Introduction to Accounting and Finance: Hair silk- financial plan and pitch - Essay Example

?Hair silk- financial plan and pitch Table of Contents QN 2 ASSUMPTIONS ON REVENUE AND COST 3 QN 2 4 MARGINAL COST MENT 4 QN 3 5 BREAK EVEN ANALYSIS 5 QN 3 6 CASH FLOW FORECAST 6 FORECAST INCOME STATEMENT 7 FORECAST BALANCE SHEET 9 QN 4 10 QN 1. ASSUMPTIONS ON REVENUE AND COST The business aims to manufacture 63,709 shampoo bottles during the first year of operations. Each unit would be priced at ? 7/bottle. The projections for sales revenue would be around 30% monthly. This would begin from April 1 2011 to March 31, 2011. It is very crucial for a starting business to be liquid to cover most of the expenses ;hence, all sales must be done on a cash basis only. The procedure for taking orders would be first come, first serve basis. As the orders increase, production would also be adjusted so it can come up with the volume. For the time being, credit transactions would not be entertained for the first two to three years of operations to avoid debtors. The concept of jus-in-time production by the Japanese would be adapted so there is no need for an inventory. The following is a summary of cost break up for our product. Total Sales (in ?) 445962 Total Units sold 63709 Selling cost per unit (in ?) 7 Variable Cost Direct materials ( in %) 25% of selling cost Direct Labour ( in %) 25% of selling cost Direct expenses (in %) 10% of selling cost Variable selling cost 7.5% of selling cost QN 2 MARGINAL COST STATEMENT One of the fundamental concepts that should be understood is Marginal Cost. According to Investopedia, marginal cost is “ the change in total cost from making or producing one additional item.” Any business is interested in determining the marginal cost because it has positive effects on economies of scale. Producers or manufacturers often make calculations that would help them arrive at the best production level. If a business would like a more concrete calculation of marginal cost, they can prepare a Marginal Costing Statement. The cost of raw materials along with labour is 25% of sales. Expenses would reach as much as 10% of the selling cost. Since the business would be utilizing a sales force, the commission and packaging cost will amount to 7.5%. As aforementioned, the selling cost is ? 7,yet the variable cost per unit is ? 4.8 per bottle. Production would entail fixed cost that would amount to ? 154100. Based on these figures,please refer to Table 1 for the Marginal Cost Statement. Table 1: Marginal Cost Statement of Hairsilk QN 3 BREAK EVEN ANALYSIS Almost all people doing business know the relevance of a break-even analysis. Having a reliable break-even analysis can help a business owner make sound decisions that would affect the financial health of his business. In a break-even analysis, production costs are classified into two categories, namely, Fixed and Variable. These two major types of costs are usually compared with the income generated from sales. By doing so, the volume of sales needed to incur no profit nor no loss state is determined. Hence, when production reaches a certain point where gains is equivalent to losses or revenue equals expenses, it is called a Break Even point (valuebasedmanagement.net). This particular point is called Break-even point. Table 2 illustrates the Break even analysis of Hairsilk Sales = Variable expenses + Fixed expenses + Profit (Atrill & McLaney, 2008) Total number of units= 63709 Selling price/unit= ?7 Variable cost/unit= 4.8/bottle Fixed costs= 154100 7Q= 4.8Q+154100+0 2.2Q=154100 2.2Q=154100 Therefore, Q= 70046 The break- even point is attained at that point where profit is ‘zero’ Table 2: Break-even analysis of Hairsilk QN 3 CASH FLOW FORECAST Cash, as what business owners know, is the lifeblood of the business. Without cash, the business would simply fail. It is therefore crucial to project the movement of cash over a certain time period. This can be done through cash flow forecasting or cash flow management. The estimate of the timing and amount of cash moving in and out of the organization over a specific time period is called Cash Flow Forecast. What is presented here is a 12-month Cash Flow Forecast of Hairsilk. However, it is important to take note that a 30 day forecasting is ideal once the business is stable since actual data is available in the form of receipts and disbursements (Caux,2005). Table 3 is a cash flow forecast of Hairsilk. Table 3: Cash Flow Forecast of Hairsilk for First 12 Months There is a need to emphasize in the given table above that cash surplus is always maintained in the account. At the end of the first year, total cash surplus of ? 90838 is expected. Having a strong cash position is a necessity because this ensures liquidity. The cash receipts come in two forms: initial capital contribution of investors and sales revenue on a monthly basis. FORECAST INCOME STATEMENT The Forecast income statement of Hairsilk for the year starting from 1st April to 31st March is displayed in table 4. Table 4: Forecast Income Statement of Hairsilk for the year ending on 31/03/2011 At the assumptions of revenue and cost, it was projected that volume of shampoo in units that would be sold is 63,709 bottles for the first year. Also, it was assumed that a 30% increase in sales would happen on a monthly basis for the first twelve months. It was also stated that transactions are mainly cash basis only since liquidity is necessary for sustainability of operations. At such projections, the first-year total sales is expected at ? 445962. Deductions such as cost of sales (?96490), direct labour (?111490) and direct expenses (44596) from the total sales would amount to Gross profit of ?193385. Our gross profit margin for the year is estimated to be 43.36% for the 1st year. From the gross profit, a Net profit can be derived once all the operating expenses are deducted. The resulting Net Profit would be ? 