The financial forecast of a start-up business within the sports industry


Term Paper, 2010

53 Pages, Grade: 1.0


Excerpt

Assignment Cover Sheet

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Module: Financial Management – Assignment (50%)

MSc All streams

This assignment is to be carried out by a small group (3-4) of students from your MSc Stream. The groups must come from within the same MSc.

Your group is involved in the start up of a new business. The exact nature of the business is left to the group to decide but must be a new venture that will require funding of no more than 4 million pounds.

You are required to produce a comprehensive financial plan for this business which and:

a) Clearly outline the aims and objectives of the business, indicate what the unique selling point of the enterprise is and the legal form (company or partnership).
b) Detail the main costs of the products or services provided and establish the break even point for those products or services including a sensitivity analysis. You must indicate how you have arrived at the price of your product or service.
c) Produce a detailed monthly cash flow for the first three years of the business.
d) Provide a comprehensive investment appraisal for any capital purchases that need to made (machinery, transport, or buildings).
e) Produce annual budgeted income statements, balance sheets and cash flow statements for the first three years of the business. Showing a range of financial ratios from year to year so that an appraisal of the business may be made.
f) Indicate the level of funding required and what form that funding will take.

This data will be complied into a 2000 word report (tables and financial statements are not included in the word count).

The report is expected to explain the decisions made, include appropriate theory where applicable, and show an understanding of the markets you will operate within and justification of your reasons why this business will be a financial success.

Learning Outcomes: On successful completion of this assessment, the student will:

Understand the content and purpose of financial statements, their interpretation, their limitations and show awareness of the legal and accounting constraints in their production.

Understand and apply the principles of budgeting and planning and use cost concepts required for decision making.

Comprehend the theoretical basis of investment appraisal techniques and evaluation of the risks involved and use valuation skills and metrics in capital budgeting.

Identify the sources of finance of a business or other organisation and recognise the key relationships between debt and equity.

Evaluate different capital structure options available to a business

Understand the working capital requirements in companies

Recognise the strategic implications of financial decision making

Internet-based & electronic library research skills

Problem Solving Skills

Marking Scheme

Answers should follow the question structure; the basis of assessment gives a clear indication of what is expected. There is not a model answer to this as each group will produce a unique data set, but the marks will reflect the clarity of thought by the students and those that link appropriate theory into their responses will be rewarded. Certainly it is expected that those students whose analysis includes a comprehensive commentary on the decisions taken will be credited.

Similarly the marking should be on the basis of clarity and appropriateness, not on volume or discursive presentation. Students who show a clear understanding of the techniques they are using will be appropriately awarded.

Guide for Total Assignment Mark:

Note that the pass mark is 50%.

- Almost flawless & possibly publishable 80% and over
- Excellent work with theoretical integration 70% - 79%
- Satisfactory: Competent but strong in part 60% - 69%
- Marginal pass: 50% - 59%

Limited linkage between theory, practice & case
- Retrievable fail: 40% - 49% Thin, with little or no theoretical underpinning
- Clear fail Below 40%

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General Comments: (Markers are required to complete this section)

Basis of Assessment

- Presentation and report 10%

The presentation should be clear informative and persuasive. The marker will be looking for a well-structured, concise but detailed report, with relevant tables and/or figures to aid the student’s explanation or argument. A good standard of English is essential. Correct Harvard referencing is required.

Note that the word limit does not include references or contents page. Students are expected to keep to the word limit +/- 10%

- Aims and objectives of business. The Business Case 10%
A clear explanation must be given as to why this business is likely tom be a success. So evidence of some market research needs to be shown.
- Funding Requirements and company structure 10%
The students should consider not only the level and cost of debt but look at the theoretical arguments that arise around the debt equity balance in the company. Also a case needs to be made as to the legal structure of the company and why that choice has been made.
- Costing and Pricing. Break Even Analysis 20%
The costs and prices of the products or services offered must be clearly thought through and consist with the current market chosen.
- Monthly Cash Flows and Investment Appraisals 15%
With a new business the detail and accuracy of the cash flows is critical. The group will need to demonstrate they have gone through a range of possible outcomes and that the cash flows produced are the most likely outcome. The group will need to demonstrate they have given clear thought to the cost of capital in any investment appraisal.
- Production of budgeted statements 25%
There should be an income statement, a balance sheet and a cash statement for each of the three years of business. Students should ensure that the information is consistent across all the three statements.
- Ratios 10%

Ratios should reflect the progression of the business over the three year period. A reasonable cross –section of ratios should be demonstrated and an appraisal of the business made based on their results.

