Savvy Garments

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Business Plan Prepared For Mr. SADIR ZAIDI Instructor of corporate finance Director of Faculty of Life Sciences and Business Management University of Veterinary and Animal Sciences (UVAS) Lahore

Prepared By Mr. KHAWAR NADEEM Mr. YASIR LATIF Miss. FAIZA MUNEER Mr. AMIR HUSSAIN Miss. SARA FARID Students of MBA 2nd Semester (sec B) Session (2008-2010) University of Veterinary and Animal Sciences (UVAS)

June8, 2009

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To My Mother And my beloved MSB.

Y.L

To My Beloved Parents.

K.H To My Beloved Parents.

F.M

To My Beloved Parents.

S.F

To My Beloved Mother.

A.H

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First of all thank to whom who is most merciful and kind to all of his creations with out any discrimination and who make us able to Prepare this project

We are proud on following personalities for being our friends and relatives that guidance helps us in the preparation of this project

➢ ➢

Mr. Haseeb who provided us some useful information related to our topic. Mr. Ali who provided us some useful information related to our topic.

In the end Special thanks to our parents and teachers specially Mr. ZAIDI (Our corporate finance instructor) whom unlimited efforts are there in our personality

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5- Outfall Road University of Veterinary and Animal Sciences Lahore January 28, 2009 Mr.Sadir Zaidi Director Department of Livestock Business Management (FLBS) University of Veterinary and Animal Sciences (UVAS) 5, Outfall Road Lahore Dear Mr. ZAIDI First of all we would like to thank to Mr. ZAIDI who has given us a good opportunity of working on project to increase our of business planning skills on garments

“SAVVY GARMENTS” In this report we have given the introduction of business, products of garments, financial analysis.This is our first experience to do work on business plan, we learn much from it. We hope in future Mr.Zaidi will provide us more chances of such good experiences.

Yours sincerely Student of FLBS (UVAS)

Mr. KHAWAR NADEEM Roll no. 00

Roll no. 31

Mr. AMIR HUSSAIN Roll no. 06

Miss. FAIZA MUNEER

Mr. YASIR LATIF Roll no. 44

Miss. SARA FARID Roll no. 42

Table of contants [Type text]

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Synopsis Introduction: we started the garments business in Lahore city with high quality of the products. We want to increase and stabilize the business in the market by the good behave with the customers. Sales forecasting: then we do the work on the forecasting of the business, we forecast the cost of the business first variable and as well as the fixed cost of the business. After forecasting the cost of the business do the work on the sales of the business with the help of the data that is taken form the market and implement it and make the sales for the business On the basis of above data we prepare the projected income statement of the business. Capital budgeting: in business plan the first task is capital budgeting in which we do the 6 type of analysis NPV, IRR, ARR, PI, discounted payback, payback. By this we check the feasibility of the project. OCF: then we calculate the operating cash flow of the business by using the different techniques like bottom up approach, top down approach, and tax shield approach. Scenario analysis: after this we do the scenario analysis and check the feasibility of the project in the different scenario like base case, best case, and worst case. Sensitivity analysis: in this analysis we used different scenario to check the feasibility of the project by change only one variable among the four variables (units, price, VC, FC) and other remains the same. Break even analysis: in this analysis we check the break even of the project by the different way like accounting break even, cash breakeven and financial breakeven.

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Introduction Tag line: “You were savvy garments, you look savvy”

Mission: Satisfy the customer on the low prices and with high quality of product. Business nature: We started a trading concern business in the Lahore city.

Products: We have the following products in men’s garments: 1) 2) 3) 4) 5) 6)

Casual shirts Dress shirts Dress pants Jeans Suits ties

Objective: We have the following objective in this field: ✔ Increase the sales up to 5% ✔ Increase the branches [Type text]

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✔ Do work socially ✔ Maintain the standard of the products in the market Location: Kareem market, Kareem Block, Allama Iqbal town, Lahore. Features: We have the following features in this business: ➢ We provide good standard of products and suitable prices ➢ Friendly environment for customers ➢ Good return of customer money

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✔

PROJECT FORCASTING Variable cost: ➢ Variable cost per unit: Shirts per unit

Rs.290

Pent per unit

Rs.475

Suits per unit

Rs.1800

Tie per unit

Rs.80

➢ Per month variable cost Rs.476100 ➢ Per year variable cost ➢ Per year Variable FOH cost Maintenance & repairs Rs.20700 Miscellaneous expenses Rs.55920 Electricity charges Rs.78840 total variable cost

