The business plan is developed based on the following the assumptions:
Despite fact that business plan is developed after conducting comprehensive research in market business is still prone to risks of various kinds. These risk and measures that business will take mitigate their impact are discussed herein:
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THE PRICE OF THE PRODUCT IS HIGH AND THE CUSTOMERS ARE NOT WILLING TO PAY THAT PRICE
This factor will result in decreased sales. If the price charged for the product is high, then the company will fail to attract customers and this will disrupt the whole profit estimations which have been made for the company. If the profits of the company fall, then the IRR rate and the NPV of the company will also fall. Reduced profitability will make survival difficult for the company. At the initial stage the companies require to sustain the competition which can only be possible if the estimated sales are managed.
IF THE COST OF RAW MATERIAL RISES
The success of business in terms of generating profits remains effective once the cost estimates for the business remains aligned to plan. The business plan has already attempted to incorporate the effect of referred increasing in the operational costs such as advertisement is increased as the proportion of sales. Similarly, most of the expenses are increased in plan with three percent on annual basis. Hence, the risk of reduced profitability due to increased costs is considered in the plan.
IF COMPANY FAILS TO GENERATE ESTIMATED SALES
If the company fails to generate the sales which have been estimated the revenue of the company will decrease. This will reduce the profitability of the company as most of the cost contribution is by fixed cost section. Being a new company Crystal Care Limited will require sustaining competition. For this it is essential that consistent sales are maintained by the company. For the purpose of ensuring sustainability, it is essential that consistent sales are maintained by the company. This is also important to maintain the momentum of distributors and saloons in using and promoting products.
After initial few years the company will have to expand the target customers and it will require new products to target a new segment of customers to cater the appropriate customer needs.
IF THE PERCEPTION OF MEN REGARDING SKIN CARE CHANGES
Previously skincare was considered to be a feminine attribute. With the changing perceptions of the customers a new segment for the business initiated. Men today are becoming metro sexual and are increasingly attracted towards products design to enhance their looks among others. They have understood the importance of caring for their appearance and beauty. Similarly, the male segment working in managerial positions in organizations take sheer notice of how they look and appear. This need has created opportunities for the businesses.
If the perception of men changes regarding skincare, then the business will be affected significantly. Occurrence of this issue is very rare but if such an event happens then the sales of the company will fall. As mentioned before decreasing sales will impact on the survival of the company and it will effect on its sustaining power. This is a high risk scenario and this will impact on survival of the business. To deal effectively with this risk, the products of Crystal Care products claim to provide customers solution to their skin’s problem related to oil while also considering the features of skin sensitivity. Hence, the risk to be affected by the change in perception is mitigated by providing product that is problem solver and the beauty enhancer only.
IF BORROWING COST INCREASES
The company is operating on the basis of loan which it has taken from the industry. If the borrowing cost increases, then the repayment of installments to the banks will also increase. This will result in lesser profits and the sustaining power of the company will also be affected. Reduced sustaining power will reduce the chances of survival of the company.
If the debt borrowing cost of the company increases, then the NPV and IRR of the company will both reduce. This will impact on the feasibility of the business. To enhance the survival and existence of the business such risk factors must be carefully assessed and margin should be maintained by the company to overcome these unexpected increased costs. Company has developed fixed rate agreement with the loan providers and the impact of the cost of debt, if any arises, will be dealt with curtailing the costs at other ends such as marketing etc. It can also be controlled by raising another debt with reduced cost or gaining minority interest holders on board.
DUE TO TECHNOLOGICAL CHANGES THE MANUFACTURING PRICE RISES
Technology is the biggest factor for ensuring that the business will generate the desired revenues and the cost will also be reduced. If there are changes in the technology, then the investment incurred by the company will not be able to generate the efficient results which were expected. Change in technology will decrease the competitive edge which the company was expecting to have. The production efficiency of the company will also reduce.
These are unpredictable factors and cannot be controlled through assessment. For this purpose, it is essential that the company has estimated these factors and the best decision must be taken to increase the chances of sustaining such events.
