Unit 2 Assignment 3: Business Planning Forecasts

Unit 2: Assignment 3: Business Planning and Pitching

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    In this assignment, I will be using business planning forecasts using my financial forecasts produced in other units and assignments, this will allow me to better understand the future of my business and also predict the rate of growth over time. I shall also predict how I would respond if my business was not on target as a result of unforeseen financial difficulty. I will then conclude with an analysis of my financial forecasts to show viability and hopefully identify any times where things may become difficult.

    To start, we will look again at my cash flow forecast which was produced for Unit 3: Assignment 2, this will allow us to produce a forecast for my business’ profit/loss account.

    Summary of revenue and expenses:

Costs:

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Total Annual Fixed Costs: £139

Total start-up costs: £3151

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Sources of Revenue (Monthly)

Total Monthly Revenue Sales: £1680

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Cash flow Forecast 2018: Minimum Cash Flow Needed to Sustain Growth

*The income distributors earn (distributor’s commission) is based on one single order, depending on how many different company’s leaflets or how many letterboxes they post in will have a direct impact on their earnings; if they post leaflets for two companies at the same time, they would earn double the amount and three companies, triple the amount they would earn if they were posting just one leaflet (one distributor completing just one order per week will provide £120 per month, 2 orders per week, two different companies leaflets together, £240, 3 orders per week, £360). I expect distributors will work mostly part time hours but they are responsible for their own working hours.

.	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Year End Total
Cash Inflows	.												.
Distribution	480	480	480	960	960	960	1440	1440	1440	1920	1920	1920	14400
Billboards	.	1200	1200	1200	1200	1200	1200	1200	1200	1200	1200	1200	13200
Total Cash in	480	1680	1680	2160	2160	2160	2640	2640	2640	3120	3120	3120	27600
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Cash Outflows	.
Total Start Up Costs:	3151	No longer applicable or necessary to include in future cash flow forecasts.											3151
Yearly Costs	First year’s yearly costs included in total start-up costs so does not apply for the first year.												.
Distributor Commission (25%)	120	120	120	240	240	240	360	360	360	480	480	480	3600
Cyclist Commission (20%)	.	300	300	300	300	300	300	300	300	300	300	300	3300
Lease and business rates budget	500	500	500	500	500	500	500	500	500	500	500	500	6000
Vehicle Purchases	Not Applicable during first year
Vehicle Running Costs (£100 per month per vehicle)	Not Applicable during first year
Contingency Payment (10% of overall revenue)	48	168	168	216	216	216	264	264	264	312	312	312	3760
Total cash out	3319	588	588	756	756	756	924	924	924	1092	1092	1092	18811
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Balance	–3339	–2247	-1055	1653	2153	3057	4773	6489	8205	10233	12261	14289	14289
Contingency Balance	1048	1216	1384	1600	1816	2032	2296	2560	2824	3136	3448	3760	3760
Total Balance	-1291	-31	229	1849	3469	5089	7069	9049	11029	13369	15709	18049	18049

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Further Notes for Cash Flow Forecast:

*This cash flow forecast does not account for seasonal impacts such as popular public holidays.

*Factored in £500 as a budget for lease and business rates, this is omitted from the cash flow forecast submitted in previous assignments.

*Insurance is included in yearly costs; this is included in the start-up costs for the first year as the insurance policies will be purchased pre-start up.

*The contingency budget comes from sales revenue however it will be cushioned from the outset with an initial deposit of £1000 (+ commission from sales revenue).

*Total Start Up costs are calculated with all pre-start-up costs incurred combined; expenses such as insurance policies which will be incurred again next year and every year onwards will be included in yearly costs though for the first year, as all yearly costs are paid before start-up for our first year, it is appropriate to include them in overall start-up costs.

