Introduction
The following report presents a detailed business plan for establishing a debt collection agency in Dubai. The report provides a detailed discussion of the aim and structure of the proposed business and its services. It also provides a detailed analysis of the debt collection market, which highlights the need to establish a debt collection agency in Dubai.
Moreover, the report includes forecasted sales and revenues and forecasted financial statements of the proposed business and the exit plan. Furthermore, the report includes findings of different capital appraisal methods used for evaluating prospects of the proposed business.
Description of Organization
The title for the proposed business is “Al-Masroof & Partners LLC.” The legal status of the proposed business would be a partnership between four partners. Each partner would contribute his or her own share of capital, and thereby, he or she would be entitled to profits and losses of the proposed business in accordance with his or her share in the total capital of the proposed business. The mission statement of the proposed business is to lead Dubai’s debt collection industry by setting high standards and success rates in debt collection and assisting clients in an efficient and effective manner.
Product and Services
The business of a debt collection agency involves acquiring the right to redeem debt obligations from individuals and businesses, which have written them off in their financial statements due to non-payment of the same by their respective debtors. By targeting these potential clients, the proposed business aims at purchasing uncollectable debts from its clients at a certain fee based on their book values. It would also provide services to collect debts without purchasing them on behalf of its clients and charging a certain fee as a percentage of the total amount collected.
The aim of the business would be to collect as much amount as possible from debtors; however, a certain margin would be given to debtors as well to make them pay the amount they owe. Moreover, the services of the proposed business would also include providing consultancy services to its clients for credit management and setting up terms and conditions with debtors, which can increase the likelihood of debt payments by debtors. These services are discussed in detail in the following.
Debt Collection Services
The debt collection agency would also provide its services as a third-party for recovering those debts, which are deemed bad debts and written off books of such companies. These recoveries would be made on behalf of the clients of the business, and a certain percentage of the amount recovered would be charged as a debt collection fee. The fee earned would also form a part of the company’s revenues.
Consultancy and Credit Advisory Services for Clients
In addition to this, another service of the proposed business would be the provision of consultancy services to different business organizations for credit management and debt recovery strategies. Furthermore, it would help in establishing terms and conditions with different debtors based on detailed evaluations and analyses.
Keeping in view the fact that Dubai has a large corporate community and numerous business entities exist in the market, it is considered as a considerable opportunity for the proposed business to offer such advisory and consultancy services. For advisory and consultancy services, a certain fee would be charged on the basis of hours of consultancy provided to a particular client.
Market Analysis
The market analysis has been performed to understand the potential and scope of a debt collection agency business. In this regard, UAE’s business’ debt collection trends are reviewed. In the UAE, debt collection from debtors has become a significant concern for almost every creditor.
An interview by Bhoyrul (2013) of a well-known lawyer Dr. Habib Al Mulla, revealed the worrying state of debt collection prevailing in the UAE. In an interview, the lawyer pointed out the issues pertaining to debt collection faced by businesses operating in the UAE. The lawyer said, “Banks are using the police as debt collectors, but even the police do not want to do this, though until the law is changed, they cannot change this.” It shows that business entities operating in the UAE do not have a reliable and established source for collecting their bad debts and, therefore, have to rely on the police for collecting bad debts.
It implies that both regulatory measures and debt collection agencies are absent in the UAE, and these conditions add to the existing problems of debt collection for business entities operating in the UAE. This factual information and stats provide a rationale for setting up a debt collection agency in Dubai, where the concentration of business entities is highest. Moreover, based on the fact that there are measures and policies introduced by the government for non-payment of debts by debtors, there is a large scope for a debt collection agency.
Apart from this, in Dubai, there are numerous business entities operating and belong to a variety of industries. In addition, businesses operating in Dubai have varying investments and credit profiles and volumes of transactions with other business entities. It follows that the proposed business would have a variety of clients as its customers and would not be limited to a particular industry.
However, it could be stated that the banking companies would be the major customers of the proposed business since they have the largest number of debtors and, therefore, face more debt collection issues than any other business. Apart from this, the proposed business would be able to target the same customer base for credit advisory and consultancy services since they require efficient and effective planning against loan defaulters and bad debts management and recovery.
Sales and Revenues
The sales and revenues, which are represented by the fee earned by the debt collection business, are forecasted on a monthly basis.
Monthly Sales Forecast
The monthly sales forecast is provided in the following table. From the sales figures provided, it could be indicated that sales are likely to follow an incremental trend.
* Recoverable Amount: Debt amount to be collected
* Fee is the percentage amount that the business expects to earn based on assumptions.
The above figures indicate seasonality as debt collection increases near the year-end. In the last three months of the accounting year, the proposed business expects to make higher debt collections. Furthermore, collections at the start of the year are also expected to be higher.
Financial Plan
The financial plan, which includes the proforma income statement, balance sheet, and cash flow statement, has been developed on the basis of numerous assumptions about certain trends to be expected and findings from market analysis.
Assumptions for Financial Projections
- The proposed company would be a debt collection agency that would collect debt payments from customers, including individuals or businesses.
