Fragrant Scent Company Managing Financial Resources and Decisions - Essay Example

IDP - MANAGING FINANCIAL RESOURCES AND DECISIONS Task 1 Introduction Fragrant Scent Company is a forthcoming flower shop whose goal is to meet floral needs of the customers for both occasional and personal arrangements. The business is focused on providing the best products and directly working with customers in order to offer a new and enjoyable experience in the flower industry. The business seeks to enhance customer satisfaction by offering many ways in which our customers can place their orders to suit their convenience. Our flower shop is located in London, which is a prime location for this type of business. The location is strategic and the space is an optimum size which allows us to design a 1,500 square feet. The perfect location and size of the business will be paramount to ensuring that we satisfy our customers, both in London and its surroundings. The flower delivery is done by Fragrant Scent who will make sure that the flowers get to the customers while still fresh and in great quality. The business is also targeting to engage in flower delivery nationwide. The company focuses on creating flower variety of special flower arrangements by investing in broad assortment of gift backset and plants for all occasions. It is our commitment to offer professionally arranged fresh flowers packed in a reusable vase. For effective customer care services, the flowers are hand delivered to ensure utmost care. Our floral shop plans to sell the flowers as a retailer to individuals and corporate clients. The vases and the flowers are sourced on wholesale from a huge online wholesale company. The flower arrangements and the vases preferences are customized according to the requests of the customers. The company focuses on selling most of our flowers online in our website where customers can place their order requests for enhanced convenience. While making the online order requests, customers have an option of specifying if they want their flowers delivered so that they do no need to step out of the house. The flower arrangements will be uniquely done to suit events such as ceremonies, school dances, funerals, holiday parties or weddings. The reason for setting up this business has been driven by the desire to bridge the gap in the flower business as most of the flowers shops do not offer customized flower arrangements and vase designs since traditionally, vases have been standardized. With the advancement in technology where business can be conducted online, we are able to offer the floral services according to the wishes of the customers. Furthermore, London is a huge economy where the flower business is looming and therefore, it’s a strategic location for profit maximization. 1.2 Objectives of the business Fragrant Scent Company’s goal is to become the leading retail flower shop in the whole of London offering differentiated and customized flowers. The business wishes to serve all the customers and satisfy their floral needs regardless of the level of income. By the end of the first year, the Fragrant Scent Company seeks to achieve the following objectives: Penetrate the flower market in London successfully and maintain a large market share. To generate more than 400% revenue from the capital amount. To boost the revenue of the flower shop by not less than 50% per year. To conduct accurate sales forecast that will lead to proper planning for revenue. 1.3 Mission statement The mission statement of Fragrant Scent Company is “Fresh Fast Friendly Flowers”. The mission is to make the business the best choice in the market by ensuring that customers are satisfied with efficient, friendliest and clean service in the entire London coverage. This will make us busy with customers coming for more and referring us to ore clients. The company is seeking a startup capital of £8,840 which will be used for renting the shop premise, buying new and advanced flower packing materials, high quality vases, setting up a website, and contracting a supplier for supply of fresh flowers. The money will also be used for training of personnel and buying flower delivery 2 vans. Initial purchase of the two vans and contracting of wholesale supply of flowers and vases has been strategized as a way of ensuring that the unit cost of operation will reduce by 25% which will be translated into 35% in revenue. During the first year of operation, the sales are estimated to amount to 75,000 flowers/unit. This will be equivalent to 70% of the total capacity. In the consecutive years, the growth in sales of the shop are expected to rise at an annual rate of 5%. Revenue will increased at an estimated rate of 7% as prices of the flowers will increase with time. The packaging of the flowers are environmental friendly and therefore, more sales are expected in the coming years. Task 2 2.1 Sources of finance The most important aspect in starting up an entrepreneurial venture is to ensure that there is adequate financing source. When an entrepreneur is capable to analyze and mobilize financial, there is a higher probable chance that he will be able to raise more funds (Kotha and George 2012). Starting up a new venture is often very difficult especially in terms of mobilizing financial resources (Berger, Cowan & Frame 2011). Some researchers have found out that entrepreneurs first use internal financing sources (own funds) before embarking or considering any form of external financing sources (Paul, Whittam & Wyper 2007). 