Executive Summary
This work aims to comprehensively analyze Felix’s business idea to open an online pearl retail website in Switzerland. A detailed consideration of the aspects of purchases, expenses, and income for various periods makes it possible to use different financial instruments that show the liquidity of assets and the soundness of the idea as a whole. This paper uses breakeven analysis, the construction of an income statement, a balance sheet, and potential sensitivity analysis scenarios to achieve this goal. A more differentiated, complex and comprehensive approach is proposed in terms of critical reflection since the initial data and the available marketing research do not fully take into account all possible external factors over a longer distance and business development mechanisms with related expense items. In addition, Felix does not provide data on the company’s further development, which is a crucial aspect in implementing possible business development mechanisms. Taking into account all the known initial conditions of this case, a critical assessment of starting a business in this industry, support in the first year and subsequent periods, possible risks associated with this, potential ways to solve them, and recommendations in the method of financial analysis are proposed.
Main Report
The demand for jewelry is subject to many external factors that should be considered when planning to earn money in this business sector. Crises contribute to purchasing precious metals and jewelry as a kind of investment. Retail prices for jewelry depend primarily on the exchange price of the critical raw material, gold, and the exchange rate in which these auctions take place and in which imports are settled. The supply chain factor, the prices of transportation and related industries, which Felix will use in the process of starting and supporting a business, influences. These include the information technology sector experiencing worldwide growth and correspondingly higher service prices; security companies, marketing, banking, and finance (Rocha, Ferreira, and Silva, 2018). Initially, low sales are expected with high costs for many of these aspects.
At the same time, one of the most overhead items of expenditure for the maintenance of the premises of trading floors is missing. This factor is an undoubted advantage in choosing the mode of sale exclusively via the Internet. However, at the same time, the business processes of this enterprise are associated with some risks that are not taken into account in this financial analysis. The agreement with Orohena Pearls does not take into account inflation and even the increase in the purchase price during the six years of the contract for exclusive sales rights in Switzerland. This financial analysis shows only a gradual increase in the number of purchased products, while the price has remained constant for six years. On the one hand, this factor can be documented in the contract; on the other hand, the stagnant jewelry price is unusual for this industry (Bertacchini et al., 2021). Therefore, the cost of goods sold will theoretically be higher. In addition, this factor may be affected by the difference in the exchange rate.
This phenomenon should also be taken into account for the following reasons. The current maximum demand level is around 250 pearls, excluding the contract for products with Paula. In the future, a significant increase in demand is not expected, as the maximum potential of the market will be reached. At the same time, the price tags for consumables are rising, and therefore the retail price will increase; cooperation with Paula may be limited to only one year, and new mechanisms for generating revenue will depend only on the optimization of production or pricing policy. An increase in the selling price can reduce demand, especially if external factors demonstrate a crisis, even indirectly affecting the sector.
Accordingly, Felix needs to find a balance between high initial costs and further supporting payments. For example, the security system supports monitoring for only 100 francs, which makes it quite profitable to use in the long run. The interest fee on a line of credit is less beneficial as it increases as sales increase. Felix may consider fixed monthly payment options in the future. Moreover, the contract with Paula is good to help at the initial stage, but in the future, it is not profitable in the long run, and perhaps other ways to increase the number of products sold should be looked for. At an early stage, pressure on the balance sheet will also come from a deposit in the form of a three-month rent for a safe deposit box.
Investments at 4% per annum are a step when it is impossible to diversify the business further since if Felix takes an additional loan at 6% per annum, then a significant part of the amount will be lost due to the difference in the growth rate of monetary units. Moreover, the performance of the personnel has not yet been assessed, and no measures have been implemented to control these employees. One likely is enough for the headquarters, or two is not enough, leading to recalculations of the indicated values. As the company develops, when it reaches a plateau of 250 pearls sold per month, the expansion will be required, possibly horizontally and vertically. If the service remains at the premium level, then looking for a profit in shipping and packaging is not a desirable step to avoid losing reputation. Accordingly, the different ways of the company’s development can be determined and determine the final decision to start a business or the insolvency of an idea.
