Cost and Revenue Assumptions
Financial documents are extremely valuable in a business setting due to its various applications. However, the business management team must establish the most appropriate assumptions, which will form the basis for preparation of such documents. Financial assumptions enable the management team to forecast the future costs of running the business entity, while at the same time, allows for the determination of expected revenue (Murthy & Gurusamy, 2009). Cost and revenue assumptions refer to all the assumptions made regarding the expected future operational costs, as well as the forecast revenue of a business venture (Brigham & Joel, 2010).
In connection, the launch of our new hair product will be based on relevant revenue assumptions that have been established from the market research we conducted. Since revenue assumptions reflect the feasibility of a new project, there should be a solid backing for all the assumptions made (Reddy, 2004). In that case, the unit pricing for our new hair product is based on the market research, which incorporates commodity prices, target market size, predicted market share, and market value pricing among others. Equally, costs resulting from the venture are deduced based on the market research conducted and include marketing, operational, administrative, and other costs (Murthy & Gurusamy, 2009). Marketing costs are all the costs resulting from advertising and business development, while operational costs refer to all the costs arising from commodity purchases and other business functions. Lastly, administrative costs are fixed and include rental and utilities such as electricity. Costs that remain constant regardless of the outcome are known as fixed costs, while costs that change with outcome are known as variable costs (Reddy, 2004). With these assumptions, we have created all financial documents that are valuable in business decision-making process.
Marginal Costing Cost Statement
Marginal costing is an accounting system that allows business managers to create strategic decisions that will guide the direction of their business (Pizzey, 1989). This accounting system is valuable and easier to use than several other systems because variable costs on products are charged to cost units, while fixed costs are written off in the profit and loss account (Reddy, 2004). Variable costs that result during the manufacture of products account for the marginal costs of such products and include commodities, wages, and utilities among others (Murthy & Gurusamy, 2009). Essentially, marginal costing is a variable cost and changes with the level of production or outcome.
In connection, the marginal costing cost statement is a document that provides the basis for determining all costs and revenues for an identified business venture (Murthy & Gurusamy, 2009). The expected marginal costs of products and contribution margins can be generated from the products by sing the document. Contribution refers to the surplus of sales revenue above the marginal cost of the product (Globusz, 2001; Reddy, 2004). The cost statement is straightforward, but gives all the basic items required for preparing relevant financial documents (Murthy & Gurusamy, 2009). Business managers at HAYLO Hair Products have implemented marginal costing accounting system because it is easily understood, and at the same time, essential for making valuable business decisions. In essence, it allows managers to make fast decisions especially in a competitive business environment; thereby, increasing the competitive advantage of such a business. In marginal costing, unfortunately, fixed costs are not applied to the products; consequently, giving an intuition that such costs have no role in production (Globusz, 2001). The marginal costing statement for the new hair product, HAYLO, is as shown in table 1 below.
Table 1: HAYLO Hair Products, Inc. Marginal Costing Cost Statement
From the created marginal costing cost statement, it is established that HAYLO will achieve a contribution margin of £6.45 per unit of the new hair product. As such, this will result in a contribution of £774,000 for the first one year of operation. Within the first 12 months, it is estimated that HAYLO Products will sell 120,000 units of the new product, which will result in total sales revenue of £1,800,000. Similarly, there the business venture will have a net profit of £342,000 and fixed costs amounting to £432,000. Therefore, the proposed venture will generate yearly profits worth 19% the total value of the sales revenue for the whole year.
Break Even Analysis
As mentioned earlier, marginal costing accounting system is essential in making pertinent costs and revenue calculations; hence, presents an excellent basis for breakeven analysis (Murthy & Gurusamy, 2009). On the other hand, breakeven analysis is a strategy used to generate adequate details of business costs, especially where there are enormous variations in sales or production volumes (Correia, David, Enrico & Michael, 2007). In breakeven analysis, however, it is assumed that variable costs of the products and sales actualization will remain constant during the entire operations of the business (Tutor2u, n.d). Breakeven analysis is established on the principle that there will be no variation in the variable costs, as well as sales realization of a business. The idea holds that changes in the level of business activity will alter variable costs; however, fixed costs will remain unchanged regardless of the variations in the level of activity (Cafferky & Jon, 2010). With continuous investment, the business will expand and lead to subsequent increase of the fixed costs.
