North Country Organics – Business Plan
1.0
Introduction
54 North Agri-Foods, Tisdale, SK.
54 North Agri-Foods is made up of two Saskatchewan farm families looking at a ways to
diversify or create supplemental income for their families. 54 North Agri-Foods is
looking at developing an organic product that can be manufactured in the Tisdale district.
To help answer some of 54 North Agri-Foods questions, we have developed a business
plan for an organic cracker facility.
Over the past several years decreasing grain prices, along with unpredictable weather on
the prairies have left farms wondering what they can do to generate alternative income
for their families. By diversifying the farming operation with another source of income,
54 North Agri-Foods believes that they can surpass these tough times on the farm. By
creating an alternative business along side the farm, they feel they would not have to
worry about unpredictable farming situations on the prairies.
54 North Agri-Foods feels that there is an increasing market for organic foods. In studies
conducted over the past several years, organic food consumption is increasing at a rate of
about 20% per year. From this 20% growth, studies show that 1% of all consumers by
organically grown products at least once a week. Considering the number of people in
North America, this could be a so-called gold mine for anybody interesting in taking the
risk of setting themselves up in an organic processing business.
1.1
Current Study Objectives
The goal set out by the 54 North Agri-Food Company is to subsidize their prairie farm by
setting up an organic manufacturing facility. This project will attempt to develop a
business plan for an organic cracker facility. With in-depth research of the exact target
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North Country Organics – Business Plan
market for organic crackers, we hope to prove that it is feasible to start up your own
facility in Saskatchewan and tap the organic marketplace. The idea behind the facility is
to take organic flour product and turn it into and end product, which will be marketed
towards the niche organic markets of California.
Goal: To determine the feasibility of, and complete a business plan for an
organic cracker facility situated in Tisdale, Saskatchewan.
Objectives:
1)
To establish an operations plan for a organic cracker facility;
2)
To establish a human resource plan which covers all employment needed
for the facility to function sufficiently;
3)
To establish a marketing plan which deals with product, place, promotion,
and price; and
4)
To establish a financial plan to anticipate financing, costs, risk analysis,
and economic returns (IRR and ERR) over the next ten years.
Throughout this plan, the name North Country Organics is used in place of 54 North
Agri-Foods. This name change was suggested for marketing purposes to better position
the company in the organic foods market.
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2.0
Industry Overview
2.1
Organic Industry in North America
The idea of organic food consumption has been around for many decades. As
populations grow in North America, so does the idea of being a health conscious
consumer. Therefore the organic food industry is increasing in popularity across North
America. “The organic market is growing at an impressive rate. Retail sales in the United
States are expected to top $20 billion by 2005, up from just $1 billion in 1990. Organic
food sales have grown a whopping 20% per year during the past 10 years, compared to
1% per year for the food industry overall,” (All things Organic 2002). Consumer demand
for organically produced food is on the rise and provides new market opportunities for
farmers and businesses around the world, according to a new report from the United
Nations Food and Agriculture Organization (FAO).
2.2
The Culture
We have seen that a large number of North Americans have been becoming deeply
interested in their health and wellness. " This yearning expresses itself in new attitudes,
changing behaviors and a deeper appreciation for the importance of nutrition, exercise,
community involvement, nature, spiritual practice, femininity and ecological
health,"(The Hartman Group). This type of cultural change has a large affect on the baby
boomer generation. As this generation has moved into their middle age they have
become more interested in preventing health problems through healthier foods. Cultural
values are changing in society today. Cultural values are evolving to emphasize health,
nature, community, and spirituality. Therefore from a cultural prospective the demand
for natural and organic foods is on the rise.
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2.3
The Market
Based on ten years of consumer and trade research, The Hartman Group has determined
that the "natural" or "green" consumer is now mainstream. This shows that buying
organic food is not just a fad but it is an indicator of deep-rooted cultural and lifestyle
changes occurring in North American culture.
Billions (US$)
Figure 1. Growth in the Natural Food Products Industry
16
14
12
10
8
6
4
2
0
1990
1991
1992
1993
1994
1995
1996
1997
Years
Natural Product Sales
Source: The Hartman Group
Figure 1 represents the large increase in the demand for natural products across America.
From this figure it is safe to say that the demand for organic products has the same
upward slope and this is simply because society is shopping and eating healthier. It is
evident that natural and organic products are now available is just about very
conventional retail store including pharmacies and supermarkets, this is because there is a
large demand and profitability of organic foods. This large rise in the demand also comes
from the differentiation in the products offered. Now there are more products with better
quality and reduced prices therefore we can say that the market and or industry is
developing. The bottom line is that the industry is growing at a rapid pace, therefore it is
a good business decision to try and access this market.
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3.0
Operations Plan
3.1
Cracker Production
North Country Organics will be marketing whole-wheat organic crackers produced by a
highly automated biscuit manufacturing line. The operating schedule in year 1 will be a
10-hour per day, 4-day workweek. To produce enough units to meet the estimated sales
level of year one, the plant would operate ten months of the year. The maximum capacity
of the plant is approximately 3 million boxes per year. This is well above the year one
sales figure of 864,000 units, leaving room for rapid market expansion.
3.2
Product Composition
The crackers are composed of organic soft white wheat flour, baking powder, salt, canola
oil, and water. Each finished unit is a tin box containing two plastic sheaths filled with
350 grams of organic, whole-wheat crackers.
3.3
Ingredient Receiving and Handling
On an average manufacturing day 5230 units will be produced. This is based on a tenhour working day with the manufacturing line being in operation for 80% of that time,
while the remaining 20% of the time is used for cleaning and maintenance. Operating at
this pace on a 4-day week, monthly output will be approximately 91,000 boxes per
month. To operate on this monthly schedule, ingredient requirements will be
approximately 20 tonnes of flour, 16-25kg bags of baking powder, 13-25kg bags of salt
and 4 tonnes of canola oil. Water is also needed in the process, which will be supplied by
wells on site.
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All flour is milled by organic soft white wheat. It is sourced in bulk form from Hayhoe
Mills Ltd. in Woodbridge Ontario and will be delivered by Super-B truck every 29 days.
The flour will be stored in a 50 tonne epoxy coated steel bin. Salt and baking powder are
purchased from Dawn Foods (Saskatoon) by the pallet, which contains 36-25kg bags.
One pallet of baking powder will be delivered every 67 days and one pallet of salt every
85 days. Baking powder and salt will be stored in raw ingredients inventory. Refined
canola oil is purchased from ADM Agri-Industries in Lloydminster, Alberta. Oil will be
delivered by bulk truck every 56 days and stored in a 2000-gallon stainless steel tank.
3.4
Production Process
The cracker production process involves a highly automated manufacturing line
composed of multiple pieces of machinery (summarized in Figure 2 below). There are
four main steps in the production process including fermentation and mixing, forming,
baking, and product handling.
Ingredients
Mixer
Dough
Feeder
Laminator
Salt
Sprinkler
Finished
Product
Rotary
Cutter
Packager
Stacker
Gauge
Rolls
Cooling
Conveyer
Oil
Sprayer
Oven
Panner
Web
Figure 2. Cracker Manufacturing Process
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3.4.1 Mixing and Fermentation
The first step in the mixing process involves the flour, baking powder, salt, a portion of
the canola oil, and water being dumped into the mixer. Flour is put in first, filling the
mixer up to a pre-specified level. Salt and baking powder are each weighed and added
into the mixture. Part of the canola oil is metered out of its storage tank and pumped into
the blend. The latter part of the oil will be sprayed directly on the baked crackers near the
end of the process. Finally, water is metered out of its storage tank and pumped into the
dough mixer. Two members of the production staff will perform ingredient handling.
After the initial mixing step the remainder of the process is automated. The ingredients
are mixed in the single blade high-speed mixer (Figure 3) then fed through the dough
feeder to the beginning of the forming process.
Figure 3. Dough Mixer
Source: New Era Machines
Figure 4. Dough Laminator
Source: New Era Machines
3.4.2 Forming
The wet dough mixture is received from the dough feeder and sent through the dough
laminator (Figure 4). The dough laminator essentially receives the raw dough and flattens
it into a homogenous sheet. From here the dough is sent through gauge rolls which reduce
the thickness of the continuous dough sheet to a specified size. Following this step, the
continuous sheet of dough will pass through the salt sprinkler (Figure 5) where salt will
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North Country Organics – Business Plan
be sprinkled on the top of the sheet. After being salted, the sheet of dough proceeds
through the rotary cutter (Figure 6) where the sheet is cut into individual crackers.