Moreover, the volume of work should be extrapolated during the year, and the performance of the two hired employees should be evaluated. Site support, as well as accounting, require certain qualified specialists, which, when expanding the business, must be added to additional costs. A four-week supply for a three-week shipment is relatively small given the ever-growing demand to a plateau, but given the specifics of the jewelry market, it may be sufficient. It should be based on the factors of proximity to specific holidays, for which demand naturally and significantly increases and is accordingly reduced in other seasons. Moreover, this financial plan does not specify anything about marketing expenses, except for a study on the average price of a product in the market. Exclusive marketing rights in Switzerland create the conditions for effective advertising slogans on the country’s most famous social networks and relevant topical communities (Griffiths and Mylly, 2022). This item of expenditure is not included in this analysis but is required for online sales.
In addition, selling at the average price in the market may not bring proper growth without marketing campaigns. For example, to enter the market, Felix can use a lower price as a promo, which, given the small volume of sales, will not lead to significant losses, but in the future, it is possible to set a price higher than the market price due to exclusive rights and product quality. Given that the contract with Paula is only for a year, then in the future, it is possible to use these tools and chain suppliers to diversify products on the site with a gradual reorientation to a jewelry store with various products. Receiving payments from the bank every fifteen days, taking into account the basic monthly expenses, looks like the best solution, which gives Felix enough flexibility to manage his finances.
Therefore, a superficial analysis reveals that this plan does likely not consider many items of expenditure that can stimulate sales. On the other hand, this minimizes the cost of starting a business and, in the study, still offers steady growth for one year before reaching a plateau. Signing a contract with Paula provides important reputational, marketing, and financial support for the first year of sales. In the future, Felix can consider how to continue cooperation on more favorable terms if his products work well in the market or as an experience diversifying his products. For a more detailed assessment, it is needed to refer to breakeven analysis, balance sheet calculation, cash flow, income statement, and possible sensitivity analyses to find dependencies between non-obvious aspects of this business.
To find the breakeven point, it is needed to define fixed and variable costs per unit of production. Fixed costs include the cost of renting a pearl storage room of CHF 850, staff salaries of CHF 7200, an alarm system monitoring fee of CHF 100 and a salaried assistant of CHF 350. The remaining costs are variable and depend on the number of units purchased and sold. They include courier from Tahiti, packaging, and shipping – 15 CHF, credit card fee of 1.2% of the sale, and direct cost of pearls, which will be 86.6 for each pearl. According to Paula’s contract, the costs are fixed since the number of sales units is strictly regulated by the document. Accordingly, it is also necessary to calculate the initial costs, which include the purchase of a safe, installation of a security system, website design, marketing research, and small drig and jig to create chains. Accordingly, this analysis will show how many pearls need to be sold before all the initial costs with variable and fixed costs are paid off. It is worth noting that the chain’s sales under the contract have the same number, so the breakeven analysis does not consider their costs and revenues.
Therefore, initial costs include CHF 28,200, which are added fixed costs of CHF 9,050 and approximately CHF 121 variable costs. Thus, with an average selling price of 270 CHF, it turns out that Felix needs to sell more than 247 units of goods in order to reach payback. According to marketing research, this quantity will be sold in the first five months with the development of demand. Accordingly, the results of the sales plateau, which include 250 units, are satisfactory but very insufficient for significant business growth, in connection with which diversification of the lines was proposed.
It can be concluded that within the framework of the breakeven analysis, there were data obtained that indicate the viability of the idea; however, subject to the sales forecast. All costs pay off after only five months, after which a profit can be used to develop the business. Therefore, it is necessary to assess the situation after several months, how much sales approached the breakeven point as the forecast period approaches, take into account the influence of seasonal and holiday demand factors and understand different business development vectors. After passing this point, Felix will have assets like a supply of pearls, a safe, a sales site, and a security system. At the same time, long-term obligations will need to be taken only in case of significant diversification of products or another direction of business development.
