Lentil Pasta Sauce
Executive Summary
Introduction
XXXXX Foods is a lentil pasta sauce processor that is located in SK. XXXXX
Foods will have a total of five members sitting on the board of directors which includes
two internal and three external members.
XXXXX Foods will purchase cleaned lentils from a local producer. The lentils
will be cleaned and delivered for processing. They will enter a niche market with a
premium gourmet lentil pasta sauce. The product will then be marketed through Calgary
Coop out of Calgary Alberta, and eventually through Sobeys in both Alberta and
Saskatchewan.
Operations Plan
XXXXX Foods will be located in SK. The primary vehicle access, allows ease
for sourcing product in and out of the facility. The facility is a 3500ft2 floor heated,
insulated building which will be required for production of the pasta sauce.
The production will begin with the lentils being boiled in a steam jacket kettle,
which will then be transported into the mixing kettle that will contain the tomato paste.
From there the sauce will be placed into 750ml jars, sealed and shipped to the
distributors. XXXXX Foods will begin production at 70,000 units in the first year which
will leave room for expansion in the future. The majority of the production line will be
purchased from Alard Equipment and Handling Innovations.
Human Resources
XXXXX Foods will employ a total 7 employees and increased to 9 by year six
when production increases. The plant manager will be responsible for the day to day
operations. The sales manager will be in charge of selling and marketing the product.
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They will need to be in contact with distributors and consumers to learn and invent new
ways to market the lentil pasta sauce. The secretary will be involved in the day to day
administration and regular secretarial duties. The plant workers will be in charge of the
processing, filling and shipping/receiving of the lentil pasta sauce production.
Marketing Plan:
XXXXX pasta sauce will be sold in 750 ml glass jars, XXXXX is a lentil
enriched tomato pasta sauce that will appeal to vegetarians and health conscious
individuals within a niche market. The sauce will be produced and packaged at the
XXXXX Foods production facility in SK and shipped to the Sobeys and Federated Coop
Limited (FCL) warehouses in Calgary, AB for distribution.
As the health food industry becomes more health conscious, and vegetarians are
looking for additional meat alternatives, XXXXX will become a greater demand.
XXXXX will be marketed in the health food, specialty food aisle. This offers the product
two advantages, the first being a healthy pasta sauce choice, because of the protein found
in lentils. The second opportunity is the focus towards vegetarians, as a meat
replacement.
The specialty nature of the product allows there to be room for a mark-up in price
in comparison with competing pasta sauces. A reasonable mark-up is 25% above
XXXXX competitors. XXXXX will be strategically priced at $5.88 which is a 25%
markup over main stream sauces. The objective of the marketing strategy is to supply
Calgary FCL and Sobeys stores with XXXXX in year one, expanding to the surrounding
Calgary area in Alberta in year two and three, with a long term goal of supplying the
province of Alberta with XXXXX, While obtaining sales targets of 10% of the total
target market each year, 30% of the target market will be aware of the product by year
three.
Awareness of the product will be the primary objective of the XXXXX Foods
marketing team. The Calgary Vegetarian Resource magazine will be used as a main
resource because this magazine has no charge to advertise. In store taste tests will also be
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used as well as advertising in fliers, in both the Co-op and Sobeys fliers. XXXXX Foods
are also going to advertise in the Country Women, and Flare magazines, because these
magazines target the main segment of the target audience.
Financial Plan
Ten years of financial projections have been made of XXXXX Foods. All costs
including selling prices, expenses and salaries have been inflated at 2% every year.
Financing will be a mix of debt and equity, but will rely more heavily on equity. A loan
of $115,000 will be taken on representing 30% of the land and building costs and will be
repaid over a 15 year period.
Critical variables involved in the financial analysis are the selling price of
individual jars, the production and sales per year, and the beginning owner’s equity
investment. These variable all have a huge impact on the level of success experienced by
the company. The selling price has the largest impact on whether the company succeeds
or fails, followed by the production levels.
Given the current market prices for pasta sauce, the base run shows the plan to be
unfeasible. A positive cash flow cannot be sustained without a substantial initial owner
equity investment of $1,625,000. The following break down of the financing budget is
based on the building and land costs, as well as covering the working capital required for
the first year of operations. This represents the absolute minimum investment to operate
for year 1.
Net Present Value of Investment
$-913,535
Internal Rate of Return on Equity Investment and Internal Rate of Return on
Equity Investment are both negative 100%, meaning that the company is bankrupt. In
order for the IRR to become positive and therefore make the plan feasible, either price
levels or production levels must increase by 35% or 52% respectively.
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Conclusion
The base plan will be unfeasible and in order for XXXXX Foods to have a
feasible base run the company will either have to charge more for their product or
increase unit production.
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Table of Contents
Executive Summary ............................................................................................................. i
Table of Contents ................................................................................................................ v
List of Figures .................................................................................................................. viii
List of Tables ..................................................................................................................... ix
1.0 Operations Plan ............................................................................................................. 1
1.1 Product Description .................................................................................................. 1
1.2 Organizational Structure ........................................................................................... 1
1.3 Site Plan .................................................................................................................... 2
1.4 Building and floor plans............................................................................................ 4
1.5 Steps Required for Processing Lentil Sauce ............................................................. 6
1.5.1 Raw Materials Delivered ................................................................................... 6
1.5.2 Raw Lentils Weighed ......................................................................................... 6
1.5.3 First steam jacket kettle ..................................................................................... 7
1.5.4 Ingredients Measured ......................................................................................... 8
1.5.5 Second Stem Jacket Kettle ................................................................................. 8
1.5.6 Pumps Transferred Sauce to Filling Machine .................................................... 9
1.5.7 First Person Passes Empty Jars .......................................................................... 9
1.5.8 Semiautomatic Filling Machine ....................................................................... 10
1.5.9 Full jars are Capped ......................................................................................... 10
1.5.10 Labeling and Packaging ................................................................................. 10
1.5.11 Finished Product to Storage ........................................................................... 11
1.5.12 Delivery to Warehouses in Calgary ............................................................... 11
1.6 Average Business Cycles ........................................................................................ 11
1.6.1 Average Business Day ..................................................................................... 12
1.6.2 Average Business Month ................................................................................. 13
1.7 Quality control ........................................................................................................ 13
1.7.1 HACCP ............................................................................................................ 14
1.8 Supply/service analysis ........................................................................................... 14
1.9 Capital Budget ........................................................................................................ 15
1.10 Cost of Goods Sold ............................................................................................... 15
1.11 Cash Management ................................................................................................. 18
1.11.1 Inventories...................................................................................................... 19
1.11.2 Accounts Receivable ...................................................................................... 19
1.11.3 Accounts Payable ........................................................................................... 20
1.11.4 Cash Conversion Cycle .................................................................................. 20
2.0 Human Resources Plan ............................................................................................... 21
2.1 Plant (operation) Manager (1):................................................................................ 21
2.2 Sales Manager (1): .................................................................................................. 21
2.3 Secretary (1): ........................................................................................................... 21
2.4 Plant workers .......................................................................................................... 21
2.5 Training Programs .................................................................................................. 22
2.6 Compensation ......................................................................................................... 22
3.0 The Marketing Plan .................................................................................................... 24
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3.1 Overview ................................................................................................................. 24
3.2 Marketing Mix (4 P’s) ............................................................................................ 24
3.2.1 Product ............................................................................................................. 24
3.2.2 Place ................................................................................................................. 24
3.2.3 Price ................................................................................................................. 25
3.2.4 Promotion......................................................................................................... 25
3.3 Segmentation, Targeting, and Positioning .............................................................. 25
3.3.1 Segment............................................................................................................ 25
3.3.2 Target ............................................................................................................... 26
3.3.3 Position ............................................................................................................ 26
3.4 SWOT Analysis ...................................................................................................... 26
3.4.1 Internal Strengths ............................................................................................. 26
3.4.2 Internal Weaknesses......................................................................................... 26
