Financial Analysis
For the new business Eco- Current, it can be expected that the following requirements would need to be taken into consideration for its start up. We aim to initiate the business with three generators and one pick up vehicle for transport of generators at the clients’ sites. We aim to save the cost of buying a new vehicle, and purchase an old pick up vehicle which has a useful life of 3 years.
The generators that will be purchased have a long life of 10 years and they will be depreciated using straight line method. To further save up costs the business will be operational from a rented office rather than buying a property upfront which may be difficult to maintain and manage for the start up of the business.
In addition to the fixed asset requirements, we expect that an initial inventory has to be purchased to ensure that the business is operational in the first month. This inventory will include cable guards, distribution boards, and other components for installing generators on a rental basis at the clients’ sites.
Start-up Requirements ($)
Start-up Funding
The owners of Eco-Current are considering a $50,000 through equity investment and $50,000 through external debt acquisition. The result would be a 50:50 debt-equity structure for the business. Loan from a bank can be obtained for a period of 2 years at a nominal interest rate of 6% per annum (Info Choice 2011).
The entire loan will be paid by the end of the 2nd year of business. Further, borrowing will be made in the third year. The funding required at the start of the business is presented in the following table:
Sales Forecast
We estimate a rental value for each generator to be $1,500 per temporary installment of generators. We also expect 6 minimum rentals to be made each month in the first and second year. However, in the third year we expect that we can double the number of generators and also would be able to generate additional sales. Furthermore, on a prudent side we expect the business to grow organically at a rate of 5% per annum.
The following table gives an idea of both sales, cost of sales, variable costs and fixed costs that the business will have to incur every month in the first year of the business. Subsequent, years’ financial data can be derived on these estimations and estimations.
Variable costs are considered to be directly proportional to the sales expected from the business whereas the fixed costs include the rent to be paid for office premises.
Pro Forma Profit and Loss
The business is expected to start with a decent profit in the first year of approximately $26,235. This is expected to rise in the third year with an increase in the number of generators and sales and profit is likely to increase to $76,349 after paying all expenses, interest obligations, and taxes.
Pro Forma Cash Flow
Pro Forma Balance Sheet
Break Even Analysis
Break even is calculated as the period in time when there is no profit or loss from the business operations or the fixed costs of the business are covered from the sales of the business (Cafferky et al. 2010). Keeping in view the low variable costs and ability of the business to generate sufficient demand for its generators in the coming months we expect the break even to be achieved in the first 18 months of the business which is quite attractive for investors who can expect quicker return on their investments.
List of References
ATO, 2011. Company tax rates. [Online] (Business Expert Press). Web.
Cafferky, M., Wentworth, J. & Jon, W., 2010. Break Even Analysis. New York: Business Expert Press.
Info Choice, 2011. Business Loans Comparison. Web.