The concept is designed to establish the breakeven point (BEP), which is known as the level of activity at which a business venture will not incur any profits or losses (Reddy, 2004; Tutor2u, n.d). At this point, the business just recovers the cost of its investment, which is measured by the sales volume, production capacity and sales revenue for the established period (Cafferky & Jon, 2010). In practice, it is essential to determine the cost-volume-profit ratios and product mix calculations because they assist in the formulation of strategic business ideas that will help in redirecting the business towards the right path. During production planning, all the variable costs, or costs that change with the output must be considered in redefining decisions (Cafferky & Jon, 2010; Pizzey, 1989). The contribution margin of a single unit of a product is defined as revenues per unit minus the variable costs per unit. The breakeven point is established by dividing fixed costs by the contribution per unit as shown in the following calculations (Reddy, 2004).
Table 1: Marginal Costing Cost Statement for HAYLO Hair Products, Inc.
Fixed costs = £432,000
Contribution per unit = £6.45
Breakeven Point = Fixed Expenses/Contribution per unit.
= £ 432,000 /£ 6.45
= 66,977 units
BEP in sales value = BEP Units x Sales price
= 66,977 x 15.00
= £ 1,004,655
BEP in percentage = (BEP Units x 100)/Capacity in Units
= (66,977 x 100)/120,000
= 55.81%
Financial Documents. 900
Financial documents are extremely valuable to business enterprises because they represent the financial strength of such entities and establish grounds for appropriate decision making (Koontz & Heinz, 2007). Severally, new business ventures need financial documents for the initial years of operation in order to present their ventures before potential investors (DuBrin, 2008). In such situations, the financial documents must show the most vital information that will convince investors to invest in the ventures, and hope for a rewarding future cooperation (Ehrhardt &Eugene, 2009). Therefore, a proposed venture must have the capability to repay both the long-term and short-term loan, and generate enough revenue to sustain the business operations, as well as maintain a significant profit margin (DuBrin, 2008).
In this section, financial documents namely the cash flow budget, forecast income statement, and the forecast balance sheet are described to reflect the strength of the proposed venture (Ehrhardt & Eugene, 2009). The proposed is known as HAYLO Hair products, and will be registered to facilitate the launch of the new hair products product, HAYLO. The cash flow budget statement will demonstrate the capability of the venture to generate substantial cash from operations, which are valuable for growth and expansion of business. The cash flow budget will show whether the business will produce enough working capital to sustain its operations, as well as initiate substantial growth and expansion (Ehrhardt & Eugene, 2009). In connection, the forecast income statement will highlight the average profitability of the proposed venture; hence, provide the grounds for effective decision-making process by the concerned members. For example, where the profitability of the firm is below the expected margins, business managers will make appropriate decisions for improvement. Lastly, the forecast balance sheet will highlight the financial position of the proposed venture at the end of the first year of operation (Ehrhardt & Eugene, 2009). With all these financial documents prepared, the proposed venture will have a clear prediction of its future expected operations, cash generation, profitability and financial worth. In fact, the documents will play an essential part in convincing potential investors to invest in the business. Therefore, strong and heavily supported financial documents will easily attract investors than weak and poorly supported financial documents (Ehrhardt & Eugene, 2009). HAYLO Hair Products is scheduled to start operating in January 2012; hence, all the necessary financial documents relate to the same period as shown in the following information.
During start-up, HAYLO will need a starting capital of £250,000, which shall be made available by the business founders. However, the starting capital will not be sufficient to cater for all the future operations of the proposed venture and will necessitate for sourcing more funds for running the project. The business will require a total of £774,000; thus, an additional long-term loan of £524,000 from potential investors will be required for successful operation of the business venture. The management at HAYLO intends to attract investors who shall be repaid at an interest rate of 10.4 percent per annum. According to the ventures financial predictions, the loan will be repaid within the first three years of operation and investors are guaranteed payment on a yearly basis. HAYLO will make an asset investment of £432,000, which will include property, land and equipment to allow for the successful launch of all its operations. The proposed venture will depend on rented facilities during the initial years; hence, will result in rent arrears amounting to £96,000 for the first 12 months. Over the years, rent arrears will gradually reduce as the venture will purchase its own premises due to financial growth. A rental advance of £75,000 will be made to the facility owner during the launch of the proposed venture. In the following document, table 3, is the cash flow budget statement of HAYLO Hair Products for the year ending 31st December 2012.
