Knowing, the old business adage, "it takes money to make money" you decide to pitch your business plan in the Salisbury University Entrepreneurship Competition with the hopes of enticing an investor. You plan is to present and ask for $100,000 in startup money but know any good investor will want to make sure a return is possible. After extensive research, you compile a list of information surrounding the three areas of expansion.
Research Details:
Fortunately, you have been in the paper business long enough to have some solid market knowledge. Your business goal is to increase efficiency and sales in such a way that puts your competitors out of business. With your knowledge and the insider information you have secured on your competitors, you decide to use the market values (not your individual company) to estimate sales. You manage to compile the following information on the three expansion areas to help you create your forecast and pitch this to potential investors:
Employees :
As a startup, you can't pay your employees a high salary but you hope to entice them with good working environment, a strong benefits package and time off.
You hope to start with three employees in addition to you - the principal owner. Each will work the paper cutter and provide additional business support.
You are planning on paying each of your employees $25.00 per hour or $20,800 per year. You estimate with salary, insurance, and benefits, each employee will cost you about $35,000 per year.
You know this is not a strong financial offer so you decide to sweeten the pot by offering a 4-day work week. You base this on the traditional 52 week working calendar.
It is true that many small business owners do not draw a salary for a number of years, but you can't do that - you have no other source of income. You are hoping your new cutter will allow you to take at least $60,000 this first year. As the business becomes secure, you are sure you will be able to pay yourself more.
New Location:
With the cities incentives to bring new manufacturing companies downtown, you were able to secure a deal for six dollars a square foot in a 1000 ft.² facility. Your rent of $6,000 per month allows you space to operate your paper cutter, house your new employees, and handle the day-to-day business. Your space will also work for expansion and you estimate it will last for the next many years.
Fortunately, your lease covers insurance, maintenance, and building taxes.
Paper, Cutter, & Production:
If you start buying your paper in reams (500 sheets), you can get a 10% discount on the markets average price.
While the cutter is much faster than scissors, it still takes a toll on your employee's wrist. You estimate that an employee can't cut for more than 4 hours each day. The cutter only needs one employee to run it.
A new paper cutter will allow a single employee to cut 2 reams per hour. This is much better than the 6 hours it would take to cut one ream by hand.
As the cutter is used the blade becomes dull. The manufacturer's recommendation is to change the blade every 1,000 sheets or 2 reams. Blades cost $5.00 to replace.
Based on the market and what you know of paper sales, you make the assumption that every bit of paper you produce, you can sell.
Cutter cost is $6000 for one
Average original square sale price is $3.76
Average original paper purchase price is $3.64
Even though your specialty item can demand a high price, you recognize the strength of your business lies in its core operation - original squares.
Other business expenses:
After talking to a lawyer and insurance agent, you estimate company insurance at $38.00 per month.
Business licenses and lawyer fees should run you about $2,000 each year.
You expect to spend the equivalent of $1 per ream on advertising and marketing.
Additional miscellaneous business expenses you hope to keep below $500 per month.
You expect to pay about 30% in taxes
Your cutter will depreciate over the course of 1 year - meaning it won't be worth anything at the end of the year.
You expect to pay 6.1% interest on your loan each year.
Assignment A: Create a 1-year projected forecast with one cutter and three employees.
Make sure your case has the following
Correct information in the Constants section
Formulas in the Production Calculations section
Formulas and/or cell references in the forecast section