Implementing Strong Business Strategy to Make the Company Establish a Stable Cash Flow - Example

FINANCIAL PLAN I. Sources of funds: Loan – Self – Cash Self – Assets II. Funding requirement/Applications: Fixed Assets: Formation expenses: Working capital: Stock: III. Fixed Assets: a. Machinery and Equipment: No. Machinery/Equipment Price + Taxes(£ ‘000’) Qty. Required Total Value(£ ‘000’) 1 RFID readers 500 5 2,500 2 T7500 desktops 370 10 3,700 3 mechanic/installers 200 2 400 4 car maintenance tool kits 150 4 600 5 mechanic creepers 89, 2 178 6 manual hydraulic jacks 56 3 168 b. Premises: Youtrak’s premises will be located in the London the premises will be a rented at £ 50 per month. Other expenses that are associated with these premises include refurbishment, and fire safety refurbishments c. Raw Material (Stock) No. Item-Type Qty. (Monthly/Annual) Total Value (Monthly/Annual) 1 RFID 500 pieces GPS system stock (7 x 36) £2.52 £295390 £297910 d. Formation Expenses: Expenses Amount(£) payroll 156000 Marketing/promotion 79000 rent 50000 utilities 8000 insurance 3000 Payroll taxes 49000 others 6000 e. Working Capital for Expenses (and the period for): Year 1(£) Year 2(£) Year 3(£) Working capital 129400 209500 283800 IV. Product/Service Information (Sales forecast): No. Item Quantity produced/Month Projected sale /Month in value(£) 1 Radio Frequency Identifications combined with GPS (Global Positioning System). 10 47600 V. Key People and Job Functions and Salary: khaled alhabss will serve as the Director. He will be paid a basic salry of £ 1500. Two staff who will work in the operations field of installing and preparing vehicles with the sufficient disguise for installation of the RFID and GPS systems will be getting & 890 per month. Data inputer and system analysis will get £750 and £760 respectively. VI. Key financial assumptions: All the projections on the income and expenses have been based on factual and verifiable information. There is an assumption that the inflation rate will remain constant, and that significant economic adjustments that could lead to substantial changes on the projections will take place. Other assumptions are as follows. The market will keep growing The economy will be stable There will be easy availability of raw materials and labor Financial Highlights (For the first 5 years) Year 1 Year 2 Year 3 Year 4 Year 5 Turnover: 103,840 993,280 1,115,930 12,138,840 46,160,000 Profit: (1,454,000) (654,000) 548,000 3,357,000 7,901,000 Breakeven: Fc/sales= 0.22 0.17 0.14 0.12 0.10 GP % Operating Profit/Sales= 26% 23% 21% 21% 33% NP% Profit after Tax/Sales= 0.03 3% 45% 50% 13% ROE% Net income/ Shareholders Equity =0.2 30% 36% 36% 37% ROCE% 12% 14% 25% 28% 25% Projected growth of turnover - 26% 23.6% 19.1% 14.9% Projected growth of NP - 0% 43% 5% -37% Gearing 0.2 0.1 0.3 0.2 0.2 Interest coverage 0.23 0.15 0.36 0.24 0.26 Forecast Income Statement Business _________Car track ltd___________________________ Period: Five years Year 1 (£ ‘000’) Year 2(£ ‘000’) Year 3(£ ‘000’) Year 4(£ ‘000’) Year 5(£ ‘000’) Sales: 103.84 993.28 1115.93 12,138.84 46,160 Less direct (variable) costs Materials Direct wages Other 368.40 146.58 139.91 458.39 257.90 246.37 95.52 79.66 0.00 5589.93 1500.23 37.93 24000.20 10000.00 618.15 Total direct costs 154.89 962.66 175.18 7128.09 34618.35 Operating profit (551.05) 30.62 940.75 5010.75 11541.65 Fixed costs (overheads): Rent Administrative costs Equipment leases (50) (200.76) (172.62) (50) (200.76) (172.60) (50) (54.76) (26.00) (50) (150.26) (300.00) (50) (1000.76) (300.00) Profit before interest and tax (974.43) (392.74) 809.99 4510.49 10490.89 Interest expense (43.37) (65.06) (97.59) (146.39) (219.59) Profit before tax (1017.80) (457.8) 712.40 4364.10 10271.30 Taxation 436.20 196.20 164.40 1007.10 2370.30 Profit after tax (1,454) (654) 548 3357 7901 Forecast Cash flow Statement Business Car track ltd.