Question: Use the scenario to calculate the income (including the original loan) and expenditure for the fi...

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 trucks 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.