3.4.3 External Opportunities ..................................................................................... 27
3.4.4 External Threats ............................................................................................... 27
3.5 Market Analysis ...................................................................................................... 27
3.5.1 Past Performance ............................................................................................. 27
3.5.2 Market .............................................................................................................. 27
3.5.3 Competition...................................................................................................... 27
3.5.4 Product/Service Features ................................................................................. 27
3.5.5 Customers ........................................................................................................ 28
3.5.6 Opportunity ...................................................................................................... 29
3.6 Marketing Strategy.................................................................................................. 29
3.6.1 Sales and Profits ............................................................................................... 29
3.6.2 Select Markets/Product/Service Mix ............................................................... 30
3.7 Selling and Advertising........................................................................................... 30
3.7.1 Product Placement ........................................................................................... 31
3.7.2 Magazine Advertising ...................................................................................... 31
3.7.3 Flyers and Coupons.......................................................................................... 32
3.7.4 Business Cards ................................................................................................. 32
3.7.5 Taste Tests ....................................................................................................... 32
3.7.6 Web Page ......................................................................................................... 32
3.7.7 Travel ............................................................................................................... 33
3.7.8 Freight .............................................................................................................. 33
4.0 Financial Plan ............................................................................................................. 34
4.1 Financing................................................................................................................. 34
4.2 Balance Sheet .......................................................................................................... 35
4.3 Economic Forecast .................................................................................................. 36
4.4 Unit Cost of Production .......................................................................................... 36
4.5 Financial Performance Analysis ............................................................................. 37
4.5.1 Critical Variables ............................................................................................. 37
4.5.2 Risk Analysis ................................................................................................... 37
4.5.3 Breakeven Analysis ......................................................................................... 38
4.5.4 Alternative Salary Scenario ............................................................................. 40
4.5.5 Contingency Plan ............................................................................................. 41
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4.6 Conclusion .............................................................................................................. 41
5.0 References ................................................................................................................... 42
6.0 Appendix A ................................................................................................................. 43
7.0 Appendix B ................................................................................................................. 45
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List of Figures
Figure 1.1 Organizational Structure for XXXXX Foods .................................................... 2
Figure 1.2 Site Plan ............................................................................................................. 3
Figure 1.3 Floor Plan .......................................................................................................... 4
Figure 1.4 Flow of Production ............................................................................................ 5
Figure 1.5 200kg Scale ....................................................................................................... 6
Figure 1.6 Stainless Steele Containers. ............................................................................... 7
Figure 1.7 Steam Jacket Kettles. ........................................................................................ 7
Figure 1.8 Steam Jacket Kettles with Scraper ................................................................... 8
Figure 1.9 Transfer pump. .................................................................................................. 9
Figure 1.10 Stainless Steel Table. ...................................................................................... 9
Figure 1.11 Filling Line . .................................................................................................. 10
Figure 1.12 Pallet Jack. .................................................................................................... 11
Figure 3.1 Channels of Distribution: ................................................................................ 30
Figure 4.1 Breakeven Analysis Using Change in Wholesale Price .................................. 39
Figure 4.2 Breakeven Analysis Using Change in Yearly Production ............................... 39
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List of Tables
Table 1.1 Capital Budget Summary .................................................................................. 16
Table 1.2 Breakdown of equipment cost .......................................................................... 16
Table 1.3 Cost of Goods Manufactured ............................................................................ 17
Table 1.4 Cost of Goods Sold ........................................................................................... 18
Table 1.5 Average days Inventory .................................................................................... 19
Table 1.6 Inventory costs .................................................................................................. 19
Table 1.7 Cash Conversion Cycle ..................................................................................... 20
Table 2.1 Plant manager salary and benefits for 2007 ...................................................... 23
Table 2.2 Secretary and sales manager salaries and benefits for 2007 ............................. 23
Table 2.3 Annual wages and benefits for all 4 plant workers in 2007.............................. 23
Table 3.1 Competition ...................................................................................................... 28
Table 3.2 Marketing Budget Plan ..................................................................................... 31
Table 4.1 Financing Plan for XXXXX Foods .................................................................. 35
Table 4.2 Balance Sheet for XXXXX Foods as at December 31, 2007 ........................... 35
Table 4.3 Unit Cost of Production in 2014 (first year of full production) ........................ 36
Table 4.4 Sensitivity of Critical Variables ....................................................................... 38
Table 4.5 Changes in Key Numbers After Proposed Changes ......................................... 41
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1.0 Operations Plan
1.1 Product Description
The product being produced by XXXXX foods is a lentil pasta sauce. This sauce
consists of cooked lentils and spices and ingredients such as chopped onion, oregano,
basil, salt, garlic powder, parsley, and vegetable bouillon. All of these ingredients will be
added to the tomato sauce during production.
1.2 Organizational Structure
XXXXX Foods is presently a partnership. We will be forming a corporation with
a board of directors that consists of five members, two internal and three external.
Forming a corporation will allow the company to seek capital more easily. The internal
board members will be the founders of the company. The external will consist of three
members yet to be determined. Possibilities for this position are shareholders and
investors. Under the board of directors will be the president/plant manager who oversees
the day-to-day operation of the plant and delegates jobs for employees working on the
plant. The owner will be in this managerial position as well as on the board. Working
bellow the president/plant manager will be vice-president/secretary treasurer as well as
six general laborers working in the plant. A marketing/sales manager position will also
be implemented into the structure and will be discussed further in the marketing module
of this business plan. The company’s organizational structure is organized into the chart
below (Figure 1.1). The simplicity of the structure makes it a perfect fit for a small
company like XXXXX. The organizational structure avoids being top heavy in that
David and the owners will consume the roles of President; Vice-president, secretary, and
treasurer. Therefore, high wages will not be paid to outside individuals consuming these
dominant roles.
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Board of directors-5
2 internal. 3 external
President/Plant
Manager
VicePresident/Secretary
Treasurer
Sales Manager
(4) Plant workers
Figure 1.1 Organizational Structure for XXXXX Foods
1.3 Site Plan
XXXXX Foods will be located in Saskatchewan. XXXXX Foods will be located off the
highway on a service road. XXXXX Foods will have a 2 ½ acre lot located just
north of the Saskatchewan Wheat Pool storage bins. The sight will have two
entrances into the lot, one will be an entrance/exit for workers, and the other will be
an entrance/exit for truck drivers to eliminate confusion for traffic arriving at the
same time. There will be parking on the North side of the building to avoid
congestion in front of the building. The building will be located as close to the
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service road as possible but still allow transport trucks enough room to turn and
access the loading dock at the back of the building. The entire location will be
graveled and maintained with fresh graveled every 2 years.
Figure 1.2 Site Plan
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1.4 Building and floor plans
The proposed building will be a completely insulated 3500 ft2 building with
electrical and plumbing and will be covered with a fully weather bearing metal siding.
Of the 3500ft2 floor space, 2500ft2 will be used for the production line and storage area.
The remaining 1000ft2 will be for two offices, two change/bathrooms for the employees,
customers and transport drivers and a lunch and coffee room for the employees.
Figure 1.3 Floor Plan
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A.
Raw, cleaned
lentils arrive in
Totes.
B.
First Steam
Jacket Kettle
E.
Second Steam Jacket
Kettle with Agitator
D.
Ingredients
measured and
added to
tomato sauce
C.
Ingredients
taken from
storage
G.
F.
Jars put in
Position
Filling Line
H.
Capping
I.
Labeling
J.
Storage
K.
Retail
Sales
Figure 1.4 Flow of Production
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1.5 Steps Required for Processing Lentil Sauce
The following steps required assume that the plant is at full capacity and requires
a total of six plant laborers to produce 130,000 jars.
1.5.1 Raw Materials Delivered
The raw goods used to produce the lentil pasta sauce will be delivered to the
processing plant by various suppliers that are outlined in the supply/services analysis of
the operations plan. When the trucks arrive at the loading dock of XXXXX foods, the
plant manager will ensure the trucks are unloaded and the products are placed in the raw
goods storage room in the processing plant.