Figure 5. Salt Sprinkler
Source: New Era Machines
Figure 6. Rotary Cutter
Source: New Era Machines
3.4.3 Baking and Oiling
Following the rotary cutter, the panner web transfers the cut dough pieces onto the oven
belt. The raw crackers then pass through a gas fired tunnel oven (Figure 7) where they are
baked, losing approximately 27%1 of their original raw weight. The stripper unit
immediately receives the baked crackers from the oven and sends them into the oil
sprayer (Figure 8) where each cracker is sprayed with a fine mist of canola oil. At this
point the crackers are still very hot and require about two and half minutes of natural
cooling. To do this, the hot crackers exit the oil sprayer and enter the cooling conveyer
system. This system is simply a long belt that transports the cooling crackers to the
stacker.
1
In conversation with Connie Perron, Department of Applied Microbiology and Food Science University
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North Country Organics – Business Plan
Figure 7. Gas Fired Tunnel Oven
Source: A.R. Enterprises
Figure 8. Oil Spray Machine
Source: New Era Machines
3.4.4 Product Handling
The stacking machine (Figure 9) collects crackers from the cooling conveyer, forms them
into rows and places them into stacks. The stacks then move into the cracker-packaging
machine (Figure 10), which seals the desired length of crackers in a plastic wrapper. Two
plastic sleeves of crackers will then be put in each tin box, put in cases, and stacked on
pallets. From here the pallets will be transported by forklift to finished goods inventory
storage. Three members of the production staff will oversee packaging and storage.
Figure 9. Stacking Machine
Source: New Era Machines
Figure 10. Packaging Machine
Source: New Era Machines
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3.5
Shipping
Operating on the 10-hour day, 4-day workweek, the plant will produce approximately one
semi load of product every two weeks. If the cracker market experienced continuous
demand, a load would be shipped every two weeks. Since market demand will probably
not occur in this continuous fashion, the plant production schedule will have to operate
accordingly. If a slump in demand is experienced, plant shutdown will be mandatory until
demand picks back up. If there is a sudden increase in demand, production can be
increased 8 to as many as rapidly. This would be done by increasing the number of
production hours in a day from 8, to as many as 22. Operating days in the week can be
picked up from 4 to 7. Input suppliers were re-assuring that there would be ample
supplies available, so ingredient requirements would not be a problem. The high output
nature of cracker production gives the firm the opportunity to maintain a relatively low
amount of finished goods inventory.
North Country Organics major market is California, with the San Francisco Bay area
being the main target. The distance from Tisdale to San Francisco is 2,067 kilometers.
Although this is a rather long distance, freight costs per unit are calculated to be
approximately $0.092 per unit. This low freight cost is due to the competitive nature of
the trucking industry and back-haul availability to California. Much of Saskatchewan’s
fresh produce consumption is delivered by truck from California. This enables the firm to
access economical back-haul rates and be able to depend on truck availability.
2
Based on $1.57 a loaded kilometer
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3.6
Land and Utilities
3.6.1 Land Purchase
The plant will be situated 2.5 miles north of Tisdale SK on Highway 35. 12 acres will be
purchased for $10,250. The site was chosen because of the company’s current location, as
well it is situated directly adjacent to a well-maintained highway.
3.6.2 Electricity Installation and Consumption
Electricity is a major factor in the cracker production process. All electrical installation
costs are included in the cost of the building. The cracker manufacturing equipment
accounts for approximately 95% of the annual electricity bill which totals $105,1153 in
year one of operation.
3.6.3 Natural Gas Installation and Consumption
Natural gas installation accounts for $12,5004 of the total building cost. Natural gas is
used to heat the buildings and bake the crackers in the gas-fired oven. The oven
consumes approximately 65% of the gas usage in year 1.
3.6.4 Water System
The plant’s water consumption in year 1 is approximately 35,000 gallons, which includes
both office use and ingredient requirement. The water will be supplied by an on-site well,
or in the event of a dry well can be trucked in. Water is purified through a reverse
osmosis machine and stored in a 454-gallon water tank.
3
4
Sask Power, based on machinery specifications provided by APV Baker
Sask Energy, based on specifications provided by APV Baker
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3.7
Project Development
3.7.1 Building Site Plan
Loading Docks
H
I
G
H
W
A
Y
Office
Production
Plant
35
Parking
Flour Storage
Figure 11. Proposed Site Plan
3.7.2 Building Costs
The production building is 120 feet long, 40 feet wide, and 20 feet tall (4800 square feet).
The long and narrow shape of the building is due to the nature of the cracker
manufacturing equipment housed inside. It is an insulated steel structure building fully
finished with electricity installation and natural gas heating. An office building is
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North Country Organics – Business Plan
attached to the side of the main production building. The fully finished office building is
60 feet long, 30 feet wide, and 10 feet tall (1800 square feet). Total cost of the buildings
is $372,9655. Approximately 60% of this cost is for the production building, with the
remaining 40% for the office.
3.7.3 Building Floor Plan
10
1
Main
Entrance
2
8
9
0
3
5
4
0)
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
Reception/clerical assistant
Washroom
President
Account Manager
Marketing Manager
Lounge
Flour storage bin
Production line
Packaging line
Cracker storage
Loading docks
Water tank
Ingredient storage (with oil
tank)
13) Shop/misc
14) Plant Manager
15) Water distiller
7
14
13
15
12
11
6
Figure 12. Proposed Floor Plan
5
Graham Construction, Saskatoon SK
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3.8
Equipment
3.8.1 Cracker Manufacturing Equipment
Cracker production is a rather concentrated industry with a few large players providing
most of the output. This has caused cracker-manufacturing equipment to become bigger
to suit the needs of its customers. The capacity of new equipment can be quite over
whelming to a new entrant. Our firm selected smaller scale, commercial classed
equipment, which still exceeds our initial required capacity. Commercial classed
equipment is generally regarded as automated, minimal labour input machinery6. Having
room for extra capacity allows the firm room for rapid market growth and to practice
minimum inventory management. The cost of new cracker manufacturing equipment can
be very costly; therefore a used line of equipment was sourced for an approximate value
of $894,0007.
3.8.2 Additional Equipment
Equipment requirements for the rest of operations are relatively small after the purchase
of the cracker manufacturing equipment. The packaging machine described in section
3.44 will have an approximate cost of $50,000. Bulk ingredient storage equipment
includes the flour storage bin with an approximate cost of $90008, and a canola oil
storage tank with an approximate cost of $72009. The water supply system, which is
composed of a well, reverse osmosis water purifier, and a 424-gallon tank, will have a
total cost of approximately $8,80010. A used tractor to perform yard maintenance is
valued at a cost of $14,00011. This tractor includes a mower and blade, which will mow
grass in the summer and clear roads of snow in the winter. A forklift is required to move
6
In conversation with Mike Whaley, Biscuit Equipment, Inc.
Biscuit Equipment Inc., Ellerslie, Georgia
8
Flaman Sales Ltd., Saskatoon, SK
9
Nelson Machinery and Equipment Ltd., Vancouver BC
10
Waterworld, Wadena SK; Flaman Sales Ltd., Saskatoon, SK
11
Jay-Dee Equipment, Swift Current, SK.
7
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pallets of finished product from the end of the packaging line to finished goods storage. It
would also be used in unloading shipments of baking powder and salt, and to load trucks
with finished product. An electric forklift, with a cost of $9,50012, was selected in order
to keep low emissions in the production plant.
Office equipment including computers, computer hardware and software, fax machinephotocopier-printer, filing cabinets, desks, and chairs were estimated at a total cost of
$28,00013 The entire equipment requirements for operations are summarized in Table 1
below.
Table 1. Estimated Cost of Equipment
Type of Equipment
Estimated Cost
Mixer
Dough Feeder
Laminator
Gauge Rolls
Salt Sprinkler
Rotary Cutter
893,550
Panner Web
Oven
Oil Sprayer
Cooling Conveyer
Stacker
Packaging Machine
45,000
Reverse Osmosis
8,000
Water Tank (424 gal)
800
Oil Tank (2000 gallons)
7,200
Flour Bin (50 tonne)
8,850
Forklift
9,500
Yard Tractor
14,000
Office Equipment
28,000
Total Equipment Cost
1,014,900
12
13
Liftway Material Handling Solutions, Brantford ON
Office Depot, Saskatoon SK and Staples, Saskatoon SK
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North Country Organics – Business Plan
3.9
Cost of Goods Manufactured
The cost of goods manufactured is the total cost for of all direct inputs used in the cracker
production process. These costs include direct materials used (flour, canola oil, salt,
baking powder, and packaging), direct labour used (production staff), and manufacturing
overhead (utilities). These costs for the first six years of operations are illustrated in
Table 2.