2.2 Importance of sources of finance There is a great advantage if a business venture is started without involvement of a third party investment, a technique referred to as bootstrapping. It is a very difficult activity, but it is comprises the fundamentals of entrepreneurship (Lopac 2007) and is a form of financing strategy (Lahm & Little 2005). Bootstrapping can be described as that situation when an entrepreneur has initial income at the beginning, it can be very practical if the entrepreneur doesn’t require huge capital for start-up (Worell 2002). The main advantage of this form of business financing is that the owner has full control of the business since there is no involvement of third party. In addition to bootstrapping there are other numerous forms of sources of business finance, which can be divided into traditional and modern methods of financing a new business. The common sources of business finance include; Traditional method of financing a business venture can be said to represent a logical sequence of raising finances, most business ventures that exists today were started from this type of financing. It is logic that if the founders of a business venture don’t have their own finances, they have no option but to turn to external forms of business finance. The following are the various forms of traditional and common types of financing a business: Bank loans: they can be said to be one of the oldest form of financial sources for majority of entrepreneurs. It is however very difficult for business that require intensive technology to use bank loan as compared to other business in other industries (Brown et al., 2012). Most of the existing literature acknowledge that banks are most sources of business finance in both developing and developed countries (Vera & Onji 2010; Ono & Uesugi 2009; Zhou 2009; Wu et al., 2008; Carey & Flynn 2005; Cole & Wolken 1995). Bank loans are availableto anybody wishing to start up a business on a fair and competitive basis (De Bettignies & Brander 2007). Friends and family: it is very easy to obtain fund from the people that are close to you before one thinks turning to external sources such as banks (Krishnan 2010). The major risk of this source is that there is a probable chance of disagreement in families or between friends if the business don’t break even (Lopac 2007). Business angels: it is also a traditional or informal form of business finance (Berger & Udell 1998). Angels are the selected wealthy individuals who have an intense business experience and can invest directly to a small business enterprise that they have no prior experience or relationship (Madill, Haines, & Riding, 2005). One can engage this type as a form of investing financing the business through equity contact. Business angels as a form of financing a business are very advantageous since they share their knowledge and experience in additional to the financial resources. Government assistance and initiatives: Today most governments have recognized the necessity of financing new business ventures as a means of enhancing development in a particular country. Due to this fact there are many government initiatives to help support new business venture that are ben set up in their respective countries. Government official scheme are those initiated by the government solely or with a support of a donor agency for the purpose of financing small and medium enterprise (Mensah 2004). Debt financing: this involves borrowing funds from creditors with the stipulation of repaying the fund with an interest after a given time. Additional equity is very important to an enterprise in order to satisfy the business’ financial needs, which in turn it can lead to dilution of ownership and control. Keeping the control and ownership of a business, the owner may opt debt financing rather than external equity. 2.3. How much is your own capital and how much is borrowed capital for your own business? The business is strategizing on utilizing a loan from a commercial bank (Barclays bank). This is due to the fact this financial institution is very ‘generous’ in terms of asset and business finance. Due to the fact that the payback period of the business is estimated to be five months as calculated in the subsequent chapter the repayment of the loan will be done with a lot of ease, and without straining the operations of the business. 70% is the start-up capital is what is required to be borrowed from the bank in form of loan, this is equivalent to £8100. The rest of the amount is from personal saving. 