Table 1


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Table 1

  1. 1. From Business Conception to the Bank: Interactive Model in Estimating the Financial Economic Feasibility and Its Application to Anthurium Cut Flowersfor Starting Home Care Cooperative In East Hawaii By: Sabry Shehata and Cherie ShehataSabry Shehata1 I. Introduction The purpose of this publication is to develop an interactive financial feasibility that provides a fast means to conducting financial feasibilities applied to the Hawaii agribusiness industry. The model is written in PHP and is published on the website. Data on the cost of establishing a business is input into the webpage, then the model estimates the Pro forma Income Statement, Pro forma Balance Sheet, Cash Flow Statement, and conducts some financial analyses that are needed to approve a loan. The model is modified and applied to the anthurium agribusinesseconomic feasibility of starting Home Care Cooperative at East Hawaii. The main objective is to provide investors and existing farms business with an accurate and fast method for estimating the financial economic feasibility andfeasibility of producing anthurium cut flowers customized to their farm operation and financial analysis to help bankers access its profitability. It can be used for planning new business as well as expanding existing operations. It can also be used for various managerial decisions, such as sensitivity analysis, annual evaluations and budgeting. The software is located at the website, under the anthurium homecare cooperative economic feasibility page, which provides convenient and fast methods for accessing the viability of growing anthurium cut flowers. It can be used for planning new orchid farms as well as expanding existing operations. It can also be used for various managerial decisions, such as sensitivity analysis, annual evaluations and farm budgeting. II. Application of the Model to Anthurium Cut Flowers Business In order to demonstrate the use of the model in estimating economic feasibility if establishing home care cooperative in east Hawaii, the following information are needed: market size on the Island of Hawaii, market segment in the target market, market size in east Hawaii, market sixe in the target market, market potential of Hawaii health care cooperative, market plan; product and service, source of revenue, pricing strategy, distribution strategy, and completive analysis. In addition in formation of facility requirement, human resources and equipments are needed. This information was used to predict the market and design market plan. 1 Professor of Agribusiness, College of Tropical Agriculture, Forestry and Natural Resource Management
  2. 2. The competition stems form two sources: family members and friends who provide home care for elders, and caregiver companies located in Hawaii County that offer home health care services in East Hawaii. Family members and friends as caregivers need breaks; that’s why respite service will be a part of the cooperative service—capitalizing on hours needed for family members and friends to continue performing the care giving task without having problems. The second source of competition is the existing companies that provide the same services. The consultants surveyed the existing companies that provide home care service. There are five small companies currently operating. Four of them reported that they serviced a total of 334 clients and three of them reported that they employ a total of 140 caregivers with the majority of workers on call. One reported a shortage in CNAs and chore workers. Other sources of competition come from future companies entering the market. The faster the cooperative starts, the faster it will develop name recognition and loyalty among its clientele. In order to estimate the market size by number of Big Island residents who needed assistance, U.S. Census data was used to forecast the future population trend. The linear regression model was used to obtain the best fit (US Census, 2000). Data on annual residents’ population by age was used to forecast the growth in population in the Big Island of Hawaii for the next 5 years. In order to forecast the demand for health home aide services, secondary data on the percentage of population who need health care assistance was obtained from the State of Hawaii Department of Health Executive Office on Aging (Published report on Profile of Hawaii’s Older Adults and other Caregivers). They reported the percentage of the population that needs health care aids as follows: for those Hawaii residents between 18– 44 the need is 3.6%, for 45–59, it is 5.2%, for 60–74, it is 4.75%, 75–84 it is 6.8 %, and for 85 and over it is 22.1%. These percentages were used to forecast the number of persons who needed assistance by age. The results revealed that the need for assisted care will continue to increase on the Big Island of Hawaii. In 2007 it is expected that 6294 residents will need assisted care and the number will reach 7022 by the year 2011. The forecast is highly significant at .05 confidence level and the estimated R2 is 0.96. From the above forecast, 2,271 of the age group 60 and above will need assistance and this will grow to 2,599 in the next five years (Table 1). Table 1: Trend of Number of Persons Who Need Assisted Care by Age on the Big Island of Hawaii 2007–2011 Age 2007 2008 2009 2010 2011 20–44 1920 1954 1989 2023 2057 45–59 2101 2167 2234 2300 2366 60–74 881 896 911 926 941 75–84 625 645 666 686 707 over 85 768 814 859 905 951 Total 6294 6476 6658 6840 7022 According to Executive office of aging 3.65 of Hawaii residents between 18–44, 5.2% 45–59 , 4.75 for 60–74, 6.8% for 75–84 an 22.1%, for 85 year old receive help.
