Potential Entrepreneur of PowaPak - Assignment Example

Potential Investors Potential Entrepreneur – here ‘ENERGY WITH EVERY SIP’ Introduction ‘PowaPak’ is power packed and provides ‘energywith every sip’. This drink is will be on the shelf before Christmas which is one of the busiest shopping seasons of the year. The Christmas season is busiest because it lasts for just under a month (The Free Library 2009). Bainbridge (2011) indicates that is the season for parties. During this time people are expected to stock up on food and drinks and so it is a good time to launch ‘PowaPak’. It may be considered a little late but most of the Christmas shopping is done in the last week before Christmas. In fact, All In London.co.uk (2012) indicates that Christmas shopping is always left for the last minute. Additionally, most of the parties will take place in the last two weeks ending with New Year celebrations. Therefore, a large quantity of ‘PowaPak’ is expected to be sold. Packaging The package that is used for a product is a powerful marketing tool (FactExpert 2012). The style of the bottle is therefore very important. PowaPak will be packaged in 250ml glass bottles. Glass bottles are used because it is environmentally friendly when compared with PET and aluminium cans. However, the cost is high in comparison to those substitutes. Nutricap Labs (2012) indicate that costs and environmental factors play a key role in the drink packaging industry. Consumers have become very environmental and health conscious and awareness is increasing in relation to the deleterious effects of greenhouse gas (GHG) emissions. Therefore, this is a major consideration in our choice. Although, aluminium cans and PET bottles cost less and are more convenient to carry around as well as to ship because of their lighter weight, glass bottles provide more benefits. A list of factors which makes bottles more beneficial when compared to substitutes includes: i. Glass bottles are recycled more than aluminium cans (Johnson 2011) ii. Aluminium products use a lot of energy in the mining process iii. The production of aluminium products have a negative impact on the ecosystem and contribute to waste (Johnson 2011) iv. Aluminium is number one in terms of being the contributor of the largest amount of GHG in the waste stream (Johnson 2011) v. Plastic bottles normally end up in landfills even though they are recyclable vi. Aluminium cans are better to use than plastic bottles because plastic bottles are made from unrefined and non-renewable petroleum (Johnson 2011) vii. Health risks are associated with the use of plastic bottles viii. Plastic bottles leach out Bisphenol-A (BPA) which is used in its production (MacLusky et al 2005) - BPA is a potent hormone disruptor which can impair the reproductive system (Johnson 2012). Even a small dosage of BPA is associated with adverse health effects such as cancer, obesity and neuro-behavioural problems (Vogel 2009). ix. Canned beer gives a metallic tastes to drink (Jim Koch n.d; cited in Johnson 2011) - The taste of a product is very important and so it is best to allow our customers to taste the real PowaPak. The aim in producing PowaPak is to ensure that it meets safety standards for all adults including pregnant and lactating mothers. Sporting enthusiasts and people engaged in sporting activities are the main target group. The ingredients will be assessed to ensure that it is safe for all while providing the required energy and nutrition. Foods in general can be harmful if too much is consumed and so the 250ml bottles are expected to meet the requirements of the majority of consumers - even those with diabetes. The drink will contain ginseng, wheat germ, lecithin, bee pollen and non-sulphured blackstrap molasses. Ginseng which has gained popularity in recent times is highly valued in the Far East (Attele et al 1999). Lecithin contains choline which is good for the brain. Bee pollen is considered to be highly nutritious and can be used to enhance energy, memory and performance (Johnson 2012). It is considered by many to be nature’s perfect food (Johnson 2012; Agriculture and Consumer Protection n.d.). Rajeev (n.d.) indicates that blackstrap molasses is very nutritious and is also a healthy sweetener. It contains calcium, magnesium, copper, manganese, potassium and two teaspoon provides the daily requirements (Rajeev n.d.). Molasses is considered to be good for lactating mothers and it is said to turn grey hair black (Rajeev n.d.). Distribution PowaPak will be distributed by the manufacturers. The cost per bottle is included in the cost price. This removes the hassle out of distribution and reduces the number of