Financial Feasibility Evaluation: Hattie's Geodes Business Plan

This report assesses the financial feasibility of Hattie's proposed geodes retail business. It includes a comprehensive analysis encompassing breakeven analysis, profit and loss statements, balance sheets, and monthly and annual cash flow projections. The report evaluates two scenarios: online sales of geodes and sales of cabinets to a friend. It calculates key financial metrics, including the break-even point, and performs sensitivity analysis to assess the impact of various factors on profitability. The analysis reveals that online sales of geodes are highly profitable, while the cabinet sales proposal is not financially viable. The report also calculates the maximum upfront fee that could be offered and provides conclusions and recommendations, suggesting Hattie should proceed with the online sales plan but reject the cabinet proposal. The report also includes critical reflection and references.

Evaluation of financial feasibility
of proposed venture
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Contents
Executive Summary................................................................................................... 3
Main Report................................................................................................................ 4
Break even Analysis................................................................................................ 4
Profit and loss statement for the 1st year of operations...........................................8
Balance Sheet at the end of first year...................................................................12
Monthly Cash flow for the first year of operation..................................................13
Annual Cash Flow.................................................................................................. 16
Amount of Cash the business would need to get started......................................18
Sensitivity Analysis................................................................................................ 19
Calculation of maximum amount that could be offered as upfront fee.................24
Conclusions and recommendations.......................................................................26
Critical Reflection..................................................................................................... 26
References............................................................................................................... 27
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Executive Summary
This report conducts an evaluation of the proposed business opportunity of retailing
of geodes that is available to Hattie. The evaluation has been done by performing
various calculations such as breakeven analysis, computation of profit/loss for the
first year of business, preparation of balance sheet for the first year of business,
monthly cash flow for the first year of operations. The report also shows calculation
of Annual Cash flow, Maximum amount that can be offered as upfront fee,
Calculation of Net Present value of Cash Inflows and Sensitivity Analysis of the
business opportunity. The results of these calculations and analysis of those results
have led to the conclusion that Hattie should go ahead with the plan of online sale
of geodes as it is highly profitable but should not accept the proposal of supply of
cabinets to Ian as it would not prove profitable to her.
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Main Report
This report will do an evaluation of the financial feasibility of the venture that Hattie
intends to start. Various calculations have been performed so as to support in
analysis of the business opportunity. Since Hattie would get the exclusive rights for
dealing in geodes for a period of 6 years only, the business will be existence for the
aforesaid period of 6 years only.
(All amounts are in GBP)
Break even Analysis
Breakeven point is that point at which the revenue generated by the business is
equal to the total costs incurred by the business. i.e., there is a situation of no
profit, no loss. At the breakeven point, the net profit earned by the business is equal
to zero. Breakeven point shows the quantity of product that should be sold by the
business so as to be able to cover its fixed costs as well as variable costs. It is
important for the business to know its beak even point so as to ensure that the
actual quantity or the number of units sold by it are not less than the breakeven
point for the business. Breakeven point is calculated by dividing fixed costs by
contribution per unit
In the given case, the breakeven point will be calculated for 2 scenarios – (i) Online
sale of geodes (ii) Sale of Cabinets (each equivalent to 1.5 kg of Geodes) to Hattie’s
friend Ian.
i. Online sale of geodes
In order to arrive at the breakeven point for online sales geodes, contribution per
unit will required to be calculated.
Calculation of contribution for each kg of geodes
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Calculation of contribution per unit Working Amount in $U
Amount in
Pounds
Sellingprice per kg 35
Less: Variable cost
Purchase cost of each kg of geodes 350*0.55 192.5 4.23
Freight cost of each kg of geodes 200 200 4.39
Credit card charges 1.2%of Sales 0.42
Packaging and shipping 5.5
Total variable cost per unit 14.54
Contribution per unit 20.46
Fixed costs that are related to this proposed business includes monthly rent of shop,
depreciation on equipment & website and the salaries of two part time students
that would be required to run the geode operation. The total fixed costs related to
online sales of the business are given below:
Monthly Rent 300
Salary of part time students 1500
Monthly Depreciation 104.17
Total 1904.17
Fixed Costs
Breakeven point for scenario 1 (Monthly)
= Fixed costs per month/ Contribution per kg of geodes
= 1904.17/20.46
= 93 kg
Calculation of expected quantity for each month of the 6 year period of
the business
Calculation of budgeted online sales for the business
(in kg)
Month
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
1 50 750 750 750 750 750
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2 63 750 750 750 750 750
3 78 750 750 750 750 750
4 98 750 750 750 750 750
5 122 750 750 750 750 750
6 153 750 750 750 750 750
7 198 750 750 750 750 750
8 258 750 750 750 750 750
9 335 750 750 750 750 750
10 436 750 750 750 750 750
11 567 750 750 750 750 750
12 737 750 750 750 750 750
Total 3093 9000 9000 9000 9000 9000
Assumptions for sales budget
1. It is assumed that the online sales of geodes for the first year of operations
would grow at the rate of 25 percent per month during the first 6 months and
would grow at the rate of 30 percent per month during the next 6 months.
