Free Essay Sample: Financial Plan for Blessed Detergents Corporation

Blessed Corporation will be manufacturing cleaning detergents for all types of floors. The business will require an investment of $500,000 to purchase the necessary equipment and meet initial working capital needs. The equipment will cost $450,000 and will have a useful life of 10 years.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Forecast Sales, Direct Cost, and Other Expenses

I am already in advanced talks about three cleaning companies about a long-term sales contract. I expect the business to start making significant sales right from the first month of operation. The estimated sales for the first month is 10,000 units (5L cans). Sales are expected to grow at 2% every month for the foreseeable future. The company will charge $10 per unit. Direct material (variable production) is estimated at 55% of the sales ($5.50). The company will maintain inventory at 10% of the budgeted sales for the succeeding month, in order meet the unexpected changes in demand.

The company will employ five workers and pay a fixed monthly salary of $5,000. Other expenses, including rent, suppliers, administrative, selling, among other expenses will be $30,000 per month. Annual depreciation of equipment will be $45,000.

Sources of Finance

The initial capital required will be funded through owner's equity a bank loan and raising additional equity. The desired capital structure of the company is as follows:

Source Amount Cost Proportion

Own capital/equity 100,000 10% 20%

Bank Loan 200,000 8% 40%

Equity 200,000 15% 40%

Total 500,000 Table 1: Desired Capital structure

Forecast Financial Statements

Assumptions:

60% of the monthly sales will be in cash while 40% will be collectible one month after the sale. Since most customers will be other companies with proven creditworthiness, no bad debts are expected.

70% of the material purchases will be paid in cash while 30% will be payable one month after purchase.

All other expenses will be paid within the month they are incurred.

Income tax is payable one month after the end of an accounting period.

The 5-year bank loan will be payable in five equal annual installments.

Annual payment, PMT = Loan amount/PVIFA8%, 5 years

= 200,0003.9927 = $50,091.29

Interest for the first = 8% 200,000 = $16,000

Principal repayment = 50,091.29 - 16,000 = $34,091.29

Balance of the loan = 200,000 - 34,091.29 = $165,909.29

As shown in the statement below, the company will have positive operating cash flows from the second month of operation. By the end of the first year, the business will have adequate cash to pay the annual loan installment and still have more than $140,000. It implies that it will be able to fund expansion plans or pay dividends to the shareholders.

Figure 2: Proforma Cash Flow Statement

Proforma Income Statement

Blessed Detergents Corporation

Income Statement

For the First Year of Operations

$

Total Revenue 1,341,210

Cost of Revenue (737,665)

Gross Profit 603,544

Operating expenses: Salaries 60,000

Other Expenses 360,000

Depreciation 45,000

Total Operating Expenses (465,000)

Operating Income 138,544

Interest Expense (16,000)

Earnings Before Tax 122,544

Taxes (15%) (18,382)

Net Income 104,163

The above statement indicates that Blessed Corporation's operations will be profitable beginning the first year of operation. The company will earn a net income of $104,163. This translates to a net profit margin of 7.766%.

Proforma Balance Sheet

Blessed Detergents Corporation

Balance Sheet

As at the end of First Year

Property, Plant & Equipment 450,000

Accumulated Depreciation (45,000)

Property, Plant & Equipment, Net 405,000

Current Assets Cash 147,300

Accounts Receivable 49,735

Inventory 6,975

TOTAL ASSETS 609,010

Liabilities and Equity Accounts Payable 20,557

Income Tax payable 18,382

Bank Loan 165,909

Equity 300,000

Retained Earnings 104,163

TOTAL EQUITY AND LIABILITIES 609,010

The capital to be invested in the company is $500,000.

Weighted Cost of Capital (WACC) and the Return on Investment

After-tax cost of debt = (1- 0.15) 8% = 6.8%

WACC = (0.2 10) + (0.4 6.8) + (0.4 15)

= 2.0 + 2.72 + 6.0

= 10.72%

Return on investment = Net IncomeCapital Invested= 104,163500,000 100%

= 20.83%

The company's return on investment will be 20.83% in the initial year of business while its weighted average cost of capital is 10.72%. It shows that the firm will be viable since its actual return will be greater than the required return (Weygandt, Kieso & Kimmel, 2015).

Break-Even Analysis

Contribution margin = 10 - 5.5 = $4.50

Total annual fixed cost = $465,000

Break-even Point = Total Fixed CostUnit Contribution Margin= 465,0004.50= 103,333

The company is estimated to break-even in the tenth month of operation. This implies that the company will be guaranteed profits if it operates throughout the year.

Conclusion

The analysis illustrates that Blessed Detergents Corporation will be profitable. It will generate adequate operating cash flows from the second month of operation. It will have sufficient cash to repay the loan and pay dividends or fund expansion activities. Break-even analysis shows that it will break-even within ten months of operation. It will also generate a higher return on investment than its average required return. Thus, it is a viable business will earn sufficient return on investment.

References

Weygandt, J., Kieso, D., & Kimmel, P. (2015). Financial accounting. Hoboken (N.J.): Wiley.