*Phone and broadband will be my personal lines for the first year in an effort to save costs, this is taken account for in my personal budget which is not appropriate to include in this cash flow. However, my budget for this will be below £60 a month when I do decide to have a dedicated phone line and broadband. It is important to understand that steady growth is achieved and this can only be done with wise financial decision making. Using my personal phone line for business purposes isn’t ideal for my carrier or my customers, my carrier because it is not a business phone and broadband agreement and my customers because it’s my personal line; currently, I am investigating whether to use a virtual landline that’s rerouted to my personal mobile phone or not as this would be far cheaper than a dedicated business phone line and broadband. Because of the disparity between the cost of a virtual landline and a physical landline, I have chosen to omit this cost from any forecasts and instead, we will assume the contingency budget will cover this overhead when it occurs – this is the point of the contingency budget.

*All operative (distributors and travelling billboard riders) will be paid based on performance on a self-employed basis. They will be responsible for their own taxes, expenses and any other duties associated with being self-employed. Only employed staff will be paid an hourly wage though I do not expect to employ any staff until I have grown my business to a point I cannot singlehandedly manage and in which case, I will generate a budget to enable me to be able to pay at least the legal minimum wage.

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Breakeven (/Time)

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*I have chosen to omit the travelling billboards from the breakeven chart because, especially in our first year, we will be focusing on expanding our distribution network.

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Breakeven (/Units Sold)

*1 Unit = an order for 5000 leaflets distributed.

*I have chosen to omit the travelling billboards from the breakeven chart because, especially in our first year, we will be focusing on expanding our distribution network.

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    The above breakeven charts show that I will break even in the second quarter or after I have sold approximately 5 units where each unit is equivalent to an order for 5000 leaflets or other free printed material up to the size of A4 to be distributed.

    It also represents the fixed costs as £1500, it is important to note that this chart is projected over 4 quarters of the first year so the fixed cost per quarter is £1500; as currently my only projected fixed cost is the budget for lease and business rates (see above notes about communication) which is £500, per quarter it is £1500 (3 months in a quarter x £500 = £1500).

Profit/Loss + Growth Forecast

Total revenue 27600

Total expenses 12811 (=46.41% of revenue)

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Summary of revenue and expenses:

Costs:

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Total Annual Fixed Costs: £139

Total start-up costs: £3151

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Sources of Revenue (Monthly)

Total Monthly Revenue Sales: £1680

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Profit/Loss:

P/L	2018	2019	2020
Total Revenue	27600 (=53.59%)	179400	1.167 Million
Total Expenses	18811 (=46.41%)	26549	44015
Net Profit	8789	98851	1.122 Million
. P/L Ratios	. 2018	. 2019	. 2020
Profit/Loss (%)	7.18	11.45	30.69
Rate of Growth (%)	100	90.69	85.91
Growth year on year (%)	100	9.31	4.78

    *Please note: I factored in £500 per month as a budget for lease and business rates, this is reflected in total expenses and profit/loss but is omitted from Profit/Loss (%) and Rate of Growth (%) and Growth year on year (%) because the changes would be almost insignificant. However, please allow for +/- 5% on each value.

    *Gross profit non-applicable as I will be providing a service, therefore I have no costs of production, instead my variable costs are dependent upon revenue because they’re mostly a commission.

If we divide our yearend total income for 2018 by our start month revenue, we can see that the income turns over 6.5 times throughout the year; we can now predict that the revenue for 2019 will be 6.5x higher than the previous year and likewise in 2020.

Similarly, if we divide our yearend expenses by the lowest amount of expenses at the beginning of the year will give us the number we have to multiply our expenses by to predict our expenses for 2019 and 2020. We then need to subtract the start-up costs from each year as they will not apply in years 2019 and 2020 (start-up costs = 3151 excluding lease and business rates).

Growth is calculated by the difference between the rate of growth between one year and the last. Any growth in the first year would be equal to 100% because we started from nothing or very little.

The above P/L account forecast does not account for seasonal changes. I have also omitted tax expenses as I would be required to pay VAT from year 2019 if growth reflects the forecast.

The above is based on maintaining growth at the same rate year on year, this will not be reflective of reality as we would adjust our rate of growth accordingly to ensure the business remains manageable. Also omitted from the above forecast is the cost of extra staff to manage new distributors though this has been compensated by only focussing on leaflet distribution growth and maintaining the same amount of travelling billboards through years 2019 and 2020.

