Great Barrier Reef Sponge Farm - Case Study Example

Business Plan for Great Barrier Reef Sponge Farm Cairn-Australia Executive Summary Great Barrier Reef Sponge Farm is aimed at specialising in thedesign, manufacture, marketing and distribution of sponges. The business which expected to begin its operations in Cairns Australia is expected to expand its operations to the entire country over the next five years. The company is not expected to distribute cash to shareholders in the form of dividend or share repurchases over the next five years as it expects to expand its activities and invest in all positive net present value (NPV) projects. Consequently, all profits will be re-invested into its expansion program as well as any profitable venture that the company may come across. Based on feasibility studies, the business has targeted two premises, one to be used as its administrative office and the other as its factory location. Rents in the administrative block stand at $15,000 per annum while rents at the factory stand at $16,000 amounting to a total of $31,000 per annum. Initial funding for the project is expected to be $100,000. Of this amount, the principal shareholder has contributed 40%, that is, $40,000 while a bank lone of $60,000 has been secured to cover the remaining 60% of the funding requirements. The proprietor placed his three apartments flat as collateral security for the loan. Sales for the first year are expected to amount to $500,000 and are expected to grow at an annual rate of 10%. Gross profit is expected to be $100,000 against which expenses for rents, depreciation of factory equipment, wages and salaries, overhead expenses and miscellaneous expenses will be charged. Expenses during the second, third, fourth and fifth year are expected to witness increases as the company plans to increase expenditure on advertising, research and development, staff, and office and factory equipment. Constant growth is expected to come from an aggressive marketing strategy that will be adopted by the company. The company also expects to develop a good reputation through the supply of high quality products as well as good customer services. The company will also do everything necessary to protect the environment it which it operates such as improving its waste management activities as well becoming ISO1400 certified. Mission Statement. The mission of Reef Sponge Farm Cairn-Australia is to provide its customers with high quality sponges and to maintain a high reputation in the sponge industry in Cairns and Australia as a whole. Overview SWOT Analysis SWOT analysis refers to the strengths, weaknesses threats and opportunities. Strengths include such things as technical competence of proprietors, enough financial resources, good network of contacts for potential clients, suppliers and target market. Weaknesses include lack of management skills, no business track record, and no current plan for management succession in the short-term. Opportunities include rapidly growing market, poor reputation of existing businesses, large number of old yet valuable homes, availability of casual staff and tradespersons, availability of display and manufacturing premises within the area, high disposable income within the target market, potential for future expansion of the business. Threats include poor reputation of the industry, potential for economic downturn, natural disasters and catastrophes, wars, existence of competitors rising cost of raw materials, rising cost of real wages, government regulation. As far as Great Barrier Reef Sponge Farm is concerned, the main strengths of the company include the presence of scientists with experience in sponge products who have sound technical basis in solving production problems as they arise and in proposing innovative strategies for growth. The company has also has a good management with knowledge of both financial, managerial and marketing skills which makes it possible for it to overcome management problems and thus increases its ability to succeed in the industry. Some of the weaknesses of the company are that it is new in the industry with little knowledge concerning the sponge market. However, it is carrying out extensive research to better understand the sponge market. The company also lacks a labour force with skills in sponge harvesting but it is putting everything in place to train and retain competent labour force. As far as its opportunities are concerned, there is a growing demand for natural sponges in Australia as well as the entire globe. The company plans to benefit from this profitable niche by supplying its customers with high quality naturally harvested sponges. Another opportunity to the company is the fact that it is going to be located around the Great Barrier Reef where it can gain easy access to the natural sponge farm in the region. The main threats to the company are government regulations, for example, the government may levy high taxes on the company which may negatively affect earnings. Environmental regulations may also significantly affect the company and its entire operations. In addition, some of the sponge species are becoming extinct, which might lead to shortages in supply in the long run. However, the company plans to tackle this problem by setting up a plantation where it