Table 2. Cost of Goods Manufactured
Direct Materials Used
Direct Labour Used
Manufacturing Overhead
Cost of Goods Manufactured
2003
625,492
173,937
268,565
1,067,994
2004
672,404
178,286
373,923
1,224,612
2005
722,834
182,743
347,258
1,252,835
2006
777,047
187,312
328,802
1,293,160
2007
835,325
191,994
317,189
1,344,509
3.10 Operating Expenses
Operating expenses for the business include all other costs not included in the cost of
goods manufactured. All operating expenses for the first six years of operations are
summarized in table 3.3.
Table 3. Operating Expenses
Expenses
2003
Communications
14,500
Salaries (SG &A)
353,700
Benefits (SG &A)
34,592
Start up Expense
40,000
Marketing Expenses 1,592,607
Broker/Importer
199,076
Shelf Space charge
96,000
Office Expenses
2,500
Transportation Costs
73,440
Interest - LT Debt
56,000
Total Expenses
2,462,414
2004
15,588
362,543
35,457
1,672,237
209,030
98,400
2,688
79,040
52,134
2,527,115
2005
16,757
371,606
36,343
1,755,849
219,481
100,860
2,889
82,992
47,959
2,634,736
2006
18,013
380,896
37,252
1,843,641
230,455
103,382
3,106
87,141
43,451
2,747,337
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2007
2008
19,364
20,817
390,419
400,179
38,183
39,138
1,935,823 2,195,224
241,978
274,403
105,966
108,615
3,339
3,589
91,498
96,073
38,581
33,322
2,865,151 3,171,359
16
2008
897,975
196,794
311,340
1,406,109
North Country Organics – Business Plan
3.11
Summary of Capital Budget
The total capital cost of the operation including land, buildings, and equipment is
$1,448,115. The capital budget is summarized in table 3.4.
Table 4. Capital Budget
Land
Buildings
10,250
372,965
Equipment
1,064,900
Total Capital Cost
1,448,115
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4.0
Marketing Plan
4.1
Mission Statement
Our mission at North Country Organics is to produce an organic alternative to fatty
snacks. O will enter the market with a lot of marketing and slowly evolve as the
premium organic cracker on the shelf. Our product will be known for it’s taste, it’s
healthiness, and it’s prestige. Our product will fit the brand we develop from marketing
activities.
4.2
Marketing Objectives
Three key marketing objectives are:
 To develop markets for an organic cracker in California
 To build a prestigious brand that will be recognized by a loyal customer base
 To expand our production and our marketing base as the organic market grows
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4.3
Situation Analysis
Table 5. SWOT Analysis
Strengths
 Premium Canadian organic product
 Low input costs
 Differentiated packaging
 Few employees
 Location (cheap land & labour)
 Educated employees
 Competitive price
Opportunities





Low transportation cost
Low competition
Relatively new market
Opportunity for product expansion to fit
clients needs
Opportunities to enter new markets
Weaknesses
 High start up costs
 Finding investment funding
 Location (distant from market)
 Customs paperwork
 High non-organic competition
Threats






Amount of organic flour available
Other companies may enter
Truckers go on strike
Vulnerable to recession
Strong substitute brands
Other companies may expand
4.3.1 Strengths
A good strength of the firm is low input cost is the low cost. Since the crackers are made
on an automated manufacturing line, the plant can operate with few employees. With
fewer employees labour cost will be low, which is very beneficial to the firm in the long
run. Given the plant location, labour and land costs are cheaper than setting up
operations in California. The last strength of the firm is the potential to increase
production. The cracker production facility is not running at full capacity and therefore
there is potential to increase production with larger demand. The facility is set to hold
enough raw materials for a two-month period of production. The final product is priced
lower than the direct competition. This is a good strength, helping to establish the product
in a new market.
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4.3.2 Weaknesses
The major weakness of the firm is the amount of start up cost required. Equipment will
cost $1,075,150 to purchase. The building and facilities will cost $372,965, which
includes utilities and hook-ups. The total capital required to get the business started will
cost $1,448,115. This is a high start up cost and it may be difficult to raise sufficient
financing. This brings up another weakness of finding investors. It may be difficult to
find investors in Saskatchewan for a product selling in California. Since this is a newer
market, potential shareholders may perceive substantial risk and therefore be hesitant to
invest. Although the firms distance from market is somewhat of a weakness the low
freight-cost per unit helps offset it.
4.3.3 Opportunities
Although there is already some direct competition, the organic cracker market is
relatively new. The organic food market is growing at a rate of 20-24%, which means are
business has a great opportunity to expand with the market growth. This rapidly growing
market, along with the fact that our target market population is growing, justifies our
operation size and lend the opportunity to meet retail demand. There is also an
opportunity to expand our product line into markets that already exist. Examples of these
products are different flavours of organic crackers, and organic baby food crackers. These
markets are also relatively new, giving North Country Organics the opportunity for
successful market penetration.
4.3.4 Threats
There is a small threat of an organic flour shortage. Flour made from organic soft white
wheat is imported from Ontario, and in the event of a major shortage, the firm would
have to find an alternative source. This is a small threat because the amount of flour
needed is very small at 240 tonnes per year. There is also a threat is of substitution.
There are some very well established non-organic crackers companies in the market.
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Even though they do not currently produce an organic cracker they could produce them
much cheaper than us if they opted to enter the market. This is due to the large economies
of scale they would realize, and the fact that they already have a recognized national
brand. Another threat is that our product is vulnerable to recession. This means that if
the economy is in a downward spiral our product, a premium priced organic cracker,
could be substituted for a cheaper non-organic cracker.
4.4
Competition
Competition in the organic cracker market is minimal because the market is relatively
new. The main competition in California is Devonsheer Organic Crackers. They are
based out of Ventura California, which is a huge marketing advantage for them. A box of
Devonsheer Organic Crackers is $6.99 a box in U.S. dollars. This is considerably higher
then what we will sell a box for. Another organic cracker company is Basca Organic
Crackers. Basca makes a cracker similar to a Ritz cracker. It sells a box for $5.00 a box
in U.S. funds. Other companies, which are not organic but create huge competition are,
Nabisco (Triscuit’s, Ritz) and Breton Wheat Crackers. These companies have very well
established brands and hold a large portion of the market share. Although these
companies are not organic, they can be easily substituted for our product.4.5 Customers:
Market Definition and Segmentation
4.5
Target Customer
Active and health-conscience individuals represent the organic consumer base. The
customer whom we will target for our marketing strategy is a health conscience
consumer. Since our product is a premium product it is priced higher then ordinary, nonorganic, crackers. With that, our target base is the customer who is in the high-income
bracket. These customers are willing to pay a premium price for a product that does not
give up taste as it increases in health. The market segment will include the post
secondary education students up to the adults in a professional occupation. The range in
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age will vary from 22 years old to around 55. Included in the young adult segment are
young adults with families. Parents tend to be more health conscience then single adults.
Another segment is the older citizens who are very health conscience and shop
organically regularly.
4.6
Product
Our physical product is an organic whole-wheat cracker. This product is made up of the
following ingredients:
 organic flour
 salt
 baking powder
 canola oil
 water
The product we are selling is not just a cracker, as it includes many intangible
characteristics. The crackers are packaged in an elegant tin box that represents prestige
and wealth. To catch the eye there will be a colorful design that covers the box. A
farmyard with a wheat field will make up the design. The tin box is a marketing
technique we believe can influence the decision of a customer between our product and
another. Although the packaging is far more expensive then the cardboard box we
believe as a new company we needed something to give us the edge over other premium
crackers. The idea behind the tin box is that it will be kept at home and used for
decoration to store other things after the crackers are gone. This is in house advertising
without an expense to us.
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North Country Organics – Business Plan
4.7
Sales and Profit Objectives
4.7.1 Sales Objectives
Our sales objective is to sell our product into California. The transportation costs are not
high because of the back hauls that other grocery store trucks are making to California.
The organic crackers will be sold through the Whole Foods organic food market chain.
