Chapter 5: Conducting a Feasibility Study1, Slides of Business Strategy

Download Chapter 5: Conducting a Feasibility Study1 and more Slides Business Strategy in PDF only on Docsity! 1 Chapter 5: Conducting a Feasibility Study1 This chapter provides a step-by-step overview of how to conduct a feasibility study and market research, including: • the difference between a feasibility study and a business plan; • major components of a feasibility study; • key market analysis, organizational, financial questions in your feasibility study; • techniques for conducting market research; and • where to obtain information you need to conduct market research. Although [an unsuccessful feasibility study] may appear to be a failure, it's not. The real failure would have been if you had invested your own and other's money and then lost it due to barriers you failed to research in advance. . . . David E. Gumpert How to Really Create a Successful Business Plan Feasibility studies and business plans are identified in Chapter 4 as key steps to starting a cooperative. This section explains two vital issues: how to conduct a feasibility study and how to do market research. First, some definitions. What is a Feasibility Study? A feasibility study is designed to provide an overview of the primary issues related to a business idea. The purpose is to identify any make or break issues that would prevent your business from being successful in the marketplace. In other words, a feasibility study determines whether the business idea makes sense. A thorough feasibility analysis provides a lot of information necessary for the business plan. For example, a good market analysis is necessary in order to determine the project's feasibility. This information provides the basis for the market section of the business plan. Because putting together a business plan is a significant investment of time and money, you want to make sure that there are no major roadblocks facing your business idea before you make that investment. Identifying such roadblocks is the purpose of a feasibility study. A feasibility study looks at three major areas: a. Market issues b. Organizational/technical issues c. Financial issues Again, this is meant to be a first cut look at these issues. For example, a feasibility study should not do in-depth long-term financial projections, but it should do a basic break-even analysis to see how much revenue would be necessary to meet your operating expenses. The purpose of the business plan is to minimize the risk associated with a new business and maximize the chances of success through research and maximize the chances of success through research and planning. . . . University of California, Center for Cooperatives A feasibility study is not necessary unless there is a REAL problem. The problem must be: a. Defined, understood, described and quantified, b. Significant, broad and large enough to warrant group action, c. Capable of solution from purely economical and financial point of view, d. Economically and socially (cultural/anthropological) fitting...capable of being considered a reasonable solution by members of the group. 1From " Cooperatives: A Tool for Community Economic Development" 2 In sum, a "large enough" group of farmers must feel the need of solving a problem which is understood and believed to be solvable and which cannot be solved by individuals acting alone. Strong leadership is necessary, but in dealing with the problem it is important that members of a cooperative (or potential members of a new cooperative) all are aware of the problem and all more or less feel a strong need for solution to the problem. There is danger that one or a few aggressive individuals may short cut the delving process and force a premature decisions to proceed with a feasibility study. Having said that, it can now be said that strong leadership is essential for the process of defining and understanding the problem and deciding if a feasibility study should be made. What is needed is enlightened leadership and enlightened self-interest. This leadership may come from outsiders who are obligated to work with groups--extension agents, lenders, etc. or from insiders who are an integral part of a group. Leaders must press forward and keep all parties in some degree of creative stress until there is a consensus to go or not to go with a feasibility study. Careful consideration of whether or not to make a feasibility study will save much time and money; it will also increase the return on time and money spent if a feasibility study is made. At this point it is appropriate to introduce a test which everyone should take in making any decision. This test has one question: If I choose a course of action and my decision proves to be in error, what would the cost be? If the cost of a wrong decision would be relatively small, do not spend much time and money on the decision making process. On the other hand, if the cost of an error would be large, take more time and spend more money delving into the pros and cons before choosing a course of action. This sounds simple. But, in practice, it is not easy to carry out, especially in group action. Some members may be sow to learn or have aversions to high risk. Sooner or later a decision must be made and further delving would cost more than it is worth. The following guidelines should be followed: 1. It is not necessary to have unanimous agreement before going forward. 