2.4 Advantages and disadvantages of both types of finances you are going to use Due to the fact that bank loans plays a vital role in financing start-up business, this business venture has opted to consider commercial banks as the major source of finance. Advantages of considering bank loans include: 1. The business will be able to acquire timely assistance from the bank in terms of finance, funds will be acquired immediately when needed after the banks approval. 2. The information that is going to be provided to the bank in regard to the business will be confidential. 3. There will be less formalities requirement from the bank, items such as prospectus, and underwriting won’t be required. 4. Loans from the banks are highly flexible, there is the capability of increasing the loan or repaying it before the maturity date according to how the business will fair. The major disadvantages of this type of business finance include; 1. Banks offer the loans for a short period of time, it might be difficult to repay the loan since the business won’t have break even. 2. Before the issuance of the loans, the bank will investigate the viability of the business, which might be unfair since the assessor might be judge mental. 2.5 Start-up summary The start-up costs of Fragrant Scent consists of inventory that will be required to form the flower arrangement, appliances, and furnishing and installation fees. Some of the inventory that will be required to make sure that the business produces excellent floral arrangement include items such as ribbon, pins, boxes and scissors and envelops. For the purposes of furnishing the business, three stainless steel work table will be required for assembling floral arrangement. The appliances required for the business is a flower cooler to preserve the flowers fresh with their natural fragrance. Two computers will be needed to enhance processing of online orders. A cash register will also be needed to monitor all the transactions that will be made within one business day. Start-up cost for utilities such as upfront rent will be required and other utilities like telephone bill, water and electricity. A van will also be a necessity since delivery of the orders will have to be transported to the client’s premises. The start-up cost of the business total £8,840. 70% of the capital is loan form he bank while 30% is capital from personal savings. Further operating cost of £2,720, the cost are broken own as follows: Premises (rent): £2000 Rototiller: £1000 Van lease: £1900 Equipment: £800 Installation and utility: £300 Supplies: £100 Insurance: £300 Legal and accounting fees: £240 Beginning materials: £200 6 month operating costs: £2,720 2.6 Cash flow for your business for minimum 6 months Months Jan February March April May June total Balance (£8840) £0 £952 £6120 £12038 13684 -8840 Cash Receipts (A) Cash Sales £0 £0 £5850 £6375 £5750 £0 £17975 Other Income Total Cash Receipt £0 £0 £5850 £6375 £5750 £0 £17975 Cash Disbursements (B) Cash Purchases £300 £145 £445 Owner Withdrawals £0 £0 £2000 £2000 £2000 £0 £6000 Non-Labor Expenses £0 Accounting £100 £100 Insurance £300 £300 Advertising £0 Occupancy Expense £360 £260 £240 £240 £260 £230 £1590 Miscellaneous Expense £700 £700 £700 £700 £700 £700 £4200 Purchase Of Fixed Cost Total Cash Disbursement £1760 £960 £3085 £2940 £2960 £930 £12635 Net Cash Flow (A-B) (£1760) (£960) £2765 £3435 £2790 (£930) £5340 2.7 Sales budget Sales budget is a component of the master budget which shows the expected number of sales units of given time and the expected price per unit. Fragrant scent Sales budget For the period ending May 30, 2015 Months January February March April May June Total Units sold £0 £0 £70 £75 £50 £0 £195 Cost per Unit £0 £0 £0.2 £0.2 £0.2 £0 £0.1 Total Cost £0 £0 £7 £7.5 £5 £0 £1950 Task 3 3.1 Return Investment (ROI Investment appraisal is a means of assessing whether an investment project is worth to venture in or not. Akalu (2001) the investment project can take any form, rom the purchasing of own machinery or leasing the machinery. It is a technique that is used in both private and public sector. There are various types of investment recognized around the globe, which include payback period, accounting rate of return (ARR), Net Present Value (NPV), profitability index, and Internal Rate of Return (IRR). The reason as to why people make investment is under the assumption that they will yield future income streams. It is therefore critical to assess these income streams against the cost of the investment, which is referred as investment appraisal. 