Small Business - Assignment Example

SMALL BUSINESS A Small Business is one that is independently owned and operated and which is not dominant in its field of operation. The law s that in determining what constitutes a small business, the definition will vary from industry to industry to reflect industry differences accurately. The small business success depends on the management and business skills. Things to consider in planning a small business like in period picture framing and small craft workshop for furniture business needs a good and effective business plan. According to Prof Johan Strydom 80% of all South African small businesses fail in the first five years of their existence. Because of the failure South African economy has lost more than R68 million over the period of 1997 to 2000. A study also in Canada shows that 68 % of small and medium enterprises with fewer than five employees, failed within five years. The reason for failure of businesses includes the following areas of concern: a. a lack of adequate working capital b. a rapidly changing of business environment c. a poor market selection d. a lock of essential business and management skills The above reason will be our focus in making the business plan for a period picture framing and small craft workshop for furniture. Creating a business plan is essential for small business to be able to develop a path for a strong business. Our business plan for picture and framing woodcraft furniture includes the capital, market selection and business and management skills. Our marketing report shows that since we are producing a furniture and picture frame at not so low price, therefore we are offering our furniture to those whose accept the fact that it is hard to produce a very low price furniture with quality. We are marketing our product to high and medium class people of Kent as well as throughout London. As described in our marketing report and analysis a proper strategy will be implemented to market the furniture. Working capital is important in starting a small business. From here you will be able to start your business by selecting materials which are cheaper but of quality. The company wants to develop a quality furniture for our customer but it has an inadequate working capital. This may cause a failure of the business if we were not able to manage the cash well. Small business failure can inevitably be related to poor or careless financial management (Berryman, 1983; Peacock, 1985). Businesses can increase their capital by looking for a material which would not cost them a lot, or by looking for a lending company with a low interest to be able to have enough capital for the business. The advantage of these actions is that it is beneficial to the company since they have an additional capital but it could be a disaster if they were not able to manage their capital well. Other encourages small businesses owner-managers to install and use accounting information systems (McMahon and Holmes, 1991). Breen and Sciulli (2002) report that, in order to reduce the cost burden on small business, a number of mechanisms were put in place.. All of this was to encourage small business to utilize computerized technology. However to be able to use the computerized technology proper training and seminars should be conducted for employees. Chittenden and Bragg (1997) report that when a small business is suffering from late payment there is an increase in short-term bank borrowing, or delay in payments to creditors. When this occurs small business then has to over commit themselves which leads to the next two comments that "There is a definite down turn since GST. Money is very much tighter. In an arts and craft business experiencing very much reduced turnover" and "I spend a lot more time monitoring cash flow, with more work and less cash" sums up what the small business owner-manager is experiencing. Petzke and Murphy (2001) reported that the introduction of the GST and consequent reporting requirements had put stress on marriages and 'ruined some small businesses with red tape'. Proper monitoring and recording of the business financial aspect could help in the survival of the company. Our next concern is the rapidly changing of business environment. Technology plays an important role in the success of a small business. Computerization of the business in picture framing and woodcraft business would help increase the output of the company. Thru this modern technology we will be able to increase our target market not only locally but to the whole world. It will reduce the time of work and increase our output. We will be able to promote our product thru internet and other means of communication. Poor market selection. You will not be able to sell any Picture framing and small craft woodcraft if you are not aware as to where will be the right place to market the item. It will not be nice to see our product near the hospital. Who will get interested on the item It will be nice if the item will be sold near the schools or offices or in the department stores and supermarkets. We can have a website for viewing of our products. Lack of business and management skills is seen as the prime reason why small businesses fail, and it is speculated that there is a general lack of awareness of management processes and tools in the small business sector. Training is regarded as an imperative to rectify the problem. It is in small business in particular that training is not encouraged because of financial constraints and lack of support from management. Proper training would give a positive result in the company since the following business approach will be given a thorough study: Training in how to increase the sales, how to promote the business, how to research the market, how to