2. Never make a decision to proceed with a feasibility study or accept a feasibility study on negative reactions; for example, out of resentment or envy toward middlemen, money lenders, etc. 3. For group action, a few reliable and loyal persons are superior to a larger number of doubtful persons. 4. Extravagant promises of what the cooperative can or will do should be avoided. Expectations of participants should always be based on the economic and social facts of life. 5. A cooperative should not be considered an end in itself; rather it is a means to the end of improving the life of its members. Three decisions regarding feasibility studies. 1. To make the feasibility study or not. 2. To accept the study once made. 3. To implement the study. Although the above ideas have been pointed toward number one above, the ideas apply to the other kinds of decisions. Moreover, if the decision to make a feasibility study is done correctly, the other group decisions will come easier and will likely be correct. What is a Business Plan? If the feasibility study indicates that your business idea is sound, the next step is a business plan. The business plan continues the analysis at a deeper and more complex level, building on the foundation created by the feasibility study. For example, the financial section of the plan would include pro forma (estimated) financial statements and 2-3 years of financial projections. 5 e. How much will the equipment and technology cost? Keep in mind that technology doesn't necessarily mean complex machinery; if your business simply needs a personal computer, printer, and fax machine, those are your technological needs. However, making wise decisions on even simple purchases such as office machines may require some research. Obviously there are numerous types of personal computers on the market. You many want to check Consumer Reports for their recommendations, do some comparative shopping, and ask acquaintances about their experiences with different companies. Your cost estimates (question #e) will get plugged into your financial projections. Naturally, the more complex the technology you need, the more research that will be required to make good decisions about it. Don't skimp on this foot work; you may regret it. 3. Financial Issues Once your analyses of marketing, organizational and technology issues have been completed, the third and final step of a feasibility analysis is to take a look at key financial issues. Answer the following questions as well as you can at this point and identify key issues that will require additional research. Note that some of the questions below -- specifically revenue projections -- are directly based on your market analysis (the first step in the feasibility study), in which you estimated the number of units of product or service you could sell. If you didn't do that part of the feasibility study thoroughly, you won't be able to do the financial analysis adequately. a. Start-Up Costs: These are the costs incurred in starting up a new business, including capital goods such as land, buildings, equipment, etc. The business may have to borrow money from a lending institution to cover these costs. b. Operating Costs: These are the ongoing costs, such as rent, utilities, and wages that are incurred in the everyday operation of a business. The total should include interest and principle payments on any debt for start-up costs. c. Revenue Projections: How will you price your goods or services? Assess what the estimated monthly revenue will be. d. Sources of Financing: If your proposed business will need to borrow money from a bank or other lending institution, you may need to research potential lending sources. e. Profitability Analysis: This is the bottom line for the proposed business. Given the costs and revenue analyses above, will your business bring in enough revenue to cover operating expenses? Will it break even, lose money or make a profit? Is there anything you can do to improve the bottom line? Kinds of feasibility studies 1. Evaluate a new cooperative 2. To expand the service of an existing cooperative a. Build or remodel facility b. Move to a new location c. Merger or consolidation with other cooperative d. Buy out an existing business e. Improve an operation to increase efficiency f. Choosing among alternative development opportunities. Possible things to consider in a PRE-feasibility study. 1. Comparative advantage 6 a. history and distinctive characteristics of industry i. International-industry in the world ii. National-industry in the nation iii. Regional-industry in the region iv. Local area-industry in the area. v. Concerned producers-comparative advantage of local producers in total picture. (This section is to re-evaluate the chances for success, keep in mind that it has NOT already been determined that the feasibility study should be made. 2. Need for cooperative in light of findings in number one above. a. What kind of services are needed? b. Is need felt by people who will use the cooperative, or is it being force upon them by outside promoters? 