- The main business of the proposed company would depend upon third-party accounts that were previously held by financial institutions or trading companies.
- The third-party accounts include amounts of receivables / debt payments due to the customers of financial institutions or trading companies.
- The proposed company’s source of revenue would be a fee that it would charge on the receivables / debt amount to financial institutions or trading companies.
- The pricing / commission to be charged by the proposed business would be based on the receivables / debt amount to be recovered as provided in the following table.
Management of the proposed business has strong industry relationships, and it is forecasted that the company would be able to secure 200 different client accounts in the first year of operations. Management expects that the company would be able to secure recoverable accounts worth AED 19,800,000 initially and generate commission income of AED 1,661,814 in the first year based on the average commission rate of 10.9% on the expected recovered amount of AED 15,246,000. The company aims to maintain a high level of recovery efficiency of 77% in the first year and further improve it in the next five years.
The first month of operations is expected to be January 2015. The organizational structure of the company indicates the company would hire operational and administrative staff. Since the company is a start-up, therefore, the partners of the business would hold the administrative positions in the company, and they would be paid a basic salary of AED 21,600 in the first five years operations in addition to the distributed profits. The company’s management aims to save costs of hiring administrative staff, and therefore, its members would hold these positions.
If the company makes profits, then 50% of the company’s net income would be appropriated to four directors of the company on an equal basis, and the balance would be added to the company’s retained earnings. If the company makes no profit / loss, then no appropriation of profits would be made. If the company reports loss in a year, all partners relative to their respective capital contribution would proportionately share the amount of loss to the business.
The administrative positions include accountant, sales managers, and customer relationship managers. The operational staff would include debt collection officers, accountant, and office supervisor. The expected salaries to be paid to individuals holding operational staff positions are provided in the following table.
Staff Expenses Estimates
The expenses related to each category of staff members are forecasted for the next five years as follows:
Although the proposed business expects growth in the coming years, no additional staff would be required to deal with the increased business-level until the end of the third year of operations. The company would hire additional two or three debt collection officers in 2018 to support its growing business.
Start-Up Budget
Projected Start-Up Costs
The office equipment and vehicle would be recorded at their net book value in the company’s balance sheet. The net book value would be calculated by deducting accumulated depreciation amount from the principle amount. A straight-line method would be used for calculating the depreciation value of office equipment over its useful life of six years. Similarly, the useful life of the vehicle is estimated to be of ten years.
Capital Required
Since, the proposed business would acquire funds from external borrowing for the first five years of operations, therefore, it would have to pay interest on the borrowed amount. The interest rates expected by the proposed business are as follows.
The proposed business would settle the short-term loan after one year. The medium term loan would be paid off after two years, and the long-term loan would be settled after five years. Full year’s interest amount would be paid at the year-end.
Based on the work experience of management, it is forecasted that the company would achieve 23% growth on a year-on-year basis. The growth rate is based on the expectations regarding debt collection industry. Furthermore, the proposed business expects to earn 10.9%, 10%, and 9.5% in 2015, 2016, and 2017. The decrease in fee earnings is based on the expectation that the company would be able to secure accounts with larger recoverable amounts due from third-party clients.
- In addition, the proposed business would incur operating expenses and marketing expenses every year. These expenses would be equal to 10% of the company’s fee income.
- The tax rate applicable to the proposed business would be 5%.
Proforma Income Statement
The following table is the proforma income statement of the proposed business. The proforma income statement presented here includes projections for the next five financial years on the basis of assumptions and market evaluations provided earlier.
Proforma Balance Sheet
The following is the proforma balance sheet of the proposed business. The proforma balance sheet provided below includes projections for the next five financial years on the basis of assumptions and market evaluations made earlier.
Proforma Cash Flow Statement
The following is the proforma cash flow statement of the proposed business. The proforma cash flow statement provided below includes projections for the next five financial years on the basis of assumptions and market evaluations provided in this report.
The above five years’ proforma financial statements could be considered to understand how the proposed business is expected to perform in the future on the basis of the market analysis and certain financial assumptions. Although the financial statements projected for the next five years are reasonable and based on justifiable assumptions, there is, however, an inherent limitation related to the practicality of assumptions. Any changes in any assumption could make the above-presented forecasted financial statements irrelevant or inappropriate.
Key Financial Indicators
The following table provides key financial indicators that indicate the proposed businesses’ profitability and liquidity in the next five years.
The values of financial ratios indicate a rising trend in the profitability of the proposed business in the next five years. However, the current ratio value is expected to decline. In 2017-2019, the company expects to have no current liabilities and therefore, the current ratio is not calculated. However, it could be noted that the ratio value is expected to remain above the benchmark value of one.
Net Present Value
The Weighted Average Cost of Capital (WACC) of the proposed business is estimated to be 12% based on the cost of debt and cost of owners’ equity of 11% and 6% respectively. The corporate tax rate used for calculating the cost of debt is 40%. The net present value of the proposed business is positive that is a good sign for positive returns.
