Managing Financial

Resources & Decisions

Lectured By Mr. R. Ranathunga.

P.B.R.Senali Fernando.
BM-K11-15

i
 Acknowledgement

If I was not blessed by god I would never able to do this. Therefore, I thank my God for
blessing me and for giving me the courage to do this task. I would like to extend my gratitude
to my mother for been my shadow through-out my life in ups and downs. Yet I would like to
thank my lecture for his invaluable guidance and suggestions. Last but not least my dear
friends thank for been so good o me to help me at any time in-order to make this effort a
success.

Table of Content

ii
 Page No.
1. Introduction………………………………………………………..1
1.1 SWOT Analysis……………………………………………..2-4
1.1.1 Strengths………………………………………………2
1.1.2 Weaknesses……………………………………………3
1.1.3 Opportunities………………………………..................3
1.1.4 Threats…………………………………........................4
2. Executive summery ……………………………….....................5-6
3. Company Summary……………………………………............7-10
3.1 Mission…………………………………………………….7
3.2 Start-up Summary…………………………………………7
3.2.1 Start-up chart……………………………………….….7
3.2.2 Start-up Requirements Table………………………..8-9
3.3 Company Locations, Facilities and Service……………...10
4. Market Analysis Summary…………………………………...11-12
4.1 Market Segmentation…………………………………….11
4.2 Market Growth…………………………………………...12
4.3 Market Trends……………………………………………12
4.4 Main Competitors……………………………………......12
5. Strategy and Implementation Summery…………………..….13-15
5.1 Competitive Edge ………………………………………..13
5.2 Marketing Strategy……………………………………….13
5.2.1 Promotion Strategy…………………………………..13
5.2.2 Marketing Programs ………………………….……...14
5.2.3 Pricing Strategy………………………………………14
5.3 Sales Strategy ……………………………………………14
5.3.1 Sales Fore-cast …………………………….………...15
5.3.2 Chart- Monthly Sales Fore-cast……………………...15

6. Management Summary………………...…………………….16

iii
 6.1 Personal Plan …………………………………………….16
7. Pro Forma Financial Statements …………………………….17-20
7.1 Important assumptions …………………………………..17
7.1.1. Table of General Assumptions ………….…………….17
7.2 Projected Profit and Loss ………………………………..18
7.2.1 Chart – Monthly Profit ………………………………...19
7.2.1 Chart – Yearly Profit …………………………………..19
7.3 Projected Cash Flow …………………………………… 20
7.4 Projected Balance Sheet ………………………………...21
8. Investment Appraisal ………………………………………. 22-26
8.1 Time Line of the Investment …………………………… 22
8.2 Discounted Pay back Period ………………………….... 23
8.3 ROCE / ARR …………………………………………...24
8.4 Net Present Value ………………………………………25
8.5 Internal Rate of Return ……………………………...25-26
8.5.1 Chart- IRR ………………………………….…………25
9. Business Risk ………………………….…………………….27-30
9.1 Business Ratios ………………………………………….27
9.1.1 Profitability Ratios…….………………………… 27-28
9.1.2 Liquidity Ratios ……………………………………..29
9.1.3 Solvency Ratios ……………………………………..29
9.2 NPV / ROCE / IRR & DPP …………………………….30

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10. Financial Plan ………………………………………….31-36
10.1 Sources of Finance…………………………………. 31
10.1.1 Internal Sources…………………………………...31
10.1.2 External Sources……………………………….32-33
10.2 Impact of Financial Sources ………………………..34
10.2.1 Pie Chart- Total Investment……………………… 34
10.2.2 Start-up ……………………………………………34
10.2.3 Profit & Loss Statement …………………………..35
10.2.4 Cash Flow ………………………………………...35
10.2.5 Balance Sheet …………………………………….36
11. Notes …………………………………………………37-38
12. Conclusion ……………………………………………….39
13. Reference list …………………………………………….40
14. Appendices …………………………………………...42-44

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0
1. Introduction

In this fast moving world the life style of every individual has become busy and complicated.
Increasing competitiveness among families and escalating cost of living, pave both husband and wife
of a family to be employed. Most of the young couples find it difficult to engage in their jobs leaving
their children at home alone. In some families they leave their children at home with domestic helpers
for high salaries. But in a situation like this there is a greater degree of neglecting the children and the
parents can’t rely on them. These major issues have indicated a great need of child care centers where
the parents can leave their children and attend in their jobs with a free mind.

When we consider Kurunegala city there is a 20 million population. Yet most of the people in
kurunegala are recommended as well educated. Kurunegala indicated a drastic development in the past
10 years. Due to this significant development the people from villages as well as from other cities
started coming to kurunegala for various purposes. Most of them have now become permanent
residences in kurunegala. This development made the lives of people in kurunegala more complicate
and busy. these busy lives find it really hard to care and lookafter their children in working hours. In
the past the best solution for this was hiring helper to look after children and do their work. But now, it
is really hard to find these helpers even for high salaries. Yet there is a big question on trusting them to
leave the children with them.
These issues indicate a greater need of Day Care service in kurunegala city.

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1.1 SWOT Analysis

1.1.1 Strengths

 Unique selling point

This child care centre; ‘Sweet Home’ is situated facing the Kurunegala-Negambo main road.
It is very convenient for our customers to drop-in their children on their way to Kurunegala for
work as it is on the left hand side of the Kurunegala-Negambo main road.
 High space advantage
The ‘Sweet Home’ premises consist of ample space which provides a 20 perch play ground. It
creates a peaceful environment for children to enjoy themselves.’ Sweet Home’ play ground
has been designed in an attractive and secure manner. ‘Sweet Home’ building can
accommodate over 50 children.
This will consist of children as follows,
6 months - 2 years - 10 maximum
2 years - 4 years - 20
4 years - 6 years - 20

 Skillful employees
This child care service has taken necessary steps to recruit qualified, kind, pleasant, good
looking ladies with good command of English.
 The assistance of a highly qualified, retired teacher
Mrs. R. Fernando is a highly qualified retired teacher who has served 15 years as a primary
teacher in Holy Family Convent Kurunegala. She has willingly joined with the management of
‘Sweet Home’. She will be present in ‘Sweet Home’ in the working hours. All the activities
will be carried out under the guidance of Mrs. Fernando.

