Professional Documents
Culture Documents
Executive Summary
Introduction
XXXXX Foods is a lentil pasta sauce processor that is located in SK. XXXXX
Foods will have a total of five members sitting on the board of directors which includes
two internal and three external members.
XXXXX Foods will purchase cleaned lentils from a local producer. The lentils
will be cleaned and delivered for processing. They will enter a niche market with a
premium gourmet lentil pasta sauce. The product will then be marketed through Calgary
Coop out of Calgary Alberta, and eventually through Sobeys in both Alberta and
Saskatchewan.
Operations Plan
XXXXX Foods will be located in SK. The primary vehicle access, allows ease
for sourcing product in and out of the facility. The facility is a 3500ft2 floor heated,
insulated building which will be required for production of the pasta sauce.
The production will begin with the lentils being boiled in a steam jacket kettle,
which will then be transported into the mixing kettle that will contain the tomato paste.
From there the sauce will be placed into 750ml jars, sealed and shipped to the
distributors. XXXXX Foods will begin production at 70,000 units in the first year which
will leave room for expansion in the future. The majority of the production line will be
purchased from Alard Equipment and Handling Innovations.
Human Resources
XXXXX Foods will employ a total 7 employees and increased to 9 by year six
Marketing Plan:
XXXXX pasta sauce will be sold in 750 ml glass jars, XXXXX is a lentil
enriched tomato pasta sauce that will appeal to vegetarians and health conscious
individuals within a niche market. The sauce will be produced and packaged at the
XXXXX Foods production facility in SK and shipped to the Sobeys and Federated Coop
Limited (FCL) warehouses in Calgary, AB for distribution.
As the health food industry becomes more health conscious, and vegetarians are
looking for additional meat alternatives, XXXXX will become a greater demand.
XXXXX will be marketed in the health food, specialty food aisle. This offers the product
two advantages, the first being a healthy pasta sauce choice, because of the protein found
in lentils. The second opportunity is the focus towards vegetarians, as a meat
replacement.
The specialty nature of the product allows there to be room for a mark-up in price
in comparison with competing pasta sauces. A reasonable mark-up is 25% above
XXXXX competitors. XXXXX will be strategically priced at $5.88 which is a 25%
markup over main stream sauces. The objective of the marketing strategy is to supply
Calgary FCL and Sobeys stores with XXXXX in year one, expanding to the surrounding
Calgary area in Alberta in year two and three, with a long term goal of supplying the
province of Alberta with XXXXX, While obtaining sales targets of 10% of the total target
market each year, 30% of the target market will be aware of the product by year three.
Awareness of the product will be the primary objective of the XXXXX Foods
marketing team. The Calgary Vegetarian Resource magazine will be used as a main
resource because this magazine has no charge to advertise. In store taste tests will also be
used as well as advertising in fliers, in both the Co-op and Sobeys fliers. XXXXX Foods
are also going to advertise in the Country Women, and Flare magazines, because these
magazines target the main segment of the target audience.
Financial Plan
Ten years of financial projections have been made of XXXXX Foods. All costs
including selling prices, expenses and salaries have been inflated at 2% every year.
Financing will be a mix of debt and equity, but will rely more heavily on equity. A loan
of $115,000 will be taken on representing 30% of the land and building costs and will be
repaid over a 15 year period.
Critical variables involved in the financial analysis are the selling price of
individual jars, the production and sales per year, and the beginning owner’s equity
investment. These variable all have a huge impact on the level of success experienced by
the company. The selling price has the largest impact on whether the company succeeds
or fails, followed by the production levels.
Given the current market prices for pasta sauce, the base run shows the plan to be
unfeasible. A positive cash flow cannot be sustained without a substantial initial owner
equity investment of $1,625,000. The following break down of the financing budget is
based on the building and land costs, as well as covering the working capital required for
the first year of operations. This represents the absolute minimum investment to operate
for year 1.
order for the IRR to become positive and therefore make the plan feasible, either price
levels or production levels must increase by 35% or 52% respectively.
Conclusion
The base plan will be unfeasible and in order for XXXXX Foods to have a
feasible base run the company will either have to charge more for their product or
increase unit production.