1.5.2 Raw Lentils Weighed
Raw cleaned bags of lentils are brought from storage to the scales located beside
the first steam jacket kettle. This is where enough lentils for one batch are weighed by
scooping lentils from the bag into a stainless steel container.
(employee 1).
Figure 2.5 200kg Scale. (Scales Galore. Available at
http://www.goscales.com)
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Figure 1.6 Stainless Steele Containers.
(Handling Inovations. Available at http://www.handlinginnovations.com)
1.5.3 First steam jacket kettle
The weighed lentils are placed in the first steam jacket kettle. Once in the kettle
the lentils are cooked for 1 hour. Then cooked lentils from the kettle are poured out into
a stainless steel container and transferred to the next kettle. (Employee 1)
Figure 1.7 Steam Jacket Kettle. (Alard equipment. Available at
http://www.alard-equipment.com)
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1.5.4 Ingredients Measured
The spices and ingredients are weighed on scales then added to the correct
amount of tomato paste in another additional stainless steel container. This container
consisting of the tomato sauce and spices is taken to the second kettle. This is done by an
additional employee.
(Employee 2)
1.5.5 Second Stem Jacket Kettle
This kettle is called a scraper kettle because it has an agitator built in that allows it
to mix the tomato sauce and cooked lentils. This is where the cooked lentils from the
first kettle are added to the formulated sauce from the previous step. Once in this kettle
the lentils are mixed with the tomato sauce to give the desired consistency. After mixing
for 25 minuets the kettle is dumped into the container located beside the filling machine.
(Employee 2)
Figure 1.8 Steam Jacket Kettle with Scraper. (Alard Equipment. Available at
http://www.alard-equipment.com)
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1.5.6 Pumps Transferred Sauce to Filling Machine
Pumps located on the container that the sauce was dumped into in the previous
step, transfers the sauce to the filling machine though tubes. (Employee 2)
Figure 1.9 Transfer pump. (Volumetric Technologies. Available at
http://www.volumetrictechnologies.com)
1.5.7 First Person Passes Empty Jars
Jars that had been brought out from storage at the beginning of the day are set on
the table and passed to the filling machine operator. (Employee 3)
Figure 1.10 Stainless Steel Table. (Handling innovations. Available at
http://www.handlinginnovations.com)
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1.5.8 Semiautomatic Filling Machine
This is the step where the sauce is placed into the jars by the filling machine.
Semiautomatic filling occurs which means one employee must operate the machine by
using a foot peddle to cause sauce to flow into the jar. The filling machine sits on a
stainless steel table. (Employee 4)
Figure 1.11 Filling Line (A Packing Systems. Available at
http://www.apackaging.com)
1.5.9 Full jars are Capped
After the jars have been filled in the previous step, they are passed manually by
the filling machine operator to the capper. At this step the jars are manually capped by an
additional employee. (Employee 5) Three total employees are needed to carry out steps
1.5.7 to 1.5.9.
1.5.10 Labeling and Packaging
At this step the full and capped jars are passed along a table by the employee in
the previous step to an additional employee. This employee is responsible for manually
placing labels on the jars, then placing the labeled jars into a box. Each box holds 12
jars. The boxes are sitting on a pallet for easy transport with a pallet jack. (Employee 6 )
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1.5.11 Finished Product to Storage
The finished product in the boxes sitting on a pallet is transferred to storage by the
labeling employee, once the pallet has the proper amount of full boxes on it. The
employee will use a pallet jack to transfer the pallets of finished products to storage. This
step will only be done twice a day because each pallet will hold 18 boxes of finished
product, and the plant can produce 29 boxes of finished product in one working day.
(Employee 6)
Figure 1.12 Pallet Jack. (Handling Innovations. Available at
http://www.handlinginnovations.com)
1.5.12 Delivery to Warehouses in Calgary
Palettes of finished product will be loaded onto a truck from the Risdale trucking
company. This truck will transport the finished product to the warehouses for Calgary
Co-Op and Sobeys in Calgary Alberta.
1.6 Average Business Cycles
This average business cycle is for year 8 (2014) of XXXXX Foods when plant
will operate at maximum capacity. The average business cycle will be consistent from
day to day, week to week, and year to year. There is no large increase in pasta sauce
consumption at any point in time in a given year, so production each day, week, month,
and year will remain constant. The Plant will operate 8 hours a day, five days a week and
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52 weeks a year. The plant will not be open on statutory holidays and 6 plant workers
will be employed year round. The plant will produce 130,000 jars of lentil pasta sauce in
a year.
1.6.1 Average Business Day
The average day will consist of processing the lentil pasta sauce by the process
outlined earlier in the flow of work section. The employee responsible for cooking the
raw lentils in the first kettle will begin their work day at 8:00am and end at 4:00pm.
The five other plant workers will start at 9:00am and end at 5:00pm. The cook must be
dressed in proper work attire and begin cooking at 8:00am. The five additional
employees must be dressed in proper work attire and begin work in processing area by
9:00am. Proper work attire includes latex gloves, hair nets which are provided at the
plant, as well as proper work clothing that employees are responsible for purchasing. All
employees must change clothing in the change room provided. The processing line will
run continuously through out the day. Employees will rotate two at a time for a 45min
lunch break. First two employees have a lunch break from 11:15am to 12:00pm. The
next two employee’s lunch break runs from 12:00pm to 12:45pm. The final two
employees will have a lunch break from 12:45pm to 1:30pm. The other three salary
employees including the secretary, plant manager, and marketing manager will begin
their work day at 8:00am and end at 5:00pm. End finished product at the end of the day
will be 540 jars. Cleaning of the work stations will be completed by 5:00pm each day.
This is the responsibility of the plant workers, so processing should be completed by 4:30
to allow time for cleaning. The secretaries work day will consist of answering phone calls
to the plant, as well as ensuring delivery trucks are showing up at the scheduled times.
The plant managers day will consist of keeping the processing line in operation and
ensuring delivery trucks are loaded and unloaded when they arrive at the processing
plant. The marketing manager will be responsible for marketing the lentil pasta sauce
through Calgary Co-Op and Sobeys.
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1.6.2 Average Business Month
In an average business month XXXXX foods will produce 10,834 jars. Delivery
of finished goods will occur once a month which works out to one time every 15 days.
Delivery of raw materials such as jars, spices, and tomato paste will occur once a month.
1.7 Quality control
The Canadian Food Inspection Agency (CFIA) has product regulations that
XXXXX Foods must follow when making the pasta sauce that will be food for human
consumption. XXXXX Foods will have to follow these regulations:
1. Building must be situated on the proper land where the land can be drained, be
easily accessible for transport, and be free from congestion.
2. Building must be properly managed with good drainage off of building, be
closed in to be free from entrance of birds and insects. It must be basically
sound and in good repair. Must have the capacity to receive and house the
raw and finished products.
3. Have the proper equipment to handle merchandise which are to stay in
location and not taken out of the work area. If new or used merchandise needs
mechanical work, they must be cleaned, sanitized and inspected.
4. Have proper cleaning and sanitizing measures in place
5. Make sure that work area is properly managed and cleaned
6. Inspection must be done on all products
7. Employees must follow appropriate dress attire which would include hair nets,
gloves and some type of clothes to keep outside materials getting into product.
8. Do not bring in any objects (gum, tobacco, etc.) that can infect or fall into the
food
9. All packaging procedures must be followed
10. Proper labeling of products must be established before shipment out.
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1.7.1 HACCP
HACCP (Hazard Analysis of Critical Control Points) is used to analyze the sauce
production and distribution systems. The steps are:
1. Identify potential safety hazards such as spills, equipment malfunctions and
human error.
2. Determine where and when to prevent these problems that may occur.
3. Be sure to set some types of limits to control potential problems and set up
methods to monitor critical limits.
4. Have procedures in place to handle and correct problems if critical limits are
exceeded. Such as spill kits, Material Safety Data Sheets (MSDS) and
equipment contact numbers.
5. Accurate records must be kept and routine evaluations must be done to check
if controls are effective.