3. Support commitment by: producers, community and potential lenders. 4. Volume: number an size of existing producers and possibility of expansion. a. production history and experience in production of the commodities to be handled by the cooperative. 5. Marketing: Size of market area for: a. Inputs-raw materials supply area b. Outputs-market outlets: major competitors and their market shares and degree of competition: monopoly to perfect competition. 6. Competition-local and beyond. 7. Capital needs: a. organizing cooperative b. physical facilities c. operating and commodity d. financing member's production 8. Sources of Capital a. stock: common and preferred b. bank loans c. from members d. debenture bonds e. delay in paying producers for products, ie pooling f. revenue or pollution control tax exempt bonds. 9. Legal matters a. articles of incorporation b. bylaws c. membership agreements/contracts d. other contracts--pooling e. legal obligations of board members 10. Facilities needed: purchase, build or lease (develop capital assets budget with established lives of depreciable assets specified) 11. External factors: environmental (EPA), local, state and national licenses, codes, zoning, etc., other factors. 12. Transportation: raw materials, selling finished product, other location considerations. 7 13. Management: Spell out methods of operation for the board of directors and management (written policies); is skilled management readily available and affordable?; are local producers willing to pay enough to attract good personnel? what will it cost? 14. Budgeting and finance: a. balance sheet-minimum 3 years b. operating statements c. source and use of funds d. cash flow--month to month and annual 15. Mergers or consolidations: how to handle assets, stock transfers, liabilities, and member and director representation. 16. General assessment of benefits to producers and the community: a. Has the community had experience with other cooperatives? Have they been (un)successful, if so Why? b. other assessments. The above sixteen items are for use in the early stages of discussions about a feasibility study. The purpose is to get interested persons to think systematically about what is involved in making such a study. Conclusion Your feasibility study should give you a clear idea whether the proposed co-op is a sound business idea. Some techniques for conducting the Market Analysis part of the feasibility study are presented on the following pages. 10 l. Present Value of Investment and Net Benefits Schedules at Alternative Discount Rates 2. Benefit-Cost Ratios and Internal Rate of Return for Project 3. Sources and Schedule of Associated Benefits 4. Sources and Schedule of Associated Costs 5. Present Value of the Combined Schedules of Associated Benefits and Costs 6. Project Potential in Relation to the Opportunity Cost of Capital, and Summary of Economic Feasibility 7. Sensitivity Tests-What if Prices and Costs Changed by Various Amounts (Stress competitive price cutting by factors already in the market-key item!) N. Financial Plan for Project Implementation: l. Proposed Equity Investment by Source of Funds 2. Proposed Sources, Schedule and Terms of Loans for Meeting Balance of Capital Requirements 3. Projected Cash Flow by Sector under Proposed Financing Plan 4. Projected Schedules of Depreciation, Interest and Taxes 5. Pro forma Balance Sheets and Operating Statements 6. Pooling Arrangements 7. Pro forma Source and Application of Funds 8. Summary of Financial Plan and Recommendation for Implementation 9. Impacts of Members: Impact on the Cooperative O. Transportation and Processing Analysis 1. Map of Producer Locations 2. Supply Outlook 11 Conducting Market Research Now that you know what questions to ask, exactly how do you go about answering them? This section will explain some of the techniques used to conduct the market analysis research recommended as the first step in a feasibility study. This section reviews the key questions from Step 1 of the feasibility study instructions (p. 4 of this chapter), providing guidelines on how to answer each. Don't think of market research as highly sophisticated, expensive and complicated. It can be very much a do-it yourself thing. Market analysis results in information about the market potential, which provide the basis for accurate sales forecasts and your marketing strategy. Its basic components include: • an estimate of the size of the market for the product/service; • projected market share; • information about your target market; and • analysis of the competition. Market research involves activities designed to obtain data about the market, and falls into two main categories: • primary research is that which collects new data through market surveys and other field research -- specific studies that are conducted on behalf of your company; and • secondary research includes gathering pre-existing