3.2 Importance of Investment Appraisal methods Capital investment appraisal methods is based on the assumption that the objective of a company’s owner or manger is to maximum value. Akalu (2001) suggested that it is very important to appraise a business for the purposes of making sure that right decisions are made regarding the business. Accurate methods of investment appraisal should be used in order to maximum shareholders wealth (Ryan & Ryan 2002). It is recommended that manager of a business adapt appraisal techniques that only add value to the firm, which implies that senior administrators of the business should identify all the projects will add utmost value to the enterprise as a means of maximizing shareholder value (Glbert, 2005). Use any two choice to appraise your own business 3.1 Calculating investment appraisal of the business using payback period Due to the comprehensive use of cash flow for this business, the payback period will be used as a traditional method of investment appraisal. Payback period = initial investment/Cash inflow per period =8840/1950 =4.533 The payback period for the business will be after 4.533 months 3.2 Advantages and disadvantages of using both methods of appraisal Advantages and disadvantages of Accounting rate of return (ARR) technique This is a method that is computed as the ratio between the projects’ planned average profit and the average accounting value of the investment (Brealey & Myers 1998). This ratio is normally compared with the industry’s average value. The main advantages of this method is due to its simplicity iin usage and understanding, since the figures used are from accounting reports. The drawbacks of this project is that it does not facto in time value of money, it also uses accounting earnings rather than the projected cash flows, and finally one has to set a target rate of return as a requirement to apply ARR as an appraisal method (Akalu, 2001). Advantages and disadvantages of net present value (NPV) This technique is based on discounting the expected future cash flows of a particular investment. It dictates that the current project inflows should be greater that the current outflows of the investment project. Cash flow streams comprises of all payments and receipts that are associated with a particular investment during its economic life, and should be discounted at opportunity cost of capital (Damodaran 2001). The main advantage of NPV is the fact that it based on the concept of cash flows, it is also advantageous that this technique includes all the cash flows generated in its computation, and finally the method makes sure that the cash flows are discounted at the appropriate rate of return. Nevertheless, the method has some drawbacks such as in the cases of mutually exclusive projects. If two mutual projects have different investment amount and/or economic life, the technique may lead to different decision rule (Akalu 2001). It is also a demerit that the NPV principle in indifferent concerning the amount of initial investment needed. 3.3 Evaluate if return on your investment in your business will be positive or negative and justify your investment plan on how viable our project is using both the techniques. Return on investment (ROI) as stated earlier is the measure that investigates the amount of additional profits produced in a certain business venture. In regards to evaluate whether the return on investment will be positive or negative, it shall be expressed as a percentage. The importance of expressing ROI as a percentage is to visualize what percentage of the investment has been gained after a specific period of time (the period in used to assess our business is six months). Gain from investment is £14, 493 Cost of investment £11560 £14, 493 - £11560 £11560 = 0.2537 * 100 =25.37% The ROI is positive as indicated from the calculation, this means the business will have 25.37% on start-up capital (cost of investment). Task 4 4.1 Justification for the success of Fragrant Scent Company The success of this company is rooted in offering the fresh and high quality flowers to the clients. As such, there are different attributes we poses that rare differentiated from the rest of the market players. Such reasons will be responsible for the success of the business and include; The ability to empathize with the clients. Flowers are mostly used during emotional times in one’s life such as in funerals, celebrations and weddings. Understanding the emotions of the clients at the time of flower delivery is very important to use as it allows us to understand how they are feeling now or in the future and hence customize their flowers to show care and concern. We acknowledge that being empathetic is a great determinant of whether the clients will be back for more flowers in their next occasion or if they would refer us to their friends. Clarity of purpose is our strength. We are a flower shop that is specialized with providing fresh flowers to individuals and company clients for all the occasions and events needed. As such, our clients are made aware that this is our specialization and therefore, we are good at it. On the other hand, most of our competitors in the market are involved in several activities such as event organization and outside catering activities among others. Our concentration of delivery of fresh flowers shows that our company deals with a single highly-desirable product which makes s the better option. Perfect sense of timing. The company has done enough research on the types of flowers needed for different occasions on different times of the year. For instance, there are more weddings planned in the summers, fall and in spring while flowers for the funerals can be stocked throughout the year. Perfect timing will help the company stock the right type of flowers whenever they are needed by the clients thereby increasing our convenience. 