Use the scenario to calculate the income (including the original loan) and expenditure for the first year to determine if the business, from a financial perspective, is worth the risk for Mr Ngobeni.
Scenario
The cement industry in Kenya is currently undergoing mixed
sentiments by
various economic and financial specialists. From an economic
perspective, this industry should grow, especially in view of the
growing property markets. Due to these potential views of the
cement market, there might be ample work opportunities, including
for small and medium enterprises (SMEs).
In this regard, Mr Ngobeni decided to investigate an SME to provide
ready mixed cement to builders. He is aware that all SMEs are
subject to specific risk exposures.
The business involves the use of cement mixing trucks
to provide ready mixed cement to builders for building purposes. To
start such a business, it is imperative to get a licence from the
appropriate government department and be a registered supplier of
this product and service. Due to the price of these cement-mixing
trucks, it will be an expensive business to start. The cost of one
truck is R1.5m, and usually, two trucks are required to start such
a business. It is also imperative to confirm a customer base to
ensure that there is a market for the business. This would mean a
detailed marketing campaign to advertise the business and to
establish a customer base. The cost for such a campaign will amount
to R500 000 and after that R50 000 per annum (This will only come
into effect the second year after establishing the business).
Furthermore, it is crucial that the business must have skilled
employees. The drivers of the trucks must be trained and have a
special license to drive these trucks and also have the skill to
operate the mechanics of the truck’s mixing machines. Training is
thus, essential to ensure a successful business. The average
training cost per employee will be R65 000, which will include the
required license fees.
In order to operate two cement trucks, the following staff members
are required with an annual compensation package:
2 x truck drivers R470 000 per driver
2 x machine operators R350 000 per operator
2 x Cement mixing specialists R225 000 per specialist
1 x Administration officer R300 000
To employ the above staff members, it is required that the total
annual compensation must be available upfront in order to protect
the employees for at least a year should the business fail.
The trucks require a maintenance service after 20 000 km. A normal
service costs
approximately R8 500 and the average distance per month for a truck
is about 10 000 km. To ensure that the trucks operate at their full
capacity, these maintenance services are crucial.
One truck can provide three loads of cement per day which will
ensure a net income of R16 000 (after the cement, sand and water
costs). Mr Ngobeni envisaged that he would provide cement for only
20 days per month, which will allow him time for the maintenance of
the trucks on a monthly basis. The building industry closes during
the months of December and January each year, meaning that there
are only ten months available for business.
A potential threat to this business is the
exposure to road accidents involving the trucks. Since the trucks
form the basis of this enterprise, Mr Ngobeni must be insured
against accidents. This is also essential to cover any third party
claims against the business such as the non-delivery of cement as
per agreed times as well as claims from other accident victims.
Potential monthly insurance
premiums are:
- R5 500.00 per month (12 x months) per truck (including third
party costs) for
accidents.
- R2 500.00 per month (12 months) to insure against claims for
non-delivery.
Furthermore, the safety of the trucks
also requires attention, and they must be parked in a safe
environment when they are not in use. In this instance, Mr Ngobeni
will have to rent buildings with adequate parking facilities and
office space. These rental costs (including water and electricity)
for a suitable building is R20 000 per month. Security is also
vital to safeguard the equipment, which will cost R6 500 per month
(including a 24-hour security guard) and rapid response from ABS
Security.
In addition, the trucks must be monitored in terms of its fuel
usage; the oil services and the kilometres travelled to ensure that
the trucks are serviced when it is due. It is therefore imperative
that those above be technologically supported. A system for the
business will cost R50 000 and R2 000 per month.
Mr Ngobeni envisaged that to make the business worth his while, he
must, at a minimum, receive a monthly income, before tax, of R90
000. The total tax implications for the business can be calculated
at 28% on the gross income per annum.
To ensure the continuity and the growth of the business, a minimum
annual amount of R1 000 000 must be invested. Should this target
not be achieved, the business will not grow and go bankrupt after
five years (this is also the lifetime of the trucks and must be
replaced after five years).
To start the business, Mr Ngobeni is prepared to invest R5 000 000
into the business for ten years at 5% interest per year. The
monthly amount for this loan is R67 870.
Calculation of feasibility report
| Particulars | Amount | Amount |
| Initial investment (2*1500000) | 3,000,000 | |
| Sales (16000*20*10)*2 | 7,680,000 | |
| Expenses | ||
| Salary of drivers (470000*2) | 940000 | |
| Salary of machine operators (350000*2) | 700000 | |
| Salary of mixing specialist(225000*2) | 450000 | |
| Salary of administrative officer | 300000 | |
| Training cost of driver( 65000*2) | 130000 | |
| Repairs cost (10000*10)*2*8500/20000 | 85000 | |
| Insurance cost (5500) *2*12 +2500*12 | 162000 | |
| Rent cost (20000*12) | 240000 | |
| Security cost(6500*12) | 78000 | |
| Maintenance cost(52000*12) | 624000 | |
| Total cost | 3709000 | |
| Net income before tax (excluding depreciation ) | 3971000 | |
| Less: Annual investment required | 1000000 | |
| Less: annual loan (67870*12) | 814440 | 181440 |
| Available income beore tax | 2156560 | |
| Required income before tax (90000*12) | 1080000 | |
| Extra income | 1076560 |
Since, there is income beyond his expectations so, project is feasible.
taxes are ignored because investor wants income before tax
Depreciation is not taken into count because annual investment for the same in future is deducted.
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