information from published sources. In addition to conducting research, it is valid to rely somewhat on your own opinions and observations, especially if they have to do with your local community. No one knows a community like the people who've spent their lives there. However, it is important to back up your opinions with data and research. Don't rely solely on your gut feelings; they're probably not enough to go to the bank with. Resist the temptation to only look for data that confirms your opinions! All this information goes into estimating the sales your company will achieve during its first few years of operation. The rest of the feasibility study and business plan is built upon these estimates. Because it is one of the principal tools for determining whether the business will work, it is worth making an investment in market research. The quality of information in the market analysis is dependent on the amount of energy that went into obtaining it! You need to be as specific as possible about the dimensions (size, trends) of the opportunity your business faces. Since a new business doesn't have a track record, your research must be thorough to enable you to make realistic sales estimates. MARKET RESEARCH • Have a need and a market been clearly identified? • Has a clear, persuasive case been made as to how sales will be generated? • Does this section serve as a sound basis for the implementation of a marketing strategy? Eric S. Siegel, et. al., The Ernst & Young Business Plan Guide It is beyond the scope of this Manual to cover the entire subject of market research. A good book on this subject is Practical Marketing Research by Jeffrey L. Pope, published by the American Management Association. Cooperatives only work when they are market-driven... [You must] ensure that accurate market projections precede other development steps. Madison Principles Existing Demand Adequate? In the Market Analysis section of the feasibility study, we suggested that you determine whether adequate demand exists for your proposed co-op's products/services. How do you figure this out? 12 Much of this information can be obtained through secondary research. A lot of the information you need is available to the public, from government statistics, computerized data bases, and the Yellow Pages. And of course the Internet is a potential source of information. Many public libraries now have access to the Internet, if you don't. A lot of information exists out there; the best place to start is your local library. Talk to the research librarian! Remember that the government collects a lot of information about you and others. Use your imagination to find the information you need. The U.S. Industry Outlook, for example, provides an economic and market overview of hundreds of industries. Other sources for industry information are in the sidebar below. Obtain Industry information from: Dun & Bradstreet: 800-552-3867 Moody’s Manual of Investments Standard & Poor's 800-437-3528 Value Line 800-654-0508 Figures can be obtained for average sales in many industries (except for entirely new products). Robert Morris & Associates publishes an annual survey of major industries, organized by Standard Industry Classification (SIC) number. Using this book, you can look up the average sales of companies in each SIC category. For example, if you plan to open a convenience store, you can find the annual sales, net margin, and lots of other financial information about retail convenience stores. These can be a very useful starting place for your sales estimates. Use them with some caution, however, as your sales will probably fall below those of more established businesses. There is a national or regional association for almost every industry under the sun. Your public library may have a Directory of Associations in which you can look up the appropriate industry group. These groups are often a wealth of information, some of it free. Call them and explain you are considering going into this field, and ask for any information they may have available. If possible, get their membership list. The members of the association are doing exactly what you want to do, and many of them will be glad to talk to you (with the exception of the ones who will be your local direct competitors). If the association requires that you join in order to get their information, do so. It could be the best money you ever spent. HELP WITH MARKET RESEARCH Note that a local business school or small business development center can help guide you in conducting your own market research. College students may be a good source of labor for conducting telephone or other type of interviews. Target Markets • What are the target markets for this product or service? • What demographic characteristics do these potential customers have in common? • How many customers are there in your target market? • How many units of your product or services is each customer likely to buy monthly? Identifying a target market allows you to focus your efforts on marketing to a distinct class of customers. This is also called market segmentation. It is the act of dividing a large potential