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1.1.2 Weaknesses

 Lack of investors
As this is a sole proprietorship organization there is only one investor. Yet she; Miss. Pereira
is a young entrepreneur who is new to this market. Therefore there will be gaps in the
capability of investing.
 Lack of awareness
As ‘Sweet Home’ is a start-up organization they must spend money on advertising. Though
this organization is new to people they look forward to attracting new customers through word
of mouth by providing an excellent service to the customers they have in the start.

1.1.3 Opportunities

 Competitors’ vulnerabilities
The child care market in Kurunegala city is little bit competitive. But most of the child care
centers are run in small scale. Yet there are only a few centers up to the required standard. So
‘Sweet Home’ has an opportunity to attract customers by implementing required standards.
 Life style trends
When we consider modern parents, they are much into English education. Most of such
parents spend much on educating their children in the medium of English. Therefore ‘Sweet
Home’ has identified their opportunity of attracting customers who consider this by carrying
out all the activities in the medium of English.
 Implement a transportation service.
‘Sweet Home’ has an opportunity of providing a more effective service for their customers by
providing a transportation service. This will be especially useful to the parents who have
school going children. This transportation service will transport children from schools to the
‘Sweet Home’ premises.

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 1.1.4Threats

 Competitors’ intention
In the long run of this business they might have to face new competitors or the existing
competitors imitating them. Yet these competitors might implement innovative strategies
which may affect the ‘Sweet Home’. So it is vital to have a good relationship with the
customers and identify and cater to there exact needs and wants. Yet they must be always on
alert about the constantly changing environment.
 Loss of key staff
In the long run of this organization there should be a strong relation ship between employees
and management. Managers should take necessary steps to fulfill the expectations of their
employees. This makes employees to be genuine and loyal to the organization and do there
best to the betterment of the organization.
If not it may cause loss of key staff. They leave the organization with all the organizational
secrets and strategies. They have the ability to join to a competing organization and work
against previous organization. Yet they may have the knowledge to startup a new child care
center with the experiences gained. So this may cause losing customers and it will be a huge
threat for the organization.

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 2. Executive summary

‘Sweet Home’ is a start-up organization which provides day care services in the city of Kurunegala.
This medium-scale facility serves, children from 6 months to 6 years of age. There service is safe and
secure; providing parents with an excellent place where there children can be taken care of.
When we consider the overall child care service in Kurunegala city it has a competitive nature.
Especially in Kurunegala-Negambo road there are many childcare centers but in small scale. They
usually target customers from their neighborhood and they typically have a maximum capacity of 10
children.
As mentioned before the market is quite competitive. ‘Sweet Home’ will apply appropriate strategies
to differentiate them. They have taken necessary steps to carry out all the activities in the medium of
English. It helps to attract parents who wish to see their children converse in English. There will be
trained employees to help the school going children to do their school home work. Yet they apply the
strategy of benchmarked customer service. A customer-centric philosophy will be infused within the
entire organization. In order to do so ‘Sweet Home’ will allocate a large sum of money to recruit
qualified and highly skilled employees. This is especially important because it is the employees who
interact with both the children and parents and will have the best chance of impressing them enough to
turn them into loyal customers as well as to be vocal in telling their friends about their positive child
care experience.
‘Sweet Home’ will categorize their customers basically in to two.
3. School going
The children of 4-6 years of age will fall under this category. They will be served from 11.00am –
6.00pm.Yet in the long run of the organization they are planning to arrange a special transportation
service from school to the day care center.
4. Non- school going
This is the category of the children of 6 months- 4years. For non-school going children employees of
‘Sweet Home’ will provide there maximum service from 6.00am-6.00pm.

5
This ‘Sweet Home’ child care service is owned by a young entrepreneur Mrs. Pereira. She has the
financial health to invest in this organization and has a fair knowledge about business. Yet ‘Sweet
Home’ has the full time assistance of Mrs. Fernando. She is a highly qualified retired primary teacher
with 15 years of experience in a leading school in Kurunegala. She has got a good reputation in the
society. So it is a great privilege to have her service as a manager at ‘Sweet Home’.

‘Sweet Home’ childcare service will open for business starting with 5 children and with a recruitment
of 3 employees. They project healthy revenues by the end of first year and expect to nearly triple that
by the end of the year three. The biggest operating expenses will be the salaries of employees and the
expense on the facilities they provide such as nutritious, balanced meals and milk three times per day.
They anticipate a net profit beginning in our second year. To these ends they are putting significant
investment in the business and are seeking a matching amount in the form of a loan.
‘Sweet Home’ is an exciting opportunity that provides the sense of homeliness, safe and secure child
care service to the dwellers of Kurunegala-Negambo road. Through a combination of well priced
service and out standing customer service, ‘Sweet Home’ will quickly gain a good market share and a
reputation as a premier child care provider.

6
3. Company summary

‘Sweet Home’ is a start-up child care centre owned by young entrepreneur; Miss. Pereira who has a
fair knowledge about business and has a healthy financial background to invest in this medium scale
day care centre. Yet highly qualified retired primary teacher
Mrs. Fernando will be hired to manage the day to day activities at ‘Sweet Home’.

3.1 Mission
‘Sweet Home” child care centre aims to offer the sense of homeliness to the children with safe and
secure. Close personal attention to each child is essential to provide a quality experience for children.
Therefore adequate personals will be recruited to ensure that the each child has the proper supervision
in their care.