The first year of production we have a sales target of 864,000 boxes of crackers. We plan
on increasing our sales by 5% each year. We believe that this is possible because the
organic market growth in United States is expected to be steady at 20-24% for the next
five years14.
4.7.2 Profit Objectives
The objective of our company is to generate a profit. The return on investment should be
high because it is high risk. Thus our profits should be greater then the opportunity cost
of using our money in other investments. Our net earnings in the first year are $360,179
and increase steadily each of the following years.
4.8
Channels of Distribution
In the food business it would be most desirable for the product to go from the producer to
the retailer without a broker. In our situation it would be very difficult not to use a broker
because of the location of the factory and our market. The broker will handle all
importer/exporter-related issues and paperwork. They will also provide warehouse
storage in California, which will secure the cracker supply chain in the event of
transportation problems. The crackers are product will produced in Tisdale, SK and
shipped to California by truck. These semis will be back hauls from large chain grocers
14
U.S. Organic Information Standards, U.S. Embassy
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North Country Organics – Business Plan
transporting product from California to Saskatchewan. The consumer will then purchase
the product from the super market.
4.9
Pricing
Our product is a classic example of a differentiated product commanding a premium
price. Our product will come in a 350-gram box. North Country Organics will sell the
product to the super market for $2.99 US dollars. The super market would mark up the
price 50%15. The consumer would then pay $4.49 USD for a box of crackers. The
amount we would receive is $2.99 USD which converts to $4.61 CDN (FOB California).
Approximately $0.08 CDN will be subtracted for freight, giving a wholesale price of
$4.53 FOB Tisdale. In the year 2008 we will increase the price by 8%. Our policy is not
to increase price until we have a well-established brand. We believe by the year 2008 our
brand will be well established and we can increase our price to $4.98 Canadian dollars
from $4.61. The primary reason for the price increase is to compensate for our expenses
that have been increasing due to inflation.
4.10 Place
Our geographical target markets are mainly the Southwestern United States coastal areas.
The area from San Diego up to San Francisco accounts for the majority of California’s
population. The California population represents one of the world’s largest, most diverse
populations. With over 34 million people living in the state, the opportunity to market a
high volume of product is very evident. With the nature of our enterprises high output
equipment, this is an ideal market for us. Without the California market it would be very
difficult for our firm to market our entire production and realize the economies of scale
that are possible in our operation. Within the California market we will focus our
resources on the San Francisco Bay area. This area, which houses over 12 million people,
is the geographical area that best represents our targeted customer.
15
Whole Food Market Inc., Austin TX
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North Country Organics – Business Plan
Initially, one might think that it is not economical to produce something in northwestern
Saskatchewan and ship it to southern California, but after conducting logistical research it
has been found otherwise. A useful part of today’s food industry is the fact that countless
freightliners bring fresh produce up to Saskatchewan and return back to their origin
empty. This current situation allows us to take advantage of the competitive nature of the
trucking industry and get lower cost “back haul” rates to California. With the size of
today’s’ freight liners, we will be able to fit tens of thousands of units on a single truck,
resulting in a very low freight cost per unit.
After assessing our estimated production, it became evident we will need a major grocery
retailing chain to sell our products. Our targeted grocer is Whole Foods Market who is
the largest retailer of natural and organic foods in California. Whole Foods is exactly the
type of retailer we need to make our venture feasible. Whole Foods is a supermarket of
natural and organic specialty foods that sell at premium prices. Whole Foods operates
over 120 stores in the United States, with a very large proportion of those being located
in our target market area. Having Whole Foods as our main grocer would make many
aspects of our business much more efficient. By simply having our product placed on the
shelf, we are marketing it as a premium product.
4.11 Promotion
Table 6. Marketing Costs
Marketing Activities
Website
Brochures
Free products and coupon discounts
Telephone
Magazine Advertising
Convention and trade shows
(includes materials and travel)
Marketing Agency Budget
Total
Year 1 cost
$37,500
$10,477
$404,227
$1,057
$172,760
$60,300
$906,286
$1,592,000
The promotion of our product will be an important part of our marketing strategy.
Entering a new market, brand establishment will be an essential component of our
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North Country Organics – Business Plan
marketing strategy. To begin this, three major food trade shows will be attended. The
first show is called NASFT Winter International Fancy Food and Confection Show. This
show is held in the Moscone Centre in San Francisco California, running from January
20-22, 2003. This is the 20th annual show that displays a wide arrange of specialty foods.
The second fair is called the Natural Products Expo West. This is an annual event that
runs from March 7-10, 2003 and is located in the Anaheim Convention Centre in
Anaheim California. This show provides great opportunity for us to gain exposure
because it is for natural and organic foods only. The third trade show is called Nutrocon
2003 and is held in Anaheim, California. This is a newer show but is along the same type
of products as the Natural Product Expo. Combining these three shows it is estimated
that over one million people will pass by our exhibit.
The second step is to advertise in magazines that appeal to our target markets. These
magazines will include Natural Life and Organic Style. By advertising in these
magazines we are also creating a healthy brand. These ads will run all year round in
many food and health magazines.
Another marketing strategy is to design a web site. Country Organics is willing to spend
money to get a firm to design a web-site. Other resources will be used to advertise on
other health food web-sites and to put a link from their site to ours. This site will include
information about our product and where it can be purchased. Information will include
nutritional information and statistics about the organic industry. There will be a place
where consumers can place feedback about our product and contact information. We will
also try to make joint agreements with health magazines to have a link to each other’s
web-sites. With this, people may access our web site from health magazine web-sites and
vise-versa.
We will also promote our product within the stores that the product is being retailed in.
Beside the shelves that our products are placed on will be brochures and coupons
(periodically). These brochures will contain nutritional information about our organic
crackers and the organic industry. Each brochure will have suggested recipe ideas that go
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
with our delicious crackers. A marketing agency located in California will also handle
promotion for us. Although we would optimally like to do all promotions from our
headquarters, it makes sense to have another marketing agency from California assisting
us. They will be paid to design all advertisements and run them in the local media. They
are successful marketers in our target area, and will be aware of any changing market
conditions. By doing this we are not giving up a marketing advantage to our competitors
who are located in the United States. The fact that our product is unknown justifies ample
resources to be spent on marketing.
4.12 Start-Up Expense
Substantial investment is required for North Country Organics to start cracker production
operations. The fact that the product has not been yet established in the market creates
risk for potential investors. For this reason it is suggested that North Country Organics
employ the Food Center (located in Saskatoon SK) to produce a small quantity of product
on a pilot scale. By doing this the recipe can be refined and a small quantity of finished
units can be produced. These units would be then taken to California to try and get
contracts with major organic food retailers such as Whole Foods. The crackers will be
sampled by the retailers themselves, and placed on their shelves for a preliminary amount
of time. The retailer will then have a measure of market demand (before any advertising
takes place) and will make a decision on whether to make a contract with North Country
Organics. Once these contracts are attained, then North Country Organics can start
raising capital to build the manufacturing facilities. Taking this route before starting
production is recommended, as it will substantially reduce investor risk. $40,000 has
been budged for start-up expense. This includes all direct materials and labour needed to
produce approximately 2000 units, resources to rent the Food Center, and all travel costs
to go to California and live their for 6 weeks.
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North Country Organics – Business Plan
5.0
Human Resource Plan
North Country Organics is a plant that manufactures crackers from organic wheat flour. It
is crucial that we have highly knowledgeable and dedicated staff members. This
corporation will be known for a high quality product, therefore all employees will have to
posses that same characteristic. We will employ a variety of different people with
different backgrounds in order to capture diversity within the working environment. All
jobs within this small business are very important and are all an integrated part of the
business. This cracker business requires a simple organizational structure that
incorporates a Board of Directors, President, Marketing Manager, Account Manager,
Plant Manager, Production Staff, and lastly a Receptionist. Each of there job
responsibilities will now be explained.
5.1
Job Descriptions
Board of Directors
The Board of Directors is responsible for the strategic planning and overall vision for
North Country Organics. There will be four individuals on the board of directors and
these people are the owners of this small business. This group of four is made up of two
husband and wife couples that are from the Tisdale area in Saskatchewan that wish to set
up this proposed cracker operation. The board of directors will have a variety of
responsibilities, which can affect the operations of the business. This board will have to
make the decisions about the overall management of the business, also the direction it
will head in the future. All the external shareholders will be updated on the operations
and performance of the business by the board of directors.