6. Periodic audits must be done to ensure the HACCP system is in working
order.
XXXXX Foods is not required to follow HACCP guidelines, but will follow them in case
the regulations are changed at a later date. In this case, their production will already be in
line with the regulations and alterations to the production process will not have to be
made. (CFIA, 2006)
1.8 Supply/service analysis
XXXXX Foods will have a minimal amount of suppliers in order to get as many
supplies as possible from one venue. Saputo’s is the choice of supplier for the spices, and
Costco for the tomato sauce. The cleaned and ready to eat lentils will be supplied from
David Krause and will be delivered to the plant in proportional size for the demand
needed at the time. The production line equipment consists of two steam jacket kettles, a
filling line, scale, scoops, containers, pallet jacks and stainless steel tables. The steam
jacket kettles and filling lines come from Alard Equipment. The scales for weighing
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lentils and ingredients come from Scales Galore. The scoops are from Rose Scientific
Ltd, and the stainless steel container, table and pallet jack come from Handling
Innovations. The printing plates and labels come from Custom Labels Inc. Boxes for
shipping come from packagingprice.com. Jars with lids for the sauce are purchased from
Ampak. Computers/printers are from Future Shop and office desks will come from
Staples business depot. A detailed list of suppliers can be found in Appendix A.
1.9 Capital Budget
Table 1.1 is a summary capital budget for 2007. A detailed description of costs in the
capital budget can be found in Appendix B. Table 1.1 shows cost of land purchased. The
cost of the building previously described in floor plan section, including water, natural
gas, electricity and sewage installation. Also included in the capital budget summary is a
cost of landscaping for the site. Processing equipment costs are broken down in Table
1.2 to give the total on the capital budget summary. Office equipment includes
computers required as well as office desks. The total capital required is 364,174 for the
first year 2007. Total capital required = total capital costs (387,876) + total working
capital (23,702) for a total of $411,678.
1.10 Cost of Goods Sold
Cost of goods sold is summarized in table 1.4 by adding beginning inventory, cost
of gods produced, cost of goods available for sale, and ending inventory to give cost of
goods sold.
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Table 1.1 Capital Budget Summary
Schedule 6: Capital Budget
2007
Land
Building
Water Installation
Natural Gas Insatallation
Electricity Installation
Sewage Installation
Landscaping
Processing equipment
Office equipment
Total Capital Costs
Working Capital
Accounts Receivable
Raw Inventory
Inventory in progress
Finished Inventory
Less Accounts Payable
Total Working Capital
Total Capital Required
$
1
305,000
12,000
10,000
28,000
5,000
3,500
22,375
2,000
387,876
$
$
35,556
6,850
923
13,847
33,476
23,702
411,678
$
$
Table 1.2 Breakdown of equipment cost
Quantity
Processing Equipment
Steam Jacket Kettle (20 gal)
Scraper Kettle (20 gal)
Filling Line
Scale (75kg)
Scale (200Kg)
Scoops
Tables
Stainless Steel Containers
Pallet Jack
Pallet Rack
Printing Plates
Office Equipment:
Computer/printers
Desks
Total equipment cost
Cost
1 $
1
1
1
1
6
2
3
2
1
1
2
2
AgEc 495. College of Agriculture and Bioresources
Total Cost
6,300.00
7,600.00
5,000.00
115.00
130.00
30.00
500.00
183.00
200.00
800.00
300.00
$
750.00
250.00
$
6,300.00
7,600.00
5,000.00
115.00
130.00
180.00
1,000.00
550.00
400.00
800.00
300.00
1,500.00
500.00
24,375.00
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Lentil Pasta Sauce
Table 1.3 Cost of Goods Manufactured
Schedule 3: Cost of Goods Manufactured
2007
kg required
Direct Materials
Tomato Sauce
Oregano
Basil
Salt
Garlic powder
Parsley
Total spices
Choped Onion
Vegetable bouillon
Lentils
Packaging materials
Hair nets
Rubber gloves
Total jars
Total boxes
Total lables
Total packing materials
Price/kg
$
22
7
53
50
29
$
10,355
0.6
3859
Boxes required
10
Boxes required
10
Jars required
70,000
Boxes required
5,834
Labels required
70,000
0.26
448.00
0.79
$
$
$
$
Price/box (100 )
$
7.54
Price/box (200 pair)
$
6.73
Price/jar
$
0.63
Price/box
$
0.15
Price/label
$
0.35
Total direct materials
6,462
284
40
176
382
367
1,250
2,692
269
3,056
12.90
5.70
3.30
7.60
12.66
75
67
44,100
875
$
24,500
69,618
$
83,347
Direct Labour
Wage Labourers
Employee benefits
Wage labourers
Employment Insurance
Canadian Pension Plan
Holiday Pay
Workers Compensation
104,000
Total benefits
Total Direct Labour
AgEc 495. College of Agriculture and Bioresources
$
2,839
5,148
6,032
5,325
19,344
$
123,344
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Lentil Pasta Sauce
Manufacturing overhead
Variable Manufacturing overhead
Electricity
Natural Gas
Water/Sewer
Telephone/Internet
Repairs and Maintenance
Total Variable overhead
9,000
7,800
13,800
2,400
5,818
$38,818
Total Fixed Manufacturing Overhead
Total Manufacturing Overhead
$5,688
7,000
22,358
$35,046
$73,864
Fixed Manufacturing overhead
Insurance
Property Taxes
Capital Cost Allowance
Cost of Goods Manufactured
2007
Total Direct Expenses
Total Direct Labour & Benefits
Total Overhead Costs
Total Cost of Goods Manufactured
$83,347
123,344
73,864
$280,554
Table 1.4 Cost of Goods Sold
Schedule 4: Cost of Goods Sold
2007
Beginning Inventory
Cost of Goods Produced
Cost of Goods Available for Sale
Ending Inventory
Cost of Goods Sold
$
$
336,954
336,954
13,847
323,107
1.11 Cash Management
During the first one to two months of operation, there will be little to no cash flow
into the company. This start up period will be spent getting ready for production. The
following month will include building up enough finished product inventory to supply
retailers with product. Following the initial three months of start up, cash flow should
stay relatively constant as there is no seasonal market for selling pasta sauce and there are
no plans to operate the plant on a seasonal basis.
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Lentil Pasta Sauce
1.11.1 Inventories
Inventory will include the raw cleaned lentils used in the sauce. Lentils cleaned
to food quality will be brought in as needed, resulting in a very small amount of raw lentil
inventory in the plant at any given time. Other raw materials will consist of the tomato
paste and spices needed for the sauce and will be ordered as needed from suppliers.
Finished products inventory will be relatively low because products will be shipped every
15 days to warehouses for Sobeys and Calgary Co-Op both located in Calgary Alberta.
The values of raw inventory, inventory in progress and finished inventory come from the
values in the capital budget.
Table 1.5 Average days Inventory
Average Days Inventory
Raw Inventory
Inventory in progress
Finished Inventory
Total Days Inventory
Days
30
1
15
46
Table 1.6 Inventory costs
Raw Inventory
Inventory in progress
Finished Inventory
$
6,850
923
13,847
1.11.2 Accounts Receivable
XXXXX Foods will have only accounts receivable for Calgary CO-Op and
Sobeys because they are the only retailers for the product. The company will adopt a
discount policy such of 2/25 net 45 to help there competitive stance in an already
competitive market. The clients will receive 2% discount if paid before day 25 of the
receivable. The average days for receivables will be 45 days. In year one accounts
receivable is calculated as: Total sales Revenue x (Avg. days payable/365)
Accounts receivable for 2007 = 288,400 x (45/365) = $35,556 in 2007.
