Cash Flow Analysis and ROI Forecasting for Software Business

This detailed analysis covers cash flows, ROI, and recommendations for a software business targeting electricity companies. It includes cost breakdowns, profit projections, and marketing strategies.

Computation of cash flows from Year 1 to Year 5
Variable cost
Per
unit
Software licence 8
Supplies 3
Storage space 3
other variable
cost 1
Total
1
5
Fixed cost Amount
Salary
140,00
0
Rent
180,00
0
Electricity
78,00
0
other fixed
cost
70,00
0
Total
468,00
0
Particulars Amount (AUD)
Average selling price 24
Variable cost per unit 15
Contribution per unit 9
Fixed cost per month 468,000
No. of customers serviced 35,000 52,000 60,000 67,000 72,000
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Sales based on units sold 840,000
1,248,00
0 1,440,000
1,608,00
0
1,728,00
0
Variable cost based on units
sold 525,000 780,000 900,000
1,005,00
0
1,080,00
0
Contribution based on units
sold 315,000 468,000 540,000 603,000 648,000

Fixed cost 468,000 468,000 468,000 468,000 468,000
Profit -153,000 0 72,000 135,000 180,000
Year 1 Year 2 Year 3 Year 4 Year 5
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
Break even point and Profit analysis
From the above it can be identified that the average selling price of the software is estimated to
be AUD 2 per month, therefore the company will charge only AUD 24 per year from 1 customer.
The business also intends to incur variable cost like software licence, which is key for offering
the services to the customers, supplies of raw materials like hardware components, storage space
and other variable cost. So, the total variable cost estimated by the business is around AUD 15
per customer. The management will also face to pay for fixed cost like salary for the employees
like software engineers and other individuals, rent to be paid for the buildings, cloud computing
devices and other charges, also the business need to pay for electricity and other fixed cost, the
total fixed cost is estimated to be AUD 468,000.
From the cash flow analysis it is identified that the business may inccur loss during the 1st year as
it may ot able to attract more customers, the estimated loss is expected to be 153,000, however,
the business will break even during 2nd year and from the 3rd year onward the business tend to
generate positive cash flows.
The following is the detailed computation of return on investments and the internal rate of return
of the business
Investmen
t Year 1 Year 2 Year 3 Year 4 Year 5
-15000 - 0 72000 135000 180000

153000
The average income generated for 5 years is 46,800 and the investment is 15,000 so the ROI is
computed to be
= 46800 / 15000 x 100
= 312%
Similarly, the internal rate of return of the business is computed to be 28.72%.
Recommendations
Based on the research it is identified that there are more than 2,600,000 customers who are using
the electricity services from various companies in the country. So, the business need to talk with
these electricity companies to offer the needed software solutions and help them to provide best
in class services to their customers at just AUD 2 per month. The business is not going to
compete against any electric companies, rather help them to offer support and services to the
customers at lower cost. The business will first help the electric companies understand the
importance of using the software and how such services will assist the customers to know the
total charges paid by them month on month, electricity expenses incurred by each electronic
appliances in the household, electric charges per day or week or month etc.
The business will first provide a detailed advertisement on the use of the software and its
assistance to offer the best services to the electricity companies and to its customers. The
management of the company will tend to attact the electricity companies, therefore the business
model will be designed as B2B (business to business) model, currently the business does not
hold any competitors in the current situation. . Every consumer get the electricity bill on monthly
and quarterly basis, giving advertisement of bill is cheap and get to relevant person, who need it.
Company’s websites can also be used as a source of advertisement.
The company will attract the electricity companies to use the software and assist the customers in
offering best solutions, the company also intends to advertise the services in social media like
Facebook, Youtube, Twitter etc, place a detailed advertisement in local news papers and
televisions. This will create more visibility and awareness among the electricity companies,
customers and other stakeholders which enable the company to get more customers. The
management also focuses in employng marketing executives who will market the software
services to the electricity companies and others to get the required customers. The company will
first focus on top cities like Melbourne, Sydney, Perth etc and slowly move into other areas as
well. The business is expecting to attact 35,000 customers in Year 1, 52,000 in Year 2, 60,000 by
Year 3, 67,000 in Year 4 and 72,000 in Year 5. Though, this is the initial target, based on the
market demand and changing consumer preferences & business requirement, the management
will set a higher target level and intends to achieve them.

Conclusion
Thus from the above a detailed forecasting of cashflows of the business for the next 5 years is
presented, also the researcher has identified the return on investment and internal rate of return of
the business based on the cash flows. It seems that the business possess unique advantage to the
electricity companies and the customers as it offers win-win situation to both. The management
is more poised in offering the best class services to the customers through the electricity
companies at low cost. The business is quite simple as the intended software will provide
information to production companies about how is total electricity is used by heavy machinery
for making production, how much electricity is used by air conditions/ heaters and other small
equipment. This enables the customer to control their expenses on electricity and the electricity
companies to offer the services to its customers in a semaless way.
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