can plant and harvest its own sponges thus ensuring the sustainability of its supply. Other threats include economic factors such as inflation, interest rates and exchange rates. Inflation can negatively affect the company's earnings in that it will result to an increase in production, marketing and distribution cost although customers may not be willing to pay higher prices. Interest rates may significantly affect the firm's borrowing cost in that very high interest rates would lead to very high cost of borrowing and this may negatively affect the firm's ability to raise much needed finance to fund profitable ventures. Finally exchange rates too remain a cause for concern given that they may negatively affect future cash flows in foreign currency as well as the firm's costs of inputs sourced from abroad. However, the company is putting in place a financial management team that is cable of designing hedging strategies that would eliminate the inflation risk, interest rate risk and exchange rate risk although this cannot be completely eliminated. Products and Services. The company aims at supplying customers with natural sponges harvested from the Great Barrier Reef. These sponges will be presented in packages that evoke a positive image from the customers' point of view. The sponges will also be supplemented with value-adding activities such as the development of bath kits with soap and shampoo. The company aims at delivering high quality products and customer services. Due to concern for the environment, and potential extinction of sponge species from the Great Barrier Reef, the company plans to set up its own sponge farm where it can grow natural sponges in a plantation. This will enable it keep the supply of all natural species constant. Marketing Analysis and Plan According to Oceanz (2001) the demand for bath sponges exceeds supply and the situation is expected to continue in the near future. Customers continue to increase their demand for natural goods while the supply of wild-harvested sponges from traditional sources continues to decline. This represents a profitable niche for any serious company like Barrier Reef Sponge farm. The company intends to capitalise on this opportunity by providing customers with high quality natural sponges supplemented by value-adding activities such as attractive packaging and the development of bath kits with soap and shampoo. The value of the sponge market is difficult to determine but the unit value of an unpackaged cultivated sponge will depend on a number of factors such as quality and specie. It is estimated that wholesale price per unit of unpackaged sponge will range from AU$2 to AU$4 for good to premium sponges. A value adding and marketing strategy is proposed for increasing yields to the company for the benefits of the entire Cairn community. It will take approximately five years for production to reach about 500,000 units per annum. The company expects to target a high yielding niche market. It will also identify the sponges with the indigeneous industry, be environmentally-friendly, practice sustainable production and derivation from the pristine waters of the Great Barrier Reef. These factors are considered market advantages to the company. Financial Plan Start-up Summary The company is in need of Technological equipment, Computers, Satellite Communication equipment, printers, Computers and software programs. The company also needs to rent a bigger space for its operations and needs to recruit competent staff. It also needs to pay for expenses such as supplies, lighting and heating, insurance, legal fees and furnishings. Below is an outline of the total start-up costs for expenses and assets. The forecasted income statement for the first year of operation has also been provided. The total start-up expenses amount to $100,850l. This money is expected to be contributed by outside investors. Below is a summary of the forecasted income statement for the first year of operation. The figure below presents a comparison of the investment needed in assets to that needed in expenses. One can observe that the investment in assets is far higher than that for expenses. These assets are expected to have a useful life of 10 years. The expenses are expected to rise with inflation but the company plans to improve on operational efficiency as soon as it begins its operations. Thus the variable expenses will be minimised as years go by. This is in line with the company's objective to increase return on investment to its shareholders. Figure 1. Comparative analysis of the investment in assets and expenses. Forecasted Income Statement Year Ending 2008 Revenues $ 175.000,00 Expenses: Office Supplies $ 2.000,00 Insurance 1.850,00 Rent 5.000,00 Refurbishment 5.000,00 Legal and Consultancy fee 3.000,00 Research and Development 3.500,00 Lighting and heating 1.000,00 Salaries and Wages 4.000,00 Miscellaneous expenses 1.500,00 Transportation 1.500,00 Total Expenses 28.350,00 Income before tax 146.650,00 Income Tax (35%) 51.327,50 Net Income $ 95.322,50 Forecasted income after tax for the first year of operations amounts to $95,322.50. The company plans to reinvest 80% this amount in its expansion plan. To this effect it will pay out only 20% of the income as dividends over the first three years of operation. Read More