A Business Start-Up plan

ABusinessStart-Up plan

1.0Introduction

Theinnovation project is about operating a senior living communitybusiness. The project will provide quality care services and enhancethe quality of life for the elderly citizens, create jobopportunities and serve as a business venture in exploiting marketopportunities presented by increased need for elderly care services.In this project I am the finance director who will be in charge ofmanaging all financial issues in the project. The following followsan analysis of major financial issues expected in the startupbusiness. The analysis includes detailed research and evidence onmanaging startup business finances, working theoretical framework offinance management, importance of finances, the financial objectivesof the business, accounting ratios, discussion and recommendations.

2.0Research and Evidence on Finances for startup business

Acomparative analysis on social enterprises indicates that, businessventures of this type require a financial plan before the actualfinancial management takes place. The first step in setting up abusiness venture under financial management is

Redefiningand reviewing business targets

Thismeans having a realistic target on the impact of business outcome andhow such targets are to be achieved. Afterwards, these targets aretranslated into financial equivalents in relation to the amount ofmoney required for expenses and income. For instance, the amount ofrevenue to be generated if the community living center enrolls 5,000elderly citizens, the amount of money required to employ supportstaffs every month and other expenses. Targets are set during theinitial pilot phase of the business and these targets are reviewed asthe business grows(Bodie, Kane &amp Marcus, 2004: 459)this means constantly assessing new results against the projectionson incomes and costs (Weston,1990:295).The goal is to assess any eventuality of risks and challenges thatmay befall the business(Weygandt, Kieso &amp Kell, 1996: 801).

Knowingthe variable and fixed costs in the business

Differentcosts present different effects on the business growth and therefore,it matters most to identify the variable and fixed costs of thebusiness. Variable costs changes as the business progresses forinstance as more elderly citizens are enrolled in the communitycenter expenses costs will go up(Weston, 1990:295).Variable costs include consultation fees, supply material costs andemployee costs. Fixed costs include management costs, administrationand rents.

However,fixed costs are not ‘fixed’ as such a may be affected by changein business aspects. Therefore, it is important to assess andunderstand the financial plan and projections of variable and fixedcosts. The most useful method is to have a break even analysis offixed and variable costs (Brigham &amp Ehrhardt, 2013:122).

3.0Theoretical Framework

Howand why accounting ratios is used in business

Financialratios are the most significant aspects of measure when assessingbusiness performance and progress (Groppelli&amp Nikbakht, 2000: 433).Four main financial ratios are calculated profitability ratios,liquidity ratios, leverage ratios and activity ratios (Weston,1990:295).Liquidity ratios determine that capacity of the business to addressits immediate financial debts without experiencing difficulties theyshow the stability of the business in running its current affairs inrevenue and expediting its current debts. Profitability ratios on theother hand say more about the profitability of the business(Weygandt,Kieso &amp Kell, 1996: 802).

Activityratios indicates the illustrates the effectiveness of the managementin managing the available resources in short the activity ratiosindicates the ease at which the business is able to dispose of itsdebts and the length of time a business takes to receive revenue(Houston,Joel &amp Brigham, 2009: 90).Leverage ratio indicates the ability of a business to rely onbusiness in paying its operations.

Inmost cases financial ratios are used by business managers, potentialand current shareholders as well as creditors in making importantfinancial decisions of the business. In addition, financial analysts’uses financial ratios to assess the weakness and strengths ofbusiness as a way of facilitating financial advice to the managers(Brigham &amp Ehrhardt, 2013:120). Financial ratios are given inratios while some ratios are quoted in percentages and others arequoted in decimals (Bodie,Kane &amp Marcus, 2004: 459).

Financial Ratio

Description

Liquidity Ratio

This ratios indicate the capacity of the business to pay its debts

Net profit

This ratio indicates the level of business profitability after deducting costs. It’s a measure of business profitability within a given period of time.

Gross profit

This ratio indicates the profit derived after making sales and guides in adjusting selling prices

ROCE

This is a measure of returns on capital or equity employed in the business after tax deductions. It shows the value gained from the invested assets and liabilities.

