Business Plan - Financial Analysis of the Business

Running head: BUSINESS PLAN
BUSINESS PLAN
Name of the University
Name of the student
Author notes

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Executive summary
The aim of the report is to make an assessment of the business of uncle Isaac who wants to
start a new business. The report contains a detail of the various assumptions that uncle Isaac
wants to make to prepare the projected income statement, cash flows and balance sheet to get
an idea about the financial viability of the project. The report concludes with the
recommendation to Isaac about the possible modifications that he should do to make his
business a successful project.

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Introduction
The financial analysis of the business of Isaac has been done to evaluate the viability
of doing the business. In addition to that the estimation of the need of investment to start the
business has been made to give uncle Isaac an estimation of the projected investment that he
has to make to start the business. The break-even analysis of the business is also made in
order to evaluate the margin of sales that the business has to made in order to attain a no
profit or no loss position in the initial stage of the business. Further the analysis of the income
statement, balance sheet and the discounted cashflow statement has been made to assess the
estimated financial strength of the business.
Discussion
In the initial stage the analysis of the estimated Profit and loss statement of the
business of uncle Isaac is made to interpret the financial viability of the proposed business.
Profit and loss statement analysis
From the above profit and loss statement after the end of the first financial year. The
above profit and loss statement indicate that at the end of the first operational year the
business will give an after-tax net profit of CAD 22524.00. the profit generation of the
business can be adversely affected by the increase in the cost of material. To promote the
business uncle Isaac decided to choose social media for which the cost of marketing is
comparatively high than the other expenses (Berbegal-Mirabent Gil-Doménech and Alegre
2016). The conversion rate used to convert the currency from euro to CAD is 1.46.

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The first-year targeted profit is met as the demand for chocolate is high in Canada.
The initial demand is expected to be 750 kg per month but in the initial month the sales is
estimated top be 50 kg and the estimated figure is gradually achieved at the later stage of the
business. The average selling price is estimated to be 160 per kg and that can fluctuate in the
future based on the demand of the chocolate. The total operating expenses is predicted to be
CAD 112480.00, and the tax rate is assumed to be 25%. Uncle Isaac can achieve the
estimated profit by setting an effective strategy of cost control and by following the
assumptions that are made in the given calculations. The only concern for uncle Isaac is the
increase of the material cost which can adversely affect the profit margin in the future
(Schenkel and Karlsson 2016).

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The business of uncle Isaac can make a projected sale can be classified into two parts
fixed sales and variable sales, from the fixed sales the business can generate CAD 54000 and
from the variable sales the business can generate sales that values CAD 7200000. This
indicates that the business has to depend largely on the variable sales and not on the fixed
sources of sales. The estimated total value of sales is CAD 774000. From the sales figure the
cost of goods sold are deducted to calculate the gross profit of the business. The estimated
cost of goods sold is CAD 631488 and the gross profit is CAD 142512.00.
After calculating the gross profit, the operating expenses are to be deducted from the
gross profit to assess the net profit or loss of the business. Under the operating expenses the
following expenses are recorded
 Packaging Cost for Boxes
 Credit Card Charges
 Rent for Industrial Room
 Employee's Salary
 Labour Cost for Packaging
 Depreciation of Refrigerator
 Depreciation of Wrapping Machine
 Deferred Revenue Expenditure- Market Research
 Amortization of Website Designing
 Amortization of Distribution Right
The estimated packaging cost of the business is CAD 9600 this expense is incurred to
meet the requirement of packaging the goods that are to be delivered to the customers. The
credit card charges are estimated to be CAD 8640.00. uncle Isaac has to take rent for

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industrial room where he will carry on his business activities which amounts to CAD 42000.
Uncle Isaac invested amount of CAD 30000 for hiring two part time employees and that will
be sufficient to meet the requirement. In addition to that the company has to incur CAD 6000
for labour cost of packaging cost. Depreciation on refrigerator, machine and amortisation cost
on website design and the distribution rights are calculated on the basis of straight-line
method and the estimated useful life of the assets are assumed to be 5 years. The total
operating expenses will be CAD 112480.00. the net profit at the end of the first year of
operation will be CAD 22524.00 (Odijie 2018).
For more analysis of the profit and loss statement it is required to interpret some other
parameters also which will be more useful to interpret the effects of the outcome of the profit
and loss statements.
The balance sheet reflects the true and fair view of the financial position of the
business at the end of the financial year. The projected balance sheet of new business is
demonstrated in the above table. This will assist in effective analysis of the accumulated
labilities and assets of the organisation. from the balance sheet uncle Isaac will be able to
make an evaluation of the valuation of his business at the end of the first year of operations.
Uncle Isaac has contributed CAD 350000 to operate the business which reflects that uncle
Isaac has limited amount of fund and for that reason he has decided to take loan at 7% pa. the
total capital investment made by uncle Isaac is evaluated by the projection of the balance
sheet. If the balance sheet is prepared without making a proper research then it will not give
the proper estimated figure of profitability and the interpretation made on the basis of the
balance sheet will give wrong results (Hasmidyani Fatimah and Firmansyah 2017).

