Business Case Analysis: Financials for Evergreen Skincare Product

This document presents a business case for launching a new skincare product under the name "Evergreen Skin Care Products Ltd." It includes a marginal costing statement, cash budget, forecasted income statement, and balance sheet to assess the financial viability of the venture. The analysis covers revenue projections, fixed and variable expenses, and profitability estimates, indicating a gross profit margin of approximately 75% and a net profit margin of 14%. The cash budget forecasts positive cash flow throughout the year, while the income statement projects a net profit of $16,500. The balance sheet provides a snapshot of the company's assets and liabilities in the first year of operation. The report concludes that the business is expected to be cash-positive and profitable, making it a potentially attractive investment opportunity. The document also includes a report to investors summarizing the key findings and recommendations.

[Date]
FINANCIAL AND MANAGEMENT ACCOUNTING ASSIGNMENT
A business case on new Skincare Product in the market
Student’s Name
University’s Name

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Introduction and Background......................................................................................................................3
Marginal Costing Statement........................................................................................................................3
Financial Statements...................................................................................................................................4
Cash Budget.............................................................................................................................................4
Forecast Income Statement.....................................................................................................................6
Forecast Balance Sheet............................................................................................................................7
Business case report....................................................................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction and Background
A report has been prepared on the introduction and launch of the new skin care products in the market.
The need for introduction and launch of the skin care product under a completely new brand is the need
of the hour and has been decided post much research and various iterations (Arnott, et al., 2017). For
the purpose of investment in the product, a business case has been prepared with the forecasted sales
and the costing data on the per unit basis and the per year basis. Furthermore, the marginal costing
statement, the cash budget, forecasted profit and loss account and forecasted balance sheet has been
prepared for putting forward the financial permutations and combinations to the management and the
potential investors. The name of the company analysed below with the help of the financial statements
is “Evergreen Skin Care Products Ltd.”
Marginal Costing Statement
The marginal costing report for the given skin care product company has been shown below (Alexander,
2016). The same has been prepared to give the fair idea of what will the revenue on per unit basis and
the total yearly basis. The marginal costing statement for the company shows the bifurcation between
the fixed and the variable expenses and reflects that most of the cost is being incurred on the material
and the labour component in the skin care product industry. Depreciation and other fixed costs has also
been shown as a separate bifurcation as it is one area where the cost savings can be achieved.
Evergreen Skin Care Products Ltd.
Marginal Costing Statement
for year ended 31st December 20X5
(Amt. in $)
Particulars per unit 12 months
Sales 10.00 100,000
Variable Cost:
Material 2.50 25,000
Contribution 7.50 75000.00
Fixed Costs:
Labour 2.6 26,000
Depreciation 0.6 6,000
Other overheads 2.9 29,000
Net Profit 1.40 14000.00
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Financial Statements
Cash Budget
The cash budget on a monthly basis for the given company has been shown below (Choy, 2018). This is
being prepared as it serves multiple purposes and acts at the target sheet. It shows the overall inflow
and outflow of the cash during the year and the timings of the same. It helps in identification of when
the excess funds are there with the business and when the credit may be needed. This is one of the
most critical report which is required at the time of application of loan in the bank as it gives the bank
manager the required confidence to give credit to the business. It is for this reason that profit and loss
account and the cash budget have individual importance and it is not that a company which is having
good profits may be cash rich as well. It is also one of the tools which can be used for scenario analysis
or the “what if analysis” to understand different business scenarios and the results thereby.
Evergreen Skin Care Products Ltd.