4.2 Importance of financial planning Financial planning is very significant is a startup business as it provides a guide on the overall activities of the business and provides direction on how the business finances should be handled (Brigham & Houstan 2004). Financial planning is essential for any business’ success as it ensures that a business is financially stable over time. Effective financial planning is reflected in the cash flow of the business and can be seen when the business is faced with financial challenges related to rising costs or outstanding debt (Edmonds et al 2006). Financial planning helps in the monitoring of the assets of the company by keeping the records of the resources of the company. This involves the application of financial reports where the earned, spent and remaining assets of the company are recorded (Brigham & Ehrhardt 2005). By planning, a business benefits from proper decisions involving the best way to gain or spend resources as a result of effective evaluation of fixed assets, intangible assets and current assets (Spiller & Phillip 1990). Financial planning is the base for financial control. In most businesses such as the flower shop we are setting up, there are periodic or monthly variations in revenue. This means that there are times when the business has more cash while other times there are shortages. When undertaking financial planning, one is able to account for the excesses and shortages of cash in order to cushion against financial difficulties such as being unable to meet payroll or outstanding debt (Weygandt et al 2002). 4.3 Pricing Strategy The pricing of flowers will be set by a model of cost based pricing. This means that a customer will spend a varied range of prices for the flowers based on the different aspects such as the type of the flower and the quantity. The average price of a flower arrangement has been set at £50. However, this price does not cover funerals and weddings flowers are there are alt of customization for such flowers and therefore, the price has to be discussed with the customer first in order to ensure that the customer pays enough to cover the style and quantity of the flowers requested. The cost of the flowers based on the quantity will be determined by multiplying the costs by 500%. The price resulting from this calculation covers all the operational and production cost and still allows us to charge lower prices than the competition. However, this price does not include rose arrangements, weddings and funeral flower arrangements. This is because these flowers are very competitive and therefore, we plan to cut the prices of these flowers by about £4. This will us the most preferable as we would be the most affordable flower vendor in the entire London area thereby increasing our customer base. We hope to make our pricing strategy our competitive strategy as we will appeal to it during advertisement especially to the middle age. 4.2 Fixed cost and variable cost incurred The sales revenue of this flower shop will be calculated based on the amount of sales- the number of units sold, multiplied by the price per item. The costs incurred in flower handling from supply to delivery are divided into two types of costs; the fixed costs and the variable costs. Fixed costs: these are costs that are not dependent on sales as they remain the same. For instance, the rent is a fixed costs since its remains the same whether we sell a single unit of a thousand units. The fixed costs of our business add up to £200. Variable costs: these costs vary with the amount of sales. If the number of sales increase, the variable costs increase by the same proportion. The cost also decreases when the sales decline. For example, the supply of a simple flower arrangement will cost us £10 and then we undertake value addition to sell the flower at £50 or more depending on the style and vase the customer requests. In this case, the variable cost is £10. 4.3 Break Even Analysis Break even analysis is done in order to determine the point at which the revenue generated from the sales of the flowers will cover the total costs - fixed plus variable costs. The flower shop has fixed costs of £5000 per week. The flowers and the vases are sourced from an online wholesale supplier who sells them at £10 per flower arrangement. As such, the number of flower arrangements needed by the shop to break even are calculated as follows; BEP=Fixed cost/Contribution Contribution = sales revenue – variable costs = £50 - £10 = £40 Fixed cost = £5000/ £40 = 125 flowers per week. Task 5 5.1 Why financial documents are needed in business There are three essential financial documents that businesses are required to prepare- the cash flow statement, income statement and the balance sheet (Wild, 2008). The cash flow statement measure the in and out flow of cash in