The above forecast is extremely ambitious and though I would hate to say my business wouldn’t be as fruitful as I planned but just in case, the following will be what I do should I find myself operating at a loss.

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Contingency Plan:

    We can agree that the above financials are relatively ambitious even though they are very conservative. Because of this, it is important that we have a plan in place should things go drastically wrong or not quite to plan. The following will be the steps we would take depending on various scenarios however, should we find ourselves running in a surplus to our financial forecasts, then we would simply pass this excess on to our staff where appropriate and otherwise, reinvest the excess back into the business to further our growth rate. The following is what we would do if my business was not on target for whatever reason.

    It is common for start-ups to run in a deficit from day one however, from our breakeven chart you can see that we break even in our first month and we are in profit by the fourth month, the beginning of the second quarter. This is part of our contingency plan in the sense that we decided to pay based on performance rather than an hourly wage because this means we can alter our variable costs depending on how many people we need to distribute our leaflets. However, if we find we continue to run in a deficit beyond the first quarter then it will be important to us to either;

Another common problem is unforeseen overheads, such as licencing costs and legal fees, have been known to cripple a business. Now, from my research, I believe I do not need any specific licenses in regards to operating my business but should I incur any legal fees or licencing fees or other overheads that I have otherwise overlooked then it will become apparent why it is so important to keep a healthy contingency budget which will be used as an emergency fund. I cannot conceive any possible eventually that would result in a personal injury claim being made against us but what we can perceive is the likelihood of a legal battle should we find one of our distributors has dumped the leaflets and our customer is not happy with a refund because they may have incurred other costs such as printing and loss of business as a result of the dumping, all of which I will be liable for because the work was not carried out that they had paid for; with that being said, having the proper insurances should also mitigate these risks.

Because of the low operating and start-up costs of my business, it is unlikely I will need any finance in the way of investment, in fact even a loan or investment would simply be used for the purposes of growth and expansion but if we do seek finance, then we will have to ensure that the finance is spent on assets which do not depreciate quickly in value so in the unlikely event we cannot make repayments or upkeep our side of the investment terms, we can provide an exit to our debtors and investors without incurring too much of an expense for them. Alongside this, for further security, I will ensure that no finance is secured to my own personal assets and all debts are kept within the business; you could say that is my own personal contingency plan.

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Analysis

    From my cash flow forecast, my early breakeven point and profit/loss account, it is my firm belief that my business should be successful, with the contingency plan in place alongside a healthy contingency budget, there’s no reason why I should not be able to overcome any financial difficulties and though it is likely that any business will fail in the first two years, I do not deny it will be difficult but through proper planning and preparation, one can see that my business will be profitable.

    We’ve mitigated staff costs by paying our operatives on a commission basis and those on an hourly wage or salary basis will not be employed until the business is so large it is unmanageable by myself alone with my support networks; by this point, revenue will be regular and supersede any staff wages, naturally, otherwise we will be running at a deficit and that would eventually cause a negative balance or cause us to have to supplement staff costs with the contingency budget which, staff costs, are not what the contingency budget is designed for. The contingency budget is designed for short-term regular unforeseen overheads or unforeseen lump sum costs such as licencing.

    It is my intention to not earn a wage from my business for the first year of operation and I have omitted my own wages from subsequent forecasts beyond this as I cannot begin to speculate about my own earnings without actually knowing the state of my business when the time comes for me to earn a wage. I will utilise grants to cover the cost of living expenses during the time I am not earning a wage; I will also be eligible for government assistance depending on the hours I work in my business and the income I take from the business provided it is below a certain amount, I will take advantage of this until my business is in a position that I will be able to refuse this support and subsequently, through income tax, corporation tax and other taxes such as VAT that I will likely need to pay eventually, I will contribute back to the state anything I take from it, However, should the government legislation change, which is likely with the upcoming political events such as Britain leaving the EU, then I believe there is still plenty of room in my financials to be able to withdraw a monthly wage of below £1200; this has not been factored into any of my financial forecasts though should be affordable from the start of the second quarter.

