The Investment Needed to Start the Furniture Showroom Business - Report Example

Financial Plan Name: Tutor: Course: Date: FINANCIAL PLAN: HOME FURNITURE 1.0 Introduction The financial plan shows the investment needed to start the furniture showroom business alongside the anticipated financial performance of the business. The plan provides a series of financial documents required. The list of resources is the first document as it provides the physical resources needed to open the business such as equipment, machinery and building. This aspect explains the costs of the resources and financing mode or source of financing. Details that support the costs are also provided. For the start franchise business on furniture showroom, the financial plan also includes the profit and loss statement projected showing the projection of monthly sales and expenses for 2016. This is also goes alongside the annual expenses and revenues for the year 2017 and 2018. The plan includes a cash flow statement projected that show uses of funds and sources for the furniture showroom for the year 2016, 2017 and 2018. The business has employed 100 people with different roles and responsibilities. The organizations structure is also shown in the plan. The plan also provides balance sheet projected that lists owner’s equity, liabilities and asset listing at the beginning and the end for the year 2016, 2017 and 2018. Significant changes in the business are explained such as the need to purchase new machinery and equipment and addition of new staff. 1.1 Home furniture financing In this financial plan, there are various financial documents and analyses that will help to project the profitability of the home furniture business in Saudi Arabia. The plan starts by outlining the marketing goals with financial inclination. It then provides the breakdown of startup costs which indicates that the business requires SR36 million to be operational. The finances includes owners equity of SR28 million and debt (bank loan) of SR8 million. The equity to debt ratio = 80:20. This ratio shows that the business has high proportion of owners’ funds and little of financing. These funds were used in leasing office space, compensating employees, paying for health and property insurance, purchase of machinery and equipment and procurement of stock among others. Financial plan involved projected sales figures, cash flow statements, projected annual units sold and their pricing, and the balance sheet. The financial plan also showed the breakeven analysis which showed that the business can breakeven within six months of sales in the region of SR57million with 214 units of the product mix having been sold. The business will purchase home furniture which essentially meets the needs of the high end market. Majority of the buyers will be up market women who have fine tastes and preferences for creative furniture and artistic designs. Some of the items that the business will be stocking include; Sofas Chairs Dining tables Bed Kitchen cabinets Lighting/accessories Storages Outdoor services Designing services 1.2 Marketing goals 1. To achieve SR 54 million from first year sales (2016) First quarter SR10 million of sales Second quarter SR12 million of sales Third quarter SR14 million of sales Fourth quarter SR18 million of sales 2. To attain an average revenue of SR270 per unit transaction with customers 3. To achieve 500 of unit transactions in 2016 First quarter: 100 unit transactions Second quarter: 150 unit transactions Third quarter: 150 unit transactions Fourth quarter: 200 unit transactions 1.3 Startup Costs: Home Furniture Item Total Cost (Estimated -SR‘000’) Equity Investment (SR‘000’) Business location Security Deposit to lease the business offices 1,500 Machinery and Equipment Tools and production machinery Display equipment and storage Delivery vehicles and travel 20,000 Office furnishings and fixtures File cabinets, tables, chairs and desks 8,000 Office equipment Printers, computers, copiers, fax machine, phone system, cell phones, business software 4,500 Other items Royalty and legal fees, initial inventory and web site creation 2,200 Initial cash on-hand This will cover the operating expenses of the first month 28,000 Total cost for Startup 36,200 Less: Equity Investment 28,000 Startup Financing Required 8,200 (36 months Loan) Monthly Loan Payment (Estimated + Interest (5%)) 262 Total loan repayment after 36 months 9,430 1.4 Home Furniture Operating Budget for 2016: Fixed expenses (SR ‘000’) Fixed Expenses Projected Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Business Location Lease Payment 1,500 1,500 Utilities Heating and electricity Internet/ Wi-Fi access Telephone and Mobile phone 84 83 84 82 84 84 83 84 84 83 82 83 1,000 Insurance Business Liability Property 3,500 3,500 Professional Service Fees Legal Auditor Accountant/Book keeping 20 20 20 20 20 20 20 20 20 20 20 20 240 Supplies Office supplies 50 50 50 50 50 50 