employees required. Marginal Costing Statement A marginal costing statement is prepared using the contribution format and combines costs based on their behaviour (Eldenburg and Wolcott 2005). Fixed costs behave differently from variable costs. Fixed costs per unit decreases as production increases while variable costs remains constant. Eldenburg and Wolcott (2005) indicate that marginal cost is important in order to make decisions. It is the incremental cost of producing an additional unit. The income statement in Appendix 1 shows the cost of producing each bottle of PowaPak. The cost of producing a bottle of PowaPak is 55p. This includes the cost of the bottle containing the drink but without the label. The label will be designed by us and produced at a cost of 5p. The manufacturers of PowaPak are prominent in the drink industry and will be able to get bottle at a much reduced price. The income statement separates the direct or viable costs from the fixed costs. The cost to manufacture 5,000,000 bottles of PowaPak is ?2,820,000 and the fixed cost is ?520,000. The profit expected on the budgeted sales of 4,700,000 units is ?2.25 million. Break-even Analysis Break-even analysis is concerned with the point at which total cost equates with total revenue. A break-even table and the corresponding chart are shown in Appendix 2. The break-even volume is 866,667 units. This is where total cost and total revenue is equal at a value of ?1,040,000. This is where total revenue and total cost crosses each other on the graph in Appendix 2. The blue line on the graph provides an indication of the volume and the value of sales revenue at the break-even point. Cash Budget The cash budget is a table of cash flows. It shows the budgeted cash receipts, disbursements including loans and investments (Eldenburg and Wolcott 2005). The cash budget in Appendix 3 provides this information. It shows the amount spent on motor vehicle and office furniture and the amount contributed by investors. A healthy cash balance of ?1.8 million is expected at the end of the year. Forecast Income Statement The income statement provides information on the financial performance of a business (BPP 2011). indicates that a profit of ?2.26 million is expected. This is an indication that the business is profitable. Profitability is very important to investors who are interested in the return on their investments. The return on equity in PowaPak is expected to be 621% (?2,255,000/?363,000 x 100). Forecast Balance Sheet A balance sheet provides information on the financial position of an entity (Wood and Sangster 2010) . The forecast balance sheet indicates that the business has a positive working capital and has high levels of liquidity. A measure of liquidity is the current assets ratio which is 12:1. This is the ratio of current assets to current liabilities which indicates whether the business is able to pay its debts as they fall due (BPP 2009; Brigham and Ehrhardt 2005). The sale of PowaPak is expected to generate sufficient funds that will allow for further investments to facilitate expansion. Conclusion The business represents a good investment and should be considered. It is a very profitable business with an expected gross profit margin of 50%. In addition to that there is the capacity for debt in the future and this will pave the way for future expansion. This is very important as there is a big and expanding market worldwide for energy drink of the quality of PowaPak. PowaPak is yours for good health both financially and nutritionally. I therefore implore you to invest and provide consumers with ‘Energy in Every Sip’. Appendix 1 PowaPak Energy Drink Marginal Cost Statement Year Ending December 31, 2013   ? ? Direct Materials and Labour @ ?0.55 ?5,000,000 units 2,750,000 Direct Materials –Labels @ ?0.05 ?5,000,000 250,000 Prime Cost/Manufacturing Cost 3,000,000 Less closing inventory @ ?0.60 ?300,000 units 180,000 Manufacturing Cost of goods sold 2,820,000         Sales (?1.2 ? 