Boston Lobsters Financial Plan - Case Study Example

Financial Plan of Affiliation Boston Lobster’s Financial Plan The Boston Lobster tennis team has diverse objectives, which the management needs to meet at a certain period. In line with the financial goals, a financial plan is critical, as it will provide a framework through which various projections will be met by the available funds. In addition, a financial plan will work towards making the organization viable for investments from other organizations or individuals. The following is a summary of the primary reasons for the Boston Lobster’ financial plan To see if a business idea is worthwhile To appeal to prospective investors To plan ahead for funds needed To evaluate different strategies requisite for smooth running of the organization To analyze the financial effect of other functional parts of the business such as operations and marketing To evaluate performance of the organization The distinctive features of Boston Lobsters business that influence its finances Preparation of financial statements in a bid to forecast the organization’s sales and revenues the following distinctive features about the organization need to be considered. The team has short season of 7 games long Its main source of revenue is sponsorship or advertising; ticket sales form 17% of income. The organization makes a lot of losses which are covered by the owner’s equity and the contributions from WTT The organization does not stand a position of getting loans. Consider the following forecast for the organization. It is aimed at increasing the market niche of the team and its activities. With the increased market niche, more fans will attend the matches and more revenues will be realized. Consider the following projected financial position of the organization in 2015 and 2016. This projection is aimed at increasing the present revenues and profits through advertising and increasing the market niche by capitalizing on the anticipated popularity increase in tennis. Particulars Amount ($ million ) 2015 2016 2017 2018 Revenues Net Revenues Sources Tickets: Box Seat Package, 1,000 @1400 Individual season box seat 20,000@ 360 Individual Season ticket 40,000@ 160 Local and International Sponsorship Fund raising Beverage, onsite and special events Net Revenues $ 1, 400,00 7, 200, 000 6, 400,000 600,000 1,000,000 1, 200,000 800,000 18, 600,000 $ 2, 000,000 7, 200,000 8,000,000 600,000 700,000 - 300,000 18, 800,000 2, 200,00 7, 400,000 8,400,000 800,000 1, 200,000 540, 000 460,0000 21,000,000 2,400,000 7, 700,000 8, 700,000 900,000 1000,000 - 200,000 20, 900,000 Operating Cost Research & Development 2,000,000 2, 200,000 2, 400,000 2,400,000 Sales and Marketing 2,700,000 2, 900,000 3,000,000 3,000,000 General & Administrative 2, 000,000 2, 000,000 1, 900,000 2, 100,000 Overheads 600,000 900,000 1,000,000 1, 100,000 Players and site costs 300,000 400,000 500,000 400,000 Total Cost 7, 600,000 8, 300,000 8,800,000 9,000,000 Gross profits (Passed to the owners) 11,000,000 10,000,000 12, 200,000 11, 900,000 Unlike 2014, which recorded losses, the above financial forecast for 2015-2018 can be achieved if the losses incurred are minimized such that the sponsorship given by the WTT is invested in other activities. This will make the organization financially sound even for the interested investors to bring their money in the organization. Similarly, the aspect of increasing the price of tickets should be avoided instead various management strategies such as marketing and satisfying the needs of the already identified market segment should be implemented. Various incentives such as drinks should be made affordable during the matches. This will increase the number of the fans thus enabling attainment of the set goals and projections. The aspect of market segmentation and advertising is fundamental in these financial plans since it serves as the driving force to the realization of increased market niche and consequent increased revenues. Since the organization is “pass- through entity”, the net income realized in the period 2014-108 as indicated in the financial plan will be passed to the owners who will be taxed at individual basis. This implies that the owners will reap big from the investment. With the projections the profits margin can be calculated as follows 2014 Profit margin = Gross profit/ Sales revenue = 11, 000,000/15,600,000 Profit margin= 11/15.6 = 0.705128 2016 10,000,000/17800000 =1/17.8 =0.5618 2017 12, 200,000/ 18,800,000 = 122/188 = 0.64 2018 11,700,000/19, 700,000 = 117/197 = 0.5939 The profits ratios from 2015 through 2018 indicate theta the organization is viable for investors. The margin range of 0.55 and above is a good indication of the organization’s positive progress. If the owners sustain this trend, then the profit margin is expected to increase in coming years and this will assure the owners big profits. Break even analysis Break even analysis is a useful way to identify a level of output that covers costs. This technique is used for analysis of 2016 financial position Profit = Revenue – costs 18,800,000- 8,300,000 = 10, 500, 000 Revenue = SR + price x output SR = sponsorship revenues Revenue= 1,000,000+ 17, 800,000 The costs are, Overheads + (unit variable costs X output) if variable costs So for break even, profit = 0: Costs: = 1, 000,000 +0 (since there are no variable costs) 0= profits In this case, the organization does not experience a break-even point since the profits are not equal to zero. In the case of calculating, the weighted average cost of capital (WACC), it will be assumed that the WACC is equal to the cost of equity since Boston Lobster does not have debts. Hence WACC = Cost of equity Use CAPM formula to calculate the cost of the company’s equity Cost of equity (Rx) = Rr + β (Rm - Rr) Where, Rx - Return on company equity, Rr-risk free return, = 1.56 β -degree of market risk, Rm the general market return (about 8%) A 5-year treasuries is considered in this case Note that, when Small companies such as Boston Lobster have earnings that are more volatile and a liquidity risk. This implies that the general risk factor is higher than the general stock market. If we assume twice as risky, then the equity cost is calculated as follows 1.56 + 2 (8-1.56) = 14.4% Like any small company, Boston Lobster Company does not have debt then their WACC is their cost of equity Many outside investors would want much more than that, private equity for example looks for 25% plus Finance sub plan on operations Market segmentation and advertising The essence of market segmentation as indicated earlier is to identify the nature of the fans that are willing to pay and attend the team’s matches. The segment that form majority of the customers earns $75,000-$125,000. Followed by $136, 139-$150, 000 and lastly that of $ 100,000-$125,000. This implies that financial allocation on advertising should be aimed that increasing the number of the fans in the income brackets of $136, 139-$150, 000 and $ 100,000-$125,000. For instance, the financial projections indicated from 2015 through 2018 in the financial plan will serve well in opening up new fan bases as well as increasing the existing one. Such areas with this group of population are in Sudbury, where the average household income is around $210,000, with a median income of $150,000. This is better news for the lobsters as we see that the tennis sport attracts a wealthier lifestyle. The advertising methods that should be considered include TV, online channels and campaigns. Consider the following financial forecast and budgetary allocation on advertising in a bid to increase the market niche and awareness. Advertising media Forecasted expenditure Expected Results 2015 2016 2018 TV, Radio 770,000 770,000 770,000 Increase in the number of fans and creation of new market segments Online Channels 830,000 830,000 830,000 Increase in the number of fans and creation of new market segment Campaigns 1,300,000 1, 400,000 1, 400,000 Increase in the number of fans and creation of new market segment Total $2,900,000 $3000,000 $3000,000 If the listed projection on the marketing and advertising section is met, then the overall revenues and attributed profits will increase. The operation department should ensure that the set goals of increasing awareness and expanding the existing market niche are achieved relative to the laid financial and budgetary regulations. The ultimate objective of this plan is to ensure that the organization’s activities and way of operating is revolutionized in a bid to increase revenues and profits. This budget should ensure that the ticket sales are increased. This will comprise of maintaining existing customers as well as acquiring new customers. In addition, the budget should help in promoting the new marquee players each season will likely affect the overall volume of ticket sales. Further, continuous improvement of the overall customer experience at matches and events, and providing customers with greater accessibility to the Boston Lobsters will definitely help in achieving the set goals of this plan. Read More