The business plan is devised using the various assumptions and information from the market about the potential market growth and other associated factors. With current assumptions at work, business will be able to generate profitability from third year of operations as reflected from the given below graph depicting trends of profits:
To generate these profits, company requires startup capital of SAR 5.5 million. The entire capital of business will be financed from debt at the rate of 10 percent while the amount is payable within 10 years. The significant amount of capital is generated as compared to one required for the assets are due to fact that company was required to pay off annual installments of debt and financing operations. The repayment of debt in the following years will be done by revenue generated from operations.
The income statement developed for the business entails the impact and trend of revenue and expenses for the five years while presenting profit generated after meeting all expenses is also presented. The trend of different variables of the income statement is as follows:
The above measure shows that company has generated revenue in steep upwards pattern. This the reflection of the market and company growth applied considering business potential. The reflection of income statement also reveals that sales growth is also followed by the cost of goods sold in almost same trend as gross margin is following the trend of sales. This refers that cost of goods sold will be constantly pressuring the business. Operating expenses offer potential to increase in future as pattern is relatively smooth. Complete income statement is provided in appendix.
The balance sheet of business is since financed by debt that is to be paid off over a period of time; therefore, the balance sheet of the business show U-Shape trend. As the business goes on and generated revenue that is collected after paying debt, the retained earnings for the business also increases. The balance sheet for the business is prvided in appendix. The following trend of balance sheet is developed for the next five years:
The cash is financed by the debt and so the debt available to business constitutes the cash position of the business. The position of the company is attractive in first year of operations as the business plan in implemented. Following the high fixed payments, the cash position of business will come under pressure and business and will then move to positive trend as follows:
The image above depicts that cash made available to business from debt is critical for the business as steep upward revenue generation in planned years are unable to meet payment pressure mainly in the year one. It is also important to mentioned that cash position will be under pressure for year one and two; therefore, during this business will negotite with suppliers for delayed payment for sometime in contrast to cash dealing conducted across the business terms. The cash flow statement for the business is prvided in appendix
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The debt is adopted as the source of financing for the business. SAR 5.5 million debt is taken for business with the payment scheduled with 10 equal payments from year 2 onwards. This arrangement is done for repayment of principal amount while payment of interest is done from the year one on regular basis. The debt schedule for the business is prvided in appendix.
The business plan of Crystal Care developed for five years with debt financing of SAR 5.5 million is feaabile. The NPV of the project is SAR 5.87 million (SAR 587,463) with five years estimations.
The project is applied with 15 percent discount factor. This discount factor is increased to accommodate risk factors in addition to the discount rate for debt. Hence, business with these estimations is able to deal with challenges if cost of doing business increases for any reeason. The IRR of the project is 47 percent which refers project estimations of five years will reach breakeven if the cost of capital or doing business rises to 47%.
CASE ONE: CHANGE IN SALES
The most important concern of the business is to generate sales as the product is new and business may not be able to meet the demands of customers with respect to product quality or any other factor such as pressure from competitors etc. At the same time there is potential that customers are increasingly attracted towards the new product and the sales of business increases to higher percentage. In both cases the profitability of business will be affected. The sensitivity of profit due to change in sales units from is reflected as follows:
The sales figures refer that if the sales reduce to 2000 units the impact of it will be immediately reflected on the profitability. The loss in the second year increased by three times as it was with existing scenario of selling 2800 units. Further, the profitability of the year three will also reduce incrementally bringing it close to breakeven. The positive rise in sales to 3500 units will reduce the pressure on income statement by significant amount and profitability will immediately be achieved in year 2
Business is based on debt financing. This increases its dependency on the change in the cost of debt. Change in the cost of debt will be immediately reflected in the overall profitability of the business. Therefore, business is also assessed for impact of change in cost of debt. Both sides two levels increase in cost of debt is assessed in the following summary:
Increase in cost of debt from 10 percent to 25 percent will reduce the profitability of business significantly and profits will then be generated lately in fourth year of operations. This will also increase the pressure on cash flows of the company as against existing case, company already will have to bear the cost pressures in year one and two.
Alongside, small increase to 15 percent in cost of capital revealed that company will have reduction in overall profitability but not the extensive change will be witnessed.
Crystal Care is concerned for providing business investors an important opportunity to invest. It is also noteworthy that debt repayments are planned for the 10 years. This may result in investors a consideration of being with locked capital and hence may show resistance to invest. Crystal Clear has planned following options in case the investors or the business itself to exit. Following options will be taken into consideration:
Hence, employing these options business can always undertake exit path from the industry.
