1.0 BUSINESS DESCRIPTION
Skylux Construction Company will be located in Fairfield, New South Wales. It will be a sole-proprietorship business. The business will be a construction company, offering construction services to builders and other consumers. It will also offer renovation and remodelling services to homeowners. The company has the ability, personnel and skill to meet its client’s needs and requirements. The physical address of the company will be 1457 Pitt Street Mall, New South Wales, Australia. The company will officially start running on 1st July, 2011.
The business being a sole proprietorship will be managed by the owner, who will be the general manager and will employ his own qualified staff in running of the business. The business will obtain legal documents from government and insure itself against risks with a recognized insurance company in the country. The business will offer attractive packages which will bring in more customers within a short time period.
1.1 TOOLS AND EQUIPMENT:
The business will purchase and hire various tools and equipment for its operations. The various categories are outlined in the table below:
1. FOR PURCHASE
- Construction estimator calculator
- 17” Diamond cutting blade
- Welding materials
- Construction labour cost estimation software
- Pipe hangers
- Drywall stilts
- Tool sets
- Sheet palm sander
- Tool charger
- Stone spreader
- Pusher hardwood tool
- Drywall taper
- Concrete mixer
- Miscellaneous tools
- Total costs (purchase costs)
2. FOR LEASE
- Dump truck 3,000 (per month)
- Excavator 14,400 (per month)
- Mini steer loader 640 (per month)
- Cargo trailer 1,600 (per month)
- Terrain forklift 1,800 (per month)
- Bulldozer 10,800 (per month)
1.2 PURCHASE OPTIONS:
The business manager is planning to purchase most of the needed tools and equipment and lease the rest. Leasing will provide a better option for the acquisition of new equipment, especially since the business does not have enough capital to purchase all of them. The combination of flexible plans of payment and longer terms will make it easier for the company to fit the leased equipment into our budget.
Leasing will also cut on the starting capital, and at the same time free a significant amount of working capital, which can then be used for short-term requirements. Leasing also provides an advantage over bank loans in that it frees up capital in a shorter amount of time. In addition to that, leasing offers fixed rates, and does not demand for down payments, maintenance of financial ratios, compensating balances, or a security interest on the company’s assets. Moreover, the fact that a lease can be adjusted seasonally to fit the company’s needs and budget makes it a very viable option. However a major setback on leasing is that the business may be required to pay a security deposit, which is not necessary when buying.
2.1 PRE-OPERATIONAL COSTS (1st three months)
- Water bill
- Marketing costs
- Legal fees
- Salaries and allowances
- Licenses and permits
- Trademarks and copyrights
- Equipment and Tools
2.3 EVALUATION REPORT
The purchases and leases incorporate the costs of purchasing and leasing the equipment.
The administrative costs include the: allowances and salaries; marketing costs, advertising costs, promotional costs; special offers; business insurance; rent; telephone expenses; furniture; licences; water; electricity, taxes, and miscellaneous expenses.
The professional fees comprise of the legal fees, trademarks (logo), and copyrights.
All these costs are necessary for the daily running of the business. None can be neglected even though the business has not won any projects yet.
3.1 BREAK-EVEN POINT:
Assuming that the company undertakes a remodelling project for a house, and the project costs $25,000, the break-even point will be calculated as follows:
Total variable costs:
- Water 1,500
- Electricity 1,000
- Telephone 700
- Miscellaneous expenses 1,900
- Totals 5,100
Total fixed costs:
- Rent 4,500
- Marketing 7,500
- Furniture 2,500
- Legal 1,500
- Salaries 10,500
- Taxes 2,500
- Licences 2,200
- Insurance 2,100
- Trademarks & copyrights 3,500
- Total equipment costs 50,168
- Totals 86,968
Supposing the company receives 2 projects a month, with each project returning an average of $25,000 on sales, then the estimated BEP for a period of six months will be as follows:
Break-even point = Fixed costs/ (1- Variable costs/sales)
Fixed costs= $86,968
Variable costs= $5,100
Estimated Sales= $300,000
BEP= 86,968/ (1-5,100/300,000)
The BEP% for the period will be ($300,000/88,472) x 100
3.2 CHARGE OUT RATE:
Salary costs per month=$10,500
Salary costs for 6 months are 10,500x6=$63,000
Using the a third, a third, a third principle, the employee is able to generate 3 times the cost of that for every hour worked for the company.
Therefore: to get the monthly charge out rate:
Working two projects a month, it translates to:
$31,500/2=$15,750 per project.
Each project takes two weeks (12 working days)
Therefore, the daily charge out rate will be $15,750/12
=$1,312.50 per day.
This charge out rate is suitable because the company will get 1/3 salary, 1/3 overhead costs, and 1/3 profit. This will comfortably sustain the business for any given time period.
4. FINANCE OPTIONS:
a) The total cost needed for the 1st three months will be $92,068.
The total cost needed to start the first project will be $86,968.
The total amount needed to run the business for the 1st three months and start the 1st project will be $179,036.
The owner of the business has saved up a total of $45,000.
The total amount that the business will need borrow to set up the business and start up the first project therefore will be 179,036-45,000=$134,036
The business will therefore borrow a total of $135,000 from St.George Bank Limited and Australian Business Funding Centre. The amounts to be borrowed will be divided equally between the two institutions, i.e. $67,500 per institution.
St George Bank Limited charges an interest of 7% per annum. The business intends to pay up the overdraft in monthly instalments. The payments will be as follows:
I= Prt where,
I=interest, P=principal, r=interest rate (per year), t=time (in years or fraction of a year).
The payments for the overdraft hence will be:
P=67,500, r=7%, t=3yrs
I= $67,500 (0.07) (3)
$14,175. The total amount to be paid therefore will be:
P+I ; $67,500+$14,175=$81,675.
Payment per month will be;
b) Financial options
The business has two major financial options from which it can borrow the rest of the money from. These are: St George Bank Limited, and Australian Business Funding Centre.
The business will borrow from the bank through a bank overdraft. This is because overdrafts are flexible and can easily be accessed when the business needs to. Their interest rates are also lower as compared to those of loans. The business can also use the overdraft to manage cash flow of the business and also for day-to -day borrowing. All that is required is for the business to clearly illustrate its cash flow records.
The business will also approach the Australian Business Funding Centre for additional funding. This will be advantageous for the business because ABFC offers grants. The biggest advantage of requesting a grant is that there are no charges to pay; no interest rates to meet. Again, ABFC will help the business market its services to the target market.
6. REVIEW AND EVALUATION:
The Net Present Value of the cash flow approach will be used to review and evaluate the cash flow projection. The approach will discount all cash flows in the business at the opportunity cost of capital. The review will be carried out by the company’s manager, at the end of every month. The results for every month are then presented for comparison. The projected cash flow is then compared against the actual cash flow, and the results evaluated for the deviations in revenues and expenditure values. The review is documented in a separate worksheet. The NPV is calculated as follows:
NPV=Cash flow/(1+ r)^n
Where r=discount rate, and n=the period we are examining.
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