Table of Contents
Executive Summary..............................................................................................................i
Table of Contents.................................................................................................................v
List of Figures..................................................................................................................viii
List of Tables......................................................................................................................ix
1.0 Operations Plan..............................................................................................................1
1.1 Product Description...................................................................................................1
1.2 Organizational Structure............................................................................................1
1.3 Site Plan.....................................................................................................................2
1.4 Building and floor plans............................................................................................4
1.5 Steps Required for Processing Lentil Sauce..............................................................6
1.5.1 Raw Materials Delivered....................................................................................6
1.5.2 Raw Lentils Weighed..........................................................................................6
1.5.3 First steam jacket kettle......................................................................................7
1.5.4 Ingredients Measured..........................................................................................8
1.5.5 Second Stem Jacket Kettle..................................................................................8
1.5.6 Pumps Transferred Sauce to Filling Machine.....................................................9
1.5.7 First Person Passes Empty Jars...........................................................................9
1.5.8 Semiautomatic Filling Machine........................................................................10
1.5.9 Full jars are Capped..........................................................................................10
1.5.10 Labeling and Packaging..................................................................................10
1.5.11 Finished Product to Storage............................................................................11
1.5.12 Delivery to Warehouses in Calgary................................................................11
1.6 Average Business Cycles.........................................................................................11
1.6.1 Average Business Day......................................................................................12
1.6.2 Average Business Month..................................................................................13
1.7 Quality control.........................................................................................................13
1.7.1 HACCP.............................................................................................................14
1.8 Supply/service analysis............................................................................................14
1.9 Capital Budget.........................................................................................................15
1.10 Cost of Goods Sold................................................................................................15
1.11 Cash Management..................................................................................................18
1.11.1 Inventories......................................................................................................19
1.11.2 Accounts Receivable.......................................................................................19
1.11.3 Accounts Payable............................................................................................20
1.11.4 Cash Conversion Cycle...................................................................................20
2.0 Human Resources Plan................................................................................................21
2.1 Plant (operation) Manager (1):................................................................................21
2.2 Sales Manager (1):...................................................................................................21
2.3 Secretary (1):...........................................................................................................21
2.4 Plant workers...........................................................................................................21
2.5 Training Programs...................................................................................................22
2.6 Compensation..........................................................................................................22
3.0 The Marketing Plan.....................................................................................................24
3.1 Overview..................................................................................................................24
3.2 Marketing Mix (4 P’s).............................................................................................24
3.2.1 Product..............................................................................................................24
3.2.2 Place..................................................................................................................24
3.2.3 Price..................................................................................................................25
3.2.4 Promotion.........................................................................................................25
3.3 Segmentation, Targeting, and Positioning...............................................................25
3.3.1 Segment............................................................................................................25
3.3.2 Target................................................................................................................26
3.3.3 Position.............................................................................................................26
3.4 SWOT Analysis.......................................................................................................26
3.4.1 Internal Strengths..............................................................................................26
3.4.2 Internal Weaknesses..........................................................................................26
3.4.3 External Opportunities......................................................................................27
3.4.4 External Threats................................................................................................27
3.5 Market Analysis.......................................................................................................27
3.5.1 Past Performance..............................................................................................27
3.5.2 Market...............................................................................................................27
3.5.3 Competition......................................................................................................27
3.5.4 Product/Service Features..................................................................................27
3.5.5 Customers.........................................................................................................28