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From the estimated balance sheet, it can be possible to evaluate the capital
requirement of the business and on that basis uncle Isaac can attract investors like joe who is
one of the friends of Isaac. If the balance sheet is prepared on the basis of wrong assumptions
then the projected profitability of the business will be adversely affected by the projected
balance sheet at the time of decrease in the production or sales of chocolate due to any
financial crisis occurs in the economic condition of the country (Johnston 2017).
From the balance sheet it can be possible to estimate the liquidity position of the
business. From the value of the liquid assets like cash, inventory and the current liabilities it
can be possible to evaluate the current asset ratio of the business from which uncle Isaac can
find out how much liquid asset he will require to settle the short-term obligations. The
liquidity ratios will also give an idea to joe the probable investor of the business whether it
will be profitable for him to invest in the business (Saroha and Diwan 2017).
The balance sheet will also indicate the items in which Isaac has made investments
from the analysis it can be observed that the Isaac has made investment in small safe, small
drill and jig and in market research. It is assumed that the useful life of the assets of the
business will be 5 years and the method of depreciation will be straight line method (Roos
2018).
In the above table the first twelve month of operation is shown, from this analysis
Isaac will be able to understand the amount of cash outflow and cash inflow from the
operating investing and financial activities of the business. In he first eight month of the
operation there is continuous cash outflow from the operating activities and from the ninth
month cash is generated from the operating activities. The operating cash flow has

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experienced a gradual increase which is positive impact for the business (Gallo Antolin-
Lopez and Montiel 2018).
The analysis of the five-year discounted cash flow statement is made on the basis of
the operating cash flow for the first year of operations and this shows a negative balance of
CAD 63695.00. The first year the free cash flow represents a positive amount of CAD 44214
and this trend continues until the third year. The growth rate started to decline from the fourth
year and from 24.19% the growth rate falls down to 10% and it further decreases to 5% in the
fifth year. The estimated value of the business is CAD 107449.00 (Watson McGowan and
Cunningham 2018).
A sensitivity analysis has been made on the basis of the various assumptions that will
affect the net profit and the fair value of the business. From the sensitivity analysis it has been
observed that if the sales price is reduced then in that case the profit will become negative
and it will adversely affect the fair value of the business also. The return of equity will also
become negative from 6.44% to -23.18%. if the sales price is increased to 175 then it will
increase the net profit and will also increase the fair value of the business (Easton and
Sommers 2018).
Recommendation
It is required by Isaac to conduct certain changes for increasing the overall profit
margin of the business. Uncle Isaac have to take initiative to reduce the cost of material and
to take necessary strategy so that he can achieve the estimated sales volume that is projected
for the first year of operation.

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Conclusion
From the above discussion it can be concluded that the business project will be a
profitable venture for uncle Isaac. From the estimated financial analysis, it can be observed
that the business can provide a good return to uncle Isaac and it has the potential to grow
further in future and can attain sustainable growth.
References
Berbegal-Mirabent, J., Gil-Doménech, D. and Alegre, I., 2016. Improving business plan
development and entrepreneurial skills through a project-based activity. Journal of
Entrepreneurship Education, 19(2), p.89.
Brinckmann, J., Dew, N., Read, S., Mayer-Haug, K. and Grichnik, D., 2019. Of those who
plan: A meta-analysis of the relationship between human capital and business planning. Long
Range Planning, 52(2), pp.173-188.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Gallo, P.J., Antolin-Lopez, R. and Montiel, I., 2018. Associative Sustainable Business
Models: Cases in the bean-to-bar chocolate industry. Journal of cleaner production, 174,
pp.905-916.
Hasmidyani, D., Fatimah, S. and Firmansyah, F., 2017. Developing Entrepreneurial Spirit of
Young Generation through Business Plan Training. MITRA: Jurnal Pemberdayaan
Masyarakat-old, 1(1).

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Johnston, M., 2017. Eclipse Coffee Bar-Business Plan (Doctoral dissertation).
Odijie, M.E., 2018. Sustainability winners and losers in business-biased cocoa sustainability
programmes in West Africa. International Journal of Agricultural Sustainability, 16(2),
pp.214-227.
Roos, K., 2018. Cacao Together: A Model for True Sustainability in the Chocolate Industry.
Saroha, R. and Diwan, S.P., 2017. Enhancing competitiveness and ensuring sustainable
business growth through innovation strategy: A case study. Chanderprabhu Jain College of
Higher Studies & School of Law.
Schenkel, M.T. and Karlsson, T., 2016. DO TOO MANY COOKS SPOIL THE STEW?
EXAMINING THE ROLES OF BUSINESS PLAN FORMALITY AND TEAM SIZE ON
NASCENT REVENUE EXPECTATIONS AND GESTATION ACTIVITY.
Teasdale, S., Steiner, A. and Roy, M., 2019. Wrestling with wicked problems? The value of
business plan competitions to social entrepreneurship education. Journal of Nonprofit
Education and Leadership, 10(2).
Watson, K., McGowan, P. and Cunningham, J.A., 2018. An exploration of the Business Plan
Competition as a methodology for effective nascent entrepreneurial learning. International
Journal of Entrepreneurial Behavior & Research.

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Appendix

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