Now we need to turn to the initial costs to explain to Felix in an accessible language about the cost of starting a business. Firstly, this includes already paid 28,200 CHF for the above needs. Secondly, Felix’s price for the exclusive rights to sell pearls must be determined. The calculation showed that CHF 80,474 is a net profit for the year according to the specified forecast; therefore, in order to recoup this expense item with possible risks for the year according to the breakeven analysis, we can assume an amount of up to CHF 80 thousand, which pays off with 654 units sold, which will be achieved by the end of 11-12 months in terms of net profit. A higher price for exclusive rights already carries significant risk since under certain factors of seasonal sales, insufficient marketing work, and inefficient cost optimization, sales may fall, which will increase the payback period. It should also add the purchase of the first batch of pearls, deposit to the landlord and courier services, and fixed costs for the first month. As a result, it turns out that to start a business, Felix has to spend a minimum of 120 thousand CHF. Income will begin to fully cover monthly expenses only by the end of the third – beginning of the fourth month; therefore, Felix must have capital and financial reserve for the first three months, which will be from 105 to 175 thousand CHF, depending on the price of exclusive rights for six years. In order to mitigate the risks and consequences of any crisis or emergencies, Felix is recommended to designate an initial capital of 200 thousand CHF. If there is free money, the entrepreneur can invest it at 4%, as stated in his proposal.
If we consider the first year of sales, the cash flow and income loss statement shows that the net profit on total revenue is approximately 17.7%. Moreover, in the calculations, it becomes noticeable that the contract with Paula is unprofitable due to the fact that the costs of production, purchase of chains, and packaging are not beaten off by sales, according to documents. As mentioned above, this contract is more advertising and reputational in nature, as a chance to recommend their products on the local market. Accordingly, it is not possible to extend it for the following year. In the calculations for the following years, the contract with Paula is not taken into account, sales are kept at the level of 250 jewelry per month, and the costs do not change accordingly. In a similar vein, this analysis will be very far from the truth since, again, it does not consider many external and even internal factors. These include inflation, the possible development of a business with a diversification of the line, an increase in headquarters, and a change in the cost of maintaining a site, security system, or rent. In any case, all these costs, as well as revenue, will be dynamic, and at least the error must be considered.
Nevertheless, even if all these assumptions are accepted, the net profit margin for four years in the calculations grows to more than 23%. While maintaining the gross profit ratio at the same level, this indicator is promising, even in the absence of optimization activities that improve this indicator. However, if one adds to these costs the rights fee, which can vary at any level from ten to eighty CHF, then the first year can be profitable under any condition. This range will make it possible to determine business opportunities based on the results of the first year, and even if the net profit margin remains at the level of 20.6% even in the case of the maximum price for four years, even though in the first year it can hardly be more than 0%. Subject to the signing of a contract with Paula, this venture should be viewed as a long-term investment that pays dividends in the long run with proper management and reactive policies in a relatively stable market.
The contract of exclusive rights is designed for six years; therefore, during this period, if the final recommendation of the viability of the idea from a financial point of view is justified, Felix needs to decide on the possibility of continuing this contract firmly. On the one hand, even in the worst possible case of the rights price, the net profit margin for six years only reaches 22.3%, which in comparison year on year does not bring any growth at the moment. In this case, the retention of rights depends on the price and terms of the new contract, the retention of the 35% discount, or its absence. Liquidity and profitability for this case should be calculated based on already available statistics for five years, which can be significantly changed compared to the current marketing forecast.