Rs.5713000

Rs.155460 Rs.5868660

Fixed cost: ➢ Per month: Rent Salary of sales man

Rs.14600 Rs.18000

➢ Per year: Rent per year Salary per year

Rs.175200 Rs.216000

➢ Total fixed cost

Rs.391200

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Sales for the year Sale price per unit

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Price per shirt

Rs.450

Price per pent

Rs.650

Price per suit

Rs.2500

Price tie

Rs.180

Sale per day

Rs 22950

Sale per month

RS.688500

Sale per year

Rs.8262000

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SAVVY GARMENTS INCOME STATEMENT From 2009 to 2013 2009

2010

2011

Sales

8262000

8427240

8342967

8593256

8851053

Cost

6259860

6322458

6366715

6411282

6475394

90000

90000

90000

90000

90000

1912140

2014782

1886252

2091974

2285659

Income tax

478035

503695

471563

522994

571415

Net income

1434105

1511086

1414689

1568980

1714244

Deprecation EBIT

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2012

2013

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Capital budgeting Capital budgeting is most important issue in the budgeting of any kind of business. In this way take the decision how chose the finance operations in the business. We present and compare a number of different approaches used in practice. Our primary goal is to acquaint you with the advantages and disadvantages of the various approaches. As well as we see, the most impotent concept in this area is the idea of net preened value. Capital budgeting has the following tools. ✔ ✔ ✔ ✔ ✔ ✔

Net present value The pay back rule The discounted payback The average accounting return The internal rate of return The profitability index

Net present value:

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An investment is worth undertaking if it creates value for its owners. In the most general sense, we create value by identifying an investment worth more in the marketplace then it costs us to acquire. How can something be worth more then its cost? Calculation of NPV of the project; NPV = - initial cost + PV of future cash flows = - 1500000 + 1524105 + 1601086 + 1504684 + 1658480 + 1804244 (1.21)1 (1.21)2 (1.21)3 (1.21)4 (1.21)5 = - 1500000 + 4672053 NPV = Rs.3172053 NPV decision rule; An in vestment should be accepted if the net present value is positive and rejected if it is negative. Decision: The present value of the expected cash flow is Rs.4672053, but the cost of getting those cash flow is only Rs.1500000, so the NPV is - 1500000 + 4672053 = Rs.3172053. This is positive so based on the net present vale rule, we should accept this project.

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The payback rule It is very common in practice to talk of the payback on a proposal investment. Loosely, the payback is the length of time it takes to recover our initial investment or get “get our bait back”.

Rule; Based on the payback rule, an investment is acceptable if its calculated payback period is less then some pre specified number of years.

Years

Cash Flow 0 1 2 3

-1500000 1524105 1601086 1504689 4 1658980 5

1804244

Pay back = -1500000 1524105 Pay back = 0.984 years

Decision: The initial cost of the project is Rs. 1500000 and the cash flow of the first year is Rs. 1524105. So the payback period is 0.984 years. And this is the positive sign for the project.

Discounted payback rule We see that one of the shortcomings of the payback period rule was that it ignored time value. There is the variation of payback period, the discounted pay back period, fixes the particular problem. The discounted pay back period is the length of time until the sum of the discounted cash flow is equal to the initial investment. Rule: Based on the discounted payback rule, an investment is acceptable if its discounted payback is less then some pre specific number of years. 1st year

= - 1500000 + 1524105 (1.21)1

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= -1500000 + 1259591 = - 240409 2nd year

= - 240409 + 1601086 (1.21)2 = 240409

= 0.2198 1093563

Discounted payback = 1+ 0.2198

= 1.2198 years

The Average Accounting Return Another attractive, but flawed, approach to making capital budgeting decisions invoves the average accounting return (AAR). It defines as; = Average net income Average book value = 1528621 750000 = 203.8 %

The Internal Rate of Return We now come to the most important alternative to NPV, the internal rate of return, universally known as the IRR. As we will see, the IRR is the closely related to NPV. With the IRR, we try to find a single rate of return that summarizes the merits of the project. Furthermore, we want this rate to be an “internal” rate in the sense that it depends only on the cash flows of a particular investment, not on rates offered elsewhere. The IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate.

Rule: Based on the IRR rule, an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise. 0 = - 1500000 + 1524105 + 1601086 + 1504689 + 1658980 + 1804244 (2.007472) (2.007472) (2.007472) (2.007472) (2.007472) 0 = - 1500000 + 1499999.35 0=0 IRR= 100.7472 The internal rate of return of the project is much higher then the required rate of return. So we prefer to accept this project. [Type text]

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The Profitability Index Another tool used to evaluate projects is called profitability index (PI), or benefit cost ratio. This index is defined as the present value of the future cash flow divided by the initial investment. If a project has a positive value of NPV, then the present value of the future cash flow must be bigger then the initial investment. PI = PV of future cash flow initial investment = 4672053 1500000 PI = 3.114702 The result of calculation tells us that per rupee invested, Rs.3.114702 in value or Rs.2.114702 in NPV result. The profitability index thus measures “bangs for the buck,” that is, the value created per rupee invested.

