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Financial Analysis

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Financial Analysis

1

CASH FLOW FORECAST

OUTFLOWS:

Month 1

Month 2

Month 3

Month 4

Month 5

Cost of daffodils

400

400

400

400

400

Other Variable cost

220

220

220

220

220

Fixed Cost

1000

1000

1000

1000

1000

Total Cost

1620

1620

1620

1620

1620

INFLOWS:

Sales Revenue

1800

1800

1800

1800

1800

Net Profit/Loss

180

180

180

180

180

Cumulative Profit/Loss

180

360

540

720

900

The above calculations are subject to an order of 2000 bunches per month at an average. It seems very promising that by the end of month five, Michael and Jane would end up with 900 Pounds as retained profits. This suggests that they would have enough money to re-pay their loan and interest easily. The Cost outflows includes cost required to buy daffodils from the wholesalers, variable cost that will be incurred and the fixed element of cost that will be utilized if the business goes ahead. The calculation does not show the implication of debt financing on the cash flows. Neither the issue of time value of money is considered at the moment. It should also be noted that the cost involved and the selling price is kept constant throughout the five month analysis. This might not be the case in reality, with increase in prices in the period of high sales such as valentines, and prices will decline once the rush hour is over.

2

Following is the representation of the break-even analysis in a graphical form. The chart presents a very encouraging picture for the young entrepreneurs, as they only require selling off 333 units of their daffodils to achieve a position of no profit, no loss. In terms of amounts they should expect to achieve revenues of about $1,667 to avoid a loss. The dynamics of the chart are very easy to understand. In theory, breakeven point is a point where the sales and the total cost are equal. Similarly in the chart, sales is represented by the purple line and total cost by green. The point to consider here is that, where do these lines intersect each other. We can observe that both lines intersect at a point close to $1,700 and 300 units. It should be of utmost importance to Michael and Jane that the level of breakeven should be achieved as quickly as possible to avoid losses and present a lucrative picture of their investment proposal.

3

How will they promote the business?

To be successful in getting the loan approved by the bank, Michael and Jane should demonstrate that their business has growth prospects. Marketing and promotion plans should be in place for their small business to attract and retain customers. As hinted in the case study that such ...
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