Sensitivity analysis with current data is quite tricky since, firstly, there have not yet been actual sales, and secondly, there is no way to compare the determinants of dead data and no investment. However, it is possible to consider various sensitivity analysis scenarios for the early stages of Felix’s business. For example, it compares sales growth in the first and second years through the context of having a contract with Paula’s pendant business. Naturally, one should immediately differentiate the various determinants of the level of sales that affect their growth or decline; however, even the search for correlation through linear regression can provide a starting point for analysis. Moreover, this analysis can be used to evaluate the introduction of diversification of the product line due to the experience of the contract with Paula. For example, Felix introduces pearl pendants and pendants into the assortment of an online store, after which he can track sales, gross profit ratio, asset turnover, and other various indicators in dynamics that will reflect liquidity and optimization of the company’s operations. In other words, the influence of such determinants can already be tracked in actual sales using this tool, which will make it possible to give more significant assessments of the idea’s viability.
Using sensitivity analysis, it is possible to extrapolate the data dynamics for further periods to understand the ratio of assets and liabilities. If sales growth associated with product diversification is driven by seasonal demand or other uncertainties, a longer time frame may be needed to estimate (Razavi et al., 2021). For example, the creation of a new line of jewelry will require the purchase of new tools, and market analysis of the market, already considering the presence of such a player as Felix. These costs must be assessed using a breakeven analysis and, simultaneously, require a comprehensive approach in terms of sensitivity. The market can meet new products at above-average prices if the brand has proven its quality. At the same time, due to the presence of many external factors not directly related to the jewelry industry – for example, the crisis that led to a decrease in the purchasing power of the workshop’s target audience – sales may fall even with the growth of the global market. To do this, there are several tools that Felix must constantly implement with a specific frequency. These include analysis of the external PESTLE macro environment and the internal SWOT environment. In the first case, a detailed analysis will be required as the business grows because, at the same time, the environmental and social responsibility of the company will grow. In the second case, the tool will provide an opportunity to constantly keep abreast of a critical assessment of the internal vector of development, which should use the business’s strengths and neutralize the weaknesses.
Critical Reflection
With the company’s further development, Felix is encouraged to use more complex and severe methods for modeling financial performance. At the moment, detailed marketing research provides an understanding of the approximate demand for the year, verbal agreements with Paula and suppliers of the leading products, the availability of discounts, and various potential benefits. In the long term, it is not easy to make any forecasts, especially without accurate sales statistics, but nevertheless, it is possible to take into account various external factors that will directly affect price dynamics. For this purpose, tools such as Porter’s five forces to assess the levels of threats from various directions, as well as accounting for a six-year contract for exclusive rights, will be suitable.
The income statement model should be differentiated approximately for the next six years every month. The main disadvantage of this business plan is that Felix does not have the value background of even such a small company, on which the mission and vision should usually be based. Given the current model, Felix is content with stagnation after the first year of sales with no room for further development, a withdrawn contract from Paula, and a stable income. First, it is necessary to implement inflation and an approximate percentage of sales growth in the model based on a clear plan for the development of product diversification. The line of pearl jewelry has a classic and understandable interpretation and possible ways of improvement, proven over the years. Pearls can be combined with silver and gold, depending on the target audience discovered and their budget. Diversification can also be horizontal to cover more market segments. After successful scenarios of this approach, it is possible to search for suppliers of other gemstones and consider the possibility of creating a network franchise in neighboring countries.
Secondly, the model should consider more unforeseen expenses for an adequate assessment of the initial capital. To achieve this goal, it is necessary to implement more marketing campaigns and research based on the market segmentation, and sales by these segments will be known. As a result, it will be possible to draw up a positioning map with direct competitors to identify an unoccupied niche and the corresponding pricing policy, service, and delivery in advertising companies (Gigauri, 2019). As expected, sustainability can never be in a permanently dormant state, with a plateau of 250 pearls sold per month. If a maximum is reached in any product, following the analysis of positioning and marketing, it is necessary to implement new products in line with a price justified by the target segment’s needs. Accordingly, the model should consider the seasonal factor of sales in Switzerland, which should include an increase before significant holidays and a decrease in other periods. These percentages should be based on the company’s direct competitors’ actual statistics or financial reports.