Conclusion:
The beak even point for online sale of geodes through the website of business has
been calculated to be 88 kg. As per the above chart for budgeted online sales for
business, the proposed business would achieve its breakeven point in the 4th month
of the first year of its operations when the sales are expected to be 98 kg.
Thereafter, the sales of the business will continue to grow, and it will be able to
generate sales that are much higher than its breakeven point. Therefore, the
business can easily achieve its breakeven point and the beak even analysis
suggests that it is financially feasible to carry on the business.
(ii) Sale of cabinets (equivalent to 1.5 kg of Geodes) to customers.
In order to calculate the breakeven point, contribution for each unit of cabinet will
be required to be calculated.
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Calculation of contribution per unit Working Amount in $U
Amount in
Pounds
SellingPrice per cabinet 45
Less Variable costs
Purchase cost of each kg of geodes 350*0.55*1.5 288.75 6.34
Freight cost of each kg of geodes 200*1.5 300 6.591
Credit card charges 0
Packaging and shipping 0
Costs of Cabinets and mounting
accessories per cabinet 7 7
Total Variable cost of each cabinet 19.93
Contribution per unit 25.07
Contribution per cabinet sold to Ian
Notes:
1. It is assumed that the sale of cabinets made to Ian, are cash sales since it has
been provided in the case study that amount would be paid by Ian
immediately. Hence, credit card charges of 1.2 percent would not apply to
Sale of cabinets.
2. Packaging and Shipping cost would not require to be incurred for geodes sold
to Ian in the form of cabinets. Hence no packaging costs have been included
in the above calculations.
Fixed costs
Only the salary of part time assistant of GBP 200 per month would be considered as
fixed cost for the second scenario of sale of cabinets to Ian. All other fixed costs
included for scenario 1 will not be included for scenario 2 since those costs would
anyways be incurred by the business, whether it decides to sell cabinets to Ian or
not.
Breakeven point for cabinets
=200/25.07
=8 cabinets
Conclusion
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The breakeven point for cabinets is 8, which means that Hattie must sale at least 8
cabinets every month so as to reach a situation of no profit, no loss. However, as
Ian would purchase only 6 Cabinets every month, Hattie will only be able to sell 6
cabinets every month. Also, the demand for cabinets from Ian will continue to
remain the same for all the months for the six year period of the business, i.e.
Hattie will be able to sell only 6 units for every month in which the business will be
operating. If the business achieves less sales than its breakeven point, the business
would lead to financial losses for its owner. Therefore, it is clearly evident that the
business proposal of sale of cabinets to Ian will not be able to reach the breakeven
point and hence, it would not be feasible for Hattie to go ahead will this proposal of
sale of cabinets to Ian, as she would not be able to reach the beak even point and it
would lead her to suffer financial losses.
Note: The conversion of amounts from UYU to GBP has been done based on the
exchange rate of prevailing on 09.10.2019. (XE Currency Converter, 2019).
Exchange rate
1 UYU 0.02197 GBP
(Exchange rate as on 9/10/2019)
Profit and loss statement for the 1st year of operations
Profit and loss statement for the 1st year
Sale of Geodes 108255
(3093*35)
Sale of Cabinets
(6*12*45) 3240
Total Sales 111495
Less: Cost of Goods sold
Purchase cost of geodes 13540.23
(3093*4.23)+(72*1.5*4.23)
Costs of Cabinets and mounting
accessories 504
(72*7)
Freight 14052.39
(3093*4.39)+ (72*1.5*4.39)
Total Cost of goods sold
28096.6
2
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Gross Profit
83398.
38
Operating Expenses
Credit Card Charges
1.2% of Online Sales of Geodes 1299.06
(108255*1.2%)
Packaging and shipping 17011.5
(3093*5.5)
Depreciation 1250.00
(as per Workings shown separately)
Total Operating Expenses
19560.
56
Administrative Expenses
Rent 3600
(300*12)
Salaries of part time staff 18000
(1500*12)
Salary of assistant
(200*12)
Interest on owners capital
722.36743
2
(17322.96*4.17%)
Total Administrative Expenses
22322.
37
Profit before tax
41515.
45
Tax @ 28%
11624.3
3
Net Profit for the year
29891.
13
Workings related to the Profit and loss statement for the first year of operations
have been shown below:
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1. Depreciation on plant & machinery and intangible assets
Hattie intends to purchase jigs & tools worth GBP 3500 and spend GBP 4500 on
development of the website through which online sales would be made to all the
places across entire UK. The tools & jigs are in the nature of equipment for the
business and the cost spent on development of website is intangible asset for
the business. Hence, depreciation would be charged on both these business
assets.