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Lentil Pasta Sauce
1.11.3 Accounts Payable
The accounts payable policy will be flexible to take interest rates into account and
compare the cost of carrying a line of credit versus the cost of not taking discounts being
offered by suppliers. It has also been found that some suppliers deal in cash on delivery
only, in which case there will be no account payable and the payment will need to be
made in cash and possibly financed through a line of credit. The average days payable
will be 30 days. In year one accounts payable is calculated as: CGM – CCA expense +
Administration & Marketing salaries, wages, and benefits x (Avg. days payable/365
days) = Accounts payable
Acc. Payable for 2007 = (336,954 – 358 + 92,689) x (30/365) = 33,476 for 2007.
1.11.4 Cash Conversion Cycle
The average days of raw material inventory will be 30 days for the raw materials.
The average days of finished goods inventory on operation site will be 15 days. The
average day’s receivable is 45 days. This is summarized in table 1.7.
Table 1.7 Cash Conversion Cycle
Cash Conversion Cycle
Average days inventory
Average collection period
Average days payable
Total cash conversion cycle
2007
46
45
-30
61
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Lentil Pasta Sauce
2.0 Human Resources Plan
2.1 Plant (operation) Manager (1): will be in charge of the production plant.
The duties involved include overlooking day to day production on the floor, coordinating
shipping and receiving, assisting with any problems that may occur in the plant as well as
operating as the HACCP coordinator. The manager will be personally involved with
sanitation inspections of machinery, equipment and plant production area. These
inspections should be done at least semi annual and will follow the HACCP process
requirements. The plant manager will be trained in all safety regulations program. The
plant manager salary will start at $50,000 + $6,400 in benefits = $56,400 for the 2007
year. Table 2.1 describes how benefits are calculated for the plant manager.
2.2 Sales Manager (1): Will be in charge of selling and marketing the product. Their
base salary will be $50,000 + $4,523 in benefits. Total Salary and benefits is $54,523 for
the 2007 year. The employee filling this position will need to have some experience
and/or post secondary education in business value or marketing. They will need to be in
contact with the distributors, frequently learning and inventing new ways to market and
sell the pasta sauce. Table 2.2 describes benefits for sales manager.
2.3 Secretary (1): Will be involved in administration including paying of bills, payroll
and accounting in general. Also ordering of supplies, ordering and receiving information
from the future retails such as invoicing, and directing phone calls to whomever the caller
may need to talk to. They will be responsible for entering data such as sales numbers or
information on new retails. Computer skills will be an asset towards the secretary
position and the position will pay $35,000 + $3,166 in benefits = $38,166/year. Table 2.2
describes benefits for secretary.
2.4 Plant workers: Four total plant employees will be making the sauce which will
change to six when the plant reaches full production. This will include unloading and
loading of transport trucks and moving both raw and finished products to storage. The
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Lentil Pasta Sauce
job descriptions for plant workers have been covered in the flow of work. The laborers
are required to follow proper sanitation requirements while cooking the lentils and
mixing the sauce. They will have to be trained to work each machine in the facility and
will be put through first aid classes. Qualifications include a high school education and
upward. These positions will be paid on wage bases of $12.50/hour with benefits to aid
in keeping high employee moral and keep them within the company. Annual wages for
each employee will be $26,000 + $4,836 in benefits = $30,836/year for each of the six
employees. In year one the total plant laborer wages: $30,836 x 4 employees =
$123,344/year plus the plant managers $56,400 gives a total of $179,744. Table 2.3
summarizes benefits and wages for 4 employees in 2007.
2.5 Training Programs
All of the employees from XXXXX Foods will be put through training programs such as
fire escape plans and will be familiar with all MSDS booklets in case of an emergency.
They will be shown an emergency plant evacuation plan at least twice per operational
year. Every employee will be trained to work all pieces of processing equipment.
Employees will rotate jobs within the plant to let them experience all aspects of food
processing as well as to decrease repetitiveness for the employees. This should increase
moral and production. The plant equipment training will be performed by the plant
manager.
2.6 Compensation
All plant workers will be eligible for workers compensation if on the job injuries
occur. Compensation will only be paid to the physical laborers and not to the
management team rates are all included in the tables 2.1 -2.3.
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Lentil Pasta Sauce
Table 2.1 Plant manager salary and benefits for 2007
Sales Manager
Annual Salaries
Benefits
Employment Insurance
Canadian Pension Plan
Workers Compensation
Total Benefits
Total Salary and Benefits
$
$
2.73%
4.95%
$
5.12
50,000
50,000
1,365
2,475
2,560
$ 6,400.00
$
56,400
Table 2.2 Secretary and sales manager salaries and benefits for 2007
Secretarial Salary
Sales Manager
Annual Salaries
Benefits
Employment Insurance
Canadian Pension Plan
Workers Compensation
Total Benefits
Total Salary and Benefits
$
$
35,000
50000
85,000
$
1,443
3,594
2,652
7,689
92,689
1.95%
4.95%
$
3.12
Table 2.3 Annual wages and benefits for all 4 plant workers in 2007
Wage
Hours per worker
Annual wages
Benefits for Wage Earning Employees
Employment Insurance
Canada Pension Plan
Holiday Pay
Workers Compensation ($/100)
Total Benefits for Wage Employees
Total Benefits and Salaries
$
$
12.50
2,080
26,000
$
$
2,839
5,148
6,032
5,325
19,344
45,344
2.73%
4.95%
$0.06
$
5.12
AgEc 495. College of Agriculture and Bioresources
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Lentil Pasta Sauce
3.0 The Marketing Plan
3.1 Overview
"XXXXX is a legume based pasta sauce providing essential protein and fiber
requirements for vegetarian inclined diets as well as the health conscious individual,
within one convenient readymade serving."
3.2 Marketing Mix (4 P’s)
3.2.1 Product
The sauce will be sold in 750 ml glass jars, packing 12 jars to a box and 80 boxes
to a pallet. The total production of year one will be 70,000 jars. XXXXX is a lentil
enriched tomato pasta sauce that will appeal to vegetarians and health food fanatics alike.
The sauce will be produced and packaged at the XXXXX Foods production facility in SK
and shipped to the Sobey’s and Federated Coop Limited (FCL) warehouses in Calgary,
AB for distribution.
3.2.2 Place
XXXXX will be manufactured at Saskatchewan, where a new facility will be
constructed in the spring of 2007. The advantage of constructing a building at this
location is the accessibility to the plant by the owners. From the plant, trucking will
transport the product to Calgary. The product will be sold at the retail level through
Coop grocery stores in the Calgary area, as well as through Sobeys’ Alberta and later in
the Saskatchewan locations. Given the nutritional qualities of the sauce, it would be best
placed alongside products with similar appeal. Although this strategy runs the risk of
being passed over for a competing product, it does insure that the consumer sees the
product as an option. If the sauce is shelved out of context, it could be passed over
completely by potential buyers. Another goal related to product placement within the
store is having the jars shelved between eye level and belt height. This small detail could
mean the difference between the jar catching the buyer’s eye and being hidden out of
sight. The ideal store placement would be on an end cap at the end of the aisle which
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Lentil Pasta Sauce
would give a more exclusive position drawing more attention to the new product and its
benefits.
3.2.3Price
The specialty nature of the product means there is room for mark-up in
comparison with competing pasta sauces. In comparing mainstream sauces to organic
sauce it is concluded that a reasonable mark-up for XXXXX would be 25% above its
competitors. Being the target market is made up of people who are willing to spend a
higher portion of disposable income on food, assumes the premium for the product will
be easily accepted. Although this product is not organic, its noble qualities appeal to a
similar market. The product is priced in line with an organic sauce, the retail price of
organic sauce is in the range of $4.35- $4.50, therefore a retail price of $5.88 will be the
goal for XXXX pasta sauce based on a 30 % mark up from the wholesale price, with a
wholesale price of $4.12
3.2.4Promotion
As with any new product, product awareness is extremely important. Although
the pasta sauce market has many competitors, XXXXX stands alone in the pulse enriched
sauce market; this niche product is a novelty quality that will be used to penetrate sales,
requiring a promotional strategy to establish brand loyalty. The promotional strategy will
based on magazine advertisements in the Calgary Vegetarian Resource; Flair, Country
Women; weekly flyers through Sobeys and FCL, as well as in-store taste testing, and
internet websites.