Current ratio

This ratio measures the capacity of the business to pay its debts. It’s a comparison between current liabilities and current assets. Current ratio indicates the level of liquidity in the firm

acid test ratio

Quick ratio measures the business capacity to use its available cash to meet its current liabilities at book value

Asset turnover

This ratio measures the financial worthiness of a business efficiency in its use of assets to generate sales income for the business

ROA

The return on asset ratio indicates the efficiency of the invested assets to give maximum returns on the business

ROE

This ratio gives a measure of returns on shareholders invested equity. It also gives a measure on the efficiency of the firm in making profit.

Gearing

The percentage indicates that the business equity is enough to cater for the business operations before it gets sustainable net debts are manageable within the equity held by the business

Importanceof finance and its role in business

Ideallyfinances form the initial capital for the business. Entrepreneurshipideas are not complete without source of capital to implement theideas it has been said that it takes money to make money no matterin which form the finances will be in order to run a business(Groppelli&amp Nikbakht, 2000: 433).Finances provide a basis through which debts ratios are calculatedand traded off with finances to make the business successful(Houston,Joel &amp Brigham, 2009: 90).

Inthe same line, finances helps in making business cycles completethat is money is needed for any eventuality. Successful entrepreneurshave a financial plan for business downturns in order to keep thebusiness momentum running (Weston,1990:295).In addition, finances enhance the business owner or manager to takeup opportunities of growth in the market. Furthermore, finances areused to employ staffs and pay other expenses that support businessexpansion, growth and increase the output (Weygandt,Kieso &amp Kell, 1996: 801).

Therole of business finances is to aid in strategic planning of businessoperations. Finances are used as financial instruments with whichbusiness operations are measured as well as setting objectives to beachieved(Stokes &amp Wilson, 2010:123).Finance is an important aspect in the management of any businessoperations it assists in the analysis of how funds will be sourcedand used within the business enterprise (Brigham &amp Ehrhardt,2013:125).

Similarly,finance is used in business ventures to measure and manage risks suchas credit and market risks. In this aspect of managing risks, financeserves as a hedge in addressing business risks that are seen andunforeseen risks are measured and identified in order to formulateplans of addressing them through quantitative and qualitativefinancial means(Granovetter, 2000: 254).

Financialobjectives of the business

Financialobjectives are defined as the goal aimed through financial plan.These financial objectives relates to the expected return on capital(ROCE), returns on shareholders’ investment, minimizing costs andmanaging the cash flow goals. Cash flow targets entail settingrealistic projections for outflows and inflows and thereby maintain abalance. In the cash flow targets, the aim is to reduce bankoverdrafts, increasing sales revenue, spreading costs evenly andachieving a certain level of liquidity in the business.

Minimizingbusiness costs is another significant objective of a business.Setting financial objectives is important for business as they guidein decision making and provide a measure through which the success orfailure of the business is measured (Brigham &amp Ehrhardt,2013:124). In addition, financial objectives helps in improvingefficiency and the shareholders are able to assess the viability ofthe business(Williams, Susan, Bettner &amp Carcello, 2008: 80).

Thefinance manager needs to keep unneeded purchasing low, reduce wagescosts, lower product wastage among others. ROCE objectives areessential for business in gouging the amount of profits targetexpected from the capital deployed in the business. In addition, abusiness must satisfy the needs of its business shareholders andtherefore, shareholders return target must be in the financialobjectives (Bodie,Kane &amp Marcus, 2004: 459).Financial planning lays down tasks that will be used in achievingstrategic objectives and goals of a business (Granovetter,2000: 255).

CashRequirements

Whywe need financing

Theexpected Working Capital for the initial startup business is 25million dollars. The initial startup expenses for running a communityliving home are high due to the expenses incurred for buying assets,buying equipment and other facilities $5 million, land $2 million,building apartments $5 million, , consultancy and legal fees, payingcare managers and the health staffs as well as money for payingsuppliers. Research on this type of business venture indicates that,the initial startup finances and expense for the first year are highdue to limited returns and high running costs.