3.2 start-up summary

The company management and the employees will handle day to day activities of the business and will
work collaboratively to ensure that this business venture is a success. As reflected in the table bellow,
the estimated start-up costs for ‘Sweet Home’ will be Rs.135, 000. These costs will be financed by the
owner’ personal savings.
Start-up

4,000,000

3,500,000

3,000,000

2,500,000

LKR 2,000,000

1,500,000

1,000,000

500,000

-
Expence Investment Total Total
Assets liabilities

3.2.1

7
Requirements

Start-up Expense
50,00
Legal 0
20,00
Stationery 0
5,00
Advertising 0
10,00
Play ground prep 0
50,00
Toy 0
135,00
Expense 0

start-Assets
150,00
Cash Required 0

Other current Assets -

Long-term assists
3,500,00
Building 0
50,00
Play ground equipment 0
100,00
Electrical equipment 0
50,00
Furniture 0
3,850,00
Total Assists 0

3,985,00
Investment 0

Start-up Funding
135,00
Start-up Expense to Fund 0
200,00
Start-up assists to fund 0
150,00
Cash required 0

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 485,00
Total Funding Required 0

Assets
3,700,00
Non-cash Assets from start-up 0
150,00
Cash requirements from start-up 0

Additional Cash Raised -

3,850,00
Total Assets 0

Liabilities

Current Borrowing -
Long-term Liabilities (loan) -

Other current Liabilities(interest-free) -

Total liabilities -

Capital

Planned Investment
485,00
Owner-Pereira 0
3,500,00
Other Assets invested 0
3,985,00
Total planed investment 0

(135,00
start-up expenses 0)
3,850,00
Total capital 0

3,850,00
Total Capital and Liabilities 0

485,00
Total funding 0
3.2.2

9
3.3 Company Locations, Facilities and service.

‘Sweet Home’ child care centre has been planned to establish in a newly built two storeyed e building
with 864 sq. ft. It is situated in Malkaduwawa, facing the Kurunegala-Negambo main road. And the
back area of the premises faces to a by road. It is a very convenient place for the customers.
It is consists of fully furnished three bed rooms, two Study rooms, a TV room, a kitchen, three attach
wash rooms, Dining room and a living room for visitors. It is in a very residential area with a peaceful
surrounding. The land is fully covered by the parapet wall to ensure no outsider can either come in or
wander away without permission. Though it is covered by the wall the children will not find it
uncomfortable because of the wide play ground and because of the colorful paintings in the wall. The
play ground is designed in an attractive, safe and secure manner.

The children will be very well looked after by the dynamic highly skilled staff providing love and
affection to the children. They have planned to carry out their activities according to a time table.
Balanced breakfast and lunch, milk three times per day and some snacks will be provided to the
children in the day care centre daily.
The children will be educated in the medium of English. There will be many entertaining activities to
keep children happy and alive through-out the day.

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4. Market analysis summery
‘Sweet Home’ child care centre is a business that has become necessary in today’s fast-paced
world. There is an increasing amount of families who have become dependent on two incomes, which
has created a necessity of the child care industry. The child care facility service is quite competitive in
kurunegala city. Though there is a considerable amount of child care centers in kurunegala, there is no
doubt that there is room in the market for a high-quality child care facility.

4.1 Market Segmentation

The target market for ‘Sweet Home’ child care centre is full-time working couples. Yet they have
categorized the children from this segment in to two.
5. School going
The children of 4-6 years of age will fall in to this category. ‘Sweet Home’ will provide an excellent
service to them from 11.00am-6.00pm during the weekdays. It is worthy of special mentioned that
‘Sweet Home’ management has taken necessary steps to recruit qualified employees who have the
knowledge to help these school going children with their studies and school home work.
6. Non-school going
The children of 6months- 3years of age will be considered as non-school going. The parents can leave
their children on their way to work. ‘Sweet Home’ will take care of them till 6.00pm. This start-up
child care centre assures to provide a quality child care service according o the required standards.
Especially the employees of sweet home will do their best to give the love affection and the motherly
protection to the infants.

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4.2 Market Growth
According to the Census of Populations Housing 1998/2008 it is said that here is a 2.1% of population
growth rate in the Kurunegala city. Yet the area of Kurunegala-negambo road is experiencing a
recidential construction boom because of the recently auctioned lands. In addition the growth rate of
the child care market in kurunegala city is also should indicate a considerable growth rate. However
according to the instructions given we have assumed that the annual market growth rate as 5%.

4.3 Market Trends

The child day care industry itself has become a trend in he kurunegala . Besides the parents tend to
expect not only to be take care of the child but also to be educated when their child is in these child
care centers.

4.4 Main Competitors

Mothers’ nest activity school

 Strength – Already established in the area. Apart from child care service they offer
Kids’ computer training offered apart from the child care service.
 Weaknesses – Less space disadvantage non-trained staff.

Sakura and Day care centre

 Strength – Practicing a Chinese child care method which is unique.
 Weakness – Situated in a location which is difficult to approach to it for the customer

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5. Strategy and Implementation Summary

‘Sweet Home’ child care centre will succeed by offering its clients’ children a safe and secure
environment, and close personal attention. The goals of the centre are; to help parents feel good about
the care of their children, and to make it a safe, educational, and fun experience for the children. The
target customers are mainly from Kurunegala-Negambo road. They are dual income, middle class
families who value the quality of education and child care provided for their children ages, 6 months
to 6 years.

5.1 Competitive Edge

‘Sweet Home’ has a critical competitive edge; by several on-site observations, they have identified
that there is not any child care center that fallows the required standard in Kurunegala city. Yet they
have identified the market trend to the English medium education system. The age between 6months
to 6 years is the best age that a child find easy to pickup a langue. Therefore they have planned to
implement activities to address these requirements. So the parents who are interested in this will
willingly give the responsibility of their child to ‘Sweet Home’ till they finish their duties at working
places. ‘Sweet Home’ child care service will be a new and exciting experience to their clients.

5.2 Marketing Strategy

Marketing in the child care industry depends largely o reputation and referral.
At ‘Sweet Home’ that reputation will start within their community bolstered by
their involved commitment to those they serve.

5.2.1 Promotion Strategy

As this is a start-up organization they have decided to distribute leaflets among people along with
weekend news papers to make them aware of this outstanding child care facility service. They will
look forward to gain new clients through word of mouth by their prevailing customers.

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5.2.2 Marketing Programs
Management of ‘Sweet Home’ has planned to organize a Kiddies’ Concert annually, Religious
festivals, cultural festival celebrations and exhibitions. These marketing strategies will ensure the loyal
and reputed relationship with the families and with the community which leads to obtain the planned
market share growth of this target market.

5.2.3 Pricing strategy

‘Sweet Home’ must charge appropriately for the high-end, high-quality educational and care giving
services we offer. Our revenue structure has to support our cost structure, so the salaries we pay and
the facilities we provide to assure quality service must be balanced by the revenue we charge.
We will be price competitive in the market we serve; however, we will not subscribe to the ‘low price
leader’ concept. The quality of our service will support the price we charge.

