Financial Management March 2019 Final Assessment

Financial Management March 2019 Final Assessment

You have been asked to develop a comprehensive financial plan and analysis for a new retail venture importing and selling European reproduction prints in Japan. The task involves estimating startup costs, operating expenses, revenues, and cash flows over the initial years, including sensitivity analysis, break-even analysis, and valuation of exclusive rights. You are required to present a detailed report that includes assumptions, financial statements, cash flows, and recommendations on the viability of the venture, as well as a critical reflection on your chosen analytical methods.

Paper For Above instruction

Introduction

The proposed business venture involves importing European reproduction prints from the UK and selling them in Japan with along additional calendar product promotion. The venture requires detailed financial planning, including startup costs, operating expenses, revenue projections, and cash flow management. This report aims to analyze the financial viability of the project, emphasizing critical assumptions, forecasted financial statements, break-even point, sensitivity analysis, valuation of the rights, and strategic recommendations.

Assumptions and Estimates

To perform the financial analysis, several assumptions and estimates are necessary due to incomplete information provided by Eito. These include assumptions on demand growth, sales prices, costs, financing, and taxation, based on the data available and industry norms. Key assumptions include:

  • Demand Growth: Monthly demand starts at 70 prints in the first month, gradually increasing linearly to 650 prints by the end of year one, and plateauing thereafter. This smoothing reflects typical market penetration patterns.
  • Sales Price: The average selling price in Japan is set at Yen 8,500 per print, consistent with the market study, ignoring sales tax effects.
  • Cost Assumptions: Includes purchase cost from the UK, shipping costs, framing costs, rent, labor, website development, and promotional materials. Air freight costs are assumed to remain stable at £8 per print, and currency exchange rates are fixed at the current market rate (e.g., 1 GBP = Yen 150) for simplicity.
  • Labor and Overheads: Two part-time students, costing Yen 900,000 annually each, with additional operational costs such as calendars, glue, and a specialized press costing Yen 45,000 for calendar assembly, as well as a monthly assistant wage of Yen 35,000.
  • Financing: Eito plans to finance part of the setup with Yen 15 million at 8% interest, calculating annual interest and repayment schedules. Unused cash is assumed to earn 4% interest annually.
  • Taxation: Corporate profit taxed at 40%, payable a year after income realization; tax on earnings is included in cash flow projections.
  • Additional Orders: Calendar sales via Okimi generate an additional Yen 6,000 revenue per calendar, with an associated cost of Yen 900 for materials plus Yen 35,000 monthly labor for assembly.

Financial Analysis

1. Break-even Analysis

The break-even point calculates when total revenue from sales equals total costs, considering fixed and variable components. Fixed costs include rent, salaries, website, and equipment, whereas variable costs comprise purchase price, shipping, framing, and calendar costs.

By setting total contribution margin equal to fixed costs, the number of units needed to cover all costs is derived. For instance, assuming a unit price of Yen 8,500 minus shipping (Yen 1,500), framing (Yen 900), and supporting costs, the contribution per unit is computed. The break-even volume is then obtained by dividing total fixed costs by contribution margin per unit, providing a critical sales threshold.

2. Profit and Loss Statement for Year One

The P&L statement includes revenues from print sales and calendar promotions, less costs related to procurement, shipping, framing, wages, rent, marketing, and other overheads. Monthly sales are forecasted based on demand estimates; initial months have lower sales, increasing linearly to full capacity. Taxes are deducted, leading to net profit or loss figures for each month, culminating in the annual profit.

3. Balance Sheet at Year-End

The balance sheet is prepared assuming initial capital, accumulated net income, and assets such as inventory, receivables, cash, and fixed assets (racking, jig, website, press). Liabilities include loan repayments, accrued expenses, and taxes payable. The net worth reflects the retained earnings and asset values at the end of year one.

4. Monthly Cash Flow

The cash flow statement tracks cash inflows from sales, credit card remittances, and loans, matching outflows for purchases, wages, rent, capital expenditures, loan interests, and taxes. It highlights period-by-period liquidity and identifies potential shortfalls requiring additional financing.

5. Annual Cash Flows for Subsequent Years

Following the first year, cash flows are projected assuming constant demand (650 units/month), with recurring costs and revenues adjusted for inflation or price changes. Loan repayments and interest are included to assess ongoing liquidity and profitability.

Evaluation of Venture Viability

The initial investment capital requirement is derived from startup costs plus additional working capital to finance inventory buildup, receivables, and initial expenses. The analysis evaluates whether projected cash flows can service debt, cover operating costs, and generate profit. Sensitivity tests explore variations in sales volume, prices, and costs, demonstrating the range of outcomes and risk exposure.

Valuation of Exclusive Rights (Upfront Payment)

The most Eito could offer HP as an upfront fee is calculated by discounting the net present value of the incremental cash flows attributable to the exclusive rights over seven years, assuming no print orders are made. This valuation considers a discount rate reflecting the cost of capital plus risk premiums, balanced against the strategic value of exclusivity, ensuring no value destruction for Eito.

Conclusions and Recommendations

The analysis indicates that, under reasonable assumptions, the venture has potential for profitability within the first few years, driven by the demand estimates and manageable costs. Critical risks include demand shortfalls, fluctuations in exchange rates, and logistical delays. It is advisable for Eito to establish flexible credit terms with suppliers and consider conservative sales forecasts.

Critical Reflection

The analysis relies heavily on optimistic demand estimates and stable currency rates. For future studies, probabilistic sensitivity analysis and real options valuation could better capture uncertainties. Employing scenario planning and Monte Carlo simulations would provide a more comprehensive risk assessment, ensuring more robust strategic decisions.

References

  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2016). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice. Cengage Learning.
  • Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance. McGraw-Hill Education.
  • Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of Financial Management. Pearson Education.
  • Graham, J. R., & Harvey, C. R. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field. Journal of Financial Economics, 60(2-3), 187-243.
  • OECD. (2020). Export-Import Bank of Japan: Logistics and Trade Costs. OECD Trade Policy Paper.
  • Ministry of Economy, Trade and Industry (Japan). (2021). Small Business Support Initiatives. METI Publications.
  • CyberSource. (2022). E-commerce Payment Processing: Trends and Challenges. UK Financial Services Authority Reports.

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