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“We-Guessed & You’re-Wrong” Company’s Financial Plan Case Study

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Updated: Jun 30th, 2020

Introduction

We-Guessed & You’re-Wrong is an upcoming firm that offers computing technology and data mining software that enables its clients to predict the future of their ventures. Currently, WG & YW is headquartered in Las Cruces and has four business partners and eight clients. The partners spend a lot of time travelling to various parts of the country to meet its clients, attend their conferences, and address their needs within the firm.

The firm is projected to expand its customer base from the current 8 clients to 16 clients in the third year. This means that the need to travel will increase. The partners will have a lot of tasks to handle and this will require an effective plan to achieve success (Hockley 38). Given that this is an upcoming firm that is yet to understand market dynamics properly, it will be necessary to develop an effective business plan that will enable it to operate at a relatively low cost. The firm will need to lower its expenses as its income increases in order to increase its profitability. In this business plan, the researcher is trying to develop an effective financial blueprint that can be used by the partners to achieve success in the market.

Current Income and Expenses

In order to develop an effective business plan, it will be necessary to start by evaluating the current income and expenses at the firm on an annual basis (Loader 50). This evaluation will help the management to understand areas that may need to be addressed in order to increase income and lower expenses. This means that all the expenses, including the cost of renting office and other office expenditures, must be included in order to get the exact cost of running this business. This way, the partners can easily determine their annual profit. The section below looks at the income, expenses, and profitability of the firm.

Income

  • Revenue per client – $ 6000 per month (8 clients).
  • 6000×8= $ 48,000 per month.
  • 48,000×12= $ 576,000 per year.

Expenses

  • 30 trips per partner per year @ $ 3000 (4 partners).
  • 30×3000×4= 360,000 per year.
  • A new computers and computer software per year @ $ 5,000 (4 partners).
  • 5000×4= $ 20,000.
  • Cost of renting the office @ $ 56,000 per year.
  • Office expenses @ $ 6000 per year.
  • Total cost= $ 442000 per year.

Profit before tax per year

  • 576,000-442,000= $ 134,000 per year.

As shown in the above analysis, it is apparent the total income at the firm is $ 576,000 per year that is generated from the 8 clients. The expenses are classified into four main categories. The cost of trips that each of the four partners make in a year is $ 360,000 on average. The cost of buying new personal computers and relevant software for all the partners per year is $ 20,000. The annual rental fee and office expenses are estimated at $ $ 56,000 and $ 6000 respectively. This means that the total expenses are 442,000. It means that the firm is currently making a profit of $134,000 in a year.

Five Year Financial Plan

In this five year financial plan, the researcher proposes a number of operational strategies used at this firm. A critical analysis of the current plan clearly shows that there is only one major area where this firm is spending more than it should, and this is in the area of transport. Each partner is making 30 trips in a year at a cost of $ 3000. This means that the trips alone account for over half of the total revenue at the firm. Given that the number of clients is expected to double, then it means that this cost will increase to a $ 720,000. There are two ways through which this expense can be reduced without affecting the quality of services offered to the clients.

The first strategy will be to reduce the number of trips that the partners make in a year (Cheverton 54). The second option will be to find a cheaper alternative of transport. The aim of this plan is to lower the cost of the trips made in a year to about a quarter of the total revenues made at this firm. In this plan, it is the number of trips that will be reduced by half per partner per year. This means that now that there will be 16 clients, the partners will have to find a way of serving them without changing the number of trips that are currently made.

Each partner is currently making 30 trips to serve two clients. They will have to serve four clients in this new plan, while still making the same number of trips. The best way of doing this will be to cluster employees (Lornita 112). Instead of spreading very fast to the entire country, this firm will now focus on specific towns which are close to the firm’s headquarters. It means that each partner will not change the number of times they visit a client.

What will change is that if they were visiting a client on a single given day, they will have to visit two clients. As stated above, the value offered to the clients should not be compromised under this new plan. Every partner will make an effort to ensure that the two additional clients are closely located to the previous two clients to make this strategy work (Nersesian 72). If properly implemented, then the new financials at this firm will be as follows. The number of computers needed per partner shall not increase, but the cost of software shall increase by 1500 per partner per year. Rental costs shall not increase, but office expenses may increase by $ 2000.

Income

  • Revenue per client – $ 6000 per month (16 clients).
  • 6000×16= $ 96,000 per month.
  • 48,000×12= $ 1,152,000 per year.

Expenses

  • 30 trips per partner per year @ $ 3000 (4 partners).
  • 30×3000×4= 360,000 per year.
  • A new computers and computer software per year @ $ 6,500 (4 partners).
  • 5000×4= $ 26,000.
  • Cost of renting the office @ $ 56,000 per year.
  • Office expenses @ $ 8000 per year.
  • Total cost= $ 450000 per year.

Profit before tax per year

576,000-442,000= $ 702000

As shown in the above analysis, if this plan is executed appropriately, then the firm’s profit in the third, fourth and fifth year will be more than $ 702,000 per year. This will be a major sign that it is moving towards a greater success in the future.

Valuing the Firm

When valuing the firm, there are a number of factors that will have to be considered. The first factor that the entrepreneurship investor will be interested in will be the sales per year. The firm will be making an impressive$ 1,152,000 per year. The next factor will be the expenses incurred when making this revenue. After implementing the plan, the expenses will be $ 450000 per year, which is less than half the total revenue collected. It leaves the firm with an impressive profit of $ 702,000 per year. The next factor will be the growth rate. Within the third year, the firm shall have increased the number of its clients by 100%, from 8 to 16. Other non-monetary factors include the brand name that has already been created, and the effective business plan that the partners have developed (De 75).

Each of the four partners must feel that their three-year investment of time and resources has been fairly compensated when selling the firm. All these factors combined make this business entity worth $ 8.4 million. After the implementation of the plan, the four partners will be earning $ 175500 per year. Awarding each one $ 2.1 million each for their effort will be fair. The rate of expansion of this firm will mean that the new owner shall recover the expenses in less than four years. If the new firm injects more income and expands the firm’s operations, then the expenses can be recovered within the first year.

Conclusion

WG & YW has a bright future, and this new plan is expected to improve its efficiency even further. Currently, the firm’s biggest challenge is the huge travel costs. The plan seeks to address this challenge in order to make the firm more profitable.

Works Cited

Cheverton, Peter. Global Account Management: A Complete Action Kit of Tools and Techniques for Managing Key Global Customers. London: Kogan Page, 2011. Print.

De, Toni. International Operations Management: Lessons in Global Business. Farnham: Gower, 2011. Print.

Hockley, Lee. Global Operations Management. New York: Nova Science Publishers, 2010. Print.

Loader, David. Fundamentals of Global Operations Management. Chichester: John Wiley & Sons, 2012. Print.

Lornita, Daniel. Advanced Operations Management. Chichester: John Wiley & Sons, 2007. Print.

Nersesian, Roy. Trends and Tools for Operations Management: An Updated Guide for Executives and Managers. New York: Quorum Books, 2013. Print.

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IvyPanda. ""We-Guessed & You're-Wrong" Company's Financial Plan." June 30, 2020. https://ivypanda.com/essays/we-guessed-amp-youre-wrong-companys-financial-plan/.

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IvyPanda. (2020) '"We-Guessed & You're-Wrong" Company's Financial Plan'. 30 June.

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