Table 3: Forecast Monthly Cash Flow Budget Statement for the Year ending 31st December 2012
Basing on the cash flow budget, the venture will have a cash generation of £319,200 during its first year of operation. After 12 months in operation, the company will have repaid £165,000 of the long-term loan and still remain with the mentioned cash generation. In order for an enterprise to remain in business, there should be substantial capital to sustain its operations, and include raw materials, wages, and advertising among other functions that will enhance the level of productivity. With the aforementioned cash generation, HAYLO Hair products will have a working capital that will enable it cater for all financial needs necessary for the business to operate.
Table 4: Forecast Income Statement for HAYLO Hair Products for the year ending 31st December 2012.
The above table shows the forecast income statement for the proposed venture with all the necessary elements. From the statement, it is evident that the business will gain an operating profit of £227,400 by the end of the first year, which reflects to 12.63 percent of the total sales for that year. As seen from the document, the operating profit is obtained after deducting the total expenses, but before applying depreciation and interest. The net profit, after applying interest and depreciation charges, of the venture is adjusted to £143,000 reflecting 7.94% of sales for that year. A net profit of £100,100 results, after deducting 30% tax, since it is assumed that there will be no closing stock at the end of the first trading year (Galindo & Cristina, 2011).
Table 5: Forecast Balance Sheet for HAYLO Hair Products for the year ending 31st December 2012.
The above table shows the forecast balance sheet of the proposed venture, which shows that the venture will have sound current ratio. In that sense, the business will essentially meet its current financial requirements due to availability of substantial capital. As such, the proposed business venture shows appealing results and indicates that the business will be able to sustain its operations, as well as generate substantial working capital for growth and expansion purposes. For instance, the business will have grown remarkably to a net worth of £709,100 in total assets.
Business Plan for the Proposed Venture, HAYLO Hair Products, Inc.
Introduction
With increased population in schools, there is a constant need for hair products that young girls would use in maintaining their hairs at a low considerable low cost (Fiore, 2005). After 14 weeks of market research within our jurisdiction, we established that the products currently in the market are expensive for school girls. According to Euromonitor International (2011), “the beauty and personal care market is expected to see a 2% constant value CAGR over the forecast period.” Accordingly, we have developed a new hair product, which shall be known as HAYLO hair shampoo. This product will be affordable for all school girls and posses equal attributes to similar shampoos that currently exist in the market. This will ensure that the product penetrates well into the market against all odds (Covelo & Brian, 2006; Gamba & Alberto, 2007). Please review the following marketing mix to get adequate details about the new hair product.
Business Plan
As mentioned earlier, we spent 14 weeks conducting market research on the use of hair products by young school girls (Covello and Brian 2006). As such, this confirms that our target market include young school girls between the age of 12 and 21 who need affordable hair products that would last for long durations, as well as meet their basic quality requirement. After conducting the research, we established the gap created by similar products, which are highly priced beyond their financial ability (Euromonitor International, 2011; Fiore, 2005). Accordingly, we created the HAYLO shampoo that is expected to take the market by storm due to its affordability, quality and attractive smell (Mun, 2006). With these characteristics, the product is expected to sell extremely well, and this can be seen from the following marketing mix.
The Product
After searching for the perfect brand name, we settled for “HAYLO”, which shall be the new hair shampoo that will thrive well in the market. Accordingly, the proposed venture will be known as HAYLO Hair Products. HAYLO hair product will be available in a three colors each having its own characteristic smells as established by our designers, and will be packed in uniquely designed bottles (Mun, 2006). The hair products will be made from local material that has already been identified, and will be comfortable for all use on the skin and hair. The product will meet all health and quality requirements; thereby, it should penetrate the market favorably well.
Price Strategies
Several hair product brands within the industry are highly priced, and many young girls strain to purchase such hair products. The Alterna TEN Shampoo is one example of the expensive shampoos that fall within the top price segment. Despite the proposed venture’s quality adherence, we shall restrict the HAYLO shampoo to the middle price segment so that we can rip the benefits of market penetration and capitalization (Covelo & Brian, 2006). As established in the marginal costing cost statement, we shall have a unit pricing of £15, which shall be subject to changes depending on the market changes. The low pricing is set to enable the young girls purchase the product without straining. This pricing technique is referred to as penetration pricing and will enable us to thrive well in the market (Mun, 2006; Tutor2u, n.d).