5.3 Sales Strategy

‘Sweet Home’ will perform well in the trade separating itself from traditional daycare offerings. They
will be the most required child care service provider in Kurunegala. Their outstanding performance
will make them active in the society, building a solid reputation with parents and society. Those
‘Sweet Home’ will make a significant profit through the excellent care of children. Even though their
service cost is high they will see profit within the first yea due to beneficial word-of-mouth
advertising. The company expects to double its’ customers every six months until their maximum
capacity is reached.

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5.3.1 Sales Forecast

The following chart describes the run-down on forecasted sales in the year1. A detail spreadsheet of it
is attached to appendix of this business plan. The excellent performance of ‘Sweet Home’ will indicate
an over all growth in the business. But due to the school vacations and due to the festive season April
and December months will have slight decline of sales. During the August school vacation there will
be only a few after school children but the sales of full-time units will increase. Because of that there
won’t be a decline of overall sales in August. The targeted maximum amount of customers will be 50
including 5 maximum numbers of 6months- 2year old babies.
The first financial year will have a net profit and they have assumed a 5% market growth.
The data used for this chart is included in Appendix.

Sles Monthly within first year

250000
200000
150000
LKR
100000 After School Care
50000 Full-time

0
Month 12
Month 1
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9
Month 10
Month 11

5.3.1.1

15
6. Management Summery

The management teem of ‘Sweet Home’ is consist of the founder owner; Mrs. Pereira and the day care
center mistress; Mrs. Fernando.

Owner/founder; Mrs. Pereira will have all the fiscal responsibility, ensuring that the business is
financially sound and attains its planned goals. She is a young entrepreneur who has a good financial
background as well as a fair knowledge of business administration.
The day care mistress; Mrs. Fernando will be an assert to the organization. Her presence in ‘Sweet
Home’ will benefit the organization in several ways.
The assistance of her will lure the customers towards ‘Sweet Home’ because she is a well reputed
retired teacher with 15 years of experience being with the children.

6.1 Personal Plan

The following table summarizes the personal expenditure for the first three years of ‘Sweet Home’.
The maximum number of staff will be 7 including the mistress, 4 care staff, 2 helpers.
Refer Note-1

Personal Plan Rs.

year 1 year 2 year 3

Mistress 300,000 315,000 330,750

Care staff 320,000 336,000 352,800
Helpers 80,000 84,000 88,200

Total Payroll 700,000 735,000 771,750

6.1.1

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 7. Pro Forma Financial Statements
This start-up organization has forecast its sales and predicts an overall profit in the project. Their Pro
forma financial statements are as follows.

7.1 Important Assumptions

The ‘Sweet Home’ financial plane depends on important assumptions. Most of them are shown in the
following table as annual assumptions. Interest rates, tax rates as well as the market growth rate are
based on conservative assumptions.
Refer Note-1, 2

General assumptions

year 2 year 3
Per annum year 1
Interest rates 13.50% 13.50% 13.50%
Market growth rate 5% 5% 5%
Tax rate 5% 5% 5%

7.1.1

17
7.2 Projected Profit and Loss
Refer Note- 3

Pro Forma Profit and Loss Statement Rs.

year 1 year 2 year 3
2,063,3
1,871,500 1,965,075
Sales 29
718,55
651,750 684,338
Direct Cost of Sales 4
- -
Hidden Row -
718,55
651,750 684,338
Total Cost of Sales 4
-
-
1,344,7
1,219,750 1,280,738
Gross Profit 74
-
-
-
Expenses -
771,75
700,000 735,000
Payroll 0
Marketing and Other 34,17
31,000 32,550
Expenses 8
211,99
211,992 211,992
Depreciation 2
72,16
61,452 66,679
Utilities 7
6,61
6,000 6,300
Monthly repair 5
-
-

1,114,0
1,010,444 1,060,966
Total Operating Expenses 15
-
-
Profit Before Interest and 230,76
209,306 219,771
Taxes 0
- -
Taxes Incurred -

230,76
209,306 219,771
Net Profit 0

18
 Profit Monhly

100,000
80,000
60,000
40,000
LKR 20,000
-
(20,000)
(40,000)
(60,000)
Month Month Month Month Month Month
1 3 5 7 9 11

7.2.1

Profit yearly

220,000
215,000
210,000
205,000
LKR
200,000
195,000
190,000
185,000
year 1 year 2 year 3

7.2.2

19
7.3 Projected Cash Flow

Refer Note-4

Pro Forma Cash Flow Rs.

Start-up Year 1 Year 2 Year 3
198,8 208,
0
Net Profit 41 783 219,222

Add
211,9 211,
0
Depreciation 92 992 211,992

410,8 420,
(485,000)
Net Cash Flow 33 775 431,214

7.3

20
7.4 Projected Balance sheet

Refer Note- 4
Pro forma Balance Sheet Rs.
Starting
Year 1 Year 2 Year 3
balance

Assets

Current Assets
572,0 585,0
150,000
Cash 52 55 598,707

Other current Assets - - - -

Long-term Assets
3,300,0 3,100,0 2,
3,500,000
Building 00 00 900,000
45,0 40,0
50,000
Play ground equipment 00 00 35,000
95,0 90,0
100,000
Electrical equipment 00 00 85,000
48,0 46,0
50,000
Furniture 00 00 44,000

4,060,0 3,861,0 3,
3,850,000
Total Assets 52 55 662,707

Liabilities

Current liabilities - - - -

Long term liabilities - - - -

Total Liabilities - - - -

4,060,0 3,861,0 3
3,850,000
Capital 52 55 ,662,707

4,060,0 3,861,0 3
3,850,000
Total Capital and liabilities 52 55 ,662,707
7.4

21
8. Investment Appraisal

The main intention of investing in a business is maximizing the wealth of the investor. Investment
assumes that it will yield future income streams. Therefore before we invest in a project we should
assess whether the particular investment is worthwhile or not.
Assessed investment in ‘Sweet Home’ is as follows.