Theproject intends to have fully furnished and spacious apartments withnumerous facilities, common areas that provide the elderly citizenswith fulfilling, comfortable and satisfying lives. Residents will beprovided with three quality meals each day, have recreationalfacilities, apartment maintenance, intensive care services andtransportation services to clients. Furthermore, clients’ will beprovided with regular assistances and attentive medication, bathing,dressing and meals preparations this means that a team of dedicatedstaffs will be employed in order to assist in managing this chores.As such, in the business startup finances will be needed to hiremanagers, cooks, nurses, laundry staffs and driver.

Inthe same line, we need finances to vigorous market the projectthrough outreach campaigns, door to door program to reach out toelderly citizens and their families. In addition, the campaignprogram will assess hospitals, physians, employers, business and thewider community as part of marketing the project. In particular,major expenses for the project include water, heating, I.T system,recreational facilities and telephone services.

Sourcesof finances

Themajor sources of finance for the business will come from governmentgrants ($5.5million), founders’ investment ($2million), friends andfamily ($ 5million), Bank loan ($15 million). In the founders cashkitty each member contributed $400,000 equally at a total of$2million this amount was raised from members’ individual savingsand the money would be reimbursed after five years. Contributionsfrom the family and friends totaled $ 5million with each contributing$100,000.

Similarly,contributions from family and friends were taken as an investment andthe business would reimburse them after five years. A bank loan of$15 million was also sourced to top up the ventures working capitaland the project assets were to serve as the collateral for the loantaken. The loan would be acquired through this proposal and we intendto repay the loan within the stipulated time. The other source ofincome for the project was sourced from local business donationsengaged in corporate social responsibility and PR campaigns. As partof repaying this generous donations the project would give back tothe community by giving quality care management services to elderlycitizens, engage in publicity campaigns for these organizationsduring its outreach campaigns.

Keyfinancial assumptions

Theassumption of this venture is that the market for the business isreadily available from the senior citizens living in the community.The realistic Sales estimates for year one is expected to range from$3.99 million and $3.84 million. In the pessimistic year theprediction of monthly sales ranges from $ 2.89 million to $3.99million during the same period. However, in the second year, thesales are expected to reduce annually in the range of $3000 to $9000.

Thereis no change expected in terms of stable taxation regimes as well asfavorable political and economic environment. In any case, governmentregulations may affect lending rates that would in turn affect loanrepayments. Another assumptions made is that inflation will be stableso that it does not affect the cost of loans, the price of supplies,sources of services the profitability of the business.

MajorChallenges expected

Theproject intends to construct villa apartments and other recreationfacilities. The main challenge is getting a contractor who willundertake and complete the project in time and with quality work.

Costsoverruns are other challenges that are expected in the constructionphase. In this case, bidding will be done to contract a builder whowill be able to check on costs. Inflation is another challenge thatmay affect the cost of building the project but an allowance offluctuation will be made within the costs estimates.

Qualitycontrol In order to enhance effectiveness in resource use, aseasoned manger will be hired to run the business affairs and isexpected to share with the business board on issues arising from theoperations of the business.

Risks

Inthis business startup venture, a high turnover of staffs would berisky as the business would be in its pick up process. However, thefounder members understands this predicament of human capital drainand are willing to ensure that quality services and rewards are givento employees to enhance organization reputation.

Anotherrisk would arise if there is change in government this means newthat regulations maybe enacted thereby affecting the industry. In thesame line, new government regulations may interfere with elderlycitizens’ health insurance and pensions and this could adverselyimpact on the business.

Inany venture competition are expected, but presents risks to newventures which would raise their advertising costs and reducedmarket. However, competition ensures that quality services are givento clients by all the players in the industry.

Poordecision making and management may affect young venture and affectthe capacity of the business stability, market share and brand imagein the industry and the community at large. Demographicscharacteristic may affect the venture if the neighborhood is occupiedby members of certain age group this may affect the venture marketsince its target market is senior citizens.