    The growth forecast shows rapid growth in the first year, this is because the rate of growth would be 100% the moment I launch my business as anything beyond nothing, which is what my business would be pre-start up, would equate to 100% growth in the first year. The second year, growth is much slower at a measly 9.31% though this is still at double the rate of the following year, In the third year, year on year growth is slower because this will be when we start to look at other services and it is likely that, by then, we will have other costs such as regular employed staff wages to pay which will hinder the amount of revenue we can afford to reinvest back into the business. The rate of growth increases slower as each year passes but when growth slows to a point it could be argued that progress isn’t being made then we will take account for this in future business plans as our current business plan is an overview of where we want to go but in the dynamic world of business, it is unlikely it will go 100% to plan so when the time comes, it will be important to adjust and sometimes rewrite business plans and strategies. I think we will see significant growth when we expand our travelling billboard services and also seek national expansion but by following our business model, there is no reason why it shouldn’t be replicable in other regions as well as successful.

    In conclusion, I think my financials demonstrate the strength of my business but the main obstacle will be ensuring constant work from the offset however, even if there is a delay by several months, because I have not factored in seasonal fluctuations, the forecasts are applicable regardless of when the start date actually is. With that being said, I do believe the timing of my business is important especially given that around seasonal and some commercial holidays, businesses do spend more on their advertising; especially at Diwali, Eid and Christmas so, as these holidays are later in the year, depending on how close to these holidays I secure constant work will have a direct impact on the level of revenue I earn in one quarter compared to the last or next.

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Final Note:

    It has been brought to my attention that it could appear exploitative based on the figures provided in my cash flow forecast regarding how much I would pay the operatives within my business, who themselves would work on a self-employed basis.

    The reason it is projected so low is because it is based on them completing one order which is equivalent to 5000 leaflets (up to paper size A4) posted through 5000 letterboxes. I briefly mentioned above how the amount they work and the amount of orders they take on (being a self-employed person, they have the right to refuse orders provided it is in line with their contract), below I have provided a breakdown of how much a person could earn:

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Amount of different company’s leaflets (if each company places one order of 5000 leaflets)	Total amount of leaflets to be distributed	Total amount of letterboxes	Estimated Total Distributor Earnings Upon Completion (per week based on each month being equal to 4 weeks as per cash flow forecast)
1	5000	5000	£30
2	10000	5000	£60
3	15000	5000	£90
4	20000	5000	£120
5	25000	5000	£150

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    Again, this is for leaflets up to A4, we will also be delivering catalogues, brochures and other marketing material which will be larger, thicker or heavier than a regular sheet of A4 paper and in which case, our distributors can earn significantly more. We will also provide a hand to hand service as well as a door to door service which will also allow our distributors to be able to distribute much more quickly in more rural areas by handing their leaflets to passers-by as well as within local town centres were appropriate and in line with any contracts we have with our customers.

    As the business progresses, we will be able to pay our distributors more though this is not forecast in the following years P/L projections for consistency purposes.

    Finally, because our distributors will be focussing mostly on their recovery in the short term, it is logical to deduce that they would be mostly working part time hours. Not every single order will take the same amount of time to fulfil, some will take longer (in rural areas) and others will take a much shorter amount of time (ungated terraced housing and estates with a large amount of multi-story flats), in the first stages of business, it is likely we will only have one or two orders at a time which is why our distributors will be self-employed and operating on an ad-hoc basis (in the initial start-up period) or only working part time hours whilst they are managing their recovery and finding their stable accommodation and independence which will incur a lot of appointments and an absolutely essential need for flexibility in their working hours. The first distributor would be myself so the only person who would ever seem to be exploited would be myself but with that being said, in the future we will have grown our contingency budget which will only grow larger over time, so long as budgets are managed properly, so should find themselves in a position where they’re being paid unfairly for the amount of work they have to do as a result of a lack of available orders for them to fulfil, then we can look into using this to supplement distributor income but because they will all be self-employed, they will also be free to pursue other income streams if and when work is scarce; there would be nothing to prevent them seeking their own customers and delivering their leaflets alongside our business’ customer’s leaflets or, if we have some Big Issue sellers join our ranks, there would be nothing to stop them alternating between distribution and selling the Big Issue.