3.5.6 Opportunity.......................................................................................................29
3.6 Marketing Strategy..................................................................................................29
3.6.1 Sales and Profits...............................................................................................29
3.6.2 Select Markets/Product/Service Mix................................................................30
3.7 Selling and Advertising............................................................................................31
3.7.1 Product Placement............................................................................................31
3.7.2 Magazine Advertising.......................................................................................32
3.7.3 Flyers and Coupons..........................................................................................32
3.7.4 Business Cards..................................................................................................32
3.7.5 Taste Tests.........................................................................................................32
3.7.6 Web Page..........................................................................................................32
3.7.7 Travel................................................................................................................33
3.7.8 Freight...............................................................................................................33
4.0 Financial Plan..............................................................................................................34
4.1 Financing.................................................................................................................34
4.2 Balance Sheet...........................................................................................................35
4.3 Economic Forecast...................................................................................................36
4.4 Unit Cost of Production...........................................................................................36
4.5 Financial Performance Analysis..............................................................................37
4.5.1 Critical Variables...............................................................................................37
4.5.2 Risk Analysis....................................................................................................37
4.5.3 Breakeven Analysis..........................................................................................38
4.5.4 Alternative Salary Scenario..............................................................................40
4.5.5 Contingency Plan..............................................................................................41
4.6 Conclusion...............................................................................................................41
5.0 References....................................................................................................................42
6.0 Appendix A..................................................................................................................43
7.0 Appendix B..................................................................................................................45
List of Figures
List of Tables
Table 1.1 Capital Budget Summary...............................................................................16
Table 1.2 Breakdown of equipment cost........................................................................16
Table 1.3 Cost of Goods Manufactured.........................................................................17
Table 1.4 Cost of Goods Sold..........................................................................................18
Table 1.5 Average days Inventory...................................................................................19
Table 1.6 Inventory costs.................................................................................................19
Table 1.7 Cash Conversion Cycle...................................................................................20
Table 2.1 Plant manager salary and benefits for 2007..................................................23
Table 2.2 Secretary and sales manager salaries and benefits for 2007.......................23
Table 2.3 Annual wages and benefits for all 4 plant workers in 2007.........................23
Table 3.1 Competition......................................................................................................28
Table 3.2 Marketing Budget Plan...................................................................................31
Table 4.1 Financing Plan for XXXXX Foods................................................................35
Table 4.2 Balance Sheet for XXXXX Foods as at December 31, 2007........................35
Table 4.3 Unit Cost of Production in 2014 (first year of full production)...................36
Table 4.4 Sensitivity of Critical Variables.....................................................................38
Table 4.5 Changes in Key Numbers After Proposed Changes..........................................41
The proposed building will be a completely insulated 3500 ft2 building with
electrical and plumbing and will be covered with a fully weather bearing metal siding.
Of the 3500ft2 floor space, 2500ft2 will be used for the production line and storage area.
The remaining 1000ft2 will be for two offices, two change/bathrooms for the employees,
customers and transport drivers and a lunch and coffee room for the employees.
A. B.
Raw, cleaned First Steam
lentils arrive in Jacket Kettle E.
Totes.
Second Steam Jacket
Kettle with Agitator
C. D.
Ingredients Ingredients
taken from measured and
storage added to
tomato sauce
G.
F.
Jars put in Filling Line
Position
H.
I. Capping
Labeling
J. K.
Storage Retail
Sales
Figure 1.4 Flow of Production
The following steps required assume that the plant is at full capacity and requires
a total of six plant laborers to produce 130,000 jars.
Figure 1.8 Steam Jacket Kettle with Scraper. (Alard Equipment. Available at
http://www.alard-equipment.com)
This average business cycle is for year 8 (2014) of XXXXX Foods when plant
will operate at maximum capacity. The average business cycle will be consistent from
day to day, week to week, and year to year. There is no large increase in pasta sauce
consumption at any point in time in a given year, so production each day, week, month,
and year will remain constant. The Plant will operate 8 hours a day, five days a week and
52 weeks a year. The plant will not be open on statutory holidays and 6 plant workers
will be employed year round. The plant will produce 130,000 jars of lentil pasta sauce in
a year.
The Canadian Food Inspection Agency (CFIA) has product regulations that
XXXXX Foods must follow when making the pasta sauce that will be food for human
consumption. XXXXX Foods will have to follow these regulations:
1. Building must be situated on the proper land where the land can be drained, be
easily accessible for transport, and be free from congestion.
2. Building must be properly managed with good drainage off of building, be
closed in to be free from entrance of birds and insects. It must be basically
sound and in good repair. Must have the capacity to receive and house the
raw and finished products.
3. Have the proper equipment to handle merchandise which are to stay in
location and not taken out of the work area. If new or used merchandise needs
mechanical work, they must be cleaned, sanitized and inspected.