50 50 50 50 50 50 600 Advertising and marketing Tradeshows, website, brochures and advertising 200 200 200 200 150 150 150 150 150 150 150 150 2,000 Employee wages and salaries Benefits, Workers liability compensation, health insurance, wages and sales 2,667 2,667 2,667 2,667 2,667 2,667 2,667 2,667 2,667 2,667 2,667 2,667 32,000 Owners compensation Draws (owner) 500 500 500 500 500 500 500 500 500 500 500 500 6000 Other expenses (Fixed) Contingencies 200 200 200 200 200 200 200 200 200 200 200 200 2,400 Total Fixed Expenses 3637 3637 3637 3637 3587 3587 3587 3587 3587 3587 3587 3587 49,240 Loan Payments Startup expenses 262 262 262 262 262 262 262 262 262 262 262 262 3,144 The sales shown in the above are provided in detail in the table 1.5 below. 1.5 Annual sales estimates Items Average price (SR) ‘000’ Average number sold Total sales ‘000’ Sofas 114 46 5,244 Chairs 51 44 2,244 Tables 73 47 3,431 Dining Tables 114 23 2,622 Bed 197.4 29 5,724.6 Kitchen cabinets 323 25 8,075 Lighting/Accessories 127.5 83 10,582.5 Storages 206 36 7,416 Outdoor furniture 154 17 2,618 Designing services 120 50 6,000 Grand Total 400 53,957.1 1.6 Home Furniture Operating Budget for 2016: Projected Sales Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Projected Unit Sales 33 35 35 40 40 42 42 45 45 47 48 50 502 Average Price per Unit 270 270 270 270 270 270 270 270 270 270 270 270 270 Projected Sales Revenue Price × Units = Revenue 8,910 9,450 9,450 10,800 10,800 11,340 11,340 12,150 12,150 12,690 12,690 13,500 135,540 1.7 Home Furniture Profit & Loss Statement for 2016 (Projected): Profit/Loss, Variable Expenses and Sales Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Projected Sales Revenue 8,910 9,450 9,450 10,800 10,800 11,340 11,340 12,150 12,150 12,690 12,690 13,500 135,540 Projected Variable expenses (20% of sales) 1,782 1,890 1,890 2,160 2,160 2,268 2,268 2,430 2,430 2,538 2,592 2,700 27,108 Total Fixed Expenses 3,637 3,637 3,637 3,637 3,587 3,587 3,587 3,587 3,587 3,587 3,587 3,587 43,244 Total expenses (Variable + Fixed) 5,419 5,527 5,527 5,797 5,747 5,855 5,855 6,017 6,017 6,125 6,179 6,287 70,352 Projected Profit/Loss Profit = Revenue - Expenses 3,491 3,923 3,923 5,003 5,053 5,485 5,485 6,133 6,133 6,565 6,511 7,213 65,188 Less: Loan Payment Startup expenses 262 262 262 262 262 262 262 262 262 262 262 262 3,144 Profit Loss after repaying the loan 3,229 3,661 3,661 4,741 4,791 5,223 5,223 5,871 5,871 6,303 6,249 6,951 62,044 1.8 Furniture Annual income statement Amount in ‘000’ of Saudi Arabia Riyals (SR) for year 2016 Q1 Q2 Q3 Q4 Total 2017 2018 Volume/Unit 103 122 132 145 502 580 650 Revenue$ (Cost of Goods sold) 27,810 32,940 35,640 38,880 135,540 149,094* 164,003* Showroom Depreciation 1,250 1,250 1,250 1,250 5,000 5,000 5,000 Transportation 250 250 250 250 1,000 1,000 1,000 Rents for storage and labor housing 125 125 125 125 500 500 500 Total 129,040 142,594 157,503 Salaries 7,458 7,458 7,458 7,458 29,832 29,832 29,832 Legal/Professional fees 240 240 400 400 Utilities 250 250 250 250 1,000 1,000 1,000 Insurance 2,000 2,000 2,000 2,000 Sales and Marketing promotions 500 500 500 500 2,000 2,000 2,000 Other fixed expenses 463 2,603 2,553 2,553 8,172 8,172 8,172 Total Fixed Expenses 10,911 10,811 10,761 10,761 42,244 42,244 42,244 Variable expenses 5,562 6,588 7,128 7830 27,108 29,820* 32,802* Zakat (2.5% of sales) 3,389 3,727 3,938 Total operating expenses 16,473 17,399 17,889 18,591 70,352 71,944 72,744 Gross profit 52,299 66,923 80,821 *Projected growth in sales by 10% with corresponding increase in variable costs. 1.9 Human resources- Annual Salaries ‘000’ Rank Annual Salary ‘000’SR Number of employees Total salary CEO 1,260 1 1260 Divisional Managers 900 3 2700 General Managers 600 8 4800 Section directors 360 20 7200 Assistants 204 68 13,872 Total 100 29,832 2.0 Cash Flow Statements, Uses of Funds and Combined sources (2016) in SR ‘000’ Item Startup Funds 2017 2018 2019 Investment in Home Furniture business (Owners Cash) 21,000 - - - Other investors’ Cash 7,000 - - - Cash from Loans and other forms debts 36,200 - - - Less: Startup Expenses and Costs 16,473 - - - Start of Year cash at Hand 19,727 7,834 1,141 1,857 Add: Receipts from customers (Cash) 5,500 13,900 19,000 22,450 Less: Variables expenses, Cash paid to Employees and suppliers 10,950 11,450 12,141 13,200 After Operations Cash Position 14,277 10,284 8,000 11,107 Less: Principal and Interest on Loans (12 Months × Monthly Payment) 3,143 3,143 3,143 - Add: Loans or additional Investment 2,700 - - Less: Drawings from owner 6,000 6,000 3,000 6,000 Cash at Hand at the end of Year 7,834 1,141 1,857 5,107 Figure 1: Home Furniture- Cash at hand projections from 2016-2019 2.1 Home Furniture: Projected Balance Sheet SR ‘000’ Balance sheet item 1st January 2016 1st January 2017 1st January 2018 1st January 2019 Assets Liability & Equity Assets Liability & Equity Assets Liability & Equity Assets Liability & Equity Cash on Hand 7,834 1,141 1,857 5,107 Accounts Receivables 5,500 13,900 19,000 22,450 Inventory at Hand 84,500 87,800 93,250 102,600 Fixed Assets (Machinery, Land, Buildings) 20,000 17,600 15,488 13,629 Total Assets 117,834 84,500 129,595 143,786 Accounts Payable 70,352 71,944 119,744 140,300 Loans Payable 3,143 3,143 3,143 - Owners Equity/Investment 36,200 8,500 6,500 1,200 Total Liability 109,695 83,587 129,387 141,500 Equity (Total Assets-Total Liabilities) 8,139 913 208 2,286 N/B: Depreciation of fixed assets is capped is at 12% per annum Owners’ equity includes the savings of the owner that was injected into the business in the subsequent years. 