3.3 Segmentation, Targeting, and Positioning
3.3.1 Segment
Due to the increased interest in vegetarianism, as well as consumers becoming
more health conscious. There are two main target segments for XXXX, the Vegetarian
and Vegetarian inclined population, as well as the female health conscious population.
Both of these segments are targeted out of Calgary FCL and Sobey’s grocery chains.
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Lentil Pasta Sauce
3.3.2 Target
The target market is the vegetarian population in Calgary, as well as the female
health conscious individuals in Calgary as well. XXXX Foods will position XXXXX
into the urban centers, because 4% of urban populations are vegetarian; 78% of
vegetarians are female and as such 72% of this segment is between 20 and 39 years of
age. (Calgary Vegetarian Resource).
3.3.3 Position
The image that XXXXX foods is portraying of XXXXX is a healthy meat
alternative for the vegetarian population, as well as a healthy protein supplement to the
health conscious individual. XXXXX will be marketed in the health food aisle.
3.4 SWOT Analysis
3.4.1 Internal Strengths
▪ New product to the pasta market
▪ Only pulse based pasta sauces in the market
▪ Lentils promoted as healthy and important parts of the diet.
▪ Continuous supply of lentils (98% of Canada’s lentil production in Sask.) (Pulse
Canada).
3.4.2 Internal Weaknesses
▪ “One Shot” first impression market – there are many existing products, most consumers
will only buy this product once if it fails to impress them
▪ XXXXX is a new firm
▪ No brand loyalty has been developed
▪ Large initial investment with production
AgEc 495. College of Agriculture and Bioresources
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Lentil Pasta Sauce
3.4.3 External Opportunities
▪ Increase in vegetarian popularity due to increasing health awareness
▪ Lentils used as a meat replacement
▪ Offers a choice to vegetarian consumers of protein sources
3.4.4 External Threats
▪ Established competition (dominated by few large firms)
▪ Risk of having to import ingredients to make the product
▪ Pulse crops are not widely consumed throughout Canada
3.5 Market Analysis
3.5.1 Past Performance
XXXXX Foods, is a new business and as such they are trying to establish their
presence in the market place. This is a niche product and therefore will be marketed as a
specialty sauce, within a unique marketplace.
3.5.2 Market
In Canada 4% of the population is vegetarian, (Calgary Vegetarian Resource). In
Calgary, where XXXXX will be marketed 4.7% of total grocery shelf space is devoted to
pasta sauce, and furthermore 20,000 people in one week pass through a FCL store in
Calgary. (Federated Co-op, 2005).
3.5.3 Competition
XXXXX will have many competitors in the pasta sauce market. Table 3.1
summarizes these competitors, as well as their prices.
3.5.4 Product/Service Features
This product fits into a niche market appealing to health conscious individuals,
and the Vegetarian population that is why this product has an opportunity over its
competitors. XXXXX is a lentil, protein pasta sauce offering a healthy choice as a meat
alternative, which is an appealing aspect to both segments in the target market.
AgEc 495. College of Agriculture and Bioresources
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Lentil Pasta Sauce
Table 3.1 Competition
Product Name
Package Size
(ml)
Price ($)
Catelli Garden Select
700
2.27
Prego Traditional
675
2.98
Ragu
700
2.48
Rozoni Portabello Mushroom
700
3.48
Healthy Choice Traditional
700
2.98
Classico di Basilicata
700
2.98
Compliments Traditional
700
2.77
Compliments Organic
700
5.48
Primo
680
2.48
Hunt’s Thick and Rich
680
1.98
Catelli Spaghetti Sauce with meat
398
1.48
3.5.5 Customers
By looking at the attributes of the lentil pasta sauce that XXXXX Foods will be
marketing, and the current trends of the health food industry, the intended target is the
active, vegetarian, as well as the health conscious female consumer. Due to the
occurrence of these individuals being concentrated in larger urban centers, we will focus
on the city of Calgary. This equates to approximately 40 000 persons. (Calgary
Vegetarian Resource, 2005). Calgary was chosen because of its relative population; high
percentage of young individuals, as well as the expanding growth of the city. This will
aid in marketing/advertising and product movement of XXXXX’s early life.
AgEc 495. College of Agriculture and Bioresources
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Lentil Pasta Sauce
The customer segment chosen to be focused on is the increasing vegetarian
population found in large urban centers. Health concerned and conscious consumers are
beginning to switch more towards the vegetarian inclined diets. Requirements of a high
value protein source, cholesterol free products, and high dietary fibre found in legumes
and pulses are recommended in everyday diets of vegetarians. (Calgary Vegetarian
Resource, 2005).
3.5.6 Opportunity
As society today becomes more health conscious, and vegetarians are looking for
additional meat alternatives, XXXXX will be of a greater demand. XXXXX will be
marketed in the health food, specialty aisle. This offers the product two advantages, the
first being a healthy pasta sauce choice, because of the protein found in lentils. The
second opportunity is the focus towards vegetarians, as a meat replacement. In targeting
both attributes of the sectors within the two grocery chains; XXXXX has realm of
opportunity. In the beginning stages of XXXXX development, the product will be
marketed to Calgary, and surrounding area’s. XXXXX Foods will then look at
expanding into the Saskatchewan market of the Sobey’s grocery chain as a long term
opportunity.
3.6 Marketing Strategy
3.6.1 Sales and Profits
XXXXX is strategically priced at $5.88 which is a 25% markup over main stream
sauces, such as Compliments Organic pasta sauce. The objective of the marketing
strategy is to supply Calgary FCL and Sobey’s stores with product in year one, with a
production capacity of 70,000 jars. Expanding to surrounding areas in Alberta in year
two, with a long term goal of supplying the province of Saskatchewan with XXXXX.
While obtaining sales targets of 10% of the total target market each year, 30% of the
target market will be aware of the product by year three.
Urban populations have a
higher population of vegetarians compared to rural (4%), as well as the majority of
AgEc 495. College of Agriculture and Bioresources
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Lentil Pasta Sauce
vegetarians are female aged 20 to 39 years of age. (Statistics Canada, 2005). It is these
reasons that XXXXX will be positioned into the urban centers, of Calgary Alberta.
Figure 3.1 Channels of Distribution
XXXXX will be transported from the warehouse where the sauce is produced to
FCL and Sobey’s warehouses in Calgary. Once the product is present in the warehouse,
the company’s will distribute XXXXX to the Calgary FCL as well as Sobey’s grocery
chains in the first year, expanding to the surrounding area of Calgary in year two and
three. With a long term goal of eventually expanding into the Saskatchewan market of the
Sobey’s grocery chain.
3.6.2 Select Markets/Product/Service Mix
The goal of XXXXX pasta sauce is to generate product awareness, into the target
market. Because the target market is realistic, and is not a dominate segment of
Calgary’s population, the goal will be attainable. The product is only targeted to
individuals who are looking for a product similar to XXXXX. Being the product has no
direct competition within the market; because there is no other lentil containing pasta
sauces, this is a beneficial attribute of XXXXX entering a niche product into the specialty
food industry.
3.7 Selling and Advertising
Awareness of the product will be the primary objective of the XXXXX Foods
marketing team. The Calgary Vegetarian Resource magazine will be used as a main
resource because this magazine has no charge to advertise in, it will give an unbiased
opinion to our consumers, while also creating a demand for XXXXX. In store taste tests
will also be used through advertising in flyers, in both the Co-op and Sobey’s. XXXXX
foods are also going to advertise in the Country Women, and Flare magazines, because
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Lentil Pasta Sauce
these magazines target the main segment of the target market, therefore presenting the
product to the end consumer directly.
3.7.1 Product Placement
The $15,000 fee is the cost of having the pasta sauce on the shelf in Sobeys stores
in Calgary as well as all Calgary Co-ops in. This number is a quote from the sales
managers at both the Sobeys and Co-op offices. It is approximately $8000 for Sobeys
stores and $7000 for Calgary Co-op. The sauce will be placed as an end cap display in
the stores. This means the pasta sauce is located at the end of the row of products facing
customers as they walk into the store. The $15,000 includes having the sauce delivered
from the warehouses and placed on the shelves in all the stores.