President
The president of North Country Organics will have to be a dedicated individual. This
person will have to possess leadership skills and will have to be an integrated part of our
team aspect. He/she will require a degree in business or agribusiness and a minimum of
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North Country Organics – Business Plan
ten years of experience in the food marketing industry. With this experience he/she
should posses strong problem solving, decision-making, and marketing skills. The
president has a number of responsibilities which most of all surrounds the
implementation of the mission statement for the business. The president has to report all
aspects of the day too day operations to the board of directors. As a part of the president
job he/she will be responsible for all the internal operations of the business including the
processing plant, human resource management, and public relation work. There will be a
receptionist on hand to take phone calls and assist the president with paper work and
arranging meetings. This job requires a highly dedicated and talented individual therefore
this person will be compensated with a large annual salary.
Marketing Manager
This position will require a person with excellent numerical and analytical skills, as well
as advanced oral and written communication skills. He/she will have to be a dedicated
individual that shows outstanding initiative because this is a very demanding position.
This person will develop and implement new marketing strategies for the product, and
therefore as the marketing manager they will be responsible for the marketing and selling
of the crackers. He/she will also be responsible for finding other markets where the
product may be feasible to enter. This person will need an understanding of the
transportation industry because they will be in charge of the product logistics. The
marketing manager will be required to meet sales and marketing goals that the boards of
directors have set. Given the location of the target market and the extent of marketing that
this type of product needs, the marketing manager position is challenging.
Production Manager
The production manager will be required to be an authority figure for the production
staff. This will be a full-time position in the plant. This means that he/she will have to
play the role of a foreman in the production process. It is also important that this person
has a well-rounded knowledge of the food processing and baking industry. Therefore a
requirement for this position is a past management role in the food processing industry.
The production manager will have to be an approachable individual that has effective
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North Country Organics – Business Plan
communication skills. This is because all questions on the production floor will be
directed to the production manager. The production manager will have to make sure that
all operation in the plant runs smooth, because a consistent, high quality cracker is the
end product. Shipping and receiving of products is also another responsibility of the plant
manager. This job is again very important for the business to be successful; therefore this
person will be compensated accordingly.
Account Manager
This position will require an individual that possesses a university degree or community
college diploma in business administration or accounting. Past experience in financial
accounting is a large asset because this will be the primary job for this individual. More
requirements would be excellent communication skills and proven problem solving, and
time management skills. This person will be required to submit financial statements to the
president and board of directors and be responsible is to prepare tax information for
Revenue Canada. Keeping track of all account’s receivables and account’s payables is a
very important aspect of this business; therefore the marketing manager position cannot
be overseen.
Production Staff
The production staff will be responsible for the day too day operations, maintenance, and
upkeep of the production equipment. The plant manager will be the boss for these five
individuals. They will need the basic understanding of the production process and the
equipment involved in manufacturing the crackers. An understanding of heavy machinery
is an asset for this position because the production staff will have to operate some
machinery. A high school diploma will be a requirement for this position. This is at least
the requirement because this job involves a lot of responsibility and some degree of
problem-solving skills. These individuals will be wage earners not salary employees.
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
Receptionist/Clerical Assistant
This person will be asked to do secretarial type duties for the Account Manager and
President/ Marketing Manager. This person will require excellent computer skills and
exceptional typing skills. Advanced interpersonal and communication skills are also
required for this position because he/she will be interacting with customers daily. Also
he/she will have to work with the account manager and run the payroll activities
throughout the year. This person will also receive an hourly wage and not an annual
salary. This position is a key component to the business running smooth; therefore it is
important to fulfill with a quality employee.
5.2
Training Programs
The training of each of the employees is essential for North Country Organics to operate
effectively. Each employee from the president to the clerk and production staff will need
to know how the product is made and the manufacturing processes the product goes
through. Each of the production staff employees will have to complete a cracker
production technology seminar and receive a certification for cracker production.
This certification is to ensure that our production staff has an excellent understanding of
the production process of crackers, this is also done to ensure that the high value product
is maintained. These seminars will have to be completed before the staff member can
start work at North Country Organics.
North Country Organics will also provide guided tours of the processing facility. These
tours will be accompanied by an information package. This is done to insure that all
customers and any other person with an interest in this company can see the operation
and learn how it operates.
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North Country Organics – Business Plan
5.3
Human Resource Strategy
Cracker production is an assembly type production process. Therefore it is essential for
all our employees to work as a team in the production process. For a group of employees
to work as a team there must be good communication skills, interpersonal skills, and trust
among the employees.
At North Country Organics it is essential that all employees get along with each other and
respect each other, on the assumption that work is first priority a light atmosphere is
promoted in the work place. A goal of this small business is to have a hard working staff,
therefore to accomplish this the staff must be a motivated group and they should be
happy in their work environment. The employees will be allowed two fifteen-minute
coffee breaks and a single, one hour lunch break during the course of full working day.
5.4
Lines of Authority
Board of
Directors
President
Production
Manager
Production Staff
Marketing
Manager
Account
Manager
Receptionist/Clerical
Assistant
Figure 13. Lines of Authority
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North Country Organics – Business Plan
5.5
Present and Future Costs of Employees
Benefit Breakdowns16
At North Country Organics the employees will have a benefit package which contains:

Employment Insurance (EI) – 3.08 % (government regulated)

Canadian Pension Plan (CPP) – 4.7 % (government regulated)

Holiday Pay – 5.8 % of annual earnings (only for non-salary employees)

Workers Compensation (Office) – 2 %

Workers Compensation (Cracker Plant) – 3 %
Salary Staff
For all salary employees their wages will expand at the rate of inflation, which is 2.5 %
Table 7. Five year Projection of Salaries
2003
Annual Wage
EI ( 3.08%)
CPP ( 4.7%)
Workers Comp.( 2%)
Total Cost
2004
Annual Wage
EI ( 3.08%)
CPP ( 4.7%)
Workers Comp.( 2%)
Total Cost
16
President
$ 120,000
$ 3,696
$ 5,640
$ 2,400
$ 131,736
President
$ 123,000
$ 3,788
$ 5,781
$ 2,460
$ 135,029
Marketing
Account Production
Total Cost
Manager
Manager
Manager
$ 100,000 $ 48,700 $ 85,000 $353,700
$
3,080 $ 1,500 $
2,618 $ 10,894
$
4,700 $ 2,289 $
3,995 $ 16,624
$
2,000 $
974 $
1,700 $ 7,074
$ 109,780 $ 53,463 $ 93,313 $ 388,292
Marketing
Account Production
Total Cost
Manager
Manager
Manager
$ 102,500 $ 49,918
87,125 $362,543
$
3,157 $ 1,537 $
2,683 $ 11,166
$
4,818 $ 2,346 $
4,095 $ 17,040
$
2,050 $
998 $
1,743 $ 7,251
$ 112,525 $ 54,800 $ 95,646 $ 398,000
Bill Brown, University of Saskatchewan
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
Table 7. (Continued)
2005
Annual Wage
EI ( 3.08%)
CPP ( 4.7%)
Workers Comp.( 2%)
Total Cost
2006
Annual Wage
EI ( 3.08%)
CPP ( 4.7%)
Workers Comp.( 2%)
Total Cost
2007
Annual Wage
EI ( 3.08%)
CPP ( 4.7%)
Workers Comp.( 2%)
Total Cost
President
$ 126,075
$ 3,883
$ 5,926
$ 2,522
$ 138,405
President
$ 129,227
$ 3,980
$ 6,074
$ 2,585
$ 141,865
President
$ 132,458
$ 4,080
$ 6,226
$ 2,649
$ 145,412
Marketing
Account Production
Total Cost
Manager
Manager
Manager
$ 105,063 $ 51,165
89,303 $371,606
$
3,236 $ 1,576 $
2,751 $ 11,445
$
4,938 $ 2,405 $
4,197 $ 17,465
$
2,101 $ 1,023 $
1,786 $ 7,432
$ 115,338 $ 56,169 $ 98,037 $ 407,949
Marketing
Account Production
Total Cost
Manager
Manager
Manager
$ 107,689 $ 52,445
91,536 $380,897
$
3,317 $ 1,615 $
2,819 $ 11,732
$
5,061 $ 2,465 $
4,302 $ 17,902
$
2,154 $ 1,049 $
1,831 $ 7,618
$ 118,221 $ 57,574 $ 100,488 $ 418,149
Marketing
Account Production
Total Cost
Manager
Manager
Manager
$ 110,381 $ 53,756
93,824 $390,419
$
3,400 $ 1,656 $
2,890 $ 12,025
$
5,188 $ 2,527 $
4,410 $ 18,350
$
2,208 $ 1,075 $
1,876 $ 7,808
$ 121,176 $ 59,013 $ 103,000 $ 428,602
Wage Earning Staff
These employees work on an hourly wage. Their wages will increase each year with
inflation, which is projected at 2.5 %. These employees will work 8 hours/day, 5 days a
week. They should work roughly 260 days a year for an average of 2080 hours a year.
Table 8. Five Year Projection of Wages
2003
Individual Wage (per hour)
Total Annual Wage
EI ( 3.8%)
CPP ( 4.7%)
Workers Comp. ( 3%)
Holiday Pay ( 5.8%)
Total Cost
Production
Receptionist Total Cost
Staff (5)
$
11.30 $
15.24
$ 117,500 $
31,700 $149,200
$
4,465 $
1,205 $ 5,670
$
5,523 $
1,490 $ 7,012
$
3,525
$
951 $ 4,476
$
6,815 $
1,839 $ 8,654
$ 137,828 $
37,184 $175,012
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
Table 8. (Continued)
2004
Individual Wage (per hour)
Total Annual Wage
EI ( 3.8%)
CPP ( 4.7%)
Workers Comp. ( 3%)
Holiday Pay ( 5.8%)
Total Cost
2005
Individual Wage (per hour)
Total Annual Wage
EI ( 3.8%)
CPP ( 4.7%)
Workers Comp. ( 3%)
Holiday Pay ( 5.8%)
Total Cost
2006
Individual Wage (per hour)
Total Annual Wage
EI ( 3.8%)
CPP ( 4.7%)
Workers Comp. ( 3%)
Holiday Pay ( 5.8%)
Total Cost
2007
Individual Wage (per hour)
Total Annual Wage
EI ( 3.8%)
CPP ( 4.7%)
Workers Comp. ( 3%)
Holiday Pay ( 5.8%)
Total Cost
Production
Receptionist Total Cost
Staff (5)
$
11.30 $
15.62
$ 120,438 $
32,493 $152,931
$
4,577 $
1,235 $ 5,811
$
5,661 $
1,527 $ 7,188
$
3,613
$
975 $ 4,588
$
6,985 $
1,885 $ 8,870
$ 141,274 $
38,114 $179,388
Production
Receptionist Total Cost
Staff (5)
$
11.30 $
16.01
$ 123,448 $
33,305 $156,753
$
4,691 $
1,266 $ 5,957
$
5,802 $
1,565 $ 7,367
$
3,703
$
999 $ 4,703
$
7,160 $
1,932 $ 9,092
$ 144,805 $
39,067 $183,871
Production
Receptionist Total Cost
Staff (5)
$
11.30 $
16.41
$ 126,535 $
34,137 $160,672
$
4,808 $
1,297 $ 6,106
$
5,947 $
1,604 $ 7,552
$
3,796 $
1,024 $ 4,820
$
7,339 $
1,980 $ 9,319
$ 148,426 $
40,043 $188,468
Production
Receptionist Total Cost
Staff (5)
$
11.30 $
16.82
$ 129,698 $
34,991 $164,689
$
4,929 $
1,330 $ 6,258
$
6,096 $
1,645 $ 7,740
$
3,891 $
1,050 $ 4,941
$
7,522 $
2,029 $ 9,552
$ 152,136 $
41,044 $193,180
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
6.0 Financial Plan
6.1
Financing Budget
In order for North Country Organics to meet their financial obligations, they are going to
need approximately $1,450,000 in financing. Roughly about half of North Country
Organics financing will be from long term debt and the rest will be from the sale of
common shares. Table 9.shows the financing mix that North Country Organics will
pursue.
Table 9. Financing Mix
Financing Budget
Long Term Debt
Shareholder's Equity
Total Financing
$ 700,000.00
$ 750,000.00
$ 1,450,000.00
The long-term debt will be acquired through a bank loan. The terms of the bank loan are
as follows:
 Amortized over a period of ten years
 Interest rate of 8%
 Annual payments of $104,321
Table 10. Debt Amortization Schedule
2003
2004
2005
2006
2007
- $ 651,679.36 $ 599,493.06 $ 543,131.87 $ 482,261.77
Beginning Balance
$
Addition
$ 700,000.00
Interest
$ 56,000.00 $ 52,134.35 $ 47,959.45 $ 43,450.55 $ 38,580.94
Debt Payment
$ 104,320.64 $ 104,320.64 $ 104,320.64 $ 104,320.64 $ 104,320.64
Ending Balance
$ 651,679.36 $ 599,493.06 $ 543,131.87 $ 482,261.77 $ 416,522.07
$
-
$
-
$
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
-
$
-
36
North Country Organics – Business Plan
Table 10. (Continued)
2008
2009
2010
2011
2012
Beginning Balance
$ 416,522.07 $ 345,523.20 $ 268,844.41 $ 186,031.32 $ 96,593.19
Addition
$
$
-
Interest
$ 33,321.77 $ 27,641.86 $ 21,507.55 $ 14,882.51 $
7,727.45
Debt Payment
$ 104,320.64 $ 104,320.64 $ 104,320.64 $ 104,320.64 $ 104,320.64
Ending Balance
$ 345,523.20 $ 268,844.41 $ 186,031.32 $ 96,593.19 $
6.2
-
$
-
$
-
$
-
0.00
Dividend Policy
By analyzing our base financial projections (Appendix A), it is feasible for North
Country Organics to start paying dividends out in the second year of operation. The
dividend policy for the company states that dividends will be paid out to share holders at
a rate of 30% of the previous years ending cash balance. Dividends will only be paid out
on positive cash balances.
Table 11. Dividends Paid
2003
Dividends Paid
Dividends Paid
6.3
-
2004
$18,532
2005
$ 150,444
2006
$244,689
2007
$ 313,299
2008
$ 364,537
2009
$ 438,412
2010
$ 507,141
2011
$ 561,812
2012
$ 606,889
$
Economic Forecast
To derive the base case projections, an inflation rate of 2.5% has been used. All expenses
and wages have been inflated at 2.5% per year for the ten-year financial plan of North
Country Organics. The plant that has been purchased has a maximum capacity of
approximately 3 million boxes a year, assuming that the plant operates 24 hours a day, 7
days a week. The financial plan is set up to show an increase in cracker production of
5% per year. The sales revenue of North Country Organics is set constant for the first 5
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
years. In the sixth year the selling price is increased by 8%. After 5 years in the
marketplace, North Country Organics should have a well-established brand that can
demand a higher price. The 8% pricing increase also balances out the inflation costs
occurred, over the past five years, on costs of production and wages.
6.4
Working Capital
The following working capital assumptions have been used in the financial projections.
Table 12. Summary of year 2003 net working capital
Working Capital
Cash
Accounts Receivable
Cracker Inventory
Accounts Payable
Net Working Capital
6.5
Average Days
N/A
30 days
3.5 days
15 days
Year 2003 Level
$100,000.00
$327,247.93
$38,801.74
$25,705.15
$440,344.52
Cash Conversion Cycle
The Cash Conversion Cycle (CCC) is based on the following formula:
CCC = Average Days Inventory + Average Collection Period - Average Days Payables
In the case of North Country Organics, the cash conversion cycle is 18.5 days. The
average days inventory is 3.5 days. With a constant output of production there will be a
truckload of crackers leaving every 7 working days. So therefore, the average days
inventory will be the mean between 0-7 days (3.5 days). The average accounts receivable
is set at an industry standard of 30 days and the accounts payables usually are limited to
about 15 days. This brings the cash conversion cycle to be 18.5 days. Usually any value
less than 30 days is considered to be very efficient.
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North Country Organics – Business Plan
6.6
Other Expense Assumptions
Within the financial plan there are also a few assumptions that were made. One of the
major costs that will be incurred by North Country Organics is the cost for marketing. In
the financial plan we made the assumption that they would allocate 40% of the businesses
total revenue towards marketing of the product. The administration expenses were also
estimated at $2,500, which include various office supplies. Installation costs for the
initial set up of the equipment was also estimated to be approximately $50,000. This
price will include hiring an electrician to wire all the cracker equipment. Start-up costs
have also been estimated in the financial plan. The start up cost includes hiring the Food
Center of Saskatoon to produce 3000 boxes of our crackers and then sending the
marketing manager down to California to establish connections and distribute samples of
our product. This start-up cost is estimated at approximately $40,000.
6.7
Ratio Analysis
Table 13. Ratio Analysis
Financial Ratios
Leveraged Ratios
Debt Ratio
Debt to Equity
Profitability Ratios
Gross Profit Margin
Net Profit Margin
Return on Total Assets
Return on Equity
Net Profit Margin *
Return on Total Assets *
Return on Equity *
2003
2004
2005
2006
2007
38.5%
62.6%
31.2%
45.4%
26.4%
35.8%
22.5%
29.1%
19.1%
23.6%
73.2%
8.4%
18.9%
30.7%
11.3%
28.8%
41.7%
70.7%
7.6%
15.8%
23.0%
10.3%
23.9%
31.0%
71.5%
8.4%
16.9%
23.0%
11.4%
25.3%
31.4%
71.9%
9.0%
18.1%
23.4%
12.3%
26.8%
32.2%
72.2%
9.4%
19.3%
23.8%
13.0%
28.3%
33.0%
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North Country Organics – Business Plan
Financial Ratios
2008
Leveraged Ratios
Debt Ratio
14.9%
Debt to Equity
17.5%
Profitability Ratios
Gross Profit Margin
74.4%
Net Profit Margin
11.8%
Return on Total Assets
25.1%
Return on Equity
29.5%
Net Profit Margin *
16.6%
Return on Total Assets *
36.7%
Return on Equity *
41.6%
* Using net income before tax
6.8
2009
2010
2011
2012
11.2%
12.6%
7.9%
8.6%
4.7%
4.9%
1.6%
1.6%
74.4%
12.0%
25.1%
28.3%
16.9%
36.5%
39.9%
74.2%
12.1%
25.3%
27.5%
17.2%
36.6%
38.9%
74.1%
12.2%
25.6%
26.9%
17.3%
36.8%
38.2%
73.8%
12.2%
26.0%
26.4%
17.4%
37.2%
37.5%
Financial Analysis
The following table illustrates the critical successful variables for North Country
Organics. The table shows the percentage in change that it takes to reach our critical
IRR, which is set at 25%.
Table 14. Allowable % change in effect with critical variables
Critical Variables
Price per Box
Sales Output
Packaging Costs per Box
Marketing Expense
Direct Materials Cost
Base Case
IRR = 25%
$4.61
864000
$0.53
1592607
625492
$3.95
658610
$0.86
2975965
1997593
Allowable %
Change
14%
24%
61%
87%
219%
The following table shows that the most critical variable for North Country Organics is
the price received per box. It can only decrease 14% from the base price in order for the
25% IRR to be met. Another significant variable is the quantity of crackers sold. From
the base case, the number of boxes sold can only decrease by 24% in order for the critical
IRR to be satisfied.
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North Country Organics – Business Plan
6.8.1 Base Case
Table 14.1. Summary financial analysis of base case scenario
Key Variables
Price per Box
Sales Output
Packaging Costs per Box
Marketing Expense
Direct Materials Cost
Net Present Value
Internal Rate of Return
External Rate of Return
$4.61
864000
$0.53
1592607
625492
$ 874,203.41
47.8%
26.3%
2003
2004
Gross Margin
$2,913,522.56 $2,955,979.83
Net Income
$332,915.41 $317,754.38
Net Cash from Operations $108,209.13 $510,423.41
End of Year Cash
$61,773.49 $501,478.56
Dividends Paid
$0
$18,532.05
2008
2009
Gross Margin
$4,081,950.32 $4,285,018.56
Net Income
$646,098.94 $690,358.25
Net Cash from Operations $681,784.86 $744,189.29
End of Year Cash
$1,461,372.74 $1,690,471.42
Dividends Paid
$364,537.18 $438,411.82
2005
$3,136,787.25
$367,638.23
$520,955.90
$815,629.70
$150,443.57
2010
$4,492,376.80
$733,152.39
$772,191.32
$1,872,708.22
$507,141.43
2006
$3,315,942.74
$413,001.88
$534,259.37
$1,044,330.07
$244,688.91
2011
$4,704,837.56
$774,828.51
$801,506.62
$2,022,964.24
$561,812.47
2007
$3,495,049.42
$454,778.67
$549,832.59
$1,215,123.93
$313,299.02
2012
$4,923,095.93
$815,644.08
$831,910.54
$2,151,392.32
$606,889.27
From the examination of the base case results, it looks like North Country Organics
would be an excellent investment. Some of its strengths include the high IRR. The
required IRR was set at 25% and in the base case scenario the IRR is 47.8%. The
external rate of return is also extremely attractive for investors at 26.3%.
In addition, cash flow from operations shows a steady increase over the ten-year period.
End of year cash also shows steady increases over the ten-year period. The most
attractive part of the base case model is the dividends, which begin to get paid out in the
second year.
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North Country Organics – Business Plan
6.8.2 Worst Case Scenario (selling price decrease)
By effecting the key decision variable of selling price per box of crackers, the sensitivity
of its bottom line can be observed. In the worst case scenario the selling price is lowered
by $1.03. In this case the IRR is set at 10%.
Table 14.2. Worst case scenario by changing selling price
Key Variables
Price per Box
Sales Output
Packaging Costs per Box
Marketing Expense
Direct Materials Cost
Net Present Value
Internal Rate of Return
External Rate of Return
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
$3.58
864000
$0.53
1592607
625492
-547,759
10.0%
5.7%
2003
$2,029,142
$-35,301
$-178,700
$-225,136
0
2008
$2,862,934
$214,714
$264,092
$227,164
$14,602
2004
$2,027,380
$-81,865
$115,085
$-162,237
0
2009
$3,005,051
$210,524
$270,367
$352,703
$68,149
2005
$2,161,757
$-34,215
$123,614
$-94,984
0
2010
$3,148,411
$229,327
$274,703
$438,782
$105,811
2006
$2,292,161
$5,526
$131,538
$-24,317
0
2011
$3,293,674
$245,811
$279,171
$496,880
$131,635
2007
$2,420,079
$38,665
$138,729
$48,672
0
2012
$3,441,374
$260,176
$283,487
$534,710
$149,064
In the worst case scenario the required IRR is not met. Over the ten-year period the
business has a negative end of year cash for the first 4 years. It isn’t until the fifth year
that the business shows a positive end of year cash balance. The external rate of return
also is not very attractive for investors. At this rate of return investors could invest their
money in a less risky investment. There is also no dividends being paid out until the fifth
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan
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North Country Organics – Business Plan
year. North Country Organics could never function if the worst case scenario occurred.
The raising of share capital would be almost impossible.
6.8.3 Best Case Scenario (selling price increase)
By effecting the key decision variable of selling price per box of crackers, the sensitivity
of its bottom line can be observed. In the best case scenario the selling price would be
higher than the base case price. In the best case the price would be raised by $1.03.
Table 14.3 Best case financial analysis by changing selling price
Key Variables
Price per Box
Sales Output
Packaging Costs per Box
Marketing Expense
Direct Materials Cost
Net Present Value
Internal Rate of Return
External Rate of Return
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
$5.64
864000
$0.53
1592607
625492
2,218,616
81.4%
39.5%
2003
$3,804,966
$667,100
$360,437
$314,001
0
2008
$5,310,702
$1,106,733
$1,128,617
$2,626,646
$672,440
2004
$3,891,996
$668,648
$857,002
$1,024,616
$94,200
2009
$5,575,208
$1,174,024
$1,221,795
$2,983,769
$787,994
2005
$4,119,604
$736,076
$884,847
$1,545,717
$307,385
2010
$5,847,075
$1,241,002
$1,273,653
$3,279,478
$895,131
2006
$4,347,900
$799,862
$916,328
$1,937,460
$463,715
2011
$6,127,271
$1,308,070
$1,328,014
$3,534,210
$983,843
2007
$4,578,605
$860,982
$950,985
$2,241,467
$581,238
2012
$6,416,651
$1,375,548
$1,384,714
$3,762,068
$1,060,263
In the best case scenario, North Country Organics becomes an extremely attractive
company for investors. With a $1.03 raise in price the IRR increases by 33.6% and the
ERR increases by 13.2%. By a simple $1.03 raise in selling price the company has
almost twice as much end of year cash, after the ten-year period. The dividends paid out
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North Country Organics – Business Plan
in the second year also give the investors a 12.6% return. Raising share capital would not
be very hard if this scenario would be successful.
