Eco-Current Business Start-up Costs and Predictions Report

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Updated: Apr 2nd, 2024

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.

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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 Expenses Legal1,300
Stationery, etc.200
Insurance1,080
Brochure2,000
Advertisement14,000
Website Designing400
Office Rent (6 months)7,200
Furnishing and Equipment6,500
Total Start-up Expenses32,680
Start-up Assets Cash Required5,000
Start-up Inventory (Cable Guards/Distribution Boards/Others)20,000
Other Current Assets5,000
Generators (x3)65,000
Used Carrier Van (3 Years Useful Life)7,500
Total Assets102,500
Total Requirements135,180

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:

Start-up Expenses to Fund32,680
Start-up Assets to Fund102,500
Total Funding Required135,180
Assets Non-cash Assets from Start-up97,500
Cash Requirements from Start-up5,000
Cash Balance on Starting Date5,000
Total Assets102,500
Liabilities and Capital Liabilities
Current Borrowing
Long-term Liabilities50,000
Accounts Payable (Outstanding Bills)
Total Liabilities50,000
Capital Planned Investment50,000
Total Planned Investment70,000
Loss at Start-up (Start-up Expenses)(32,680)
Total Capital37,320
Total Capital and Liabilities87,320
Total Funding135,180
Assumptions
1Loan will be acquired for 2 years at an interest rate of 6% per annum.
2Capital planned investment will be made by the owner.

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.

AssumptionsYear 1 (2012)Year 2 (2013)
Year 3 (2014)
Price per Rental$1,500
Expected Rentals per month in the first year6$108,000$113,400$238,140
Expected Growth per Year in the 2nd Year and 3rd Year5%
Year 1 (2011)Year 1 (2012)Year 2 (2013)
Sales
Expected Sales108,000113,400238,140
Cost of Sales18,00018,90039,690
Cost of Sales Include
Fuel Charges$250/rental
Increase 5% in the 2nd and 3rd Years.
In the third year, we expect that additional 3 more generators will be added and sales will increase proportionately.

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.

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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.

AssumptionsMonth 1Month 2Month 3Month 4Month 5Month 6Month 7Month 8Month 9Month 10Month 11Month 12Total
Sales Forecast$9,000$9,000$9,000$9,000$9,000$9,000$9,000$9,000$9,000$9,000$9,000$9,000$108,000
Direct Cost of Sales$1,500$1,500$1,500$1,500$1,500$1,500$1,500$1,500$1,500$1,500$1,500$1,500$18,000
Gross Profit$7,500$7,500$7,500$7,500$7,500$7,500$7,500$7,500$7,500$7,500$7,500$7,500$90,000
Depreciation – Generators10 Years Useful Life – Straight Line Method$542$542$542$542$542$542$542$542$542$542$542$542$6,500
Depreciation – Vehicle3 Years Useful Life – Straight Line Method$208$208$208$208$208$208$208$208$208$208$208$208$2,500
Administrative Expenses2% of Sales$180$180$180$180$180$180$180$180$180$180$180$180$2,160
Staff Expenses20% of Sales$1,800$1,800$1,800$1,800$1,800$1,800$1,800$1,800$1,800$1,800$1,800$1,800$21,600
Insurance Expense1% of Sales$90$90$90$90$90$90$90$90$90$90$90$90$1,080
Office Rent$1200 per month$1,200$1,200$1,200$1,200$1,200$1,200$1,200$1,200$1,200$1,200$1,200$1,200$14,400
Lighting and Heating0.5% of Sales$45$45$45$45$45$45$45$45$45$45$45$45$540
Marketing Expense1% of Sales$270$270$270$270$270$270$270$270$270$270$270$270$3,240
Maintenance2% of Sales$180$180$180$180$180$180$180$180$180$180$180$180$2,160
Other Expenses1% of Sales$90$90$90$90$90$90$90$90$90$90$90$90$1,080
Earnings before Interest and Tax$2,895$2,895$2,895$2,895$2,895$2,895$2,895$2,895$2,895$2,895$2,895$2,895$34,740
Interest$250$250$250$250$250$250$250$250$250$250$250$250$3,000
Earnings subject to Tax$2,645$2,645$2,645$2,645$2,645$2,645$2,645$2,645$2,645$2,645$2,645$2,645$31,740
Tax30%$794$794$794$794$794$794$794$794$794$794$794$794$9,522
Net Profit$1,852$1,852$1,852$1,852$1,852$1,852$1,852$1,852$1,852$1,852$1,852$1,852$22,218