Plant & Machinery
Cost of jigs & tools 3500
Intangible Assets
Amount to be paid for
development of website 4000
Annual Monthly
Depreciation on Plant & Machinery 3500/6 583.33 48.61
Depreciation on Intangible Assets 4000/6 666.67 55.56
Total Depreciation 1250.00 104.17
Calculation of depreciation
Since the business will be in existence for 6 years only as per the terms of the
contract with Colada Geodes, depreciation will only be calculated for 6 years.
Therefore, it is assumed that Plant & Machinery as well as Intangible assets will
have a life of six years only and will not have any residual value at the end of 6
years.
2. Interest on owners capital
As Hattie can invest any available cash at an after tax interest rate of 3%, business
must pay interest to Hattie at an equivalent rate, on the cash invested by Hattie in
the proposed business. The before tax rate of interest for an after tax rate of 3% is
4.17%. Hence, business must pay interest on the investment by Hattie at a rate of
4.17 percent per annum. The initial cash investment that would require to be made
by Hattie for starting the business has been calculated below:
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Note: The workings for cash required to cover negative cash generated by the
business in the first 7 months have been provided in the Monthly cash flow of the
business for the first year of operations.
Balance Sheet at the end of first year
Assets
Fixed Assets
Plant & Equipment
Jigs and Tools 3500
Less: Accumulated Depreciation -583.33 2916.67
Intangible assets
Development cost of website 8000
Less: Accumulated Depreciation -666.67 7333.33
Current Assets
Inventory (750 kg) 6465
Cash at Bank 4487.56
Receivables 25531.89
Security deposit for rent 900.00
Preliminary Expenses 9000
Reasearch cost
Total Assets 56634.45
Liabilities
Capital 56634.4479
Total Liabilities 56634.45
Balance Sheet
Workings
1. Value of closing stock
Since Hattie would place order 1 month in advance so as to ensure that she has
sufficient stock of one month’s worth of sales, Hattie would have a stock in hand
of 750 kg of geodes which is equal to the quantity of geodes that is expected to
be sold by the business in the next month.
2. Receivables
The credit card company will make payments two weeks after the end of the
month to which those sale proceeds pertain. Thus, the sales made in the last
month of the year will be remitted to the business in the next month and thus
will be shown as receivables in the balance sheet.
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Monthly Cash flow for the first year of operation
0 1 2 3 4 5 6 7 8 9 10 11 12
Opening balance of cash -1458.58 -4184.41 -5397.15 -6450.69 -7305.21 -7910.96 -8279.16 -8414.38 -8035.30 -6987.62 -5070.76 -2023.97
Receipts
Cash received from sales
of geodes 1732.15 2165.19 2706.48 3383.11 4228.88 5286.10 6871.93 8933.51 11613.57 15097.64 19626.93
Cash received from sale
of Cabinets 270 270 270 270 270 270 270 270 270 270 270 270
Total receipt 270 2002.15 2435.188 2976.4844 3653.10547 4498.8818 5556.1023 7141.933 9203.513 11883.57 15367.64 19896.928
Payments
Cash paid on purchase of
geodes for online sales
(including freight) 431.00 538.75 673.44 841.80 1052.25 1315.31 1709.90 2222.87 2889.73 3756.65 4883.65 6348.74 6465.00
50.00 62.50 78.13 97.66 122.07 152.59 198.36 257.87 335.24 435.81 566.55 736.51 750.00
Cash paid on purchase of
geodes for cabinets 77.58 77.58 77.58 77.58 77.58 77.58 77.58 77.58 77.58 77.58 77.58 77.58 77.58
Cash paid for packing 275.00 343.75 429.69 537.11 671.39 839.23 1091.00 1418.30 1843.80 2396.93 3116.01 4050.82
Cash paid for purchase of
cabinet accessories 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00 42.00
Cash paid for Rent 300.00 300.00 300.00 300.00 300.00 300.00 300.00 300.00 300.00 300.00 300.00 300.00
Security deposit for Rent 900.00
Cash paid Salaries of part
time staff 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00 1500.00
Cash paid for salary of
assistant 200.00 200.00 200.00 200.00 200.00 200.00 200.00 200.00 200.00 200.00 200.00 200.00
Total payments 1458.58 2995.83 3214.89 3488.72 3831.01 4258.86 4867.08 5691.33 6762.85 8155.83 9966.71 12320.85 13385.40
Closing balance of cash -1458.58 -4184.41 -5397.15 -6450.69 -7305.21 -7910.96 -8279.16 -8414.38 -8035.30 -6987.62 -5070.76 -2023.97 4487.56
Cash Inflow of each
month(Receipts-
Payments) -1458.58 -2725.83 -1212.74 -1053.53 -854.52 -605.76 -368.20 -135.22 379.08 1047.68 1916.86 3046.79 6511.53
Monthly cash flow for the 1st year of operation
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