Table 3.2 Marketing Budget Plan
Advertising
Product Placement in Store
Magazine Advertising
Flyers and coupons
Brochures/Business cards
Total Advertising
Taste tests in stores
Web page
Travel expenses
Total Promotion
Freight
Total Marketing Expenses
$
$
$
$
$
$
$
$
$
$
$
15,000
10,135
15,000
300
40,435
5,000
200
4,800
5,350
20,540
70,975
3.7.2 Magazine Advertising
The $10,135 is an annual fee to place an advertisement for XXXXX in Flair, and
Country Women magazines across western Canada. This price is based on a half page
add in every issue. The reason Flair, and Country Women were chosen was because
these magazines are purchased by a large proportion of the target audience, 68% of Flair
female readership are between the ages of 18-49 ( Flair magazine, 2004), which is the
main target market for XXXXX Foods.
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Lentil Pasta Sauce
3.7.3 Flyers and Coupons
The $14,000 is an annual fee to have the product in both the Sobeys and Co-op’s
monthly flyers. This is a great way to increase customer awareness, of the product. The
coupons will be in the flyers beside the advertisement for the product.
3.7.4 Business Cards
It will cost $300 to get business cards made for XXXXX Foods, that include
David and Vicky Krauses contact information on them.
3.7.5 Taste Tests
XXXXX Foods will spend $5000 a year on setting up taste tests in the stores that
the sauce is sold in. The taste tests will be done three times a year, during three different
seasons, to reach as many customers as possible. (ex. Summer, spring, fall seasons).
3.7.6 Web Page
The $200 expense will be to update and maintain the already existing website.
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Lentil Pasta Sauce
3.7.7 Travel
The $4,800 is based on a yearly travel expense. Because XXXXX Foods is based
on a wholesale distribution to Sobeys and Calgary Co-op travel expenses to drive and sell
this product will be low. The numbers are based on approximately ten trips to Calgary
where the offices and stores for Sobeys and Calgary Co-op are located.
3.7.8 Freight
The yearly cost of freight is $20,540.00. This number is based from trucking,
from Saskatchewan to Calgary Alberta, based on the estimated trips will haul XXXXX,
to both retail stores in Calgary.
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Lentil Pasta Sauce
4.0 Financial Plan
4.1 Financing
XXXXX Foods will rely heavily on owner equity to cover the cost of
construction, as well as the costs of operation in the early years. Because of the high risk
factor associated with this business plan, as well as the relatively remote location of the
plant, a substantial bank loan can not be acquired without offering other security.
Although the amount is less than desired, XXXXX will be pursuing a bank loan to help
cover the high costs of construction.
The loan taken on as long term debt will be valued at $115,000. This is 30% of
the building and equipment costs and will carry an interest rate of 8%. The loan amount
and interest rate are based on estimations by TD Canada in Swift Current and will be paid
back over a 15 year period. Although taking on a loan will negatively affect the already
terrible IRR of XXXXX, it is included to lessen the amount of equity required which is
already very high.
In addition to the loan, XXXXX will be seeking outside investors to help raise the
required equity. These investors will be taken on as shareholders to be paid in
accordance to the dividend policy that has been set. In the case of a business failure, any
debt holders will be paid out first, and the shareholders will be paid out of any remaining
assets if any are left. The dividend policy is based on the total working capital and the
dividend policy factor is chosen such that the company does not pay out dividends if it
results in a negative cash flow. The dividend factors are very high in this plan because
company can not afford to pay any dividends in any of the first ten years of operation.
Investors will be extremely hard to find given the small chance of being paid a dividend.
As well, the complete absence of an external rate of return makes this business an
unattractive option for potential investors.
Although the interest on long term debt is taken into account when calculating
profits, it is a relatively small percentage of the losses observed in the net income and
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Lentil Pasta Sauce
ending cash flow values. While interest on debt will represent an expense for the
company, the loan only covers a small amount of the total capital required.
After examining the base run of the financial situation of XXXXX Foods, the plan
appears to be unfeasible. The ending cash flow in every year comes up negative unless a
huge initial equity investment of 1,625,000 is made. This number is far too high to be
realistic and does not fix the company’s financial problems, only nurses it through the
first 10 years of operation to maintain a positive cash flow. The following financing
budget uses values that would let XXXXX construct the plant and maintain operations in
year one, but would run into cash flow problems at the end of year one as well as in
following years.
Table 4.1 Financing Plan for XXXXX Foods
Schedule 7: Financing Budget
2007
Long Term Debt
$115,000
Owner’s Equity
485,000
Total
$500,000
4.2 Balance Sheet
The balance sheet as of December 31, 2007 can be seen in Table 4.2. Some
important numbers to take notice of are the negative cash balance and the large amount of
owner’s equity.
Table 4.2 Balance Sheet for XXXXX Foods as at December 31, 2007
Assets
Current Assets
Cash
Accounts receivable
Total inventories
Total current Assets
$(101,026)
35,556
21,621
$(43,849)
Long Term Assets
Buildings, Machinery & Equip. $387,875
Accumulated C.C.A.
(22,358)
Land
1
Total Long Term Assets
$365,519
Total Assets
$321,669
Liabilities
Current Liabilities
Accounts Payable
$33,476
Long Term Liabilities
Long term debt
Total Liablities
110,765
$144,240
Owner’s Equity
Owner Equity
Retained Earnings
Total Owner Equity
$385,000
(207,571)
$177,429
Total Liabilities & Equity
$321,669
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Because there is not currently a plant in operation, the land, building and
equipment all need be purchased new. A more in depth brakedown of the building and
equipment costs are shown in Schedule 6 Appendix B. Because the balance sheet shown
is for the end of the first year, it shows accounts payable and receivables that represent 2
weeks of finished product inventory, as well as one months worth of production worth of
raw materials inventory.
4.3 Economic Forecast
The inflation rate was set at 2% every year for the next ten years of production.
All input prices and revenues are adjusted to reflect this rate of inflation. The interest on
the long term debt was set at 8% and remains constant over the ten year plan, although it
important to note the loan is planned to be paid off over a 15 year period.
4.4 Unit Cost of Production
A break down of XXXXX’s production cost per jar of XXXXX can be broken
down into individual components including direct materials, overhead costs per unit,
direct labour, and marketing costs. This analysis can be seen in Table 4.3.
Table 4.3 Unit Cost of Production in 2014 (first year of full production)
Ingredients costs
Packaging
Total materials per jar
$0.20
0.99
$1.19
Direct labour
Overhead cost
Total Unit Cost of Production
$1.80
0.60
$3.59
Marketing and Administration
$1.50
Total Unit Cost per Jar
$5.09
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4.5 Financial Performance Analysis
The financial situation of XXXXX Foods is looking very unattractive. As the
business model stands, the plan is unfeasible. The business experiences negative cash
flows in each of the nest projected ten years of operation. The model also shows a net
loss in every year. Although the losses decrease as the life of the company goes on, the
net loss at the end of the tenth production year is still $110,000. The company’s net
present value (NPV) at 20% required rate of return was calculated using a required return
on equity and has a value of $-913,535 which indicates a poor investment because the
value is extremely negative. The internal rate of return (IRR) and external rate of return
(ERR) were 100% negative.
4.5.1 Critical Variables
The critical values for this financial model are wholesale price per jar and the
level of production per year. These two values have a great impact on whether the
business succeeds or fails. Other variables such as the price of labour and price of input
materials are minimal in comparison.
4.5.2 Risk Analysis
Because the business plan is unfeasible in its current state, the values in the base
run financial model can be considered to be the worst case scenario. The critical values
to be examined have been found to have the greatest impact on the current financial
situation. Given the current market prices for pasta sauce, the breakeven scenarios can be
considered to be the best case scenario. The variables found to be most critical are found
in Table 4.4. The values in the best case scenario represent what the price or volume
produced must be to give a positive NPV in year one.