the businesses by converting the finances from accrual form to cash form (Brealy & Myers 2003). The income statement shows either the profitability or lack of it of a businesses over a given period of time. A balance sheet shows the assets and liabilities of a company based on the basic accounting equation – liabilities + owner’s equity = Assets. Financial documents are tools used by businesses for decision making purposes as they show the financial position of a company at a given point in time. This is derived from information such as business trends, the rate of collecting the accounts receivables or the rate of paying for accounts payable (Hermanson et al 1989). By determining how much you owe the creditors and by when, as well as how much you are owned by debtors and by when, a businessman is able to determine the level of inventory. This ensures that a business scan balance its creditors and debtors by making strategic decisions which in turn makes the business more profitable (Ross, Randolph & Jaffe 2008). Furthermore, businesses need these financial documents in order to remain financially viable. This is because financial institutions require to run a credit report of a company based on the balance sheet inn order to rant a loan. This is because the balance sheet will show much the business is operating in term of loan and how the business is equipped to pay its outstanding loans (McLaney, Eddie, & Atrill 2005). 5.2 Projected profit and loss account. £ January February March April May June Total sales £0 £0 £7000 £7575 £12038 13684 £21, 700 cost of projected units sold £0 £0 £173 £187 £7125 £0 £537 gross margin £0 £0 £6827 £7488 £177 £0 £21, 163 Operating Expenses Outside Services £100 £0 £0 £0 £0 £0 £100 Insurance £300 £0 £0 £0 £0 £0 £300 Advertising £0 Occupancy Expense £360 £260 £240 £240 £260 £230 £1,590 Miscellaneous Expense £700 £700 £700 £700 £700 £700 £4200 Depreciation £24 £24 £24 £24 £24 £24 £144 Interest-Old Debt £0 Interest-New Debt £56 £56 £56 £56 £56 £56 £336 Total Operational expenses £1540 £1040 £1020 £1020 £1040 £1010 £6,670 Net Operating Profit (£1540) (£1040) £5807 £6368 £5908 (£1010) £14, 493 Other Gains/Losses £0 Net Profit (or Loss) Before Income Taxes (£1540) (£1040) £5807 £6368 £5908 (£1010) £14, 493 Owner Withdrawal £1000 £2040 £2500 £2500 £2000 £2000 £12,000 5.3 Projected Balance sheet ASSETS Current Assets Cash (£8,840) Inventory £0 Other Current Assets £0 Total Current Assets: (£8,840) Fixed Assets Land £0 Building (less accum. depreciation) £2,000 Equipment (less accum. depreciation) £1,000 Other Fixed Assets (less accum.depreciation) £0 Total Fixed Assets: £3,000 TOTAL ASSETS (A) £5, 840 LIABILITIES Current Liabilities Accounts Payable £0 Other Current Liabilities £0 Total Current Liabilities: £0 Long-term Liabilities Debt £8,100 Other Long-term Liabilities £0 Total Long-Term Liabilities: £8,100 TOTAL LIABILITIES (B) £8,100 OWNERS EQUITY (A - B) (£5,840) OWNERS EQUITY Beginning Owners Equity (£5,840) Net Income (Loss) £0 Withdrawal of Owner £0 Ending Equity (£5,840) Liquidity Ratios Current Ratio n/a Quick Ratio n/a Working Capital £0 Capital Structure Ratios Debt to Equity 5.4 Profitability and Liquidity ratios Profitability ratios Operating Profit Margin = Operating Profit / Turnover £14, 493/ £ 21,700 66.69% Return on Equity = Net Profit after Taxation / Equity £14, 493/ (£5,840) 248% Return on Total Assets = Net Profit after Taxation / Total Assets £14, 493/£5, 840 　248% Return on Capital Employed = Net Profit after Taxation / (Total Assets - Current Liabilities) £14, 493/ (£5, 840- £0) 　 248% Liquidity ratios Current ratio = current assets/ current liabilities £8,840/ £0 0 Quick ratio = (Current Assets -Inventory) / Current Liabilities £8,840/ £0 0 5.5 Summary of the investment plan Fragrant Scent Company is a very viable business as it offers new insights into the flower business. Based on the ales forecast and the projected revenue, the business is capable of delivering a generated income of up to 400% annually from the capital amount. Market research has also provided us with information needed to boosts our sales by more than 50% annually. As such, the business has a high potential for growth which will then enable us to acquire the largest share of the market in the long run. The business has also projected to offer more employment opportunities to the public in order to enhance its contribution to the economy. If the season turn as productive as the forecast show, two more employees will be needed each year working for a minimum of twenty five hours per week. More employees will be contracted during fall, spring and summer. This will be done in order to ensure that the company improves on its customer service, increased revenue and profit maximization. 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Staged Financing in Venture Capital: Moral Hazard and Risks. Journal of www.ccsenet.org/ijbm International Journal of Business and Management Vol. 8, No. 14; 2013 Corporate Finance, 10(1), 131-155. http://dx.doi.org/10.1016/S0929-1199(02)00045-7 Read More