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Approaches to calculate OCF There are the following approaches to calculate the OCF of the project.

1. Bottom Up Approach: Because we ignoring any financing expenses, such as interest, in our calculations of project OCF, we can write project net income as: OCF = Net Income + Depreciation 1st year

= 1434105 + 90000 = 1524105

2nd year

= 1511086 + 90000 = 1601086

3rd year

= 1414689 + 90000 = 1504689

4th year

= 1568980 + 90000 = 1658980

5th year

= 1714244 + 90000 = 1804244

This is bottom-up approach. Here we start with the accountant’s bottom line and add back any noncash deduction such as depreciation. It is crucial to remember that

2. Top Down Approach Perhaps the most obvious way to calculate OCF is: OCF = sales – cost – taxes 1st year

= 8262000 – 6259860 – 478035 = 1524105

2nd year

= 8427240 – 6322458 – 50 3696 = 1601086

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3rd year

= 8342967 – 6366715 – 471563 = 1504689

4th year

= 8593256 – 6411282 – 522994 = 1658980

5th year

= 8851053 – 6475394 – 571415 = 1804244

This is just as we had before This is the top down approach, the second variation on the basis of OCF definition. Here we start at the top of the income statement with sales and work our way down to net cash flow by subtracting costs, taxes, and other expenses.

3. Tax Shield Approach The third variation on our basis definition of OCF is the tax shield approach. This approach will be very useful for some problems, we consider in the next section. The tax shield definition of OCF is: OCF = (Sales – cost) x (1 – T) + depreciation x T

1st year

= (8262000 – 6259860) x (1 – .25) + 90000 x .25 = 1501605 + 22500 = 1524105

2nd year

= (8427240 – 6322458) x (1- .25) + 90000 x .25 = 1601086

3rd year

= (8342967 – 6366715) x (1- .25) + 90000 x .25 = 1504689

4th year [Type text]

= (8593256 – 6411282) x (1- .25) + 90000 x .25 Page 20

= 1658980

5th year

= (8851053 – 6475394) x (1- .25) + 90000 x .25 = 1804244

This is just as we had before. This approach views OCF as having two components. The first is what the project’s cash flow would be if there were no deprecation expense. After tax salvage value After tax salvage value is define as: = Salvage value – T (salvage – book value) So the value of the project is = 40000 - .25 (40000-

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Scenario Analysis The basic form of what-if analysis is called scenario analysis. In this case we have some confidence in proceeding with the project. If a substantial percentage of the scenarios look bad, then the degree of forecasting risk is high and further investigation in order. There is number of possible scenarios we can consider. A good place to start is with the worst case scenario. This will tell us the minimum NPV of the project. If this turns out to be positive, we will be in good shape. While we are at it, we will go a head and determine the other extreme, the best case. This puts an upper bound on our NPV. Information or base case; Number of units

14040

Price per unit

938

Variable cost

418

Fixed cost

391200

Take the 5 % change on the either side. Upper & lower bounds: Upper

Lower

Number of units

14742

13338

Price per unit

985

891

Variable cost

439

397

Fixed cost

410760

371640

Best Case

Worst Case

Number of units

14742

13338

Price per unit

985

891

Variable cost

397

439

Fixed cost

371640

410760

Best & worst case:

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Income statement Detail

Base

Sales

Best

Worst

13169520

14520870

11884158

Cost Depreciation

6259920 90000

6224214 90000

6266142 90000

EBIT Income tax (25%)

6819600 1704900

8206656 2051664

5528016 1382004

Net income

5114700

6154992

4146012

Calculation of OCF: OCF = EBIT = depreciation – taxes Base; OCF = 6819600 + 90000 – 1704900 OCF = 5204700 Best case: OCF = 8206656 + 90000 – 2051664 OCF = 6244992 Worst case: OCF = 5528016 + 90000 – 1382004 OCF = 4236012

Calculation of NPV: NPV = - initial investment + PV of future cash flow Base: NPV = -1500000 + 15228848 NPV = 13728848 PV = 5204700 (2092598) = 15228848

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NPV = -1500000 + 18272722 NPV = 16772722 PV = 6244992 (2092598) = 18272722 Worst case: NPV = -1500000 + 12394486 NPV = 10894486 PV = 4236012 (2.92598) = 12394486

Sensitivity analysis Sensitivity analysis is a variation on scenario analysis that is useful in pinpointing the areas where forecasting risk is especially severe. The basic idea of the sensitive analysis is to freeze all of the variables except one and then see how sensitivity our estimate of NPV is to change in the one variable. If our NPV estimate turns out to be very sensitive to relatively small change in the projected value of some component of project cash flow, then the forecasting risk associated with that variable is high.