4. Have proper cleaning and sanitizing measures in place
5. Make sure that work area is properly managed and cleaned
6. Inspection must be done on all products
7. Employees must follow appropriate dress attire which would include hair nets,
gloves and some type of clothes to keep outside materials getting into product.
8. Do not bring in any objects (gum, tobacco, etc.) that can infect or fall into the
food
9. All packaging procedures must be followed
10. Proper labeling of products must be established before shipment out.
1.7.1 HACCP
HACCP (Hazard Analysis of Critical Control Points) is used to analyze the sauce
production and distribution systems. The steps are:
3. Be sure to set some types of limits to control potential problems and set up
methods to monitor critical limits.
4. Have procedures in place to handle and correct problems if critical limits are
exceeded. Such as spill kits, Material Safety Data Sheets (MSDS) and
equipment contact numbers.
5. Accurate records must be kept and routine evaluations must be done to check
if controls are effective.
XXXXX Foods is not required to follow HACCP guidelines, but will follow them in case
the regulations are changed at a later date. In this case, their production will already be in
line with the regulations and alterations to the production process will not have to be
made. (CFIA, 2006)
XXXXX Foods will have a minimal amount of suppliers in order to get as many
supplies as possible from one venue. Saputo’s is the choice of supplier for the spices, and
Costco for the tomato sauce. The cleaned and ready to eat lentils will be supplied from
David Krause and will be delivered to the plant in proportional size for the demand
needed at the time. The production line equipment consists of two steam jacket kettles, a
filling line, scale, scoops, containers, pallet jacks and stainless steel tables. The steam
jacket kettles and filling lines come from Alard Equipment. The scales for weighing
lentils and ingredients come from Scales Galore. The scoops are from Rose Scientific
Ltd, and the stainless steel container, table and pallet jack come from Handling
Innovations. The printing plates and labels come from Custom Labels Inc. Boxes for
shipping come from packagingprice.com. Jars with lids for the sauce are purchased from
Ampak. Computers/printers are from Future Shop and office desks will come from
Staples business depot. A detailed list of suppliers can be found in Appendix A.
Table 1.1 is a summary capital budget for 2007. A detailed description of costs in the
capital budget can be found in Appendix B. Table 1.1 shows cost of land purchased. The
cost of the building previously described in floor plan section, including water, natural
gas, electricity and sewage installation. Also included in the capital budget summary is a
cost of landscaping for the site. Processing equipment costs are broken down in Table 1.2
to give the total on the capital budget summary. Office equipment includes computers
required as well as office desks. The total capital required is 364,174 for the first year
2007. Total capital required = total capital costs (387,876) + total working capital
(23,702) for a total of $411,678.
Cost of goods sold is summarized in table 1.4 by adding beginning inventory, cost
of gods produced, cost of goods available for sale, and ending inventory to give cost of
goods sold.
During the first one to two months of operation, there will be little to no cash flow
into the company. This start up period will be spent getting ready for production. The
following month will include building up enough finished product inventory to supply
retailers with product. Following the initial three months of start up, cash flow should
stay relatively constant as there is no seasonal market for selling pasta sauce and there are
no plans to operate the plant on a seasonal basis.
1.11.1 Inventories
Inventory will include the raw cleaned lentils used in the sauce. Lentils cleaned
to food quality will be brought in as needed, resulting in a very small amount of raw lentil
inventory in the plant at any given time. Other raw materials will consist of the tomato
paste and spices needed for the sauce and will be ordered as needed from suppliers.
Finished products inventory will be relatively low because products will be shipped every
15 days to warehouses for Sobeys and Calgary Co-Op both located in Calgary Alberta.
The values of raw inventory, inventory in progress and finished inventory come from the
values in the capital budget.
2.1 Plant (operation) Manager (1): will be in charge of the production plant. The
duties involved include overlooking day to day production on the floor, coordinating
shipping and receiving, assisting with any problems that may occur in the plant as well as
operating as the HACCP coordinator. The manager will be personally involved with
sanitation inspections of machinery, equipment and plant production area. These
inspections should be done at least semi annual and will follow the HACCP process
requirements. The plant manager will be trained in all safety regulations program. The
plant manager salary will start at $50,000 + $6,400 in benefits = $56,400 for the 2007
year. Table 2.1 describes how benefits are calculated for the plant manager.
