Assumptions Underlying Revenue and Cost Projections for Spear Brand Footwear
Debtors–It is assumed that credit sales will account for almost 96% of the total sales and the average collection period is 45 days (Zimmerer et al. 2009, p.16). Creditor balances-The projected balances are assumed at 1 percent of the expenses paid in cash with an average payment period of 45 days (Pinnock 2011, par. 8). Inventory balances are projected using the monthly cost of sales, which is multiplied by 12 months, and the result is divided by inventory turnover per year (Zimmerer 2003, p. 6)
The sales revenues were forecasted based on the actual past sales figures of existing footwear companies in the U.S. footwear industry. The sales figures were underestimated to cater to the worst-case scenario. The sales projections were generated using the formula; sales= cost + profit. The cost of goods sold will be used as the variable cost of Spear Footwear Company, while the operating expenses are assumed the fixed costs. The estimates on costs are overestimated to cater to any future shocks. The following formulae were used in generating desired profit using a 10% rate of return is the total amount invested times the desired rate of return plus the cost of labor. Seasonal fluctuations in the demand for footwear were taken into consideration while projecting the sales revenues.
Executive summary
The costing and financial data
Footwear is a multi-billion industry in the United States. According to the U.S. Census Bureau (2002, par.6), the footwear industry is worth $54 billion. Foreign manufacturers have lowered shoe prices in addition to improved technology, which has led to improved efficiency in production. On the contrary, the U.S. domestic production of quality shoes has been declining. This has forced the local consumers to fill the gap by purchasing foreign-made footwear. My company, “Spear Brand Footwear Company” seeks to fill this supply gap by eliminating the continued dependence on overseas manufacturers by employing the best design techniques in footwear manufacturing, we intend to capture a large percentage of the youth between the ages of 18 to 35 years. According to an article by Margret Pressler (Washington Post 2002, par. 2), on average the U.S. footwear industry markets share increases by 6.1 % annually. It is this market that we want to tap into by building a state-of-the-art Footwear facility in Texas (U.S. Industry Report 2011, par.2).
The company intends to create footwear products that target both men and women ages 18 to 35 years. Spear brand is better positioned to capture a substantial share of the multibillion market share. With high technology, quality design in addition to competent and experienced staff, Spear brand will meet both the local demand and supply in the international market (Patsula Media 2001, p. 2). Both the risks and the opportunities assessed indicate that such a move will be productive.
Summary of Financial Data
Capitalization: Spear Brand is seeking an investor to lend the business a start-up capital amounting to $2,541,000. By December 2010, the injection of this cash will help Spear Brand to raise substantial capital and launch the business by the beginning of 2011.
Projected Operating Results: Spear Brand revenue from sales are projected to rise from zero in January month of 2011 to $131,000 by December of the same year. It is estimated that revenue will reach its peak in March and September with $234,000 and $ 266,000 worth of revenue respectively. Equally, the monthly variations in cash flow indicate seasonal fluctuations in the demand for Footwear products. By December 2011, the total cash balances are projected at $ 1062,000.
Business Opportunity: Majority of the footwear companies in the U.S. have not devoted the necessary energy and research in the sign of footwear. Instead, they have resorted to copying Italian designs, which have greatly affected the revival of the Footwear industry in the country (Packaged Facts 2009, par.8). Spear Brand company intends to revive this lost glory in the design of footwear products by using unmatched design techniques in collaboration with artisan factories abroad. As noted earlier, the demand for footwear in the U.S. is estimated to be growing at the rate of 6.1 percent per year. By promoting strategic alliances, multi-level marketing and spearheading research into new products and new markets, Spear Brand will put $2,541 000 into productive use (Stacey 2001, p. 69).
Key success variables: The company assumes that the following factors will improve Spear Brands success. These include that it will be possible to acquire the needed funds from investors based on the detailed projections provided, the establishment of the company in Texas will be a great advantage as raw materials will be acquired easily and production process improved. Finally, it is assumed that the demand for footwear products across the United States will continue to be stable and rising and that the channels used in marketing will be effective. Spear Brand will enjoy a competitive advantage and its products will likely gain wider acceptance in various U.S target markets (Stacey, Griffin & Shaw 2000, p. 105).
Sales: the primary sources of revenue for the company are Spear Brand footwear products that will be sold in two markets; wholesale and retail. Going by the current market price, it is clear that the retail channel attracts more revenue $ 95 as compared to wholesale, which stands at $ 39. However, it is projected that it will take up to six months before reaps from this market segment. Credit sales are assumed to be 96% of the total volume with an average of 45 collection days (Boehlje 2010, p. 5).
Expenses: Advertising and promotion will be taken extensively. This will include showroom demonstrations, trade fairs, strategic alliances, and online advertising. Expenditure on advertising is expected to consume up to a maximum of 13% of the sales revenues. In addition, a pay role rate of 23 % has been adopted to cater for employee benefits and salaries plus any other federal or state statutory tax. The utilities and rental expenses associated with the rental outlet that will be acquired in Texas will be treated as fixed costs. The federal and state income tax shall be charged at 30% (Hilton 2005, p. 7).
Cash flow: in the first two months of operation, the company will suffer from negative cash flows. In the third month, it will rise to $ 69, 000 dollars. Nevertheless, the company will experience significant variations in the level of cash flows reflecting seasonal differences in major cash variables like stock, debtors and creditors. From the cash budget table, the minimum expected cash balance would be $ 28,000.
Assets: It is projected that the company’s asset base will increase throughout the year from $368,000 in January 2011 to $ 1,674,000 in December of the same year. Break-even analysis, the company will break even after the first month in February with a positive cash flow of $69,000. In Conclusion, Spear Brand Footwear Company is better positioned to benefit from the $ 54 billion footwear industry if it can secure the funding of $2,541,000 by December 2010.
List of References
Boehlje, M & Ehmke, C 2010, ‘Capital investment analysis and project assessment: Purdue extension Ec-731’, Web.
Hilton, W 2005, Managerial accounting: Creating value in a dynamic business environment, McGraw-Hill/Irwin, New York.
Packaged Facts 2009, ‘The global footwear market: Athletic and non-athletic shoes’, Web.
Patsula Media 2001, ‘Entrepreneurs’ guide book series’, Web.
Pinnock, S 2011, ‘British library: Footwear industry guide’, Web.
Stacey, R 2001, Strategic management and organisational dynamics, Pitman, London.
Stacey, R, Griffin, D & Shaw, P 2000, Complexity and management: Fad or radical challenge to systems thinking? Routledge, NewYork.
U.S. Census Bureau 2003, ‘Company business opportunity’, Web.
U.S. Industry Report 2011, ‘Shoe & footwear manufacturing in the U.S.’, Web.
Zimmerer, T & Scarborough, N 2003, Effective small business management: An entrepreneurial approach, Prentice Hall, New York.
Appendix
Table 1: Break Even Analysis
Table 3: Income Statement
Table 4: Spear brand company Balance Sheet as at 31/12/2011