Risksmitigation

Highemployees turnover will be addressed through maintain a healthy workrelation with all employees and giving them competitiveremunerations, benefits, training, rewards and career progress toenhance employee retention. The project will liaise with governmentpolicies concerning the industry and deviating from any politicalaffiliation or leaning.

Aspart of addressing the competition problem, the business venture willbe strategically positioned as the best service provider for theelderly Citizens this will attract the middle income earners who arenot targeted by the current elderly care service providers in theindustry. Poor management and decision making will be addressing bysourcing skilled mangers to lead the venture staffs and advice boardmembers on important issues for decision making.

Timelineof activities in the First Year

Time Period

Action

January-March 2011

1. Present plan to Ministry of the People.

2. Apply to local foundations for funding

3.Construction of the facilities

March-May 2011

Hire Managers, cooks, social workers, receptionists, Nurses

May-August 2011

1. Develop policies, strategies (billing, computer services,

Personnel, standards of care).

2. Design marketing materials (brochures, web presence).

3. Training and certification for Certification for Geriatric Care

Manager/Program Manager.

August-December 2011

1. Stakeholder engagement activities.

2. Distribute marketing materials, implement networking

strategies (face to face appointments with employers,

physician’s offices, hospital staff, etc)

3. Continued development of policies, procedures, program

Guidelines.

4. Screen and enroll clients into PSCC. (30 clients).

5. Initiate employer education programs.

January-March 2012

1. Screen and enroll clients into PSCC. 100 clients

2. Continue employer education program.

3. Continue marketing strategies (outreach to senior groups,

4. Community partners, stakeholders, etc).

April-June 2012

1. Continue community education through presentations at

Community groups, employers, hospitals, etc.

2. Continue screening and enroll clients into SCC.(50 clients)

4.0ANALYSIS AND DISCUSSION

a)Realistic accounting ratios year one b)Pessimistic year Ratios

NetProfit= NetProfit Net Profit= NetProfit

Net Sales Net Sales

=44384530 =2522926x 100

475880000 33306000

=0.09×100 = 75.62%

=9%

c)Net Profit Year two

NetProfit= NetProfit

Net Sales

=18146461 x 100

47580000

=38%

Theratio of 9% indicates the level of business profitability afterdeducting costs during year one. In the pessimistic year, net profitwas high at 75.62% and this could be attributed to improved sales andreduced costs. In the second year, the net profit margin was 38%, animproved ratio from the one recorded in the realistic year, the basicexplanation could be that, costs were reduced, there was more salesin the second year compared to the first year and that improvedpricing strategies could have resulted in an increased net profit.

GrossMargin or Gross Profit

  1. Realistic Year One B) Gross Profit pessimistic year

Grossprofit ORNetSales-COGS Grossprofit ORNetSales-COGS

Netsales Net Sales Net sales Net Sales

=(47580000-3195470) x 100 =33306000-29940290 X 100

47580000 33306000

=93% = 10%

  1. Gross Profit year two

GrossProfit

NetSales

=47580000-26331836 x 100

47580000

=45%

Thegross profit in realistic year is 93% while in the pessimistic yearit was 10% and 45% in year two. During the realistic year grossprofit was high and this could be attributed to projections made inregard to business returns. The gross profit in the realistic year ishigh due to a high sales forecast or more sales. The Gross marginratios are used to assess the profits accrued from sales and thismeans that, the ratio indicates that the firm has a higher potentialof making profits from its sales.

CurrentRatios

RealisticYear One Current Asset Ratio-Pessimistic year

CurrentAssets

Currentliabilities

3737315 297580

252685 2495420

=14.8 =0.12

CurrentRatio Year two

CurrentAssets

Currentliabilities

1782442

2207558

=0.81

Currentratios are used to measure the ability of the business to pay itsdebts. It indicates the firm’s ability to service its debts. In thefirst realistic year the current ratio of the firm was high at 14.8,meaning the business had $14.8 to service every $ 1 debt. In thepessimistic year, the current ratio was 0.12, meaning the businesshad $0.12 to service every $ 1 debt while in the second year, thecurrent ratio was 0.8 $ 0.8 to service every $ 1 debt. Overall, itmeans that the firm had more financial strength to service itsshort-term debts in realistic year than the subsequent years.