2.2 Home furniture showroom organization structure 2.3 Break-even analysis The Home Furniture business was profitable for the four years that projections were made. It was critical to point out the direction or future of the business by looking at the financial implications of the breakeven analysis. Being the most profitable segment in Saudi Arabia, home furniture business was calculated for break even points. Breakeven analysis – Home Furniture SR ‘000’ Annual fixed expenses projected 43,244 Average profit/unit Mean price/unit – Variable Expenses/Unit = Average profit/Unit 202 Breakeven point (units) Annual fixed expenses/Average profit/Unit 214 Breakeven point (Revenue) [(Breakeven point (units)*Variable expenses/unit) + Fixed Expenses] [(214*67) + 43,244] = 57,587 The home furniture business sells a mix of different products. The calculations were therefore based on the estimates of the product mix. Where mean price/unit = 269 Variable expenses/unit = 67 Average profit/unit = 202 From the table above, the breakeven point (revenue) for the Home Furniture business is SR57, 587, 000 while the breakeven points in units is 214. As shown in the graph below, the breakeven of the business yields the perpetual profitability as indicated. Figure 2: Graph of home furniture breakeven analysis The graph shows that the home furniture business can breakeven within the sixth month. This is indicative of a viable business because its returns can be realized in less than one year. 2.4 Discussion The implication is that the owner can be able to repay all the loans and provide dividends to those shareholders with substantial shareholding in the company. First, the employees will also work with confidence and become satisfied based on the firm performance and rewards. Second, the bank in which the loan was borrowed will not be disappointed by erratic repayments. This will increase the business credit worthiness given that the loan is medium-term (less than 36 months). This loan will be repaid in full at the beginning of 2018. Although the cash at hand is fluctuating, the business is stable because the accounts receivable is recovering cost of goods sold on credit from the previous year. This shows the business has the capacity to relate with its debtors and receive their payments in good time to pay creditors. The startup cash is sufficient given that the business opted for a healthy mix of both equity and debt. The finance mix also showed heavy contribution of owners’ equity and less than 20 percent on debt. The cash at hand as shown in figure 1, indicates a decline in disposable cash which could have been used to purchase stock which includes all the high end home furniture. The available cash steadily increases in the year 2017, 2018 and 2019 which is also indicative of a growing business. The initial capital has been used to procure the office space which will also be a showroom to display and sell the high end furniture. The spaces in Riyadh are quite expensive and given the impression the business wants to portray as a ‘superior brand’ then it had to incur more on looking for a prime space, investing on security and training employees to live up to the brand. The financial goals or marketing objectives earlier listed are possible to be achieved since the business already attains the required quarterly sales and anticipated revenues. The owner has drawings each year but can be amended based on the reflection or business performance in the year. As shown in the cash flow statement, the owner had to draw half the yearly drawings because the business required more cash to finance operations. 2.5 Conclusion The home furniture business is lucrative and viable based on the projections shown in the figures in the plan above. The business requires a mix of owners’ equity and debt to finance operational activities. This will mean that sales have to match the total operating expenses if any profit is to be made. The plan indicates that the business can make adequate sales to offset the expenses which include repaying a medium-term loan borrowed from a bank. The balance sheet had also been shown for the next four years. The business breakeven is expected in the next six months (June of 2016) which shows that the firm is on its way to profitability. Read More