market into smaller groups, which are more easily approached. One of the advantages you gain from targeting a particular niche is the ability to respond quickly when customer tastes and needs change. In order to serve your customers, you have to know who they are, where they live, what their behavioral characteristics are. Describe your target market in terms of: 15 Appendix F. Excerpts from Actual Feasibility Studies THIS APPENDIX includes excerpts from several different feasibility studies conducted by the authors. They are intended as samples to illustrate the guideline discussed in Chapter 5 of this Manual. SAMPLE #1 E. Summary of Market Strengths, Weaknesses, and Opportunities Strengths • Excellent product: good taste, health benefits, versatile red meat • Increasing supply of ostrich meat may result in lower prices • Growth in consumer awareness and acceptance over last 2-3 years • Potentially a good market overseas Weaknesses • High price of ostrich meat, both at retail and in restaurants • Lack of consumer awareness and familiarity • Consumer market will take years to develop • Consumer reluctance to try new things at first • Pressure to lower prices may threaten producers' profitability • Product has shorter shelf life than other meats Opportunities • Ongoing health consciousness of Americans • Willingness of retailers and chefs to try new things • Increasing supply of ostrich is likely to result in progressively lower prices • National and regional associations can promote together • High degree of consumer interest in product once shoppers are introduced to it • Pre-packaged specialty cuts and other value added products may serve to introduce new consumers to ostrich through a more convenient package. In summary, the market for ostrich meat is in its infancy. Like most infants, it has tremendous potential to grow. However, it clearly will not reach its potential without help. It will require significant care and feeding to do so, and that is the challenge facing the The market research indicates that the key to marketing ostrich is to make it as easy and affordable as possible for restaurants and grocery stores to sell it and for customers to buy it. Butchers and chefs indicate this is done most effectively by conducting demonstrations and samplings in retail stores and restaurants. The role of producers should be to participate in these events, while the co-op marketing staff organizes and coordinates them. SAMPLE #2 II. MARKET ANALYSIS Industry Description and Outlook The poultry industry has a history of steady growth, especially during the last ten years. Concerns over health and nutrition have spurred consumers toward poultry and away from red meat. According to the U.S. Industrial Outlook, consumption of poultry in 1990, at 63.9 pounds per capita, equaled that of beef for the first time. While per capita consumption of beef declined nearly 8% between 1987 and 1990, poultry consumption increased 15.6% during the same period. Sales in the poultry industry have grown accordingly. The U.S. Industrial Outlook reports that current-dollar value of shipments for the industry increased by 9% in 1990, to a total of over $21 billion. 16 Industry trends include the recent emphasis on lower fat and cholesterol breeding methods and marketing efforts to continue growth in sales and consumption. Concentration of poultry producing companies is also a growing trend. There has been a 16% drop in the number of plants engaged in poultry processing, and the largest four companies now account for 50% of the total production. Target Market The primary target market for the company's products is the Southeast Asian community of the upper Midwest. This market is located primarily in large urban centers. Secondary markets are located on the West Coast, East Coast, and South. Marketing efforts will initially focus on the Midwest market, but will quickly move into the national market in order to support the plant's processing capacity. The last few years have seen rapid growth in the size of the Asian community. According to Business Week June 10, 1991), the Asian community is the fastest growing ethnic group in the United States. The state of Minnesota estimated in April 1989 that 15,000 Southeast Asian refugees were living in or near St. Paul, and chat this number was expected to grow by approximately 18% that year. The demand for food items that have been produced according to Asian cultural standards has increased steadily along with the Asian population. According to sources familiar with the Asian food market, the current supply of Asian-style poultry does not meet the demand that exists. Research No published directory of U.S. Asian food distributors and brokers currency exists, which makes it difficult to estimate the exact number of wholesale and retail outlets in this country. In an effort to make up for this lack of information, research was conducted in two of the major metropolitan centers of the Midwest, Chicago and the Twin Cities. This research resulted in the following information and conclusions. Chicago: The Asian poultry market is supplied by two processors who