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Sprocket Bicycle Sharing Company’s Financial Analysis Essay

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Updated: Jul 26th, 2022

Sprocket Bicycle is a bicycle ride-sharing company that provides an easy and secure way for vehicle owners to earn money by renting out their bikes to people. When they are not using the bicycle, they can offer it to willing people for a time, who can then use it to ride to a different point and back. The application benefits both bike owners and renters, with the former receiving money from their property and the latter being able to access convenient and inexpensive transportation. Moreover, since people lend out their personal bikes, Sprocket Bicycle circumvents the quality and maintenance issues that most centralized bike-sharing companies have. As such, there is reason to believe that the company may be able to find a niche of considerable size or create a new market the same way its inspirations have. The purpose of this report is to provide a financial analysis of the company’s needs and potential for financial success.

The company’s costs will be relatively low, given that it will not purchase or maintain bikes but rather let its users do so. Moreover, the expense of purchasing the electronic lock for the bike can be shifted to the bike owner, who will buy the device from the company and compensate it for the purchasing and shipping costs. As a result, a large portion of the expenses can be mitigated, though substantial categories remain. The most significant will be related to the company’s business model, which involves taking a fee out of each payment the renter makes to the owner. Each transaction is associated with a credit card processing fee, which will be significant compared to the portion the company takes. Another significant cost category is the price of developing and maintaining the software and hardware needed for the app’s operations. Finally, the costs that exist for every business, such as administrative, marketing, and operational expenses, as well as insurance payouts to people whose bicycles are ruined or who are issued a faulty vehicle have to be taken into consideration.

In terms of growth, it can be assumed that the rates will be similar to those for Uber or similar ride-sharing applications. Lyft, a competitor in a field where Uber dominates, was able to triple its traffic between 2015 and 2016 (Winkelhake 272). With that said, the use case for Sprocket Bicycle is considerably more limited than that for the services above, as the bike has to be returned to its initial location. As such, it misses out on a large customer base, and its growth is unlikely to be as fast. With that said, this report will assume an optimistic projection of 50% annual growth on average. The business has the potential to grow significantly faster, but there are too many random and unpredictable factors involved that make assuming success an unproductive endeavor. Once it has a foothold in the market, the company should be able to grow exponentially before reaching saturation sometime later. It is reasonable to assume that, given the size of the target market, this slowing in growth will happen past the five-year period that is being considered.

The company’s starting capital is determined by the scale at which it intends to start operating. Per Harroch and Smith (7-3), capital should be considered in terms of the specific stages at which different resources will be required. First, a proof of concept has to be established, which can be accomplished with $10,000. Then, the development of the app and the associated hardware can begin, which amounts to a total of $250,000. With these steps done, an initial supply of locks and marketing can begin, incurring a further $100,000 cost for a total of $360,000 over 6 months to establish the business. With that said, some safety margin will also likely be necessary, as is shown in Appendix A. Overall, at the business’s opening time, a starting capital of $450,000 may be warranted to ensure that it can operate throughout the first year and possibly secure additional investment for the future.

Overall, the 5-year projection in Appendix 1 shows that Sprocket Bicycle will struggle to break even within the first five years, instead incurring large expenses continuously. An extension of this model for later years suggests that if the company can maintain a 50% growth rate, and if all of its costs also stagnate (which is unlikely), it will be able to break even after 15 years. This finding is in line with Sprocket Bicycle’s inspiration, Uber, which has also historically struggled with profitability and has been unable to achieve it (Albinsson and Perera xvi). Sprocket Bicycle will be among the new generation of companies, such as Amazon, that provide ubiquitous and highly convenient services without charging sufficiently high prices to become profitable, as they would drive users away. The long-term feasibility of this approach is unclear, but it appears to have been effective for many businesses so far.

As is the case with Uber and similar companies, Sprocket Bicycle is not necessarily destined to fail because of its lack of profitability. Uber finances its operations despite the losses by attracting investors, who increase the company’s value and provide it with the cash it needs to continue operating. With that said, the potential use case of Sprocket Bicycle will be considerably less large-scale than Uber’s due to the issue of it only permitting round trips and not transport to any point. As such, its potential for growth is also substantially smaller, especially given that bike rental stations are considerably less affected by this drawback. Overall, the venture is highly risky and not necessarily attractive, and it is unlikely to draw the attention of large capital the same way Uber did. With that said, Sprocket Bicycles may be able to secure funds from less risk-averse investors and create a niche for itself in which it will grow steadily.

Appendix A: Five-Year P&L Projection

Year 1 Year 2 Year 3 Year 4 Year 5 Total
Ride Revenue $50,000.00 $75,000.00 $112,500.00 $168,750.00 $253,125.00 $659,375.00
Total Revenue $50,000.00 $75,000.00 $112,500.00 $168,750.00 $253,125.00 $659,375.00
Credit Card Commissions $5,000.00 $7,500.00 $11,250.00 $16,875.00 $25,312.50 $65,937.50
Server Maintenance $1,000.00 $1,500.00 $2,250.00 $3,375.00 $5,062.50 $13,187.50
Insurance Payouts $15,000.00 $22,500.00 $33,750.00 $50,625.00 $75,937.50 $197,812.50
Administrative Expenses $150,000.00 $150,000.00 $150,000.00 $150,000.00 $150,000.00 $750,000.00
R&D Expenses $250,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $290,000.00
Marketing Expenses $25,000.00 $30,000.00 $36,000.00 $43,200.00 $51,840.00 $186,040.00
Operations and Support $10,000.00 $15,000.00 $22,500.00 $33,750.00 $50,625.00 $131,875.00
Total Expenses $456,000.00 $236,500.00 $265,750.00 $307,825.00 $368,777.50 $1,634,852.50
Net Earnings Before Taxes ($406,000.00) ($161,500.00) ($153,250.00) ($139,075.00) ($115,652.50) ($975,477.50)
Income Taxes $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Net Profit ($406,000.00) ($161,500.00) ($153,250.00) ($139,075.00) ($115,652.50) ($975,477.50)

References

Albinsson, Pia A., and B. Yasanthi Perera. Uber. ABC-CLIO, 2020.

Harroch, Richard D., and Gregory C. Smith. Start-Up & Emerging Companies: Planning, Financing & Operating the Successful Business. Law Journal Press, 2020.

Winkelhake, Uwe. The Digital Transformation of the Automotive Industry: Catalysts, Roadmap, Practice. Springer International Publishing, 2017.

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