Returnon Capital employed (ROCE)

Realisticyear one Pessimistic year

NetIncome NetIncome

Capitalemployed Capital employed

=44384530 =2522926

10,000,000 10,000,000

=4.4 =0.25

Returnon Capital employed year two

NetIncome

Capitalemployed

=18146461

10000000

=1.8

Inrealistic year one the ROCE ratio was 4.4 and indicates $ 4.4 returnon capital employed. In the pessimistic year ROCE ratio was 0.25 andindicates $ 0.25 return on capital employed while in the year twoROCE ratio was 1.8 an indication that the firm derived $1.8 oncapital employed. Overall, return on capital was high in therealistic year compared to other years.

AcidTest Ratio

CurrentAssets-(Inventories +prepayments) or Assets

Currentliabilities Liabilities

Yearone realistic

1styear 5000000/3195470

=1.5

Yearone pessimistic

5000000/29940290

=0.17

2ndyear 5000000/26331836

=0.9

Inthis case during year one, the quick ratio was 1.5 compared to 0.17and 0.9 ratioin the pessimistic year and second year respectively. For every $1debt the business had $1.5 to service it compared to pessimistic yearwhere for $1 debt the business had only $0.17 to service it. In yeartwo the business had only $0.9 to service every $1 current debt. Theindication is that during realistic year one the firm was in a morestable condition to dispose of its short term debts compared to thepessimistic year.

Assetsturnover

Assetturn over indicates the capacity of the business efficiency to meetits sales target revenuewith its assets.

RealisticYear one. Pessimistic year one Second Year

Netsales NetSales NetSales

TotalAssets Total Assets Total Assets

47580000 33306000 47580000

5000000 5000000 5000000

=9.5 =6.7 9.5

Inrealistic year for every $1 of assets the turnover was $9.5, in thepessimistic year for every $1 dollar assets the turnover was $6.7while in the second year the turnover was $9.5 for ever $1 assets.The assets turn over ratios indicates the efficiency of the businessuse of assets to make income.

Returnon Assets- ROA

RealisticYear one Pessimistic year

ROA= NETINCOME ROA=NETINCOME

ASSETS ASSETS

=44384530 2522926X

5000000 5000000

=8.87% =0.50%

ROAin the second year

18146461

5000000

=3.62%

Inthese ratio values it indicates that during the realistic year one(8.87%), the returns were for every $1 worth of asset, $8.87 wasearned, in the pessimistic year for every $1 worth of asset $0.50wasearned while in the second year for every $1 worth of asset $ 3.62was earned.

Inthe pessimistic year, the ratio was less than one (0.50%) and thiscould be attributed to reduced income during that year.

Returnon Shareholders’ Equity –ROE

ROEratio gives a measure of returns on invested equity by theshareholders. It also gives a measure on the efficiency of the firmin making profit

ROE= NetIncome

ShareHolders Equity

RealisticYear =44384530×100

10000000

=44%

Pessimisticyear=2522926×100

10000000

=25%

ROEsecond year=18146461×100

10000000

=181%

Theratios indicate that in year one the returns on shareholders equitystood at 44%, for every $1 of shareholders equity a return of $44 wasaccrued while in the pessimistic year for every $1 of shareholdersequity a return $25 was accrued. The return on equity was high in thesecond year at 181%. This means that returns on shareholders equityimproved in the second year compared to the first year. The returnson invested equity for the pessimistic year was 25%.

GearingRatio

Thisratio indicates the level of business equity sufficiency in cateringfor the business operations before it gets sustainable net debts aremanageable within the equity held by the business. It is calculatedas follows

GearingRatio- First year

Long-termliabilities

Capitalemployed

=15,000,000×100

25,000,000

=60%

GearingRatio-Second Year

15,000,000-(12×8335) + (52,500×12)/25,000,000} x100

100020+630,000=730020

(15,000,000-730020)x 100

25,000,000

=57%

Fromthe above calculations it is clear that the gearing ratio for thefirst year is high compared to the second year. This could beattributed to the fact that the business is relying on debts tomanage most of the business operations unlike in the second year whenthe business starts repaying the long term debts.