4,700,000 units) 5,640,000     Contribution (Sales – Variable Cost) 2,820,000 Less: Fixed Cost   Rent 32,500   Salaries 130,000   Advertising & Promotion 320,000   Entertainment 30,000   Depreciation (non cash exp.) 6,500   Miscellaneous 1,000     520,000 Profit 2,300,000         Appendix 2 PowaPak Energy Drink Break-even Table B/E Point Number of bottles sold 0 1 250,000 500,000 750,000 762,500 1,000,000 Sales @ ?1.2 per bottle 0 1.2 300,000 600,000 900,000 915,000 1,200,000 Variable Cost @ ?0.60 per bottle 0 0.6 100,000 300,000 450,000 457,500 600,000 Less: Contribution @ ?0.60 per bottle 0 0.6 275,000 300,000 450,000 457,500 600,000 Fixed Cost 457,500 457,500 457,500 457,500 457,500 457,500 457,500 Total Cost 457,500 457,501 557,500 757,500 907,500 915,000 1,057,500 Appendix 3 PowaPak Energy Drink Cash Budget Year Ending December 31, 2013   December-12 January-13 February-13 March-13 April-13 May-13 June-13 July-13 August-13 September-13 October-13 November-13 December-13 Total Inflow ? ? ? ? ? ? ? ? ? ? ? ? ? Capital 63,000 0 0 0 0 0 0 0 0 0 0 0 0 63,000 Receipts from Sales 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 5,040,000 Receipts from investors 300,000 0 0 0 0 0 0 0 0 0 0 0 0 300,000   363,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 420,000 5,403,000 Outflows   Manufacturer's deposit 230,769 0 0 0 0 0 0 0 0 0 0 0 0 230,769 Manufacturers 0 230,769 230,769 230,769 230,769 230,769 230,769 230,769 230,769 230,769 230,769 230,769 230,769 2,769,231 Advertising & Promotion 80,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 320,000 Labour 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 130,000 Rent 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 32,500 Miscellaneous expenses 300 50 50 50 50 50 50 50 50 50 50 50 150 1,000 Entertainment 4,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 4,000 30,000 Capital expenditure 35,000 0 0 0 0 0 0 0 0 0 0 0 35,000 Dividends 0 45,000 45,000 Total Outflow 362,569 265,319 265,319 265,319 265,319 265,319 265,319 265,319 265,319 265,319 265,319 265,319 312,419 3,593,501 Net Inflow/(Outflow) 431 154,681 154,681 154,681 154,681 154,681 154,681 154,681 154,681 154,681 154,681 154,681 107,581 1,809,499 Cash b/f 0 431 155,111 309,792 464,473 619,154 773,834 928,515 1,083,196 1,237,876 1,392,557 1,547,238 1,701,919 1,809,499 Cash c/f 431 155,111 309,792 464,473 619,154 773,834 928,515 1,083,196 1,237,876 1,392,557 1,547,238 1,701,919 1,809,499   Assumptions:   1. Initial capital of ?63,000 will be provided. ?30,000 to purchase a Motor Vehicle and ?5,000 for Office Furniture.   2. Investors will contribute ?300,000 for a 15% p.a. return on their investment   3. Sales is expected to be steady at approximately 350,000 per month in every month except December when it is expected to be 500,000   4. A deposit of ?100,000 will be paid to the manufacturer in order to secure the contract.   5. A credit period of 30 days has been agreed with the manufacturer.   6. Office will be at my home and a contribution of ?32,500 will be made for space and utilities.   7. In addition to myself, I will hire one (1) staff to assist in marketing the product.   8. Production will take place one day per month and I will have to be present at the manufacturer’s location to ensure quality   Appendix 4 PowaPak Forecast Income Statement Year Ending December 31, 2013       ? ? Sales 5,640,000 Cost of sales   Add: Purchases 3,000,000   Less: Closing inventory 180,000     2,820,000 Gross Profit 2,820,000 Less Expenses   Rent 32,500   Salaries 130,000   Advertising & Promotion 320,000   Entertainment 30,000   Depreciation 6,500   Miscellaneous 1,000   Dividends 45,000     565,000 Net Profit 2,255,000           Assumption: It is assumed that there is no tax Appendix 5 PowaPak Energy Drink Forecast Balance Sheet Year Ending December 31, 2013       Cost Accum. Dep. Net Book Value   Fixed Assets ? ? ?   Motor Vehicle 30000 6000 24000   Office Furniture 5000 500 4500     35000 6500 28500   Current Assets   Inventory 180,000   Deposit 230,769   Trade Debtors 600,000   Bank 1,809,499     2,820,269   Current Liabilities   Trade Creditors 230,769   Working Capital 2,589,500   Net Assets 2,618,000       Financed by:   Capital:   Owner 63,000   Investors 300,000 363,000   Profit 2,255,000     2,618,000       Additional information:   1. The owner invested ?63,000 by way of cash and investors ?300,000. See cash budget 2. Depreciation of Office Furniture is at 10% per annum and Motor vehicle 20%.   References Agriculture and Consumer Protection. (n.d.). Chapter 3 Pollen. [Online] Available at http://www.fao.org/docrep/w0076e/w0076e10.htm. [Accessed 26 November 2012] All In London.co.uk (2012). Christmas Shopping in London. [Online] Available at http://www.allinlondon.co.uk/life/index.php?fid=10&page=1. [Accessed 26 November 2012] Attele, A.S., Wu, J.A and Yuan, C. (1999). Ginseng Pharmacology: Multiple Constituents and Multiple Actions. Biochemical Pharmacology, 18, p. 1685 - 1693 Bainbridge, A. (2011). Christmas Frenzy. [Online] Available at http://www.autonetinsurance.co.uk/news/insurance-news/2011/12/22/christmas-frenzy/. [Accessed 26 November 2012] Brigham, E.F and Ehrhardt, M.C. (2005). Financial Management: Theory and Practice. 11th ed. USA: Thomson South-Western BPP Learning Media (2011). 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