Financial Management Coursework

Introduction

The sportswear industry is a competitive market with many established brands competing for global market share (chart 1.1.)

Recently a new venture called Kings Sports ltd. was formed. The USP of the company is to offer a fully customisable rugby kit (appendix III.J) to their customers and entering a niche market by focusing especially on university, small and low division rugby clubs.

The decision to enter this niche market was made due to high entry barriers within the general sportswear market from established companies. With Nike, Adidas and Puma ranked, 26, 62 and 97 respectively as the top 100 global brands, new entrants will be forced to place a high level of investment into the business to compete, which is not available to the owners (Interbrand, 2009).

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Aims and Objectives

Kings Sports, based and operating in the UK will be in the form of a limited liability company. The short-term aims and objectives of the company would be to successfully create an effective communications channel, by setting up an interactive website, which would include a kit designer application.

Long-term aims and objectives would be to establish itself as a reputable sporting brand known for its fully customisable rugby kit and a faster product delivery than its direct competitors. Further objectives are the international expansion in year three as well as ultimately providing sportswear for other sports.

Funding

There are two various forms of funding, the first being the owners own capital investment into the business of £100,000. These funds were provided from the owners as they have had an extensive period of employment. The other form of funding will be from long-term bank loans.

The financial gearing ratio (appendix XIII.G) shows how little the company is depended on outside funding. The loan in the first year was taken due to the uncertainty of the start of the business. The ratio in the 2nd year was raised to 7.25% due to a loan borrowed by the company in preparation for its international expansion, with a primary focus on France, Italy, Canada and the USA, in the third year (chart 1.2).

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Expenses

Staffing

Full time staff includes the two managing directors, accountant, an online sales manager and an international online sales manager, in year 2 and 3, respectively. Fixed salaries per annum are paid, with the exceptions of the freelance web administrator paid quarterly and the designers paid by the piece of design (for each kit) (appendix III.B.)

Kings Sports rents an office space, where you pay per person occupying the space. The advantage of renting this particular office space is that the price is inclusive of several amenities, (appendix III.C)

Manufacturing Process

The production is outsourced to a company specialised in garment manufacturing, located in the UK. The company will be provided with materials needed. The standard delivery time of 6-12 weeks offered by most competitors, with production overseas, has been reduced by Kings Sports down to two weeks within the UK (appendix VII). The outsourcing costs include the production of the whole kit and inventories being held and packaged at the production site. Manufacturing the kit implies slightly higher costs for the end consumer, but due to the customisability and faster delivery to the end consumer, the greatly reduced time compensates for the higher price. Outsourcing cost per unit produced will be charged by the manufacturing company (appendix III.K).

Teams participating in certain events, (i.e. sports tournaments, rugby tours and friendly matches) will be able to place such orders closer to the occasion, providing a more appropriate time for ordering when the team sizes has been finalised.

Inventories

Chart 1.3 shows that the average inventories turnover period has been reduced gradually over the years as the company has recognised the peak seasons and has been able to manage the level of inventories more efficiently. From the average of inventories held for a period of 4.2 months in the 1st year to 2.8 months in the third year, the experience curve effect has allowed the company to anticipate peak seasons.

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Investment Appraisal

The investment appraisal method chosen is the net present value (NPV) as according to Ross, Westerfield and Jaffe (2005:513), it is hard to find any theoretical fault with NPV[1].

The manufacturing machineries for the business will be the only capital purchase appraised. The initial investment in the two machines required for the manufacturing process was £29,459.46. With a discount rate of 2.75%, we determined that the NPV of the machinery was £425,987.57, which indicates that this would be a great investment to the company (appendix VIII).

Based on the NPV calculated for the first two machines purchased in year one, it can be used as a rough assumption for the NPV of the additional two machines purchased in year three. The investments on the additional machineries could be seen as a project which should be pursued as it would appear to generate wealth for the business.

Full Costing

Using a full (absorption) cost method the cost per unit for each year (appendix IX), the costs for the first year is £36.03. The selling price for each unit will therefore be required to be higher in order to make profit. Another consideration required to determine the price is the going rate in the market. Based on the economic theory, the pricing of each product may not be set too high as as customers may refuse the company’s product. Kings Sports finally set the price of £57.98 as it provides for a healthy margin of profits for the company per unit sold, as well as being within an acceptable price for consumers for bespoke rugby kit.