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 Profit and LossYear 1Year 2Year 3
Sales Forecast$ 108,000$ 113,400$ 238,140
Direct Cost of Sales$ 18,000$ 18,900$ 39,690
Gross Profit$ 90,000$ 94,500$ 198,450
Depreciation – Generators$ 6,500$ 6,500$ 6,500
Depreciation – Vehicle$ 2,500$ 2,500$ 2,500
Administrative Expenses$ 2,160$ 2,268$ 4,763
Staff Expenses$ 21,600$ 22,680$ 47,628
Insurance Expense$ 1,080$ 1,134$ 2,381
Office Rent$ 14,400$ 14,400$ 14,400
Lighting and Heating$ 540$ 567$ 1,191
Marketing Expenses$ 3,240$ 3,402$ 7,144
Maintenance$ 2,160$ 2,268$ 4,763
Other Expenses$ 1,080$ 1,134$ 2,381
Earnings before Interest and Tax$ 34,740$ 37,647$ 104,799
Interest$ 3,000$ 3,000$ 3,000
Earnings subject to Tax$ 31,740$ 34,647$ 101,799
Tax$ 9,522$ 10,394$ 30,540
Net Profit$ 22,218$ 24,253$ 71,259
Assumptions
1. Tax at 30% (ATO 2011).
2. Initial Loan of $50,000 will be paid by end of 2nd year and new finance at 6% per annum will be obtained to purchase 3 additional generators in the third year.
3. Demand for generator rental likely to increase in proportion with the increase in the number of generators purchased by the company.
4. Marketing expenses will be double in the third year in anticipation of growing competition.

Pro Forma Cash Flow

Pro Forma Cash FlowYear 1Year 2Year 3
Cash Flow from Operations
Net Income$22,218$24,253$71,259
Add:
Depreciation$9,000$9,000$9,000
Change in Accounts Receivables$0$0$0
Change in Other Current Assets($5,000)$0
Change in Inventory($20,000)$0($20,000)
Net Cash Flow from Operating Activities$6,218$33,253$60,259
Cash Flow from Financing Activities
New Long-term Liabilities$50,000$0$50,000
Short Term Borrowing$0$0$10,000
Capital Invested$50,000$0$0
Repayment of Loan($25,000)($25,000)($25,000)
Net Cash Flow from Financing Activities$75,000($25,000)$35,000
Cash Flow from Investing Activities
Purchase of Fixed Assets($7,500)$0$0
Purchase of Long Term Assets($65,000)$0($65,000)
Net Cash Flow from Investing Activities($72,500)$0($65,000)
Net Cash Flow$8,718$8,253$30,259
Cash at the Beginning of the Year$8,718$16,971

Pro Forma Balance Sheet

Year 1Year 2Year 3
Assets
Current Assets
Cash$8,718$16,971$47,230
Inventory$20,000$20,000$40,000
Other Current Assets$5,000$5,000$10,000
Total Current Assets$33,718$41,971$97,230
Non-current Assets
Generators$65,000$65,000$130,000
Accumulated Depreciation$6,500$13,000$26,000
Vehicle$7,500$7,500$7,500
Accumulated Depreciation$2,500$2,500$2,500
Total Long-term Assets$63,500$57,000$109,000
Total Assets$97,218$98,971$206,230
Liabilities and Capital
Current Liabilities$28,735
Current Borrowing$10,000
Long-term Liabilities$25,000$50,000
Total Liabilities$25,000$50,000
Paid-in Capital$50,000$50,000$50,000
Retained Earnings$22,218$48,971$106,230
Total Capital$72,218$98,971$156,230
Total Liabilities and Capital$97,218$98,971$206,230

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.

Sales$ 9,000
Variable Cost
Fuel$ 1,500
Administrative Expenses$ 180
Staff Expenses$ 1,800
Insurance Expense$ 90
Lighting and Heating$ 45
Marketing Expense$ 270
Maintenance$ 180
Other Expenses$ 90
$ 4,845
Fixed Costs$ 86,900
Break Even18

List of References

ATO, 2011. . [Online] (Business Expert Press). Web.

Cafferky, M., Wentworth, J. & Jon, W., 2010. Break Even Analysis. New York: Business Expert Press.

Info Choice, 2011. . Web.

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IvyPanda. 2024. "Eco-Current Business Start-up Costs and Predictions." April 2, 2024. https://ivypanda.com/essays/eco-current/.

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