___________ Period: Five years Year 1 ‘000’ Year 2 ‘000’ Year 3 ‘000’ Year 4 ‘000’ Year 5 ‘000’ Operating cash flow Net Income (loss) £(1,454) £(645) £ 587 £3,357 £7,901 Add: items that do not need cash Depreciation 16 38 66 100 151 Changes in Operating liabilities and assets 16 38 66 100 151 Liabilities and Assets Accounts Receivable (256) (1,196) (700) (3,370) (5,469) Inventory (211) (698) (403) (1,463) (3,978) Accounts Payable 124 178 202 537 1,651 Accrued Expense 191 138 174 345 550 Taxes Payable 0 0 0 308 1,009 Warranty reserve 24 50 76 183 414 Loans (5) 0 0 0 0 Net Cash Provided (1,571) (2,135) 2 0 2,229 Investments cash inflow Capital Expenditures (64) (73) (111) (182) (260) Net Cash Used in Investing Activities (64) (73) (111) (182) (260) Financing Equity Investment 2,000 2,500 0 0 0 Net Cash Provided by Financing Activities 2,000 2,500 0 0 0 Change in Cash 365 292 (109) (185) 1,969 Opening balance 0 365 657 548 363 Closing balance £365 £657 £548 £363 £2,232 JAN ‘000’ FEB ‘000’ MAR ‘000’ APR ‘000’ MAY ‘000’ JUN ‘000’ JUL ‘000’ AUG ‘000’ SEP ‘000’ OCT ‘000’ NOV ‘000’ DEC ‘000’ Operating cash flow Net Income (loss) £(100) (112) (109) (150) (80) (120) (96) (84) (91) (200) (132) (180) Add: items that do not need cash Depreciation 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 Changes in Operating liabilities and assets 2 2 0 0 3 0 1 4 2 2 0 0 Liabilities and Assets Accounts Receivable (12) (18) (20) (18) (20) (18) (20) (26) (20) (23) (25) (36) Inventory (11) (18) (19) (15) (17) (14) (19) (22) (19) (20) (21) (26) Accounts Payable 31 0 0 31 0 0 31 0 0 31 0 0 Accrued Expense 47.75 0 0 47.75 0 0 47.75 0 0 47.75 0 0 Taxes Payable 0 0 0 0 0 0 0 0 0 0 0 0 Warranty reserve 8 0 0 0 8 0 0 0 8 0 0 0 Loans (2.5) 0 0 0 0 0 (2.5) 0 0 0 0 0 Net Cash Provided (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) (130.92) Investments cash inflow Capital Expenditures (34) 0 0 0 (15) 0 0 0 (15) 0 0 0 Net Cash Used in Investing Activities (16) 0 0 (16) 0 0 (16) 0 0 (16) 0 0 Financing Equity Investment 166.67 166.67 166.67 166.67 166.67 166.67 166.67 166.67 166.67 166.67 166.67 166.6 Net Cash Provided by Financing Activities 200 250 200 150 0 300 150 300 300 0 0 150 Change in Cash 30.42 30.42 30.42 30.42 30.42 30.42 30.42 30.42 30.42 30.42 30.42 30.42 Opening balance 0 0 0 0 0 0 0 0 0 0 0 0 Closing balance £30 23 20 22 25 31 32 37 29 29 33 54 Forecast Balance sheet Business ____Car track Ltd.______ Period: Five years Year 1 ‘000’ Year 2 ‘000’ Year 3 ‘000’ Year 4 ‘000’ Year 5 ‘000’ Non Current Assets 5125.6 564.89 457.89 458.97 458.79 Current Assets 2338.85 1708.03 2189.69 245.89 2154.72 Total Assets 2851.41 3183.70 715.78 3081.81 3264.87 Capital: 2568.88 2568.88 2568.79 2789.65 2986.33 Non Current Liabilities: 256.85 568.93 568.79 256.48 254.98 Current Liabilities: 25.68 45.89 25.64 35.68 23.56 Total: Capital + Liabilities: 2851.41 3183.70 3163.36 3081.81 3264.87 Sensitivity Analysis: (both positive and negative with detailed explanations like how will you over come negative factors): 1. Based on Sales: As a result of increase in sales due to the growing market, the costs are to be covered without any problem. Nonetheless, increase in sales means increase in advertising costs, labor costs, but an increase in sales revenue is the outcome which will eventually increase the net income in the income statement. 2. Based on Direct cost: Sensitivity analysis system will be implemented to allow the management to track the vital in-combination cost drivers, and be proactive in auctioning changes should the need arise (Scot, Chan, & Saltelli, 2000). There will be addition in raw materials to produce more products to cater for the growing market. 3. Based on Indirect/fixed cost Increase in cost that is bound to happen due to the purchase of a new machine and extra production of products will have an effect on the Net income of the company. The purchase of new equipment will help avoid overworking the old machines due to extra production of products. 4. Based on all the above factors: Findings of the financial statements from the accounting department show that the adoption of sensitivity analysis is inevitable, while identifying the parameters that happen to be the key drivers of the model’s results. The system has been incorporated by the department to speedup analysis of the effects of changing some factors of production or items on Income Statement. Moreover, it is to be used in cost-benefit analysis. The company makes decisions based on the models derived from the system (Scot, Chan, & Saltelli, 2000). Long term Strategy: Although the company expects to experience some hardships in terms of cash flow during the initial stages of the business, the management intends to implement strong business strategy that will see the company establish a stable cash flow from the beginning of the third year. The stability is expected to result from increased revenue and high profit margin as the operation experiences reduces. Read More