Chapter 5 Financials

Chapter5: Financials



Sourcesof finance

Foundercash: each founding member contributed an equal amount of $400,000that totaled $2 million. The cash was largely raised from personalsavings and from other sources of personal income. The founders wereto be reimbursed their contribution in five years.

Friendsand family: Each founding member sourced $100,000 from respectivefamily and friends. Families were expected to contribute the largestchunk if not all of this amount. The amount was to be viewed as aninvestment with repayment/reimbursement being in five years.

Bankloan: The venture targets to raise $15 million from bank loan. Thecollateral for this loan will largely be venture assets. The keyselling point to acquire the loan will be a realistic proposal thatidentifies a realistic business opportunity in the market thatdelivers returns on investment through persistent sales/performanceand also repay the loan in a stipulated time.

Localbusiness donation 2 million: the business venture falls withinseveral organizations PR and corporate social responsibilitycampaigns. As such, the venture offers an opportunity for firms togive back to the community in taking care of senior citizens and alsooffers free publicity to several organizations involved in seniorcitizen matters.


Themarket is viable in that the venture will attract enough business informs of senior citizens. Realistic estimates predict monthly salesto range between $3.99 million and $3.84 million in the first yearwhile the pessimistic estimates predict monthly sales ranging between$2.89 million and $3.99 million in the same period. For the secondyear sales are predicted to remain the same and range between $3.84million and $3.99 million.

Thereis no change in government to guarantee a stable taxation regime andsound economic and political climate. Governments can also influencelending rates that affect existing loan repayment.

Inflationwill remain stable to ensure there are currency fluctuations that canimpact cost of loans or prices of supplies and source services andconsequently the firm’s profitability.


Findinga good builder who can deliver the project within the stipulated timeat the right quality. To access such a builder, a tender will beadvertised to arrive at the best suited for the job. It is highlyrecommended to involve/hire a third party to carry out the tenderingand vetting process.

Costoverruns. The venture will bid the contractor to a clear formula ofhandling cost overruns. Additionally, the board of directors shallkeep a close look at the project to ensure costs remain within theestimates.

Inflation.Inflation will increase the cost of building the facility. Theventure shall thus factor in a modest fluctuation allowance in thecost estimates.

Qualitycontrol. An experienced CEO answerable to the board shall be hired torun the day to day affairs of the business. A clear quality controlprogram shall be drafted to guide all operations and ensureconsistent quality service delivery.


Highstaff turnover is possible risk the venture faces. The foundersunderstand that high staff turnover is a drain to the human capitaland knowledge resource of the firm and has a bearing on the qualityof services offered and firms reputation in the labor market.

Anew government can enact new legislation that is likely to affect thehealthy industry at large. Furthermore, issues affecting seniorcitizens such as pension matters and health insurance can impact theventure.

Competitionfrom existing and new players in the industry increases advertisingcosts and shrinks the market. Nonetheless, competition can bebeneficial as it drives quality improvement in the industry.

Poormanagement decisions is a risk that the venture has to live with.Such poor decisions undermine the firm’s authority in the industryand risks decreasing the firm market share and reputation in theindustry.

Demographicchanges can affect the industry to a great extent. In the US somecities and neighborhoods are associated with certain age groups. Anyunfavorable changes in the ranking and demographics of theneighboring communities can affect business to a large extent.


Highemployee turnover shall be addressed by maintaining a healthyprofessional relationship with all employees. A suitableremuneration, reward and promotion system shall be put in place toboost employee satisfaction, career development and retention.

Liaisonwith government will be maintained in streamlining policies thataffect the industry. However, the firm shall not display politicalleanings or associate with any political alignments.

Competitionin the market shall be addressed by strategically positioning thefirm as a premium quality service provider for senior citizens toattract premium and middle income consumers, a position that is notcurrently unoccupied by any of the existing players.

Poormanagement decisions shall be addressed by assembling a highlyskilled and experienced leadership team to spearhead and advise theboard on nay major decision-making for thorough deliberation.

Changesin the demographics of the neighboring communities is likely toaffect business but can be best addressed by spreading the marketreach to a wider area to cushion the firm from changes in theimmediate market.



Therepayment period for $15 million loan from the bank is repayable in aperiod of 25 years after a grace period of one year at an interest of5%. The monthly installments shall be thus be

(1.05x 15,000,000)/(25 x12)

=(15,750,000)/ 300

=$52,500 to be paid as monthly installments

Founders,Friends &amp family

Totalcontribution (FFF) = 2.5 million

Repaymentin five years = 2,500,000/(12×5)

Monthlypayments = 8333.33≈ $8,335




=[long term liabilities/capital employed] x100

Endof first year (realistic) =

(15,000,000/25,000,000)x 100


2ndyear = 15,000,000- (12×8335)+ (52,500×12)/25,000,000} x100




Thecompany experiences high gearing ratio which shows the business ismore vulnerable as its more reliant on debts. In the 2ndyear, this ratio drops as a result of one continued repayment ofdebts.


Returnon assets is the ratio of annual net income to average total assetsof a business

1styear (realistic) = 44384530/5,000,000

=8.88 %

2ndyear= 18146461/5,000,000


Thismeans that every dollar-worth of assets for the firm, records aprofit of 3.62 cents.

Netincome percentage

(Netincome x100)/sales

1styear = (44384530×100) /47580000


2ndyear = (18146461.1×100)/47580000




=Net income divided by its average stockholder`s equity

2ndyear Net Income/Shareholder`s Equity =



Thismeans the firm will record a profit of 72 cents for every dollarinvested in the business.



1styear 5000000/3195470


Thefirm is in a stable position to pay debt

2ndyear 5000000/26331836


Thefirm might have slight difficulties paying debts in the second year.


Ahuge percentage of the funding for the business venture will besourced from the bank. However, given the validity and the marketassessment conducted in the early stages, the survey reports that themarket identified by the venture has high potential. The involvementof founders’ families, friends, the government, and local businesscommunity increases the public awareness of the venture and alsooffer free marketing for the venture.The market positioningsuggested for the firm as a premium facility for senior citizensoffers the business an opportunity to offer product extensions forits clientele as part of value addition and range to the productoffering. This will potentially increase sales and profits in thelong run. This is informed by the current liquidity andprofitability ratios which point to a relatively bleak future ofnegative return on investment. As such, the firm will seek toincrease its sales in innovative ways and expand its market withoutincurring further costs.


Brigham,E. &amp Ehrhardt, M. 2013. FinancialManagement: Theory &amp Practice.New York: