Background:

During your first business class, you saw the opportunity to bring white paper squares to the Salisbury University market. On a whim, you started manufacturing low quality, thin, white, flexible squares of paper. Shockingly, your business took off and the company was successful in competing in a saturated market. Seeing the need for diversification, you launched a new specialty product with the hope of increasing sales and setting the business apart. With moderately good recording keeping and a solid IT infrastructure, paper sales skyrocketed. The writing was on the wall, if you want to grow and remain competitive, it was time to expand.

After many brainstorming sessions you decide on three areas where expansion would be most valuable.

A couple of employees seemed an obvious choice. The team you started with turned out to be slackers, and since record keeping is clearly not your strong suit, you believe it would be worth hiring an accountant. In addition you would like to increase sales with a salesperson and an inventory manager.

You are currently operating your business out of a classroom at the Perdue School and it is therefore, clearly time to secure an office and manufacturing space.

You really want to focus on your core seller and while you are known for your thin, low quality, highly irregular paper, your hands are blistered and full of paper cuts. For the sake of your skin, you would like to purchase a reliable paper cutting machine.

Knowing, the old business adage, it takes money to make money you decide to pitch your business plan in the Salisbury University Entrepreneurship Competition with the hopes of enticing an investor. You plan is to present and ask for $100,000 in startup money but know any good investor will want to make sure a return is possible. After extensive research, you compile a list of information surrounding the three areas of expansion.

Research Details:

Fortunately, you have been in the paper business long enough to have some solid market knowledge. Your business goal is to increase efficiency and sales in such a way that puts your competitors out of business. With your knowledge and the insider information you have secured on your competitors, you decide to use the market values (not your individual company) to estimate sales. You manage to compile the following information on the three expansion areas to help you create your forecast and pitch this to potential investors:

Employees :

As a startup, you cant pay your employees a high salary but you hope to entice them with good working environment, a strong benefits package and time off.

You hope to start with three employees in addition to you - the principal owner. Each will work the paper cutter and provide additional business support.

You are planning on paying each of your employees $25.00 per hour or $20,800 per year. You estimate with salary, insurance, and benefits, each employee will cost you about $35,000 per year.

You know this is not a strong financial offer so you decide to sweeten the pot by offering a 4-day work week. You base this on the traditional 52 week working calendar.

It is true that many small business owners do not draw a salary for a number of years, but you cant do that - you have no other source of income. You are hoping your new cutter will allow you to take at least $60,000 this first year. As the business becomes secure, you are sure you will be able to pay yourself more.

New Location:

With the cities incentives to bring new manufacturing companies downtown, you were able to secure a deal for six dollars a square foot in a 1000 ft. facility. Your rent of $6,000 per month allows you space to operate your paper cutter, house your new employees, and handle the day-to-day business. Your space will also work for expansion and you estimate it will last for the next many years.

Fortunately, your lease covers insurance, maintenance, and building taxes.

Paper, Cutter, & Production:

If you start buying your paper in reams (500 sheets), you can get a 10% discount on the markets average price.

While the cutter is much faster than scissors, it still takes a toll on your employees wrist. You estimate that an employee can't cut for more than 4 hours each day and you decide that one 4-hour cutter shift per day is the best way to ensure both the cutter and your employee does not get burnt out.

The cutter only needs one employee to run it.

A new paper cutter will allow a single employee to cut 2 reams per hour. This is much better than the 6 hours it would take to cut one ream by hand.

As the cutter is used the blade becomes dull. The manufacturers recommendation is to change the blade every 1,000 sheets or 2 reams. Blades cost $5.00 to replace.

Based on the market and what you know of paper sales, you make the assumption that every bit of paper you produce, you can sell.

Cutter cost is $6000 for one

Average original square sale price is $3.76

Average original paper purchase price is $3.64

Even though your specialty item can demand a high price, you recognize the strength of your business lies in its core operation - original squares.

Other business expenses:

After talking to a lawyer and insurance agent, you estimate company insurance at $38.00 per month.

Business licenses and lawyer fees should run you about $2,000 each year.

You expect to spend the equivalent of $1 per ream on advertising and marketing.

Additional miscellaneous business expenses you hope to keep below $500 per month.

You expect to pay about 30% in taxes

Your cutter will depreciate over the course of 1 year - meaning it wont be worth anything at the end of the year.

You expect to pay 6.1% interest on your loan each year.

Assignment A: Create a 1-year projected forecast with one cutter and three employees. Make sure your case has the following

Correct information in the Constants section

Formulas in the Production Calculations section

Formulas and/or cell references in the forecast section

Assignment B: Use the information in your 1 year projection to set up the Excels Scenario Manager. Consider the following sets of scenarios. Create a summary report for each of the two outlined situation.

Summary Report 1: Economic Conditions. Your investors want you to consider how global economic conditions could affect the profitability of your new company. Consider three possibilities:

Economic Recession: The market price for paper sales drops to $1.50 and you get no discount on ream prices.

No Change: The market price remains at $3.76 and the discount remains unchanged.

Economic Growth: The market price increases to $5.00 and your discount is 20%.

Summary Report 2: Blade Costs. You would also like to see how changes in blade prices could affect the profitability of your business. Consider three scenarios:

Low Blade Costs: The price of cutter blades drops to $2.50 for each.

Current Blade Costs: The price of cutter blades remains unchanged.

High Blade Costs: The price of cutter blades jumps to $10.00 for each.

Assignment C: Answer the following questions in the comments section and submit your Excel file

What is your production capacity how many original squares can you actually make in one year?

If you sold all the paper you could produce, how much could you make at the end of one year?

Could you pay back the $100,000 you have asked for from your investor?

Why do you need an IF statement in the income tax expense cell?

Constants Notes 1 year Performance Forecast Sales Original Squares Raw Materials Paper Sheets Sheets in a Ream # of Squares per sheet Discount Rate Average per sheet price Total Sales Variable Expenses Blade costs Advertising Raw Material Cost Paper Sales Avg. selling price for original squares Labor # of employees Annual salary cost Employee daily cutting hours Days in work week work weeks in year Total Variable Expenses Fixed Expenses Loan Interest Cutter Cost Payroll Rent Company Insurance/yr Fees Misc Cutter Blade Costs Blade life in reams Cutter Cost Number of cutters reams per hour Total Fixed Expenses Total Expenses Owner Number of Owners Owner Salary Income before taxes Estimated income tax expense Marginal net income Capital & Other Costs Yearly Rent Company Insurance Fees Advertising/ream Misc Taxes Loan Amount Interest Rate Production Calculations Cost of single ream Cutting hours/year Reams cut/year Sheets cut/year Squares produced/year Constants Notes 1 year Performance Forecast Sales Original Squares Raw Materials Paper Sheets Sheets in a Ream # of Squares per sheet Discount Rate Average per sheet price Total Sales Variable Expenses Blade costs Advertising Raw Material Cost Paper Sales Avg. selling price for original squares Labor # of employees Annual salary cost Employee daily cutting hours Days in work week work weeks in year Total Variable Expenses Fixed Expenses Loan Interest Cutter Cost Payroll Rent Company Insurance/yr Fees Misc Cutter Blade Costs Blade life in reams Cutter Cost Number of cutters reams per hour Total Fixed Expenses Total Expenses Owner Number of Owners Owner Salary Income before taxes Estimated income tax expense Marginal net income Capital & Other Costs Yearly Rent Company Insurance Fees Advertising/ream Misc Taxes Loan Amount Interest Rate Production Calculations Cost of single ream Cutting hours/year Reams cut/year Sheets cut/year Squares produced/year