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|Year 1||Year 2||Year 3||Year 4||Year 5|
|Sales||SAR 283,010.00||SAR 418,854.80||SAR 691,110.42||SAR 1,105,776.67||SAR 1,492,798.51|
|Offloading||SAR 96,000.00||SAR 144,000.00||SAR 163,200.00||SAR 192,000.00||SAR 240,000.00|
|Total Sales||SAR 379,010.00||SAR 562,854.80||SAR 854,310.42||SAR 1,297,776.67||SAR 1,732,798.51|
|Inventory Coordinator||SAR 40,320.00||SAR 41,529.60||SAR 42,775.49||SAR 88,117.51||SAR 90,761.03|
|Disposal Expenses||SAR 24,000.00||SAR 25,920.00||SAR 27,993.60||SAR 30,233.09||SAR 32,651.74|
|Storage||SAR 11,040.00||SAR 11,040.00||SAR 11,040.00||SAR 11,040.00||SAR 11,040.00|
|Purchase||SAR 200,000.00||SAR 41,440.00||SAR 62,160.00||SAR 99,456.00||SAR 134,265.60|
|Total COGS||SAR 275,360.00||SAR 119,929.60||SAR 143,969.09||SAR 228,846.59||SAR 268,718.37|
|Gross Margin|| SAR 103,650.00
| SAR 442,925.20
| SAR 710,341.33
| SAR 1,068,930.08
| SAR 1,464,080.14
|Advertising||SAR 5,000.00||SAR 16,885.64||SAR 25,629.31||SAR 38,933.30||SAR 51,983.96|
|Research||SAR 30,000.00||SAR 30,900.00||SAR 31,827.00||SAR 32,781.81||SAR 33,765.26|
|Internet||SAR 30,000.00||SAR 30,900.00||SAR 31,827.00||SAR 32,781.81||SAR 33,765.26|
|bank charges||SAR 21,840.00||SAR 22,495.20||SAR 23,170.06||SAR 23,865.16||SAR 24,581.11|
|utilities||SAR 22,800.00||SAR 23,484.00||SAR 24,188.52||SAR 24,914.18||SAR 25,661.60|
|Accounting||SAR 14,000.00||SAR 14,420.00||SAR 14,852.60||SAR 15,298.18||SAR 15,757.12|
|Insurance||SAR 180,000.00||SAR 185,400.00||SAR 190,962.00||SAR 196,690.86||SAR 202,591.59|
|Travel||SAR 8,000.00||SAR 8,240.00||SAR 8,487.20||SAR 8,741.82||SAR 9,004.07|
|Telephone Expense||SAR 22,800.00||SAR 23,484.00||SAR 24,188.52||SAR 24,914.18||SAR 25,661.60|
|office expenses||SAR 60,000.00||SAR 61,800.00||SAR 63,654.00||SAR 65,563.62||SAR 67,530.53|
|other miscellaneous cost for startup||SAR 8,000.00|
|Total Expenses||SAR 402,440.00||SAR 418,008.84||SAR 438,786.21||SAR 464,484.90||SAR 490,302.11|
|Depreciation and Amortization||SAR 33,099.00||SAR 33,099.00||SAR 33,099.00||SAR 28,099.00||SAR 28,099.00|
|Interest||SAR 55,664.50||SAR 50,098.05||SAR 44,531.60||SAR 38,965.15||SAR 33,398.70|
|Profit||SAR (387,553.50)||SAR (58,280.69)||SAR 193,924.52||SAR 537,381.03||SAR 912,280.34|
|Initial Debt||SAR 556,645.00|
|Year 1||Year 2||Year 3||Year 4||Year 5|
|Starting Balance||SAR 556,645.00||SAR 556,645.00||SAR 500,980.50||SAR 445,316.00||SAR 389,651.50|
|Principle Payments||SAR -||SAR 55,664.50||SAR 55,664.50||SAR 55,664.50||SAR ,664.50|
|Ending Balance||SAR 556,645.00||SAR 500,980.50||SAR 445,316.00||SAR 389,651.50||SAR 333,987.00|
|Interest Costs||SAR 55,664.50||SAR 50,098.05||SAR 44,531.60||SAR 38,965.15||SAR 33,398.70|
CAPITAL EQUIPMENT SCHEDULE
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