Comparingthe financial ratios of realistic year 1 to pessimistic year 1

Netprofit: In realistic year 1thenet profit ratio was 9% while in the pessimistic year the net profitwas75.62%. This means that the business was more profitable in thepessimistic year compared to the realistic year. The net profitratio was low in year 1 and this could be attributed to low sales orhigh costs incurred during the first year. In the pessimistic year,net profit was high at 75.62% and this could be attributed toimproved sales and reduced costs. In short, the ratios indicate thatthe business was more profitable in the pessimistic year compared torealistic year.

Grossprofit:Thegross profit in realistic year is 93% while in the pessimistic yearit was 10%. This means that the ability of the business to makerevenue was high in the realistic year compared to pessimistic year.Similarly, the gross profit in the realistic year is high due to highsales compared to low sales made in the pessimistic year two. TheGross margin ratios are used to assess the profits accrued from salesand this means that, the ratio indicates that the firm had a highpotential of making profits from its sales in the realistic yearcompared to pessimistic year.

Currentratioin the realistic year the current ratio of the firm was high at 14.8compared to the current ration of the pessimistic year at 0.12. Thisindicates that the firm had more resources (current assets) to payits debts in the realistic year compared to the pessimistic year. Inthe pessimistic year, the current ratio was 0.12 this is below thenormal current ratio of a healthy business and indicates that thefirm had difficulties meeting its current liabilities. Current ratioindicates the ability of the firm to satisfy creditors’ demands anda good range of current ratio indicates a firm’s short termfinancial strength.

Returnon Capital employed ROCE:In realistic year one the ROCE ratio was high at 4.4 compared topessimistic year at 0.25 and year two at 1.8. ROCE indicates themeasure of returns from capital or equity employed in the businessafter tax deductions. It shows the value gained from the investedassets and liabilities. In this context, the ROCE in realistic yearwas high possibly due to low liabilities or inflation could haveaffected the cash flow. The ROCE for pessimistic year was below oneand this could have been due to more liabilities than current assets.In addition inflation could have affected the assets value therebyleading to low ROCE ratio.

Quickratio:Quick ratio measures the business capacity to use its available cashto meet its current liabilities at book value. In this case duringyear one, the quick ratio was 1.5 compared to 0.17ratioin the pessimistic year. The indication is that during realistic yearone the firm was in a more stable condition to dispose of its shortterm debts compared to the pessimistic year for every $1 debt thebusiness had $1.5 to service it compared to pessimistic year twowhere for $1 debt the business had only $0.17 to service it.

AssetsTurnover:The assets turn over ratios indicates the efficiency of the businessuse of assets to make income. In the above case, the asset turnoverfor realistic year one and realistic year indicates that there was nochange in asset turnover for the firm. In the pessimistic year, assetturnover ratio was less at (6.7) this could be attributed to lowsales forecast than the previous or preceding years.

Returnon assets:The return on assets for realistic year one was (8.87%) more than inthe pessimistic year (0.50%). This means that return on assets washigh in the realistic year compared to the pessimistic year and thiscould be attributed to reduced income during that year. Theratio value indicates the return on asset and the efficiency of theinvested assets in giving maximum returns on the business. AROA above 5% is considered healthy for an investment.

Returnon equity:The ratios indicate that in year one the returns on shareholders’equity was more than in the pessimistic year. This means that returnson shareholders equity improved in the pessimistic year compared tothe first year.

Comparingthe financial ratios of realistic year one to year two

Netprofit: Inthe second year, the net profit margin was 38%, an improved ratiofrom the one recorded in the realistic year, the basic explanationcould be that, costs were reduced, there was more sales in the secondyear compared to the first year and that improved pricing strategiescould have resulted in an increased net profit.