6.8.4 Worst Case Scenario (sales output decreases)
In the second worst case scenario we looked at decreasing the sales output of crackers.
By setting the IRR at 10% the following financial analysis occurs.
Table 14.4 Worst case financial analysis by changing sales output
Key Variables
Price per Box
Sales Output
Packaging Costs per Box
Marketing Expense
Direct Materials Cost
Net Present Value
Internal Rate of Return
External Rate of Return
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
$4.61
547,061
$0.53
1592607
625492
$-539,159
10.0%
5.3%
2003
$1,721,983
$-56,254
$-156,112
$-202,548
0
2008
$2,454,950
$209,291
$266,645
$240,774
$19,341
2004
$1,711,588
$-96,433)
$102,598
$-152,136
0
2009
$2,586,322
$206,102
$268,846
$360,709
$72,232
2005
$1,837,405
$-42,283
$117,725
$-90,773
0
2010
$2,719,124
$231,757
$280,171
$449,854
$108,213
2006
$1,959,363
$4,827
$133,118
$-18,525
0
2011
$2,854,078
$255,968
$292,507
$517,967
$134,956
2007
$2,078,994
$46,284
$148,734
$64,469
0
2012
$2,991,792
$279,015
$305,654
$571,637
$155,390
With a set IRR of 10% by changing the sales output of crackers, the company does not
start to make money until the fifth year. This scenario also is not very attractive to
investors due to the fact that dividends are not paid out until the sixth year and the ERR is
only 5.3%. An investor would be better off to invest in a less risky business.
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North Country Organics – Business Plan
6.8.5 Best Case Scenario (sales output increases)
In the best case scenario the sales output is increased by 316,939 boxes of crackers. This
number is taken from the worst case scenario above. It is the difference between the
sales output of the base case scenario and the worst case scenario is 316,939 units.
Table 14.5. Best case scenario by changing sales output
Key Variables
Price per Box
Sales Output
Packaging Costs per Box
Marketing Expense
Direct Materials Cost
Net Present Value
Internal Rate of Return
External Rate of Return
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
Gross Margin
Net Income
Net Cash from Operations
End of Year Cash
Dividends Paid
$4.61
1180939
$0.53
1592607
625492
2,191,774
80.0%
39.3%
2003
$4,105,063
$678,734
$329,180
$282,744
$0
2008
$5,708,953
$1,113,563
$1,127,580
$2,611,835
$666,537
2004
$4,200,373
$675,798
$862,105
$1,007,839
$84,823
2009
$5,983,717
$1,174,615
$1,219,533
$2,971,138
$783,550
2005
$4,436,171
$738,657
$885,285
$1,534,411
$302,352
2010
$6,265,632
$1,234,548
$1,264,212
$3,261,196
$891,342
2006
$4,672,524
$797,274
$911,498
$1,924,716
$460,323
2011
$6,555,599
$1,293,690
$1,310,507
$3,503,906
$978,359
2007
$4,911,106
$852,571
$940,229
$2,221,790
$577,415
2012
$6,854,402
$1,352,274
$1,358,168
$3,714,309
$1,051,172
In this best case scenario North Country Organics becomes very attractive for investors.
Shareholders get paid out dividends in the second year at a rate of 11.3% and the ERR for
the 10 year period is 39.3%. In the market place it would be tough to get this type of
return on an investment. End of year cash of the company is also shows a very
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North Country Organics – Business Plan
significant increase. At the end of the 10 years North Country Organics has almost 4
million in cash.
6.9
Sensitivity Analysis
Provided are the break-even analysis for net income, after-tax cash, and the break-even of
NPV = 0. The following two tables take into account the two most constraining
variables, selling price and sales output of crackers.
6.9.1 Net Income Break-even Analysis
Table 15. Net income break-even analysis by changing selling price and sales output
Net Income Break-even Analysis Varying Net Income Break-even Analysis Varying the
the Selling Price
Sales Output
Year
Net
After-tax
Selling
Year
Net
After-tax
Sales
Income
Cash
Price
Income
Income
Output
2003
$
- $ (195,735) $
3.66 2003
$
- $ (160,137)
582,202
2004
$
- $ (58,790) $
3.75 2004
$
- $ (19,907)
626,917
2005
$
$ 50,648 $
3.65 2005
$
$ 91,704
634,494
2006
$
$ 107,275 $
3.57 2006
$
$ 138,458
646,458
2007
$
$ 115,017 $
3.52 2007
$
$ 139,567
662,319
2008
$
$ 93,032 $
3.48 2008
$
$ 110,902
629,551
2009
$
$ 53,735 $
3.45 2009
$
$ 69,350
650,468
2010
$
$
5,009 $
3.42 2010
$
$ 19,347
674,223
2011
$
- $ (48,292) $
3.41 2011
$
- $ (34,529)
700,709
2012
$
- $ (117,799) $
3.40 2012
$
- $ (99,968)
729,868
The above results show that the selling price and sales output can drop quit substantially
before a negative net income occurs. However, cash flow deficits occur under both
circumstances.
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North Country Organics – Business Plan
6.9.2 After-tax Year-end Cash Break-even Analysis
Table 15.1. After-tax year-end break-even analysis
After-tax Cash Break-even Varying the
Selling Price
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Net
Income
$ 251,070
$(230,989)
$ (85,012)
$ (69,194)
$ (34,013)
$ (8,157)
$ 15,381
$ 36,151
$ 55,044
$ 72,531
After-tax
Cash
$
$
$
$
$
$
$
$
$
$
-
Selling
Price
$
4.36
$
3.29
$
3.49
$
3.45
$
3.46
$
3.46
$
3.47
$
3.48
$
3.49
$
3.50
After-tax Cash Break-even Varying the Sales
Output
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Net
Income
$ 236,240
$(219,944)
$ (89,076)
$ (68,651)
$ (34,765)
$ (4,836)
$ 14,359
$ 35,867
$ 54,556
$ 72,002
After-tax
Income
$
$
$
$
$
$
$
$
$
$
-
Sales
Output
775398
609069
675521
701637
737586
716550
751371
790403
831640
875658
From the following analysis you can see that North Country Organics has quit a bit of
room to drop there selling price in order to break-even on the after-tax cash. On the other
side of the table there is not as drastic of a drop in the sales output. The biggest drop
occurs after the first year and then slowly works its way back towards the figures of the
base case scenario.
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North Country Organics – Business Plan
6.9.3 Economic Break-even Analysis
Table 15.2. Selling price and sales output required to meet required IRR
Varying Selling Price
NPV
IRR
ERR
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$ 661
25.0%
15.0%
Selling Price
$
$
$
$
$
$
$
$
$
$
3.95
3.95
3.95
3.95
3.95
4.27
4.27
4.27
4.27
4.27
Varying Sales Output
NPV
IRR
ERR
Year
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$ 72
25.0%
14.7%
Sales Output
658610
691540
726117
762423
800544
840571
882600
926730
973066
1021720
From the economic break-even analysis of the North Country Organics, the following
tables show, both, what the selling price and sales output must be in order for the required
IRR to be met. This shows also shows the lowest selling price and lowest sales output
that the company could withstand before it could no longer deliver returns above all
direct costs and opportunity costs. This is known as economic profit. The existence of
this economic profit is often a signal to investors of the opportunity a business presents.
7.0 Future Considerations
With the growing organic marketplace many future considerations can be looked at. If
North Country Organics establishes a well-known branded product into its target
marketplace, expansion of its sales output may want to be increased at a rate greater than
5% per year. The plant and equipment that has been purchased has huge capacity
potential. With a well-known brand, North Country Organics can also consider to
produce brand extensions of its cracker product. Other organic products such as breads,
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North Country Organics – Business Plan
cookies, baby crackers or saltines. With the every changing mind of the consumer, North
Country Organics has huge potential to expand its business as long as a strong company
brand is developed.
8.0
Conclusion
From the data present, one can conclude that North Country Organics would be a
profitable and feasible business for 54 North Agri Foods. From the base case scenario
one can also conclude that the business would also be a good investment in terms of the
investors. Under the base case scenario the IRR is 47.8%, which is well above the
required rate of 25%. The ERR is also very attractive to investors at 26.3%, with a
salvage value at the end of the ten year period. The ERR, just including the dividends
paid, is also striking towards investors at 23.8%. By creating a new business, such as
North Country Organics, many new jobs will be created in the Tisdale area. By the
business plan presented, both 54 North Agri foods and the surrounding community
should benefit if North Country Organics begins its operations.
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