8.1 Time Line of the Investment

Refer Note- 2,5

Time
Year

0 1 2 3

(485,000) 410, 833 420, 755 431, 214

Rs.
Cash flows
8.1.1

Consider the general assumptions in Table 7.1.1

22
8.2 Discounted Pay back period (DPP)

It assesses the length of the time taken to repay the indicial capital cost.
The pay back period of ‘Sweet Home’ is as follows. We assume that the standard pay back period is 1
½ years.

Interest rate- 13.50% Rs.

Present value of the
Year Cash flows.
cash flows
0 (485,000) (485,000)
1 410,833 361,967
2 420,775 326,631
3 431, 214 294,920

year Amount to recover

0 (485,000)

1 (123,033)

The monthly income of the second year = cash flow of 2nd year / 12
= 326,631 / 12
= 27,219
Months to recover the rest = 123,033 / 27,219
= 4.52
Discounted pay back period = 1 year 4.52 months

Thus this investment takes 1 year and 5 months approximately. It is less than the standard pay back
period. So it indicates that it is worthy to invest in ‘Sweet Home.

23
8.3 ROCE \ ARR
(Return On Capital Employed \ Accounting Rate Of Return)

It is a comparison of the profit generated by the investment with the cost of the investment. In this
calculation we assume that the standard ROCE for the
Investment as 58%.
Average of Income
ROCE \ARR = --------------------------------------------
Average of investment

1,262,822 / 3
ROCE \ARR of ‘Sweet Home’ = --------------------------------- %
485,000
= 86%

According to the above calculation it indicates a ROCE of 86 % which is higher than the standard
ROCE. There fore we suggest that this investment is worthy of doing.

8.4 NPV (Net Present Value)

The value of money changes with the time. To make more informed decisions more sophisticated
techniques should be used. NPV is one of them. It describes the difference present value of overall
cash flows and the initial investment. The result should be a positive value. Otherwise investing in the
particular project is considered as not worthy.

NPV = (SUM of the present values of future cash flows) – (Initial

. Investment)
NPV of ‘Sweet Home’ = 983, 518 – 485,000
= 498,518

24
The NPV of ‘Sweet Home’ is a significant positive value and it again assures the investor about the
profitability of this business.

8.5 IRR (Internal Rate of Returns)

The IRR is the Rate of Interest that make the Net Present Value = Zero. It measures the worth of an
investment by allowing the firm to assess whether an investment would yield a better return based on
internal standards of return. Yet it allows comparison of projects with different initial outlays. It helps
to set the cash flow in a way that it may suites to different discount rates.The calculation of IRR of
‘Sweet Home’ is as follows.
Calculated NPVs’ for different Interest Rates as follows.

Market
Rate NPV
810,81
0% 3
587,47
10% 3
422,13
20% 9
197,56
40% 7
55,06
60% 2
70% 2,339
(2,424
71% )
(7,104
72% )
(20,66
75% 2)

25
 IRR

900,000
800,000
700,000
600,000
500,000
NPV

400,000
300,000
200,000
100,000
-
(100,000) 0% 10% 20% 40% 60% 70% 71% 72% 75%
Interest Rates

8.5.1

According to the above chart we can see that the Interest Rate that makes Net Present Value = Zero is
between 70% and 71%. In the above curve, the curve between 70%-71% we can consider as a line.

The slope = change in NPV / change in Interest Rate (r)

NPV 1 – NPV 2 / r1 – r2 = NPV1 – NPVIRR / r1- r2

2339- (2424) / 70% - 71% =2339- 0 / 70% - IRR
IRR = 70.97%

26
 According to the above calculations the market rate which makes NPV of ‘Sweet Home’=0 is 67%.
And the current market rate is 13%. There is a considerable gap between the current market rate and
the IRR. This investment has a least risk of being loss along with the changes of the market rate.

Thus by all the above investment appraisal methods ‘Sweet Home’ is recommended as a profitable
business to invest. Therefore the founder of ‘Sweet Home’ is looking forward to identify risk factors
that may come across in the long run of the organization.

9. Business Risk.

The business risk is the risk that a company will not have adequate cash flow to meet its operating
expenses. A company's risk is composed of financial risk, which is often linked to economic climate.
Yet in the long run of the company, it may have to come across with operational risks. It is a form
of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a
given field or industry. Operational risk is the risk that is not inherent in financial, systematic or
market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes
risks resulting from breakdowns in internal procedures, people and systems.
There are different risks calculating methods. The risks calculated to the ‘Sweet Home’ are as follows.

27
9.1 Business Ratios
Ratios are an invaluable tool for making an investment decision. It is a risk calculating method which
is easy to understand in order to take appropriate decisions on investing.
There are a large variety of ratios out there, but financial ratios can be broken up into four major
categories:
 Profitability Ratios
 Liquidity Ratios
 Solvency Ratios

9.1.1 Profitability Ratios.

Profitability is a key piece of information that should be analyzed when you're considering investing in
a company. This is because high revenues alone don't necessarily translate into dividends for investors
unless a company is able to clear all of its expenses and costs. Profitability ratios are used to give us an
idea of how likely it is that a company will turn a profit, as well as how that profit relates to other
important information about a company. There some of profitability ratios calculated bellow by using
financial data of ‘Sweet Home’

Gross Profit Ratio

Gross profit
Gross Profit = -------------------------- %
Total sales revenue

1,219,750
Gross Profit of ‘Sweet Home’ = ---------------------------%
1,871,500

= 65%
Gross profit ratio tells how much of each sales rupee can expect to use to cover your operating
expenses and profit. In other words, it measures the difference between what it costs to produce a
product and what you're selling it for.

28
According to the above calculation we can see that there is a gross profit of 65% predicted in ‘Sweet
Home’. In general higher the Gross profit is the better. So when we consider this investment it has a
considerable gross profit.
Return Of Assets (ROA)
Net Income
ROA = ----------------------------%
Total Assets
1,219,750
ROA of ‘Sweet Home’=----------------------------%
3,850,000
= 31.7%
ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to
how efficient management is at using its assets to generate earnings. Calculated by dividing a
company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is
referred to as "return on investment".
ROA of ‘Sweet Home’ is 31.7%. It indicates a positive efficiency of management.