Grossprofit:The gross profit in realistic year is 93% while in the second year itwas 45% in year two. During the realistic year gross profit was highand this could be attributed to high sales forecast or more sales.The Gross margin ratios are used to assess the profits accrued fromsales and this means that, the ratio indicates that the firm has ahigher potential of making profits from its sales.

Currentratio:In the realistic year the current ratio of the firm was high at 14.8compared to the current ration of the second year at 0.81 it stillindicates that the firm could have hard problems meeting currentliabilities in the second year. Itmeans that the firm had more financial strength to service itsshort-term debts in realistic year than the second year.This would affect the creditor rating of the firm creditors look forhigh current ratio when assessing the firm capacity to meet itscurrent obligations. However, this is not a major problem since thefirm could borrow funds.

Returnon Capital employed ROCE:In realistic year one the ROCE ratio was high at 4.4 compared to yeartwo at 1.8.Inthis context, the ROCE in year one was high possibly due to lowliabilities or inflation could have affected the cash flow. In thesecond year, the ROCE value indicates good returns from the capitalthe ROCE value is neither high nor low and indicates that the firmassets and liabilities are balanced.

Quickratio:In this case during year one, the quick ratio was 1.5 compared to0.17ratioin the pessimistic year.Theindication is that during year one the firm was in a more stablecondition to dispose of its debts compared to year two. Although thequick ratio is low in year two, this could be attributed to longerpayment terms to creditors and may not mean that the business isweak quick ratio indicates the capacity and availability of businessto fund its immediate payment.

AssetsTurnover:Theasset turnover for realistic year one and year two indicates thatthere was no change in asset turnover for the firm. This could beattributed to same sales volume resulting in same income in the twoyears and thus same asset turn over ratios.

Returnon assets:The return on assets for realistic year one was (8.87%) more than inthe second year at (3.62%).AROA above 5% is considered healthy for an investment this means thatat 3.62% the firm is operating below the normal value and this isbecause of low net income.

Returnon equity:The ratios indicate that in year one the returns on shareholders’equity was less than in the second year. The return on equity washigh in the second year at 181%. This means that returns onshareholders equity improved in the second year compared to the firstyear. The reason is that, there were more income and reducedliabilities in the second year compared to the first year.

GearingRatio inthe first year the gearing ratio was high compared to the secondyear. This could be attributed to the fact that the business isrelying on debts to manage most of the business operations unlike inthe second year when the business starts repaying the long termdebts. When a business is operating on debts its gearing ratio ishigher compared to when its debts are low this explains the drop ingearing ratio from year one to year two.

Projectviability and break-even after 10 years

Theproject is viable judging the trend in profit ratios, liquidity,return on capital and debt repayment. The working capital is adequatebut there is need for an effective management of working capital,pricing strategies and costs reduction in order to realize maximumprofits and efficient debt repayment. If there is good management onthe working capital, reducing expenses and improving on the businesspricing strategy, the business will break even after 10 years and beable to manage its short-term and long-term debts.

and Conclusions

Businessventures of this type require a financial plan before the actualfinancial management takes placethismeans setting down realistic forecasts and projections of thebusiness startup and its future progress. The first steps in settingup a business venture is Redefining and reviewing business targetsand knowing the variable and fixed costs in the business. Financialratios are useful in assessing business performance, viability of theinvestment and progress. Finance is important in business in runningexisting and new business ventures. In addition finances helps inmaking business cycles complete, assists in the analysis fundssources and use, business growth and disposing off liabilities.

Financialobjectives are important in business as they help in managing cashflows, assessing returns on capital, assets and the liquidity of thebusiness. In running a social enterprise, financial planning isimportant as well as laying down important strategies for business.There are expected risks, challenges and other financial aspects thatmay threaten business operations.

Thebusiness project is viable judgingthe trend in profit ratios, liquidity, return on capital and debtrepayment. The working capital is adequate but there is need for aneffective management of working capital, pricing strategies and costsreduction in order to realize maximum profits and efficient debtrepayment.

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