Promotion Strategies
Effective marketing strategies of a product will result in the attraction of several consumers within the shortest span of time (Berry, 1987). Therefore, the target market has to be aware of the products value, quality, functionality, and pricing so as to develop an interest for the product (Mun, 2006). HAYLO Hair Products will use various marketing strategies to reach its target market including the use of media, internet marketing, and magazines (Graham & Campbell, 2001). Since this is a new venture, we shall create a commercial advertisement showing the new hair products in use, while emphasizing on the benefits of the product (Mercer, 2001). Moreover, magazines with details about the new product will be supplied to schools, as well as in retail stores. Essentially, we expect to have a positive response within the first few weeks of advertisement and assume immediate sales.
Place
HAYLO Hair Product will use efficient supply strategies that would allow for smooth movement of products from the production stores to the market place. As such, there should be a continuous connection between the company, suppliers and customers in order to create, as well as retain new customers (Berry, 1987; Mercer, 2001). HAYLO Hair Products will be selling its finished products to wholesalers who will be making the products available to schools and selected retailers. The price of the final product will be controlled by HAYLO: hence, all its agents including retailers shall have to register with the company for future cooperation. The implementation of this supply chain will ensure that the company remains committed to its quality adherence policy, as well as meet the market demand in terms of productivity (Mun, 2006).
Financial Analysis
HAYLO Hair Products will require a total investment of £774,000 in order to have a successful ground for running all the business operations. This investment will include a £250,000 investment by the founding members, and a further £524,000 long-term loan from our potential investors. Without this investment, it will be impossible for the proposed business venture to operate as the capital shall be used in purchasing of essential working equipment and covering of all other operational costs. For instance, the farm will need to invest £432,000 in plant and equipment, £342,000 in total wages, and £96,000 in rental arrears during the first year of operation alone. As such, the company will have around 40 workers during the first year of operation. However, these figures will vary in relation to market changes and additional workers including casual laborers will be needed in the company’s manufacturing units. The investment will be repaid within the first three years of operation and interest compounded quarterly at a rate of 10.4% per year, which is remarkably higher than the industry rates.
As seen from the cash budget, the company will have a cash generation of £319,200 at the end of the first financial year, which is 17.73% of the sales revenue for that period. At the end of the first year, 31st December 2012, HAYLO will have already sold the forecasted 120,000 units valued at £1,800,000 before any deductions. This will enable the company to repay £165,000 of the long-term loan and still remain with enough capital that will keep the business in operation. For instance, an income tax of £42,900 will be charged on the profit before tax for the year, £143,000, which will result in a net profit after tax of £100,100. In that sense, the company will enjoy a net profit after tax of 5.56%, which is close to the values in the hair products market. With these profit predictions, it is inevitable to assert that this is a feasible project that investors must be willing to put their money. In fact, the net profit of £100,100 assures the proposed business 12.9% return on the £774,000 investment (Galindo & Cristina, 2011). Also, the business will have grown remarkably to a net worth of £709,100 in total assets. For further details, the company’s financial documents have been provided within the appendix section of this proposal.
Conclusions
Basing on the market research, we established that the new hair product will compete well within the hair care products industry. This is attributed to the products quality, affordability, and efficiency. With all these characteristics, we expect the product to thrive well in the market and establish an excellent market share. Moreover, the strategies we have in place together with predictions of the venture’s profitability will enable the business venture to meet the requirements of the target market. Also, this can be seen from the financial documents that show the realization of adequate profitability during the first 12 months of operation. In conclusion, HAYLO Hair Products, Inc is a viable project as it will achieve substantial market share and profitability margins for growth and expansion purposes.
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Table 3: Forecast Monthly Cash Flow Budget Statement for the Year ending 31st December 2012
Table 4: Forecast Income Statement for HAYLO Hair Products for the year ending 31st December 2012.
Table 5: Forecast Balance Sheet for HAYLO Hair Products for the year ending 31st December 2012.