Cash Budget for the year 20X5
Cash Flow Forecast - 12 Months
Month: 1 2 3 4 5 6 7 8 9 10 11 12 Tota
ls
Receipts
Percent of
Annual Sales 5% 8% 8% 9% 9% 12% 10% 6% 8% 5% 8% 12%
100
%
Budgeted
sales
volume
(units)
500 800 800 900 900 1,200 1,000 600 800 500 800 1,200 10,0
00
Budgeted
selling price 10 10 10 10 10 10 10 10 10 10 10 10
Total
Receipts 5,000 8,000 8,000 9,000 9,000 12,000 10,00
0 6,000 8,000 5,000 8,000 12,00
0
100,
000
Payments
Direct
Materials
Purchases
1,250 2,000 2,000 2,250 2,250 3,000 2,500 1,500 2,000 1,250 2,000 3,000 25,0
00
Direct
Labour 1,300 2,080 2,080 2,340 2,340 3,120 2,600 1,560 2,080 1,300 2,080 3,120 26,0
00
Other
Overhead
Costs:
Depreciatio
n 500 500 500 500 500 500 500 500 500 500 500 500 6,00
0
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Utilities 125 200 200 225 225 300 250 150 200 125 200 300 2,50
0
Insurance 90 144 144 162 162 216 180 108 144 90 144 216 1,80
0
Factory
Supervisor's
Salary
170 272 272 306 306 408 340 204 272 170 272 408 3,40
0
Rent 50 80 80 90 90 120 100 60 80 50 80 120 1,00
0
Maintenanc
e 90 144 144 162 162 216 180 108 144 90 144 216 1,80
0
Administrati
ve Wages 200 320 320 360 360 480 400 240 320 200 320 480 4,00
0
General
Office
Expenses
170 272 272 306 306 408 340 204 272 170 272 408 3,40
0
Interest 205 328 328 369 369 492 410 246 328 205 328 492 4,10
0
Selling and
administrati
ve expenses
350 560 560 630 630 840 700 420 560 350 560 840 7,00
0
Total
Payments 4,500 6,900 6,900 7,700 7,700 10,100 8,500 5,300 6,900 4,500 6,900 10,10
0
86,0
00
Net
Cashflow 500 1,100 1,100 1,300 1,300 1,900 1,500 700 1,100 500 1,100 1,900 14,0
00
Opening
Bank
Balance
4,150 4,650 5,750 6,850 8,150 9,450 11,35
0
12,85
0
13,55
0
14,65
0
15,15
0
16,25
0
Closing
Bank
Balance
4,650 5,750 6,850 8,150 9,450 11,350 12,85
0
13,55
0
14,65
0
15,15
0
16,25
0
18,15
0
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Forecast Income Statement
Considering all the sources of income and the expenses, the forecasted income statement for the entire
year has been prepared and shown below (Heminway, 2017). The same has been enclosed to give the
rough estimate of what would be the profitability and the return on the investment in case the
opportunity is being gone ahead with. As per the below summary, the company would be having the
gross profit and the net profit of approximately 75% and 14% respectively which is a very healthy margin
considering the industry trend. The different heads of operating expenses have also been shown below
to give the brief idea to the investors as to what will the other types of expenses incurred in the sale of
skin care products.
Evergreen Skin Care Products Ltd.
Income statement for the year ended 31st December 20X5
£ £
Sales
Sales 100,000
Other - Sales of scrap 2,500
Total Sales 102,500
Less Cost of sales
Opening Inventory 5,450
Purchases 27,500
Closing Inventory 7,950 25,000
Total Cost of sales 25,000
Gross Profit 77,500
Operating Expenses
Labour expenses 26,000
Depreciation 6,000
Utilities 2,500
Insurance 1,800
Factory Supervisor's Salary 3,400
Rent 1,000
Maintenance 1,800
Administrative Wages 4,000
General Office Expenses 3,400
Interest 4,100
Selling and administrative expenses 7,000
Total expenses 61,000 61,000
16,500
Net Profit 16,500
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Forecast Balance Sheet
The forecasted balance sheet for the 1st year of operation has been shown below (Erik & Jan, 2017). The
same has been included to show the overall position of the assets and the liabilities at the end of the
year.s
Statement of Financial Position
As on 31st December 20X5
Assets
Non-Current Assets
Property, plant, and equipment 20,000
Less accumulated depreciation 5,000
Net book value 15,000
Furniture 5,000
Less accumulated depreciation 1,000
Net book value 4,000
Current Assets
Inventory 7,950
Receivables 20,000
Cash at bank 18,150 46,100
Total Assets 61,100
Capital and Liabilities
Capital introduced 31,100
Add:
Net profit for the year 16,500
Less:
Drawings Nil
47,600
Closing capital 47,600
Non-Current Liabilities
Loan from bank 8,900
Current Liabilities
Payables 4,100
Bank overdraft 500 4,600
Total Capital and Liabilities 61,100
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Business case report
To: The Investors
From: The Entrepreneur
Date: XX December, 20X4
Subject: Business case Report: Skin care product business
Dear Stakeholders,
A business case report has been prepared and is being presented for the information and knowledge of
the prospective investors, who are requested to decide on the viability of the business based on the
above research and circumstances of the fact and thereby accept/reject the proposal.