Change in units: (5%) Base

Best

Worst

Number of units sold

14040

14742

13338

Price per unit

938

938

938

Variable cost

418

418

418

Fixed cost

391200

391200

391200

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Income statement \ detail

Best

Worst

Sales

13827996

12511044

Cost

6553356

5966484

90000

90000

EBIT

7184640

6454560

Income tax

1796160

1613640

Net income

5388480

4840920

Depreciation

Best case: OCF = 7184640 + 90000 – 1796160 OCF = 5478480 NPV = -1500000 + 160299236 NPV = 14529923 Worst case: OCF = 6454560 + 90000 – 1613640 OCF = 4930920 NPV = - 1500000 + 14427773 NPV = 12927773

Change in selling price (5%) Base

Best

Worst

Number of units sold

14040

14040

14040

Price per unit

938

985

891

Variable cost

418

418

418

Fixed cost

391200

391200

391200

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Income statement Detail

Best

Worst

Sale

13829400

12509640

Cost

6259920

6259920

90000

90000

EBIT

7479480

6159720

Income tax

1869870

1539930

Net income

5609610

4619790

Deprecation

Best case: OCF = 7479480 + 90000 – 1869870 OCF = 5699610 NPV = -1500000 + 16676945 NPV = 15176945 Worst case: OCF = 6159720 + 90000 – 1539930 OCF = 4709790 NPV = -1500000 +13780751 NPV = 12280751

Change in variable cost (5%) Base

Best

Worst

Number of units sold

14040

14040

14040

Price per unit

938

938

938

Variable cost

418

397

439

Fixed cost

391200

391200

391200

Income statement [Type text]

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Detail

Best

Worst

Sales

13169520

13169520

Cost

5965080

6554760

90000

90000

EBIT

7114440

6524760

Income tax

1778610

1631190

Net income

5335830

4893570

Depreciation

Best case: OCF = 7114440 + 90000 – 1778610 OCF = 5425830

NPV = -1500000 + 15875870 NPV = 14375870

Worst case: OCF = 6524760 + 90000 – 1631190 OCF = 4983570

NPV = -1500000 + 14581826 NPV = 13081826

Change in fixed cost (5%)

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Base

Best

worst

Number of units sold

14040

14040

14040

Price per unit

938

938

938

Variable cost

418

418

418

Fixed cost

391200

371640

410760

Income statement Detail

Best

worst

Sales

13169520

13169520

Cost

6240360

6279480

90000

90000

EBIT

6839160

6800040

Income tax

1709790

1700010

Net income

5129370

5100030

Depreciation

Best case: OCF = 7173160 + 90000 – 1793290 OCF = 5469870 NPV = -1500000 + 16004730 NPV = 14504730 Worst case: OCF = 7169724 + 90000 – 1792431 OCF = 5467293 NPV = -1500000 + 15997189.9 NPV = 14497189.9

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Break-even analysis It will frequently turn out that the crucial variable for a project is sales volume. If we are thinking, of a new product or entering a new market. Break-even analysis is a popular commonly used tool for analyzing the relationship between sales volume and profitability. There are varieties of different break-even measures. And we have already seen several types. a. Accounting break-even : Numerically we notice that the break-even level is equal to the sum of fixed cost an depreciation, divided by price per unit less variable cost per unit. This is always true.

Q = FC + D P–v Q = 391200 + 90000 938 – 418 Q = 925.3846

b. Cash Break-even analysis: [Type text]

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Q = FC P–v Q = 391200 938 – 418 Q = 752.31

c. Financial breakeven: The last case we consider is that of financial break-even, the sales level that results in a zero NPV. To the financial manger, this is the most interesting case. Q = FC + OCF P–V Q = 391200+5204700 938 – 418 Q = 10761.34

Operating leverage: It is the degree to which a project or firm is committed to fix production cost. a firm with low operating leverage have the low fixed costs compared to a firm with high leverage. DOL = 1 + FC OCF DOL = 1 + 391200 5204700 DOL = 1.075 So the project has the low degree of the operating leverage so the fixed cost of the project is also low.

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Appendix Take information from Mr. Hasseb the owner of the desire Garments.

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Bibliography ➢ ➢ ➢ ➢

Fundamental of corporate finance written by the Ross Westerfield Jordan Investipedia Google Different shops of the kareem block market

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