9.1.2 Liquidity Ratio

Liquidity is a measure of how quickly a company's assets can be converted to cash. Liquidity ratios
can give investors an idea of how capable a company will be at raising cash to purchase additional
assets or to repay creditors quickly, either in an emergency situation, or in the course of normal
business.
Working Capital Turn-over
Sales
Working capital turn-over = ---------------------
Working Capital
1,871,500
Working capital turn-over of ‘Sweet Home’ = ----------------
150,000

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 = 12.47

In general the higher the working capital turnover, the better because it means that the company is
generating a lot of sales compared to the money it uses to fund the sales. According to the above
calculation we see that ‘Sweet Home’ is generating a considerable amount of working capital. For
better analysis this can be compared with working capitals of similar firm.
Refer Note- 7
9.1.3 Solvency Ratio
Solvency ratios are used by investors to get a picture of how well a company can deal with its long-
term financial obligations and develop future assets. As you might expect, a company weighed down
with debt is probably a less favorable investment than one with a minimal amount of debt on its books.
The total debt to total assets ratio is used to determine how many of a company's assets were paid for
with debt.
Short term debts + long term debts
Total to total assets = ---------------------------------------------------
Total Assts

But when we consider the projected financial statements of ‘Sweet Home’ they have not predicted
debts. They have assumed that they are not going to have any debt.

9.2 NPV, ROCE, IRR & DPP

Under the Investment Appraisal section we have calculated all the above using the projected financial
statements of ‘Sweet Home’.

 NPV
Calculated NPV = Rs.498, 518
Higher NPV values indicate the least risk. If the calculated NPV is negative that particular investment
should be rejected. If it = zero the project there is a slight degree of selecting the project by
considering some other benefit. But it is risky of investing in it. But here, in the investment of ‘Sweet
Home’ it has a huge positive NPV. So it has a least risk being loss.

30
  ROCE
Calculated ROCE = 86%
The standard ROCE of ‘Sweet Home’ is; 58%. There is a huge positive gap between the standard and
the actual one. Thus it has the least risk of not having the return of the capital employed.
 IRR
Calculated IRR= 70.97%
The current market rate that we are considering is 13.50%. The market rate that makes the NPV of
‘Sweet Home’ = Zero is; 67%. There is a considerable gap between these rates. The constantly
changing economy of the country and the inflation influence to have slight differences in current
market rate. Thus calculations predict again a least risk of being loss due to the changes of current
market rate.
 DPP (Discount Pay back Period)
Calculated DPP = 1 years 4.52 months
The management of ‘Sweet Home’ has decided that the standard DPP is 1 ½ years. The calculated
DPP is less than the standard. But it is little bit closer to the standard. Because of that there is a slight
risk of the recovery period of the investment. However when we consider overall risk calculation
methods this investment is in the safe side.

31
10. Financial Plan

10.1 Sources of Finance

For many businesses, the issue about where to get funds from for starting up, development and
expansion can be crucial for the success of the business. It is important, therefore, that to understand
the various sources of finance open to a business and are able to assess how appropriate these sources
are in relation to the needs of the business.
There are two categories of these sources of finance.

10.1.1 Internal Sources

 Personal Savings.
Personal savings are amounts of money that a business person, partner or shareholder has at their
disposal to do with as they wish. If that person uses their savings to invest in their own or another
business, then the source of finance comes under the heading of personal savings. The founder of
‘Sweet Home’; medium scale day care centre, has planned to invest her personal savings to fund the
bulk of the required investment.
 Retained profit
When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that
are kept and not spent retained profits. ‘Sweet Home’ as a startup organization has no Retained profit
to invest.
 Working capital
This is the short-term capital or finance that a business keeps. Working capital is the money used to
pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and
wages, rent, energy bills, payments for supplies. As this child care centre is a start-up firm it does not
have a working capital to use as a source of finance.

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10.1.2 External sources

 Ownership capital
Ordinary shares
Ordinary shares are also known as equity shares. An ordinary share gives the right to its owner to
share in the profits of the company (dividends) and to vote at general meetings of the company.
Preference shares
Preference shares offer their owners preferences over ordinary shareholders. These shareholders are
often entitled to a fixed dividend. Yet Preference shareholders cannot normally vote at general
meetings.

But when we consider ‘Sweet Home’ mid-scale child care centre is a sole proprietor ship start-up
business. Sole traders and partnerships do not have shareholders - the individual or the partners are the
owners of the business but do not hold shares. Thus this financial method can be used to finance this
business.

 Non-Ownership Capital
Debentures
Debentures are loans that are usually secured and are said to have either fixed or floating charges with
them. A secured debenture is one that is specifically tied to the financing of a particular asset such as a
building or a machine. Then, just like a mortgage for a private house, the debenture holder has a legal
interest in that asset and the company cannot dispose of it unless the debenture holder agrees. If the
debenture is for land and/or buildings it can be called a mortgage debenture. When we ‘Sweet Home’
Child Care Centre, the assets that they have involves in the business directly. So it is risk full to use
these assts to get a debenture.

33
 Overdraft facility
This is a financial method that addresses the necessity of companies which might have small cash flow
problems from time to time but such problems don't call for the need for a formal long-term loan.
Under these circumstances, a company will often go to its bank and arrange an overdraft. Bank
overdrafts are given on current accounts and the good point is that the interest payable on them is
calculated on a daily basis. But this source of finance does not address the necessity of ‘Sweet Home’
as it is a start up organization which indicates cash outflows than inflows and require a financial
source for long term basis.

 Loans
A loan is for a fixed amount with a fixed repayment schedule and may appear on a balance sheet with
a specific name telling the reader exactly what the loan is and its main details. There are special loans
given by bankers to start-up small or medium scale businesses. Therefore ‘Sweet Home’ prefers to use
this financial source to finance the rest of investment.

34
10.2. Impact of the Financial Source
This start-up day care centre requires a total investment of Rs.3, 985,000. It is consists of Rs.3,
500,000 newly built building and Rs.485, 000 in cash. The owner of ‘Sweet Home’ wishes to invest
her own building which worth Rs.3, 500,000 and Rs.385, 000 cash. The management of this
organization has decided to finance the rest of the investment by obtaining a loan. That is; a loan worth
of Rs.100, 000 to a 22.50% interest rate for 3 year pay back basis.

Total investment

2%
12%

Loan
Owner-Pereira
Assets invested

86%

10.2.1
The pro forma financial statements that we derived before are now has to be changed
because of the loan obtained. It should add as a liability for the statements.