The business which has been decided to be taken up is the skin care product business considering the
shortage of such high quality products in the market and huge rise in demand from the consumer side.
Based on the average sales estimation during the year at the fixed price of $10 per unit, it has been
estimated that nearly 10000 units of the products would be sold during the year across various months
(Johnson, 2017). This is primarily on the lower side as compared to the market trend and also the selling
price per unit has been kept constant throughout the year as this will be the first year of operation. The
contribution margin statement or the marginal costing statement has been shown above which shows
the per unit selling price, per unit material and labour cost, depreciation and the other overheads. The
same has then been shown on the yearly basis as to what will be the financials for 10000 units sold
(Goldmann, 2016). It shows that the overall contribution per unit would be nearly 75% of the sales and
the net profit would be 14%. The material cost has been estimated to be around 25%, the labour cost to
be 26% of the sales and other overheads to be approximately 35% of the sales including 6% being
depreciation. The contribution margin statement is very crucial for any decision making as it (Boccia &
Leonardi, 2016).
The cash budget has also been prepared on a monthly basis. The monthly sales has been estimated in
terms of units and amount based on several factors like market growth, number of outlets, holidays,
weekends, festivities, season, etc. Based on the same, 10000 units of products has been spread across
various months. Furthermore, the cash budget also shows the spent in terms of per month and earnings
per month. It shows the bifurcation of the expenses in terms of the other fixed overheads like those of
utilities, depreciation, rent, maintenance, insurance, factory supervisor’s salary, administrative wages,
general office expenses, interest and selling and distribution expenses which has been calculated based
on the per unit basis (Gerlach, et al., 2018). It can be seen that the major proportion of the cash spent is
in terms of the direct material, direct labour, selling and distribution expenses and the depreciation. The
cash budget report also shows the total inflows and outflows for the month and gives the reconciliation
between the opening cash balance and the cash and bank balance at the end. Here, it can be seen that
there has been an addition in the cash balance from $4150 in the beginning to $ 18150 in the end
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(Visinescu, et al., 2017). Thus, the business is expected to be cash positive and cash rich during the year
which will help the company to drive profitability and at the same time maintaining liquidity.
The income statement of the company has also been plotted based on forecasts and the sales and other
income along with the cost of goods sold has been shown. It is estimated that the gross profit of the
company would be nearly 75% which is a very healthy margin considering the industry trend (Jefferson,
2017). The different expenses heads and the labour costs and depreciation has been considered for the
calculation of the net profit of the company and it is estimated to be nearly $16500, which amounts to
nearly 14% of the direct sales. The income statement acts as a budget and variance analysis tool as well
as the actual performance of the company can be checked and analysed against the budget shown
above. This will also help the business is having a check and the control on the overall expenses and
particularly the overheads where there is a scope of savings (Lessambo, 2018). It gives the
categorisation of the variable as well as the fixed expenses and it will help the business in the cost
controlling measures and thereby trying out other alternatives so that the direct material and direct
labour costs can also be minimised.
Lastly the forecasted balance sheet or the statement of the financial position has also been prepared
post the first year of operation and we can see that out of the overall assets, the company has more
proportion of investment in the current assets which is a positive sign and that to the balances of cash as
well as the inventory has increased as compared to the starting of the business (Raghupathi & Wu,
2018). The company is also estimated to have the receivables balances of $20000 which makes it a total
of $46100 of the current assets. On the other hand, the balance of the current liabilities is expected to
be around $4600 which shows that the current ratio of the company will be in excess of 10 times and
therefore it will be highly liquid (Sithole, et al., 2017). In terms of fixed assets, the company will be
having investments in plant, property and equipment to the tune of $20000 and in the furniture
amounting to $5000. Furthermore, in terms of the proportion of debt and equity in the company, the
capital proposed to be introduced by the owners or proprietors is $31100 and the loan from the banks
or financial institutions amounting to $8900 (Timothy, 2004). Towards the end of the year, the balance
of equity and the loan is estimated to be $47600 and $8900 respectively which gives the debt equity
ratio of 5:1 times and it is very healthy in terms of solvency of the company.
Conclusion
From the above discussion and analysis, it can be termed to be a good investment considering all the
above factors and financial statements analysis as there is a growth of capital, favourable return on
capital and equity, favourable solvency and liquidity ratios, etc. Considering the market scenario, the
business opportunity would be worthy of being accepted as it has the potential of positive cash flow and
capital generation with less of risk and more of returns (Fay & Negangard, 2017).
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