2.2 Sales Manager (1): Will be in charge of selling and marketing the product. Their
base salary will be $50,000 + $4,523 in benefits. Total Salary and benefits is $54,523 for
the 2007 year. The employee filling this position will need to have some experience
and/or post secondary education in business value or marketing. They will need to be in
contact with the distributors, frequently learning and inventing new ways to market and
sell the pasta sauce. Table 2.2 describes benefits for sales manager.
2.3 Secretary (1): Will be involved in administration including paying of bills, payroll
and accounting in general. Also ordering of supplies, ordering and receiving information
from the future retails such as invoicing, and directing phone calls to whomever the caller
may need to talk to. They will be responsible for entering data such as sales numbers or
information on new retails. Computer skills will be an asset towards the secretary
position and the position will pay $35,000 + $3,166 in benefits = $38,166/year. Table 2.2
describes benefits for secretary.
2.4 Plant workers: Four total plant employees will be making the sauce which will
change to six when the plant reaches full production. This will include unloading and
loading of transport trucks and moving both raw and finished products to storage. The
job descriptions for plant workers have been covered in the flow of work. The laborers
are required to follow proper sanitation requirements while cooking the lentils and
mixing the sauce. They will have to be trained to work each machine in the facility and
will be put through first aid classes. Qualifications include a high school education and
upward. These positions will be paid on wage bases of $12.50/hour with benefits to aid
in keeping high employee moral and keep them within the company. Annual wages for
each employee will be $26,000 + $4,836 in benefits = $30,836/year for each of the six
employees. In year one the total plant laborer wages: $30,836 x 4 employees =
$123,344/year plus the plant managers $56,400 gives a total of $179,744. Table 2.3
summarizes benefits and wages for 4 employees in 2007.
All of the employees from XXXXX Foods will be put through training programs such as
fire escape plans and will be familiar with all MSDS booklets in case of an emergency.
They will be shown an emergency plant evacuation plan at least twice per operational
year. Every employee will be trained to work all pieces of processing equipment.
Employees will rotate jobs within the plant to let them experience all aspects of food
processing as well as to decrease repetitiveness for the employees. This should increase
moral and production. The plant equipment training will be performed by the plant
manager.
2.6 Compensation
All plant workers will be eligible for workers compensation if on the job injuries
occur. Compensation will only be paid to the physical laborers and not to the
management team rates are all included in the tables 2.1 -2.3.
Table 2.2 Secretary and sales manager salaries and benefits for 2007
Table 2.3 Annual wages and benefits for all 4 plant workers in 2007
3.1 Overview
"XXXXX is a legume based pasta sauce providing essential protein and fiber
requirements for vegetarian inclined diets as well as the health conscious individual,
within one convenient readymade serving."
3.2.1 Product
The sauce will be sold in 750 ml glass jars, packing 12 jars to a box and 80 boxes
to a pallet. The total production of year one will be 70,000 jars. XXXXX is a lentil
enriched tomato pasta sauce that will appeal to vegetarians and health food fanatics alike.
The sauce will be produced and packaged at the XXXXX Foods production facility in SK
and shipped to the Sobey’s and Federated Coop Limited (FCL) warehouses in Calgary,
AB for distribution.
3.2.2 Place
XXXXX will be manufactured at Saskatchewan, where a new facility will be
constructed in the spring of 2007. The advantage of constructing a building at this
location is the accessibility to the plant by the owners. From the plant, trucking will
transport the product to Calgary. The product will be sold at the retail level through Coop
grocery stores in the Calgary area, as well as through Sobeys’ Alberta and later in the
Saskatchewan locations. Given the nutritional qualities of the sauce, it would be best
placed alongside products with similar appeal. Although this strategy runs the risk of
being passed over for a competing product, it does insure that the consumer sees the
product as an option. If the sauce is shelved out of context, it could be passed over
completely by potential buyers. Another goal related to product placement within the
store is having the jars shelved between eye level and belt height. This small detail could
mean the difference between the jar catching the buyer’s eye and being hidden out of
sight. The ideal store placement would be on an end cap at the end of the aisle which
would give a more exclusive position drawing more attention to the new product and its
benefits.