10.2.2 The Start-up

 The start-up table should include Rs.100, 100 as a long term liability.
 Rs.100, 000 should deduct from the investment of Owner-Pereira.
 The start-up chart changes as follows.
Start-up

4,000,000

3,000,000

LKR 2,000,000

1,000,000

-
Expence Investment Total Assets Total liabilities

10.2.2

35
10.2.3 Profit and Loss Statement

 Should include the annual equal payment as ‘Interest Expense’ and deduct it from the profit
before taxation.
 Net Profit reduces.

1,010,4 1,1
1,060,966
Total Operating Expenses 44 14,015
-
-
Profit Before Interest and 209,3 2
219,771
Taxes 06 30,760
46,1
22.50% 46,140
Interests Expense 40 46,140
0% -
Taxes Incurred - -

163,1 1
173,631
Net Profit 66 84,620

10.2.2

10.2.4 Cash Flow Statement

 Because of the changes occurred in the Net Profit the annual cash flows reduce.

Pro Forma Cash Flow LKR

163,16 173,63 1
Net Profit 6 1 84,620

Add
211,99 211,99 2
Depreciation 2 2 11,992

485,00 375,15 385,62 3

Net Cash Flow 0 8 3 96,612
10.2.3

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10.2.5 Balance Sheet

 Should add the remaining amount of payable as HNB-PLC under long term liabilities.
 By the end of third year the whole amount of liability should be settled.
Therefore that the liability of the third year indicates as zero.
 The amount of Cash under the current assets changes due to the changes of the cash flows.
Pro forma Balance Sheet
Starting balance Year 1 Year 2
Assets

Current Assets
525,15 535,62
Cash 150,000 8 3

Other current Assets - - -

Long-term Assets
3,000,00 2,500,00
Building 3,500,000 0 0
40,00 30,00
Play ground equipment 50,000 0 0
950,00 90,00
Electrical equipment 100,000 0 0
48,00 46,00
Furniture 50,000 0 0

4,563,15 3,201,62
Total Assets 3,850,000 8 3

Liabilities

Current liabilities - - -
Long term liabilities
66,66 33,33
HNB-PLC 100,000 7 3
66,66 33,33
Total Liabilities 100,000 7 3

4,496,49 3,168,29
Capital 3,750,000 1 0
4,563,15 3,201,62
Total Capital and liabilities 3,850,000 8 3

37
11. NOTES

1. According to the instruction given, through out this business plan we have used 5% as the
market rate.
According to the table 6.1.1, the payments of all the employees will be increase annually
according to the growth rate which is 5%.

2. According to the data appeared in the web site of Central Bank of Sri Lanka, it indicates a
13.50% of a market rate.
Therefore we have used this rate for our calculations as our market rate.

3. In Sri Lankan current economy, the income tax rates set as follows.
Tax free annual income – Rs. 300, 000
Tax for the first 100, 000 – 5%
Tax for the second 100, 000 – 10%
Tax for the third 100, 000 and above- 15%
According to the derived pro forma financial statements of ‘Sweet Home’ indicates a tax free
profit.

The cost of a unit has been calculated by using the ‘Marginal Costing’ method.
We have considered 1 child as a unit. For costing we have calculated the monthly variable cost
for a child.
The cost for Electricity, Gas and Water is considered as fixed casts and it is added in the utility.
Variable costs are the spendings on day-to-day activities such as costs on Food preparation
supplies, first aid supplies, cleaning supplies, Naptime bedding and so on.

38
4. in this business plan the calculations of depreciation are clearly described in the given table
bellow.

Book value of Value after 3 Depreciation

Asset
the assets years per year

Building 3500000 2900000 200000

Electrical appliances 100000 85000 5000
Furniture 50000 44000 2000
Play ground equipment 50000 20000 10000

5. The derived time line in chapter 8.1 the considered initial investment is Rs. 485,000 having a
total investment of Rs. 3,985, 000. This is because of the lacking Rs.3, 500,000; the value of
the building invested by the owner did not incur an expense to her. So for the calculations of
investment appraisal we have not included the value of the building.

6. In the chapter 9.1.2 we have calculate the risk factor by using Liquidity ratios.
* Working capital = current assets - current liabilities
As ‘Sweet Home’ is a start-up organization there are no current liabilities
or current debts reported.

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12. Conclusion

‘Sweet Home’ is a start-up organization which provides Day care service in the city of Kurunegala.
The founder and the owner of this middle scale day care centre; Mrs. Pereira is looking forward to
gain a good market share in the industry by differentiating them selves by applying numerous
strategies. The management of the founder; Mrs. Pereira and the day care Mistress Mrs. Fernando.
‘Sweet Home’ has identified its’ Strengths, Weaknesses, Opportunities, Threats and they have put
forward necessary strategies to match their strengths with opportunities and guard their weaknesses
against threats.
We have forecasted monthly sales of sweet home and have derived the pro forma financial statements.
According to the projected performance of ‘Sweet Home’ it indicates considerable profits over all the
three years. Then we derived the time line of the investment and evaluate the investment using
appropriate investment appraisal techniques. By these evaluations we could able to identify the
profitability of this investment. Investing in this ‘Sweet Home’ start-up organization to-day maximizes
the wealth of investors tomorrow significantly.
After evaluating the investment we have discussed about the risk factor of this start-up business. With
the use of several risk calculating methods we identified that this day care service centre has a least
risk of being loss. According to the pro forma statements and calculations we see that this is a business
that can be stabled even in the country’s economic vulnerabilities.
This start-up business requires an initial investment of Rs.485, 000. The founder and the owner of
‘Sweet Home’ has decided to in-vest Rs.385, 000 from her personal savings. After considering several
sources of financing we have decided to obtain a loan of 22.50% for three years to finance the rest of
the required investment. Under the 10th Chapter we have discuss the impact of the financial source that
we chose on previously derived financial statements.
We are looking forward to manage our expenses and incomes to gain a good profit. The excellent and
unique service of ‘Sweet Home’ will be ale to obtain the targeted amount of customers soon. Thus
‘Sweet Home’ sooner will able to become the pioneer of child care service industry in Kurunegala.

