtain the feasibility and possibility of the project generating favorable revenues. However, the use cost benefit analysis has shown that the project is worth being established because some of the benefits cannot be quantified. The limitations include; a) Inadequate information on changing relations and trends: Financial statements for a year such as the ones provided in the ECE project fails to capture the trends and changes in economic variables over time (Poznanski et al., 2010). This means that the financial figures are limited in interpretive value. Moreover, the success and progress of an organization is affected by customer attitudes, labor relations and general economic conditions. b) Misleading inferences on trends: Inconsistencies and changes in accounting, classification, policies and methods can be misleading. This applies to inventory methods and depreciation techniques applied if errors exist. c) In the absence of accounting analysis, financial figures can portray local uniformity and information as well as increased case of financial statement ‘anomalies’ due to missing data and changes in stock splits. Furthermore, changing financial figures cannot accurately reflect retroactive changes (Drake, 2015). d) Absence of analytical accounting adjustments in comparative analysis is frustrated by many companies not providing full information about certain aspects such as pensions and leases e) No predictive value: Financial figures are only good when providing historical results and not predicting future activities. For example, a business may have income this year but will lack the following year if their major contract is ending and not renewable. f) Lack of discussion on non-financial issues: A range of issues such as the environment and effect of the business on the local community is not discussed. This shows that the business plan could be insensitive of externalities and global warming. 1.3.3 Assumptions and impact of changes in the assumptions The business plan for the Expansion of Current Excursions made the following assumptions; a) Status quo: No major economic changes will be experienced within Canberra and the Asian pacific region which most of the overseas visitors are expected to come from. Changes in economic variables such as rise in transport costs, high cost of fuel and standard of living will reduce the intention of potential customers to choose Australia as their destination of choice. b) Competition: The business plan assumes that there will be no significant competitor coming in to tap the potential of excursions and day trips within Canberra. These include organized tours and travels and backpackers. These competitors will ‘eat’ into the market share of CS#1 and will likely reduce its earnings. c) Events: This business plan assumes that market-related events will not be significant. Financial crisis for instance, will likely increase interest rates for credit making existing repayments difficult. d) Positive advertising: CS#1 can shift to social media as one way to bolster its marketing efforts without having to suffer loss of branding. Negative attitudes on social media regarding the activities of the organization will potentially impact on its reputation and brand image. e) Risk sharing: The business plan assumes that the project will have minimal impact on the daily lives of people living in Canberra. The risks will be shared between the organization and the community. Complaints about disorganized travelers will attract penalties of fines from the authorities. f) Expectations: The business will not be bound by high expectations on the rate of return to the extent that the project will be frustrated midway. Since it is a not-for-profit organization, the proceeds of the project is directed towards the distressed, disadvantaged and the poor in society. g) Transparency: The business plan key concern is to be accountable and transparent to the stakeholders. Lack of transparency will reduce the level of trust which will negatively impact on the revenue performance of the organization. 1.4 Conclusion CS#1 organization is a not-for-profit, non-government organization operating on the south side of Canberra. The ECE project has developed a business plan to expand its current excursions to include domestic and overseas visitors mostly aged and those facing social isolation. After assuming a constant sales mix and other variables, the plan shows a contribution margin of 60% at 50,000 units and $150,000. The projected cash flow shows that the project will have liquid cash at the end of the year ($31,075) and will have made a profit of ($36,750). Although it is difficult to quantify some of the benefits, cost benefit analysis shows that the project has more benefits than its anticipated costs. Limitations of using financial figures solely include underestimation of actual project benefits, inadequate information to predict trends and neglected discussion on non-financial information such as environmental externalities resulting from project operations. As well, the business plan makes the assumptions based on transparency, stakeholder expectations, advertising, events, competition and status quo. This shows that even though a business plan is a useful guide in judging the trends and performance, it is vulnerable to assumptions and limitations surrounding the risk factors in its core area of operations. References Australian Government (2016). Income tax exempt organizations. Australian Taxation Office. Available at: https://www.ato.gov.au/Non-profit/Your-organisation/Do-you-have-to-pay-income-tax-/Income-tax-exempt-organisations/ Boardman, A., Greenberg, D., Vining, A., & Weimer, D. (2006). Cost benefit analysis: Concepts and practice. (3rd. ed.). Upper Saddle River, NJ: Prentice Hall. Briciu, S. (2012). Variable and fixed costs in company management. University of Alba Lulia. Chen, X. & Koebel, B.M. (2013). Fixed cost, variable cost, markups and return to scale. UniversitÈ de Strasbourg. Community Services Initiative (2016). Community support services. Available at: https://communityservices1.org/ Drake, P.P. (2015). Financial ratio analysis. Available at: http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Greenwood, R. & Scharfstein, D. (2013). The growth of finance. Journal of Economic Perspectives, 27(2): 3-28. Kelly, R. (2014). Cost Volume Profit (CVP) Analysis. Certified Public Accountants. Poznanski, J. Sadownik, B. & Gannitsos, I. (2010). Financial Ratio Analysis. Vancity Community Foundation. Wang, X. H. & Yang, B. Z. (2004). On the treatment of fixed and sunk costs in principles textbooks: a comment and a reply. The Journal of Economic Education, 35(2): 365-369. Read More