3.2.3Price
The specialty nature of the product means there is room for mark-up in
comparison with competing pasta sauces. In comparing mainstream sauces to organic
sauce it is concluded that a reasonable mark-up for XXXXX would be 25% above its
competitors. Being the target market is made up of people who are willing to spend a
higher portion of disposable income on food, assumes the premium for the product will
be easily accepted. Although this product is not organic, its noble qualities appeal to a
similar market. The product is priced in line with an organic sauce, the retail price of
organic sauce is in the range of $4.35- $4.50, therefore a retail price of $5.88 will be the
goal for XXXX pasta sauce based on a 30 % mark up from the wholesale price, with a
wholesale price of $4.12
3.2.4Promotion
As with any new product, product awareness is extremely important. Although
the pasta sauce market has many competitors, XXXXX stands alone in the pulse enriched
sauce market; this niche product is a novelty quality that will be used to penetrate sales,
requiring a promotional strategy to establish brand loyalty. The promotional strategy will
based on magazine advertisements in the Calgary Vegetarian Resource; Flair, Country
Women; weekly flyers through Sobeys and FCL, as well as in-store taste testing, and
internet websites.
3.3.1 Segment
Due to the increased interest in vegetarianism, as well as consumers becoming
more health conscious. There are two main target segments for XXXX, the Vegetarian
and Vegetarian inclined population, as well as the female health conscious population.
Both of these segments are targeted out of Calgary FCL and Sobey’s grocery chains.
3.3.2 Target
The target market is the vegetarian population in Calgary, as well as the female
health conscious individuals in Calgary as well. XXXX Foods will position XXXXX
into the urban centers, because 4% of urban populations are vegetarian; 78% of
vegetarians are female and as such 72% of this segment is between 20 and 39 years of
age. (Calgary Vegetarian Resource).
3.3.3 Position
The image that XXXXX foods is portraying of XXXXX is a healthy meat
alternative for the vegetarian population, as well as a healthy protein supplement to the
health conscious individual. XXXXX will be marketed in the health food aisle.
3.5.2 Market
In Canada 4% of the population is vegetarian, (Calgary Vegetarian Resource). In
Calgary, where XXXXX will be marketed 4.7% of total grocery shelf space is devoted to
pasta sauce, and furthermore 20,000 people in one week pass through a FCL store in
Calgary. (Federated Co-op, 2005).
3.5.3 Competition
XXXXX will have many competitors in the pasta sauce market. Table 3.1
summarizes these competitors, as well as their prices.
3.5.5 Customers
By looking at the attributes of the lentil pasta sauce that XXXXX Foods will be
marketing, and the current trends of the health food industry, the intended target is the
active, vegetarian, as well as the health conscious female consumer. Due to the
occurrence of these individuals being concentrated in larger urban centers, we will focus
on the city of Calgary. This equates to approximately 40 000 persons. (Calgary
Vegetarian Resource, 2005). Calgary was chosen because of its relative population; high
percentage of young individuals, as well as the expanding growth of the city. This will
aid in marketing/advertising and product movement of XXXXX’s early life.
The customer segment chosen to be focused on is the increasing vegetarian
population found in large urban centers. Health concerned and conscious consumers are
beginning to switch more towards the vegetarian inclined diets. Requirements of a high
value protein source, cholesterol free products, and high dietary fibre found in legumes
and pulses are recommended in everyday diets of vegetarians. (Calgary Vegetarian
Resource, 2005).
3.5.6 Opportunity
As society today becomes more health conscious, and vegetarians are looking for
additional meat alternatives, XXXXX will be of a greater demand. XXXXX will be
marketed in the health food, specialty aisle. This offers the product two advantages, the
first being a healthy pasta sauce choice, because of the protein found in lentils. The
second opportunity is the focus towards vegetarians, as a meat replacement. In targeting
both attributes of the sectors within the two grocery chains; XXXXX has realm of
opportunity. In the beginning stages of XXXXX development, the product will be
marketed to Calgary, and surrounding area’s. XXXXX Foods will then look at expanding
into the Saskatchewan market of the Sobey’s grocery chain as a long term opportunity.