42438 for the 1st year with an expected profit margin of 9.52%. FORECAST BALANCE SHEET The Forecast balance sheet of Hairsilk as on 31st March is displayed in table 4. Table 5: Forecast Balance Sheet of Hairsilk as on 31/03/2011 Since the company is new, the only source of capitalization would be the fund from investors. The company did not assume any loan;as such, the balance sheet would show that the only liability would be the capital as well as total capital including profit. This would amount to ?142438. Since there is no loan nor credits, cash is the main asset. The closing stock is assumed at ?15000 at the end of the first year. QN 4 PITCH The product is a revolutionary hair shampoo that could possibly grab a large piece of the market share. The product has a unique selling proposition since its 100% herbal extracts. Nowadays, consumers are more conscious and prefer organic products. In fact, since the National Organic Program rule in 2005 has been launched, millions of people fell for organic or natural products (Lee, nationalgeopgraphic.com). Aside from the unique selling proposition, the company is also considering the packaging of the product. The plastic bottles are packaged in varying sizes- 200 ml, 400 ml and 600 ml. The first one that would be launched to the market are the 200 ml bottles since consumers are still wary of new products. They want to test it first before buying large quantities. The ?7 price per 200ml bottle would cover direct costs such as cost of materials, labour and direct expenses. The materials and labour alone makes up 25% of the total cost of the product. If there would be 212,246 units sold, then the break-even point is achieved. For the first year, total volume of sales units that must be sold would be 63,709 bottles. It is expected that a 30% annual increase would happen as more loyal consumers buy the product and the product is distributed well to all major outlets. Table 3 shows the cash forecast for the first year of operations. It is the aim of the company to have cash surplus in everyday transactions to make the business sustainable. Moreover, having more financial liquidity through cash presents many advantages. First, any liabilities or commitments can be settled easily. Second, this will ensure that the company would be stable enough so it would not go to bankruptcy. Companies that run out of cash often sell some of their fixed assets that can lead to financial disaster later. The business is expected to achieve a cash surplus of ?90838by the end of the 1st year. Table 4 shows the Forecasted Income Statement. The Total Sales would be ? 445962 (63709 bottles at ?7/ bottle). There would be no more inventory due to the just-in-time production method. The cost of materials is valued at ? 111,490 in the 1st year (0.25% of selling cost). The gross profit for the first year is calculated to be ?193385. After operating expenses are deducted from the gross profit, the Net Profit would be ?42438 in the first year. Table 5 illustrates the Balance Sheet of the company. Like any business, the typical fixed assets of the company includes plant & machinery, furniture, office equipment , as well as fixtures and fittings. The only asset of the company would be cash. The aggregate of total assets is ?142438. The investors would like to raise some ?100000 as initial capitalization to sustain the business. The financial management of the capital must be sound so that the business would flourish. The summary of marginal cost statement is displayed in table 1. From the total sales revenue of ?445962 , total variable costs of ? 301024 to get the contribution. The contribution to sales ratio (contribution/Sales) is 32.50%. This ratio measures the contribution that is generated per unit of sales revenue. It just shows that for each unit of sales, the contribution margin that goes toward covering fixed cost is 32.50%. This is also a measure of the degree to which the company controls its cost of sales. Since the contribution is 32.50%, it can be confidently stated that the costs of sales are under control. From the contribution margin, total fixed costs of ? 154100 to obtain the profit/loss. The challenge therefore is how to increase the sales at 30% a year which can be addressed by a strategic marketing plan. It must be kept in mind however that there are budgetary limitations. Nevertheless, the investors know the important role that marketing plays in increasing the sales. A marketing team would be created that would plan and implement different strategies to 1) create product awareness, 2) increase sales. These marketing activities would cover the whole UK and some potential markets in Europe. It is crucial for the market to be aware of this new product. It is important for marketers to know who their target audience are, especially the locals. This requires the services of a public relations firm that can work with the marketing team to create a good campaign which can make a strong impression to the public. First of all, when a new product is launched, the marketing efforts are directed towards creating strong brand awareness. The public should be able to recognize the logo as well as the brand name. This is quite challenging since the company would be competing with big names. If possible, the PR firm must be able to get a very reliable endorser. All possible print media campaigns would be involved for wide media exposure. The campaign can also include social media marketing like Facebook and Twitter. The tag line would focus on “healthy hair alternative for beautiful hair." Lastly, we believe that the pricing scheme is affordable so consumers can easily acquire the product. Other chemically prepared shampoos cost just as much as our product. This can be a good angle to present our idea to the public by saying that our product is safer, yet affordable. There are many organic products in the market but they do come with a high price. So looking from inside, the company has no liability and the asset is mainly cash. It is liquid and inviting to investors. From the outside, the marketing campaign will be aggressive to pursue the favour of the discriminating public. Indeed, the projected profit of 30% after a year would be earned which makes this business a good investment. References "Break-even Point."Management Methods | Management Models | Management Theories. N.p., n.d. Web. 11 July 2011. . Caux, Tony De. "Cash Forecasting", Treasurer’s Companion, Association of Corporate Treasurers, 2005  Lee, Lexa W.. "Organic Shampoo | National Geographic." Green Living | National Geographic. National Geographic, n.d. Web. 11 July 2011. . "Marginal Cost Of Production."Investopedia. N.p., n.d. Web. 8 July 2011. Read More