Thirdly, the preliminary financial analysis already included Felix’s specific decisions, which were not subject to discussion. The recommendation, in this case, is to take a more comprehensive approach to market analysis for each item of expenditure. First, analysis of the real estate market can be based not only on comfortable distance but also on transport accessibility, good environmental infrastructure, and other determinants that were not considered by Felix but influenced the cost. Secondly, in the field of banking services, there is a wide choice of banks that provide various offers to small and medium-sized businesses. Quite often, some offer promotions to capture this segment over competitors; therefore, a credit card may have a lower percentage under certain conditions of use, which are best suited to the specifics of Felix’s business. A lively discussion of cooperation and negotiations with representatives of banks can give a more profitable result for doing business, reducing the payback period and increasing the net profit margin over time, even in the first year.
Finally, the critical analysis of this financial plan is relatively optimistic, as it is assumed that all expenses in the first year will be documented and will not succumb to any price fluctuations and external factors. However, including all costs and risks, Felix must be prepared for the fact that, according to the first year’s results, even zero in terms of payback may not be achieved due to the influence of a combination of determinants beyond the control of the entrepreneur. In the long run, payback is almost inevitable with proper management, constant monitoring with the help of various financial and market instruments, and appropriate response. Felix must be ready to diversify products based on market research, which should be more, and also be open to investment to open up the possibility of another source of income for development. A detailed financial plan is possible only for the next year, while for future years, a less detailed but understandable in terms of development vector plan should be developed, which will include a basis in the form of the mission and vision of the company and the corresponding steps to achieve it. Even if Felix wants to keep the local business without large-scale development, it is necessary to develop mechanisms to prevent stagnation, which will naturally lead to huge losses. Such mechanisms include demand-side marketing campaigns, seasonal holiday tie-ins, and loyalty programs for regular customers.
As a result, according to the financial analysis carried out in this work, we can conclude that the idea is viable even in the short term of the year and can lead to self-sufficiency already in the third month of work, as well as to fully recoup the initial costs by the end of the year. In the worst case, Felix will receive net profit from the second year of the company’s operation; in the best – much earlier, as shown by the profit and loss statement and balance sheet. Because the breakeven point has a relatively actual number of units for sale, taking into account the conducted marketing research, this financial instrument speaks in favor of this idea. Confirmation is also found in the calculation of the net profit margin and various application scenarios of sensitivity analysis, which will be an integral marketing tool for assessing the development of this business in the jewelry industry. The final verdict regarding the liquidity and profitability of this pearl selling idea is favorable, subject to proper control, management, and a more profound and more comprehensive attitude towards the company’s fundamental values, which must be established even in such a small staff.
Reference List
Bertacchini, F., et al. (2021) ‘Multi-objective optimization and rapid prototyping for jewelry industry: methodologies and case studies’, The International Journal of Advanced Manufacturing Technology, 112(9), pp. 2943-2959. Web.
Gigauri, I. (2019) ‘Perceptual mapping as a marketing research tool for brand positioning’, International Journal of Economics and Management Studies, 6(4), pp. 73-79. Web.
Griffiths, J., and Mylly, T. (Eds.). (2022) Global Intellectual Property Protection and New Constitutionalism: Hedging Exclusive Rights. Oxford, UK: Oxford University Press.
Razavi, S., et al. (2021) ‘The future of sensitivity analysis: an essential discipline for systems modeling and policy support’, Environmental Modelling & Software, 137, p. 104954. Web.
Rocha, H. T., Ferreira, L. P., and Silva, F. J. G. (2018) ‘Analysis and improvement of processes in the jewelry industry’, Procedia Manufacturing, 17, pp. 640-646. Web.