XXXXX will be transported from the warehouse where the sauce is produced to
FCL and Sobey’s warehouses in Calgary. Once the product is present in the warehouse,
the company’s will distribute XXXXX to the Calgary FCL as well as Sobey’s grocery
chains in the first year, expanding to the surrounding area of Calgary in year two and
three. With a long term goal of eventually expanding into the Saskatchewan market of the
Sobey’s grocery chain.
Advertising
Product Placement in Store $ 15,000
Magazine Advertising $ 10,135
Flyers and coupons $ 15,000
Brochures/Business cards $ 300
Total Advertising $ 40,435
3.7.7 Travel
The $4,800 is based on a yearly travel expense. Because XXXXX Foods is based
on a wholesale distribution to Sobeys and Calgary Co-op travel expenses to drive and sell
this product will be low. The numbers are based on approximately ten trips to Calgary
where the offices and stores for Sobeys and Calgary Co-op are located.
3.7.8 Freight
The yearly cost of freight is $20,540.00. This number is based from trucking,
from Saskatchewan to Calgary Alberta, based on the estimated trips will haul XXXXX,
to both retail stores in Calgary.
4.1 Financing
XXXXX Foods will rely heavily on owner equity to cover the cost of
construction, as well as the costs of operation in the early years. Because of the high risk
factor associated with this business plan, as well as the relatively remote location of the
plant, a substantial bank loan can not be acquired without offering other security.
Although the amount is less than desired, XXXXX will be pursuing a bank loan to help
cover the high costs of construction.
The loan taken on as long term debt will be valued at $115,000. This is 30% of
the building and equipment costs and will carry an interest rate of 8%. The loan amount
and interest rate are based on estimations by TD Canada in Swift Current and will be paid
back over a 15 year period. Although taking on a loan will negatively affect the already
terrible IRR of XXXXX, it is included to lessen the amount of equity required which is
already very high.
In addition to the loan, XXXXX will be seeking outside investors to help raise the
required equity. These investors will be taken on as shareholders to be paid in
accordance to the dividend policy that has been set. In the case of a business failure, any
debt holders will be paid out first, and the shareholders will be paid out of any remaining
assets if any are left. The dividend policy is based on the total working capital and the
dividend policy factor is chosen such that the company does not pay out dividends if it
results in a negative cash flow. The dividend factors are very high in this plan because
company can not afford to pay any dividends in any of the first ten years of operation.
Investors will be extremely hard to find given the small chance of being paid a dividend.
As well, the complete absence of an external rate of return makes this business an
unattractive option for potential investors.
Although the interest on long term debt is taken into account when calculating
profits, it is a relatively small percentage of the losses observed in the net income and
ending cash flow values. While interest on debt will represent an expense for the
company, the loan only covers a small amount of the total capital required.
After examining the base run of the financial situation of XXXXX Foods, the plan
appears to be unfeasible. The ending cash flow in every year comes up negative unless a
huge initial equity investment of 1,625,000 is made. This number is far too high to be
realistic and does not fix the company’s financial problems, only nurses it through the
first 10 years of operation to maintain a positive cash flow. The following financing
budget uses values that would let XXXXX construct the plant and maintain operations in
year one, but would run into cash flow problems at the end of year one as well as in
following years.
Assets Liabilities
Current Assets Current Liabilities
Cash $(101,026) Accounts Payable $33,476
Accounts receivable 35,556
Total inventories 21,621 Long Term Liabilities
Total current Assets $(43,849) Long term debt 110,765
Total Liablities $144,240
Long Term Assets
Buildings, Machinery & Equip. $387,875 Owner’s Equity
Accumulated C.C.A. (22,358) Owner Equity $385,000
Land 1 Retained Earnings (207,571)
Total Long Term Assets $365,519 Total Owner Equity $177,429
Because there is not currently a plant in operation, the land, building and
equipment all need be purchased new. A more in depth brakedown of the building and
equipment costs are shown in Schedule 6 Appendix B. Because the balance sheet shown
is for the end of the first year, it shows accounts payable and receivables that represent 2
weeks of finished product inventory, as well as one months worth of production worth of
raw materials inventory.