Payback
The payback period of the proposed business is 1.79 years.
Internal Rate of Return (IRR)
The internal rate of return of the proposed business is approximately 72.4%, which is greater than WACC.
Organizational Structure
The organizational structure for the proposed business would be hierarchical, but the number of hierarchies would be kept low to avoid any communication gap, which might prove to be an impediment in the performance of the employees of the company. It is pertinent to discuss the overall workforce of the proposed business in the following before discussing hierarchical levels of the proposed business.
The workforce of the proposed business would be categorised into two broad categories, which are further categorised on the basis of functions of the workforce members. The two categories into which the workforce would be categorized are service providers and support staff. The service providers would include debt collection officers, who would be responsible for collecting debts purchased by the proposed business from its clients and on behalf of the clients of the business.
In addition, the service provider staff would also include credit advisors, who would be given the responsibility of providing credit advice to the business clients of the proposed business on terms and conditions in their agreements with their debtors that would ensure the recovery of debts in a quick and efficient manner.
On the other hand, the other category of the workforce would be support staff. The support staff would comprise of an accountant, office supervisor and administrative staff. The accountant would be charged with the responsibility of preparing financial statements and recording each and every transaction of the business and reporting it to the partners of the proposed business. The office supervisor would be given the responsibility of dealing with office issues and overseeing administrating staff’s activities. The administrative staff for the proposed business would include supporting staff for accountant, marketing and sales personnel and office workers.
In short, the workforce of the proposed business would be as follows:
As mentioned earlier, the proposed business would be hierarchical, but the number of hierarchies would be kept low to avoid any communication gap, which might prove to be an impediment in the performance of the employees of the company. In this regard, the most important step taken would be that less managerial levels would be maintained for each category of the workforce, and direct reporting of each workforce category to partners would be ensured.
The service provider staff including debt collection officers and credit advisors would report directly to the partners of the proposed business. It follows that a direct reporting would be done by the service providing staff members to the partners, which would ensure quick decision making on the basis of performance of service providers.
On the other hand, as far as the supporting staff of the proposed business is concerned, the accountant would report directly to the partners that implies that there would be no hierarchical level between accountant and the top management. However, office supervisor would act as a hierarchical level between top management and the administrative staff. It implies that the administrative staff would not report directly to the top management, and they would communicate through the channel of office supervisor.
It could be expected that the performance of the proposed business would be efficient and effective in the proposed organizational design, and fewer communication gaps would be observed between the top management and workforce.
Exit Plan
The last part of the business plan is to formulate an exit strategy for the business. Although it is relatively early to talk about how a business would wound up in the future in certain situations including its failure to achieve its targets, mission or objectives, it is pertinent to outline a strategy to exit in order to avoid problems in closing operations of the business.
There are various exit strategies for businesses, which are set to operate with a long-term strategy. These strategies include letting the business run to its end through a well-planned strategy, selling out the stake in the business to some other interested party or to liquidate the whole business. The first option is best suited for small businesses in which the owner tries gradually to wind up the business. In this particular case, the strategy and planning work collectively where the owner takes out his investment and pays off debts in a systematic manner by reducing operations of the business in a gradual manner.
On the other hand, transferring the interest in a business is also a considerable option for partnerships, whereby partners are able to transfer their interest to some other individual. In this manner, they could sell off their respective shares to new partners and dissolve the partnership at once. Lastly, it is also possible to liquidate the whole business by selling each and every asset and paying off debts of the business from the amounts received.
By keeping in view the nature of the proposed business and the organizational structure, it could be stated that a choice has to be made from the first two exit strategies discussed above. As far as the first strategy is concerned, it could be stated that differences in opinion may play their part as the proposed business is a partnership and letting the business to run till some may not consider the end as suitable.
However, the second option, which is selling their stakes to some new partner, appears to be the best option. In this case, the partners would be independent to sell their part in the business whenever they feel like exiting the business and, therefore, smooth transition would be possible.
Conclusion
Based on the information provided regarding the proposed business of debt collection agency and related financial projections of the business, it could be stated that it is a feasible business. In the recent years, the need for debt collection agencies increased considerably, and there were few companies that entered this market. The proposed business could be expected to perform well as its partners hold valuable experience in the relevant market and they could bring business for the new company.
They have the ability to manage business affairs in a professional manner and ensure that the company maintains cost efficiency to generate higher returns. The assumptions provided to make the financial projections are based on the current market analysis and, therefore, it could be suggested that the proposed business would achieve these figures. As it could be noted from the financial projections, the owners of the proposed business understand the importance of keeping sufficient cash in the business to support future growth of the business.
It has been indicated that the business would retain 50% of its income as retained earnings that would be accumulated in order to meet staffing needs. The projected financial statements indicate that the proposed business would require minimal capital investment and it would generate profits from the first year.
The key financial performance indicators presented in this report indicate a positive trend in the next five years of operations. On the basis of this report, it is, hereby, requested to accept the application for a loan of AED 540,000 that would be payable in the next five years according to the repayment schedule provided in this report.
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