conduct financial analysis and control, how to obtain capital and how to obtain government contracts. Employees' relationship can be also added in our area of concerns. The following workplace deficiencies would result in failure of the business: a lack of sound work habits, poor people skills, and poor cognitive skills specific to the workplace, poor technical knowledge. A business plan can know be created for the business of period picture framing and small craft workshop. An objective is the first thing to be created to be able for the company to have its focus. We can start our business plan by citing first our objectives. The main objective of the company is to start the business at a low capital but with quality product of furniture and to be able to have a return of investment within a period of one year. The keys to success of the company include the following: uncompromising commitment to the quality of the end product: quality wood, quality workmanship, quality design, quality of end result. Successful niche marketing: we need to find the quality-conscious customer in the right channels, and we need to make sure that customer can find us. The financial picture is quite encouraging. We will be able to increase our capital if the banks allow us to apply for a credit line .With a little interest to a limit of 150,000. The credit line is easily supported by assets. We do expect to be able to take some money out as dividends. The owners don't take overly generous salaries, so some draw is appropriate. A projected cash flow will show the possible expenses and profit of the company. Although we expect to be more profitable in the coming year, we still have drains on the cash flow. The salary and other expenses will be included in the cash flow. A cash flow forecast shows the critical timing of cash coming in and cash going out during a certain period of time, normally a month or two. Preparing a monthly cash flow forecast provides you with the opportunity to show revenues the business expects to receive in cash and expenses the business expects to spend with cash. A cash flow differs from a budget forecast in that it does not show sales estimates or overhead expenses averaged across several months. Here is a forecasted cash flow of the picture framing and small craft workshops adapted to the study done by one of the furniture company in UK. The accompanying table lists our main assumptions for developing our financial projections. The most sensitive assumption is the collection days. We would like to improve collection days to take pressure off of our working capital, but our increasing sales through channels makes the collection time a cost of doing business. We also expect to see a decline in ourstock turnover ratio, another unfortunate side effect of increasing sales through channel. We find ourselves having to buy earlier and hold more finished goods in order to deal with sales through the channel. General Assumptions Plan Month 1 2 3 4 5 6 Current Interest Rate 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% Long-term Interest Rate 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Tax Rate 25.00% 25.00% 25.00% 25.42% 25.00% 25.00% Other 0 0 0 0 0 0 The following chart shows changes in key financial indicators: sales, gross margin, operating expenses, collection days, andstock turnover. The growth in sales will be very hard to manage. We expect our gross margin to be a bit lower than before, because our projections show a slight decline as we go into new product areas and face new competition. The projections for collection days andstock turnover show that we are already expecting a decline in these indicators, because of increasing sales through channels. Benchmarks Break Even Analysis Our break-even analysis is based on running costs, the "burn-rate" costs we incur to keep the business running, not on theoretical fixed costs that would be relevant only if we were closing. Between payroll, rent, utilities, and basic marketing costs, we think 40,000 is a good estimate of fixed costs. Our assumptions on average unit sales and average per-unit costs depend on averaging. We don't really need to calculate an exact average; this is close enough to help us understand what a real break-even point might be. The essential insight here is that our sales level seems to be running comfortably above break-even. Break-even Analysis Break-even Analysis Monthly Units Break-even 15 Monthly Revenue Break-even 21,961 Assumptions: Average Per-Unit Revenue 1,513.93 Average Per-Unit Variable Cost 381.96 Estimated Monthly Fixed Cost 16,420 We do expect a significant increase in profitability this year, and in the future, because we have learned how to deal with the increasing sales levels of selling through channels. Despite the lower profitability levels of recent years, we expect to pass 5% in 2006, and remain at that level through 2008. Our higher sales volume has lowered our cost of goods and increased our gross margin. This increase in gross margin is important to profitability. Because of this profit the bank manager will allow us to have an increase in capital by allowing us to have a credit limit in the bank. After maybe 2 to 3 years we will be able to pay the amount borrowed to the bank with its interest. Pro Forma Profit and Loss 2006 2007 2008 Sales 451,150 692,500 1,092,500 Direct Costs of Goods 113,825 174,000 274,000 Production Payroll 51,600 80,000 185,000 Other 3,110 0 0 ------------ ------------ ------------ Cost of Goods Sold 168,535 254,000 459,000 Gross Margin 282,615 438,500 633,500 Gross Margin % 62.64% 63.32% 57.99% Operating Expenses Sales and Marketing Expenses Sales and Marketing Payroll 37,000 65,000 72,000 Miscellaneous 2,400 2,600 2,900 Advertising/Promotion 64,000 70,400 77,400 Events 6,250 6,900 