40
13. Reference list

 http://www.nationmaster.com/graph/peo_pop_gro_rat-people-population-growth-rate

 http://retail.about.com/od/competition/a/comp_edge.htm

 http://www.investopedia.com/terms/b/businessrisk.asp

 http://www.iwmi.cgiar.org/WASPA/PDF/Publication/Kurunegala%20summary%
20background%20final.pdf

 http://www.cbsl.gov.lk/info/_cei/ir/i_1.asp

41
  14. Appendices

Sales Forecast

Mont Mont Mont Mont Month Month Month Month Month Month Month Month
h1 h2 h3 h4 5 6 7 8 9 10 11 12
Unit Sales

full-ime 5 7 9 12 14 16 20 30 23 25 27 35

after school care 3 5 7 1 8 9 10 1 15 16 20 5

Total Unit Sales 8 12 16 13 22 25 30 31 38 41 47 40

Unit Prices

6,00 6,00 6,00 6,00

Full-time 0 0 0 0 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000

After School 5,00 5,00 5,00 5,00

Care 0 0 0 0 5,000 5,000 5,500 5,500 5,500 5,500 5,500 5,500

Sales

30, 42, 54, 72, 84,0 96,0 120,0 180,0 138,0 150,0 162,0 210,0
Full-time 000 000 000 000 00 00 00 00 00 00 00 00

After School 15, 25, 35, 5, 40,0 45,0 55,0 5,5 82,5 88,0 110,0 27,5
Care 000 000 000 000 00 00 00 00 00 00 00 00

45, 67, 89, 77, 124,0 141,0 175,0 185,5 220,5 238,0 272,0 237,5
Total Sales 000 000 000 000 00 00 00 00 00 00 00 00

Direct Unit
Costs

2,25 2,25 2,25 2,25

Full-time 0 0 0 0 2,250 2,250 2,250 2,250 2,250 2,250 2,250 2,250

After School 1,50 1,50 1,50 1,50

Care 0 0 0 0 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Direct Cost of
Sales

11,2 15,7 20,2 27,0 31,50 36,00 45,00 67,50 51,75 56,25 60,75 78,75
Full-time 50 50 50 00 0 0 0 0 0 0 0 0

After School 4,5 7,5 10,5 1,5 12,00 13,50 15,00 1,50 22,50 24,00 30,00 7,50
Care 00 00 00 00 0 0 0 0 0 0 0 0

Subtotal Direct 15,7 23,2 30,7 28,5 43,50 49,50 60,00 69,00 74,25 80,25 90,75 86,25
Cost of Sales 50 50 50 00 0 0 0 0 0 0 0 0

42
 Personnel Plan

Mont Mont Mont Mont Mont Mont Mont Month Month Month Month
h1 h2 h3 h4 h5 h6 h7 8 9 10 11 Month 12

Head 25, 25, 25, 25, 25, 25, 25, 25,0 25,0 25,0 25,0
mistress 000 000 000 000 000 000 000 00 00 00 00 25,000

Care 16,00 16,00 16,00 16,00 32,00 32,00 32,00

Staff 0 0 0 0 0 0 0 32,000 32,000 32,000 32,000 32,000

4,0 4,0 4,0 4,0 8,0 8,0 8,0 8,00 8,00 8,00 8,00
Helpers 00 00 00 00 00 00 00 0 0 0 0 8,000
Total
People 3 3 3 3 7 7 7 7 7 7 7 7

Total 45,00 45,00 45,00 45,00 65,00 65,00 65,00

Payroll 0 0 0 0 0 0 0 65,000 65,000 65,000 65,000 65,000

Pro Forma
Profit and
Loss

Month Month Month Month Month Month Month Month Month Month Month Month
1 2 3 4 5 6 7 8 9 10 11 12

45,0 67,0 89,0 77,0 124,0 141,0 175,0 185,5 220,5 238,0 272,0 237,5
Sales 00 00 00 00 00 00 00 00 00 00 00 00
Less

Direct
Cost of 15,75 23,25 30,75 28,50 43,50 49,50 60,00 69,00 74,25 80,25 90,75 86,25
Sales 0 0 0 0 0 0 0 0 0 0 0 0

Total Cost 15,75 23,25 30,75 28,50 43,50 49,50 60,00 69,00 74,25 80,25 90,75 86,25
of Sales 0 0 0 0 0 0 0 0 0 0 0 0

Gross 29,2 43,7 58,2 48,5 80,5 91,5 115,0 116,5 146,2 157,7 181,2 151,2
Profit 50 50 50 00 00 00 00 00 50 50 50 50

Expenses

45,00 45,00 45,00 45,00 65,00 65,00 65,00 65,00 65,00 65,00 65,00 65,00
Payroll 0 0 0 0 0 0 0 0 0 0 0 0
Marketing 1,00 1,00 1,00 5,00 2,00 2,00 1,00 1,00 5,00 1,00 1,00 10,00
and Other 0 0 0 0 0 0 0 0 0 0 0 0

43
Expenses

Depreciati 17,66 17,66 17,66 17,66 17,66 17,66 17,66 17,66 17,66 17,66 17,66 17,66
on 6 6 6 6 6 6 6 6 6 6 6 6

Utilities 5,121 5,121 5,121 5,121 5,121 5,121 5,121 5,121 5,121 5,121 5,121 5,121
Monthly
repair 500 500 500 500 500 500 500 500 500 500 500 500

Total
Operating 69,28 69,28 69,28 73,28 90,28 90,28 89,28 89,28 93,28 89,28 89,28 98,28
Expenses 7 7 7 7 7 7 7 7 7 7 7 7

Profit
Before
Interest and (40,0 (25,5 (11,0 (24,7 (9, 1, 25, 27, 52, 68, 91, 52,
Taxes 37) 37) 37) 87) 787) 213 713 213 963 463 963 963

Interest 22.50
expense % 3,845 3,845 3,845 3,845 3,845 3,845 3,845 3,845 3,845 3,845 3,845 3,845
Taxes
Incurred - - - - - - - - - - - -

(40,0 (25,5 (11,0 (24,7 (9, 1, 25, 27, 52, 68, 91, 52,
Net Profit 37) 37) 37) 87) 787) 213 713 213 963 463 963 963

44
45
46