The inflation rate was set at 2% every year for the next ten years of production.
All input prices and revenues are adjusted to reflect this rate of inflation. The interest on
the long term debt was set at 8% and remains constant over the ten year plan, although it
important to note the loan is planned to be paid off over a 15 year period.
A break down of XXXXX’s production cost per jar of XXXXX can be broken
down into individual components including direct materials, overhead costs per unit,
direct labour, and marketing costs. This analysis can be seen in Table 4.3.
Table 4.3 Unit Cost of Production in 2014 (first year of full production)
As shown in the tables, the XXXXX Foods financial models are more sensitive to
a change in price than in volume. A smaller percentage change in price can allow the
company to reach its breakeven levels in comparison to increasing production. Because
of the unreasonable levels of price increase required and the increased production levels
that are beyond plant capacity, a combination of both would be required to allow the plan
to be feasible.
Since the base model of the plan is unfeasible, there is no concern over how much
decrease is allowable for both production levels and wholesale price. In the case
presented in the preceding pages, all numbers were found using the breakeven levels as a
basis for the best case scenario facing the company.
Figure 4.2 shows the levels of production that would result in breakeven scenario
for both cash flow and net income. These levels are both substantially higher than the
base levels. In early years, there may be a slight possibility of producing more than the
base run if experienced workers are hired. Even in the case of finding, skilled employees,
the higher production levels are only a positive if the extra product can be sold. Because
this product is unique, it is unlikely that any such skilled employees will be easy to find,
especially when considering the low wage levels, and the relatively remote area of
Shaunavon. It is also important to note that the estimated production capacity of the plant
being built is 130,000 jars of sauce. The required levels of production required to break
even are higher than capacity in every year with the exception of year one.
return to owner’s equity that made a calculation impossible, and after changes were made
the values were: IRR = -1.0% and ERR = -0.9%. These levels are beginning to approach
a positive level and make the business plan look like a more attractive possibility. In
addition to the listed changed, the cash flow could be positive and thus make the plan
feasible if the initial owner equity investment was raised to $430,000. The added start up
capital would allow the company to keep a positive cash flow throughout the first ten
year of operation. Table 4.5 summarized the effect that the changed listed above have on
some of the key numbers of the financial model.
Table 4.5 Changes in Key Numbers After Proposed Changes
4.6 Conclusion
After running the financial model, it is found that the plan is unfeasible. The
negative ending cash flows mean that the model doesn’t work. If XXXXX Foods is still
intending to construct a plant, there needs to be some changes in the employment
structure, as well as some re-evaluation in the scope and size of the project. If the
financial figures are ignored and the plan is followed as written, finding investors to
finance the project will be nearly impossible to recruit, and their investments will be lost
within a few years.
5.0 References
Websites:
Alard Equipment: Available at - http://www.alard-equipment.com/we_buy.htm
Calgary Vegetarian Resource: Available at - http://www.calgaryveg.com
Country Women Magazine: Available at - http://www.countrywomanmagazine.com
Federated Co-op: Available at - http://www.fcl.ca
Handling Innovations: Available at - http://www.handlinginnovations.com
Flare Magazine: Available at - http://www.flare.com
Future Shop: Available at - http://www.futureshop.ca
Pulse Canada: Available at - http://www.pulsecanada.com
XXXXX Foods: Available at - http://www.XXXXXfoods.com
Rose Scientific Ltd: Available at - http://www.rosesci.com
Scale Galore: Available at - http://www.scalesgalore.com
Sobey’s Grocery Chain: Available at - http://www.sobeys.ca
Staples Business Depot: Available at - http://www.staples.ca
Statistics Canada: Available at - http://www.statcan.ca
Quotes:
Ampack: Available at - http://www.ampack.co
Costco: Available at - http://www.costco.ca
Custom Labels Inc: Available at – http://customlabelsinc.com
D and D Lumber
Risdale Trucking: Available at - http://www.sasktrucking.com
Saputo’s: Available at - http://www.saputo.ca
Saskpower: Available at - http://www.saskpower.com
Sasktel: Available at - http://www.sasktel.ca
ULine: Available at - http://www.uline.com
6.0 Appendix A
7.0 Appendix B