7,600 Public Relations 750 800 900 Travel 4,500 5,000 5,500 ------------ ------------ ------------ Total Sales and Marketing Expenses 114,900 150,700 166,300 Sales and Marketing % 25.47% 21.76% 15.22% General and Administrative Expenses General and Administrative Payroll 48,000 75,000 100,000 Sales and Marketing and Other Expenses 0 0 0 Depreciation 1,000 1,100 1,200 Depreciation 1,500 1,700 1,900 Utilities 2,400 2,600 2,900 Insurance 500 600 700 Rent 3,600 4,000 4,400 Other 1,200 1,300 1,400 Payroll Taxes 20,940 35,250 57,300 Other General and Administrative Expenses 0 0 0 ------------ ------------ ------------ Total General and Administrative Expenses 79,140 121,550 169,800 General and Administrative % 17.54% 17.55% 15.54% Other Expenses: Other Payroll 3,000 15,000 25,000 Consultants 0 0 0 Contract/Consultants 0 0 0 ------------ ------------ ------------ Total Other Expenses 3,000 15,000 25,000 Other % 0.66% 2.17% 2.29% ------------ ------------ ------------ Total Operating Expenses 197,040 287,250 361,100 Profit Before Interest and Taxes 85,575 151,250 272,400 EBITDA 86,575 152,350 273,600 Interest Expense 8,750 14,000 21,500 Taxes Incurred 19,016 34,313 63,770 Net Profit 57,809 102,938 187,130 Net Profit/Sales 12.81% 14.86% 17.13% Gross Margin Monthly Gross Margin Yearly Profit Monthly Profit Yearly Projected Cash Flow Although we expect to be more profitable in 2006, we still have drains on the cash flow. We need to invest 25,000 in new assembly and manufacturing equipment, plus 15,000 in new computer equipment, and another 10,000 in miscellaneouscurrent assets, including office equipment. Because of our increased sales through channels, and necessary increase instock levels, we need to increase working capital. We plan to extend our credit line to cover as much as 150,000 incurrent credit, backed by receivables and stock. Our maximum extension looks like 115,000 at the end of the year, and it is barely covered by an estimated 140,000 in receivables andstock that same month. Cash Pro Forma Cash Flow 2006 2007 2008 Cash Received Cash from Operations Cash Sales 112,788 173,125 273,125 Cash from Receivables 288,966 478,182 751,104 Subtotal Cash from Operations 401,754 651,307 1,024,229 Additional Cash Received VAT Received (Output Tax) 78,951 121,188 191,188 HMRC VAT Repayments 65,299 0 0 New Current Borrowing 125,000 50,000 100,000 New Other Liabilities (interest-free) 0 0 0 New Fixed Liabilities 0 0 0 Sales of Other Current Assets 0 0 0 Sales of Fixed Assets 0 0 0 New Investment Received 50,000 0 0 Subtotal Cash Received 721,004 822,494 1,315,416 Expenditures 2006 2007 2008 Expenditures from Operations Cash Spending 139,600 235,000 382,000 Bill Payments 249,007 348,914 519,587 Subtotal Spent on Operations 388,607 583,914 901,587 Additional Cash Spent VAT Paid Out (Input Tax) 33,293 40,893 64,301 HMRC VAT Payments 65,299 106,494 172,940 Principal Repayment of Current Borrowing 10,000 0 0 Other Liabilities Principal Repayment 0 0 0 Fixed Liabilities Principal Repayment 0 0 0 Purchase Other Current Assets 0 0 0 Purchase Fixed Assets 50,000 20,000 30,000 Dividends 0 0 0 Subtotal Cash Spent 547,199 751,301 1,168,828 Net Cash Flow 173,805 71,193 146,589 Cash Balance 175,243 246,436 393,025 Projected Balance Sheet Our projected balance sheet shows an increase in net worth to more than 400 thousand in 2008, at which point we expect to be making 17% profit on sales of 1.1 million. With the present financial projections we will be careful in supporting our working capital credit line, and we are growing assets both because we want to--new equipment--and because we have to grow receivables andstock to support growth in sales through channels. Pro Forma Balance Sheet 2006 2007 2008 Assets Current Assets Cash 175,243 246,436 393,025 Accounts Receivable 77,001 118,194 186,465 Stock 13,277 20,296 31,960 Other Current Assets 2,375 2,375 28,971 Total Current Assets 267,896 387,301 640,421 Fixed Assets Fixed Assets 53,210 73,210 103,210 Accumulated Depreciation 2,720 3,820 5,020 Total Fixed Assets 50,490 69,390 98,190 Total Assets 318,386 456,691 738,611 Liabilities and Capital 2006 2007 2008 Current Liabilities Accounts Payable 18,061 29,629 43,877 Current Borrowing 115,000 165,000 265,000 Other Current Liabilities 47,461 21,261 1,803 Subtotal Current Liabilities 180,522 215,890 310,680 Fixed Liabilities 0 0 0 Total Liabilities 180,522 215,890 310,680 Paid-in Capital 54,500 54,500 54,500 Retained Earnings 25,555 83,364 186,302 Earnings 57,809 102,938 187,130 Total Capital 137,864 240,802 427,931 Total Liabilities and Capital 318,386 456,691 738,611 Net Worth 137,864 240,802 427,931 It is now known that the success of a small business depends on the following factors: financial management, personnel management and strategy in marketing your product. You must know who or where to go to promote your product. Question must be answer who will buy our product Why they will buy our product The questionnaire in our marketing project can be helpful to evaluate the market target as well as will help to company to have its bank credit. References 1. http://www.sampleplans.com/spv/3097/index.cfmaffiliate=gbresource 2. Business Skills of small businesses in the Peri-Urban Areas of Northern Tshwane Prof Johan W. Strydom (School of Business Management, Unisa) www.sbaer.uca.edu/research/icsb/2004/Papers pdf/077.pdf 3. Cadmium books http://www.cambiumbooks.com/books/furniture_projects 4. http://www.sba.gov/starting_business/planning/writingplan.html 5. Strategy Consulting Limited - business plan http://www.strategy.nildram.co.uk/bizplanning.htm 6. Liberty Accounts 2005 http://www.libertyaccounts.com/enterprise_support/indexframe.jsp 7. The National Council for Voluntary Organisations 2005-6 http://www.ncvo-vol.org.uk/askncvo/index. Read More