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Table 4.4 Sensitivity of Critical Variables
Base Case
Best Case
% Change
(worst)
(breakeven year 1)
Wholesale price per Jar
$4.12
$6.36
54
Volume Produced
70,000
121,382
173
As shown in the tables, the XXXXX Foods financial models are more sensitive to
a change in price than in volume. A smaller percentage change in price can allow the
company to reach its breakeven levels in comparison to increasing production. Because
of the unreasonable levels of price increase required and the increased production levels
that are beyond plant capacity, a combination of both would be required to allow the plan
to be feasible.
Since the base model of the plan is unfeasible, there is no concern over how much
decrease is allowable for both production levels and wholesale price. In the case
presented in the preceding pages, all numbers were found using the breakeven levels as a
basis for the best case scenario facing the company.
4.5.3 Breakeven Analysis
Figures 4.1 and 4.2 show the breakeven analysis by altering the wholesale price of
the sauce and the level of production respectively. As shown by Figure 4.1, the
breakeven prices that are required are all much higher than the base price of $4.12 per jar.
These prices, although attractive to the goals of the plan, are unrealistic in the pasta sauce
market. To obtain wholesale prices of $4.12, the retail selling price would have to be
$7.22 to reach the cash flow breakeven, and $9.04 to breakeven the net income. These
prices are far too high in comparison to other products that are already available on the
market. A more detailed comparison of competing products is given in the marketing
section of this plan.
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8
7
Price per Jar
6
5
4
3
2
1
0
1
2
3
4
5
6
7
8
9
10
Year
base
cash flow break even
net income break even
economic break even
Figure 4.1 Breakeven Analysis Using Change in Wholesale Price
Jars Produced per Year
250000
200000
150000
100000
50000
0
1
2
3
4
5
6
7
8
9
10
Year
base
cash flow break even
net income break even
economic break even
Figure 4.2 Breakeven Analysis Using Change in Yearly Production
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Figure 4.2 shows the levels of production that would result in breakeven scenario
for both cash flow and net income. These levels are both substantially higher than the
base levels. In early years, there may be a slight possibility of producing more than the
base run if experienced workers are hired. Even in the case of finding, skilled employees,
the higher production levels are only a positive if the extra product can be sold. Because
this product is unique, it is unlikely that any such skilled employees will be easy to find,
especially when considering the low wage levels, and the relatively remote area of
Shaunavon. It is also important to note that the estimated production capacity of the plant
being built is 130,000 jars of sauce. The required levels of production required to break
even are higher than capacity in every year with the exception of year one.
4.5.4 Alternative Salary Scenario
The business plan presented represents ideal numbers of employees and
competitive salaries. As with many businesses that are owned and operated by the same
individuals, it may be of interest to examine what will happen to the financial model if
the owner’s take on more responsibility to streamline the number of employees, or take a
cut in pay in an effort to make the business succeed. The following section will examine
how the financial model will be affected if the secretarial services are done for free, as
well as the position of plant manager taking on the duties of the sales manager and taking
a $10,000 pay cut. In addition, the assumption will be made that by intensively training
hired employees, production will be more efficient and one wage earning employee can
be eliminated. The wage for the remaining workers will stay at the same level to stay
competitive with other positions with similar required qualifications.
If the changes listed are made, the financial situation of the company does see
improvement. The ending cash flow at the end of the first year becomes positive, but is
followed by three years of negative flows. This is a huge improvement over the base
model in which all years ended in a negative cash flow. Another improvement can be
seen in the net income category. In the base run, all year showed losses, and in the
revised run, the company showed net income in the fifth year. The net present value also
showed improvement, changing from $-913,535 to $-319,599. The final noteworthy
changes come in the values of the IRR and ERR. The based run showed that a negative
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return to owner’s equity that made a calculation impossible, and after changes were made
the values were: IRR = -1.0% and ERR = -0.9%. These levels are beginning to approach
a positive level and make the business plan look like a more attractive possibility. In
addition to the listed changed, the cash flow could be positive and thus make the plan
feasible if the initial owner equity investment was raised to $430,000. The added start up
capital would allow the company to keep a positive cash flow throughout the first ten
year of operation. Table 4.5 summarized the effect that the changed listed above have on
some of the key numbers of the financial model.
Table 4.5 Changes in Key Numbers After Proposed Changes
Net Income ($)
Ending Cash Balance ($)
NPV ($)
IRR
ERR
Year 1
-74,497
67,814
Year 5
15,503
48,371
-327,099
-0.9%
-1.0%
Year 10
50,784
259,242
4.5.5 Contingency Plan
As an alternative building a plant and running all operations out of Shaunavon,
the option of co-packing could be investigated. This alternative was investigated by
colleagues in a separate planning class and was a scenario that showed positive returns.
Although that scenario showed positive returns, the levels were low. It may be an option
in early years to build funds within the company to assist in the building and
establishment of a plant.
4.6 Conclusion
After running the financial model, it is found that the plan is unfeasible. The
negative ending cash flows mean that the model doesn’t work. If XXXXX Foods is still
intending to construct a plant, there needs to be some changes in the employment
structure, as well as some re-evaluation in the scope and size of the project. If the
financial figures are ignored and the plan is followed as written, finding investors to
finance the project will be nearly impossible to recruit, and their investments will be lost
within a few years.
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5.0 References
Websites:
Alard Equipment: Available at - http://www.alard-equipment.com/we_buy.htm
Calgary Vegetarian Resource: Available at - http://www.calgaryveg.com
Country Women Magazine: Available at - http://www.countrywomanmagazine.com
Federated Co-op: Available at - http://www.fcl.ca
Handling Innovations: Available at - http://www.handlinginnovations.com
Flare Magazine: Available at - http://www.flare.com
Future Shop: Available at - http://www.futureshop.ca
Pulse Canada: Available at - http://www.pulsecanada.com
XXXXX Foods: Available at - http://www.XXXXXfoods.com
Rose Scientific Ltd: Available at - http://www.rosesci.com
Scale Galore: Available at - http://www.scalesgalore.com
Sobey’s Grocery Chain: Available at - http://www.sobeys.ca
Staples Business Depot: Available at - http://www.staples.ca
Statistics Canada: Available at - http://www.statcan.ca
Quotes:
Ampack: Available at - http://www.ampack.co
Costco: Available at - http://www.costco.ca
Custom Labels Inc: Available at – http://customlabelsinc.com
D and D Lumber
Risdale Trucking: Available at - http://www.sasktrucking.com
Saputo’s: Available at - http://www.saputo.ca
Saskpower: Available at - http://www.saskpower.com
Sasktel: Available at - http://www.sasktel.ca
ULine: Available at - http://www.uline.com
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6.0 Appendix A
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Supply/service analysis
Steam Jacket Kettle
Steam Jacket Kettle with Scraper
Filling Line
Scale (75kg)
Scale (200kg)
Scoops (6)
Stainless Steel Tables (2)
Stainless Steel Containers (3)
Pallet Jack (2)
Pallet Rack
Printing Plates
Computers/Printers (2)
Desks (2)
Tomato sauce
Chopped onion
Oregano
Basil
Salt
Garlic powder
Parsley
Cooked lentils
Vegetable bouillon
Jars & Lids @$0.63 each
Labels @ $0.35 each
Boxes @ $2.25 per 15
Hair Nets
Rubber Gloves
AgEc 495. College of Agriculture and Bioresources
Supplier
Alard Equipment
Alard Equipment
Alard Equipment
Scalesgalore.com
Scalesgalore.com
Rose Scientific Ltd.
Handling Innovations
Handling Innovations
Handling Innovations
Handling Innovations
Handling Innovations
Future Shop
Staples
Costco
Coop
Saputo's
Saputo's
Saputo's
Saputo's
Saputo's
Krause Farm
Coop
Ampack
Custom Lables inc.
Packaging Price.com
Uline
Uline
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7.0 Appendix B
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