Break-even Point

Chart 1.4 shows the break-even point (BEP) of 2,056 units sold in 1st year. The number of units sold in 1st year was 4,560 units, which indicates that the risk of the business is relatively low, as sales exceeded the break even point by 55% (appendix X.A).

The second year has a BEP of 2,922 units. This is due to an increase in fixed costs from £82,200.39 to £122,070.39 as there are additional staff and expenses to accommodate for more orders taken from the company (chart 1.5 & 1.6). Variable costs have been reduced by £1.80 due to the effects of discounts from our suppliers and a reduction in costs of the manufacturing process (experience curve effects) (appendix X.B).

This trend appears to occur again in year 3, with an increase in fixed costs by £49,470.00, resulting in a higher break even point of 3,982 units. This was mainly influenced by additional marketing expenses spent on the expansion to international markets (appendix X.C)

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Sensitivity Analysis

The NPV used in the sensitivity analysis derived from the investment appraisal (appendix XI). Input values of unit sales, variable costs, fixed costs, sales price and discount rate were changed by an increase and decrease of 10 and 20% to assess the effect that it may have on the practicability of the project. The greater the change of the NPV figure after adapting a certain variable, the more sensitive the calculation is to changes of this variable. In the case of Kings Sports machinery projects, NPV reacts most sensitive to the changes in sales price as it has the greatest range of over £100,000 (from £374,525.03 to £477,450.11). If the sales price drops by 10%, the NPV is reduced by £25,731.27. Although the NPV is still positive, the reduction in NPV is approximately 6% and may still be accepted. 2nd and 3rd year, as well as the other variables used may be seen in the appendix XI.

Monthly Cash flow Statements

The monthly net operating activities, shown in [Charts 1.7, 1.8 & 1.9] indicate that there are two peak times, March-April and August-September, when the inflow of cash is considerably higher. This is due to the purchasing behaviour of our customers for kit prior to the start of the league and when teams go on rugby tours.

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Net cash in investing activities only decreases as a result to the purchase of machineries. Aside from these purchases, Kings Sports does not require further investments for the business, and explains the tendency for investing activities to be nought (appendix III.I).

The net cash in financing activities do not fluctuate often, and changes as a result of loans taken by the company to support its operations. Significant financing activities include the initial capital investment of £100,000 made by the owners, as well as the £10,000 and £20,000 loans taken out in 1st and 2nd year, respectively (appendix IV).

The effects of outsourcing the manufacturing process can be clearly seen to have a significant effect in the cash flow statement, and explain the trend of the cash inflow/outflow following closely to the operating activities. The few financing and investing activities are reflected in the cash flow statement, as both activities have little influence on the cash inflow/outflow aside from periods explained above when capital input is required for financing the business or when cash outflow occurs from investing activities.

The full monthly cash flow statements of each year may be seen in appendix I, with annual statements available in appendix II.

Financial Analysis of Financial Statements of Kings Sports

Sales revenue

Revenue is recognised at the time when the products of the company have been received by the customers, and ownership has passed. Kings Sports implemented a 50:50 payment policy. Half the price upon ordering and half upon receival of the products, which means that trade receivables contribute to half of the revenue recognised each month.

During our international expansion, the payments charged to international customers will still be in pounds sterling due to the currency being stronger than other currencies, such as the weaker Euro and US Dollar. With the downgrade of Greece’s credit rating, the euro has weakened considerably, and shows that the decision made by Kings Sports has been beneficial to the company (Ezrati, 2010).

Sales revenue has been gradually increasing each year possibly as a result of an effective marketing strategy combined with the quality products of King Sports (Chart 2.0 and 2.1) (appendix II).

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Excerpt out of 53 pages

Details

Title
The financial forecast of a start-up business within the sports industry
Grade
1.0
Author
Year
2010
Pages
53
Catalog Number
V170892
ISBN (eBook)
9783640905119
ISBN (Book)
9783640905072
File size
1405 KB
Language
English
Tags
finance;, financial management;, ratios, financial ratios, cash flow, balance sheet, investment appraisal, surrey, income statement, funding, university of surrey, international business management
Quote paper
Raphael Städtler (Author), 2010, The financial forecast of a start-up business within the sports industry, Munich, GRIN Verlag, https://www.grin.com/document/170892

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