provide fresh-killed chickens on a daily basis to approximately 40 Asian food markets in the Chicago area. One source estimated the total number of chickens supplied by these processors to be between 400-500 per day. Because of the very strong Asian cultural preference for fresh poultry over frozen, the Chicago market will not support a frozen poultry supplier. There is simply no market for the proposed Hmong product in the Chicago area Twin Cities: This area appears to be a better market for the Hmong product. There is no fresh poultry supplier in this area as there is in Chicago. In addition, the area has a fairly sizable Asian community. A supplier to the Asian restaurant market in the Twin Cities estimates a need for approximately 40,000 pounds per week. He currently buys his chicken from a processor in the South, and is very interested in working with the Hmong plant. However, this distributor needs a younger, plumper chicken than the Hmong plant would process. In addition, he requires "American style" poultry (heads and feet removed). For these reasons, we believe the Hmong plant will be unable to effectively compete with established poultry processors such as Gold'n Plump. We have identified a food wholesaler, Asian Food Specialties, who supplies approximately 75 Asian food stores in the Twin Cities and Wisconsin . The chart below illustrates the approximate sales to this distributor, based on his estimates of use. The attached financial projections are based on these figures. POULTRY Hard Chicken Large Chicken Pheasant #CASES/MO 12 5 2 POUNDS/CASE 59 34 46 # STORES 75 75 75 POUNDS SOLD/MONTH 53,000 12,600 6,900 17 A direct survey was conducted with a sample of Asian food stores in the Twin Cities area in an attempt to substantiate the information received from other sources. This survey requested information regarding the amount of chicken or other poultry sold per week by each store, the store's supplier for poultry, the price paid for this poultry, and the store manager's satisfaction with his current poultry supplier(s). The information received through this survey indicated that current sales of poultry products was much lower than those projected by other sources. It was not possible to determine whether this inconsistency was due to a lack of adequate demand (pull factors) of the lack of an adequate supply (push factors). Other Areas: At this time, we have not conducted primary research with wholesalers in other parts of the country. However, sources indicate that the West Coast is supplied with fresh-killed poultry, so the market for the Hrnong product there would be minimal. Other areas have not been explored in detail. The market research was unable to provide verifiable estimates of demand for Asian poultry products. Thus, no dependable information is available on which to base reasonable, well grounded sales projections. The market for Asian poultry products is a risky one at this time. Without additional proof that a substantial market exists, starting a Hmong-owned poultry process plant at this time is not advisable. SAMPLE #3 II Market Analysis The following points characterize the market environment for this product. • Broad recognition that bypass protein supplements are an important feed ingredient for dairy cattle, especially in first half of lactation. • Sources of bypass protein include cottonseed, roasted beans, bone/blood meal, and some corn and grain byproducts. • Expeller/extruder meal can provide an excellent, palatable source of bypass protein with increased feed value relative to 44% protein soy meal. • Feed Trial Analysis proves feed value benefits of expeller/extruder soymeal; if proper heat treatment is applied during processing. • Larger dairy farms using TMR and nutrition consulting services are The company's most likely customers. • Larger dairy farmers can be reached directly or via feed dealers. • Competitor #1 is the leading commercial brand source of soy bypass protein, available through approximately one-third of Wisconsin feed dealers. • Consistent higher feed value at lowest cost is what drives purchases. The company's new meal product must compete with Competitor #1, in both cost and performance. A. Dairy Market Profile 1. Dairy farm numbers in Juneau, Adams, and Marquette counties: number of 1995 dairy farms percent of 1985 farms Juneau: 230 60 Adams: 49 48 Marquette: 99 59 2. Dairy farm numbers in adjacent counties: Columbia: 365 66 Jackson: 326 70 Monroe: 739 73 Portage: 309 61 Sauk: 529 64 Vernon: 918 70 Washara: 169 56 Wood 473 70 20 4. Rent per Square Foot The cash flow projections assume a rent charge of $10.75 per square foot per year (approximately $0.895 per square foot per month). B. Major Cash Flow Issues 1. REA Loan The cash flow projections assume that the facility will receive a 10-year, zero interest loan of $270,650 from the Rural Electrification Administration. It is also assumed that REA will provide a 2-year deferment on principal payments. Thus, the clinic will not make payments on its REA loan for Years 1 and 2. Starting in Year 3, the clinic will make annual payments of $33,381 on the REA loan. 2. Dairyland Loan 2% interest loan of $33,908 from The cash flow projections also assume that the facility will receive a 10-year,. Payments on the principal and interest on this loan are made every year, starting in Year 1. 3. Total Debt Service Total debt service equals the annual principal payment on the REA loan plus the interest and principal payment on the loan. In Years I and 2 the total debt service is estimated to be $3,744 per year. In Year 3, when loan payments to the REA begin, total debt service is estimated to be $37,575. C. Facility's Cash Flow Ability Assuming the facility receives a two-year deferment on the REA loan, the facility is projected to achieve a positive cash flow in Year I of $21,392. In Year 2, cash flow is projected to equal $33,697 due to the rental of the additional 1,000 square feet. In Year 3, the facility shows a much smaller cash flow of $500 due to the first payment on the REA loan. However, the building reserve fund, initially established with the working capital portion of debt financing and enhanced by the positive cash flows in Years I and 2 (due to the REA deferment) will enable the facility to survive the smaller cash flow projections in Years 3-5. 21 SAMPLE # 5 IX. FINANCIAL DATA Attached is a complete set of financial projections for the company for its first five years of operation. The projections include balance sheets, income statements, changes in balance sheets and statements of cash flow. The projections were prepared on a monthly basis for the first year, on a quarterly basis for the second and third years and on an annual basis for the fourth and fifth years. The table below provides a summary of major balance sheet and income statement items. Summary of Financial projections(in thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Balance Sheet Total Assets 297.4 256.9 228.1 206 189 Total Liabilities 194 188.1 181.3 171.1 159.3 Total Equity 103.4 68.7 46.8 34.9 30 Total Liabilities and Equity 297.4 256.9 228.1 206 189 Income Statement Net Sales 471.2 553.6 607.9 653.1 685.8 Cost of Sales 336.5 394.6 434.1 466.4 489.7 Gross Profit 134.8 158 173.8 186.8 196.1 Operating Expenses 168.1 169.7 173.6 177.6 181.6 Operating Profit -33.4 -11.7 .2 9.2 14.5 Other Expenses 23.2 23 22.2 21 19.6 Net Profit -56.6 -34.7 -22 -11.9 -5.1 The projections assume that the company will have total sales of $471,240 in the first year. Total sales represent 138,600 pounds of hard chickens at 60 cent; per pound; 582,120 pounds of large chickens at 60 cent; per pound; and 76,230 pounds of pheasant at $1.60 per pound. The projections assume that the company will realize a growth in sales of 10% per year for the second and third years and 5% per year for the fourth and fifth years. The company will operate at 54.51% capacity during the first year and increase to 72.72% by the end of the fifth year. The company's gross profit margin is projected to remain consistent at 28.60% given the product mix. This margin is higher than the industry average of 14.5% according to Robert Morris Associates 1989 for poultry processing companies with assets in excess of one million dollars. The company is projected to have a relatively high gross profit margin due to the low cost of live birds (the types of birds purchased by the company are usually not utilized by conventional poultry processors) and the low cost of labor. Although the company is projected to realize a generous gross profit margin, the gross profit generated is not large enough to cover operating and interest expenses in any of the first five years of operation. In the third year, the company begins to generate a gross profit that is adequate to cover operating expenses, but not interest expense. Thus, the company is not projected to realize any net profit during its first five years of operation. This inability to generate a profit is reflected on the balance sheet by a decline in equity and a decline in the company's cash line item. 22 SAMPLE #6 Sources Uses Option #1 100% New Construction SOURCES Cash Reserve 250,000 8.57 1592 members @ $100 Member Equity 159,200 5.46 90 members @ $4000 Member Loans 360,000 12.34 Henry Financing 180,000 6.17 Owners Contribution 949,200 32.54 Vendor Credit 98,000 3.36 Vendor Loan 200,000 6.86 City/Community 200,000 6.86 NCBDC/Local Banks 1,470,000 50.39 Total Sources 2,917,200 100.00% USES $$ $$ % Explanation Acquisition 1,100,000 600,000 20.57% 15,000 sq/ft @ $40 sq/ft Construction Costs 39,000 10,000 sq/ft @ $80 Construction 25,000 5,000 sq/ft second story @ $60 Demolition (Co-op Building) 44,000 Demolition (Other Building) 7,800 sq/ft @ $5 Site Costs 1,208,000 41.41 Total Construction Costs 4,000,000 13.71 12,500 sq/ft @ $3.50 Equipment 114,000 3.91 Inventory, additional 150,000 5.14 10,000 sq/ft @ $3.50 Fees 25,000 .86 7,000 sq/ft @ $40 Start-up Promotion 25,000 .86 7,000 sq/ft 3,200=3,800 Start-up Staffing 25,000 .86 *$30 Holding Costs 25,000 .86 6% - 12% Business Disruption 80,000 2.74 Working Capital Year 1 2,652,000 90.91 Subtotal 265,000 9.09 Overrun Allocation 2,917,200 100 Total Uses Total Sites Footprint Retail 2nd Story 22,500 sq/ft 10,000 sq/ft 7,000 sq/ft 5,000