  3. 3. Market Segments in the Target Market The target market was defined by the steering committee as East Hawaii. This includes Hilo, North Hilo, Papaikou-Wailea, Honakaa, Paauhua, Pahoa-Kalapana, and Keaau-Mt. View. The data obtained from the U.S. Census revealed this market segment represents 58% of the Big Island of Hawaii residents. This percentage was used to estimate the number of people who need assistance in the target market. Examining this market area, there are two segments. The first is the market includes Hilo, North Hilo, Papaikou-Wailea, Keaau, and Pahoa: this represents 80% of the target market. The second market includes Honokaa and Paauhua: this represents the remaining 20% of the target market. 7200 7022 7000 6940 6800 6648 6600 6476 6400 6294 6200 6000 5800 2007 2008 2009 2010 2011 Patients Figure 1: Number of Persons who Need Assisted Care on the Island of Hawaii Trend 2007–2011 Market size in East Hawaii The results revealed that the need for assisted care will continue to increase in East Hawaii. By 2007, it is expected that 3651 residents will need assisted care and this will reach 4,073 by the year 2011. For the age group between 60 and above, 1,319 will need assistance and the need will grow to 1,507 in the next five years (Table 2). The market is growing and presents a great potential for home care businesses in East Hawaii (Table 2).
  4. 4. Table 2: Trend of Number of Persons Who Need Assisted Care by Age in the Target Market 2007– 2011 Age 2007 2008 2009 2010 2011 20–44 1114 1134 1153 1173 1193 45–59 1218 1257 1295 1334 1373 60–74 511 520 528 537 546 75–84 362 374 386 398 410 over 85 446 472 498 525 551 Total 3,651 3,756 3,862 3,967 4,073 5000 4000 3000 2000 1000 0 2007 2008 2009 2010 2011 Years 20-44 45-59 60-74 75-84 over 85 Figure 2: Trend of Number of Persons who Need Assisted Care in the Target Market Area Market size of Target Market In order to estimate the market size, we collected data on average charges per hour, average hours of service per patient, total hours of service provided in East Hawaii by current caregivers, unmet demand for CNA and Home Chore services, and average revenue per hour of services. In a survey published by the American Association of Retired Persons (AARP), it was reported that Census data shows that individuals aged 60+ represented 17% of Hawaii’s total population in 2000 and the percentage is expected to reach 25% by 2020 (AARP 2005). A total of 25% of the surveyed population indicated that they are extremely confident and/or very confident that they can afford home health care aide for 3 years (Sauer, 2006). This percentage was used to project total market demand for CNA and home chore services. The remainder will be covered by friends and family members or they can afford such services. In Hawaii, there are 14 certified caregiver services, seven provided information on the number of patients served and the hours of service in 2004. The average hours needed per patient is 785 (Private-Duty Heath Provider in the State of Hawaii). The range is between 480 and 1200 hours per patient. We used the lower end of the range, 480 per patient,
  5. 5. since the Big Island has a larger percentage of population relative to other islands that is Hawaiian, Filipino, or other ethnic minorities who traditionally take care of their elders. The Steering Committee provided the consultants with data on the existing caregivers in East Hawaii. It revealed that there are five small companies in East Hawaii. Four of them service 334 clients. We estimate that the total number of patients serviced by these five caregivers in East Hawaii will be 417 in 2006. This information was used to forecast demand already met for services. The met demand is forecasted by subtracting the total demand for caregivers in East Hawaii from the demand met by the exiting caregivers. In order to determine the market size in dollar cost for home chore services in Hawaii, information was obtained from two sources. MetLife Mature Market Institute, “the MetLife Market Survey of Nursing Home Care Cost” Sept 2005, reported that the average hourly rate for a home chore worker in Hawai‘i was $19 in 2004 and increased by 5% in 2005. The second source is provided by the steering committee. Similar results were obtained from current care providers in East Hawaii. The average hourly cost of home care in 2005 amounted to $21 for CNA and $17.00 for chore workers. We have used $19.00 per hour to calculate the unmet revenue in the target market. The results showed that the total demand for health aides’ services in East Hawaii amounted to 1,752,480 hours in 2007. This represents that 495 patients needed caregiver assistance. Of that, 25% need hired health aid professionals. The total demand for hired health aid will amount to 438,120 hours in 2007, of which 200,400 hours will be met by the existing health aid organizations. It is expected that the present trend will continue to grow in the next five years. The unmet demand is estimated at 237,120 hours, valued at $4,516,680, and requires 119 CNA and home chore services providers. This unmet need can be provided by CC-Coop East Hawaii, existing firms, and individuals who supplement their income by providing home services, as well as other new entries by other firms (). Table 3: Annual Hours and Number of Patients Who Need Assistance in the Target Market in East Hawaii 2007–2011 2007 2008 2009 2010 2011 Demand for heath aides in hours 1752480 1802880 1853760 1904160 1955040 Total demand for hired 438120 450720 463440 476040 488760 professionals in hours (25%) Met demand 200400 210420 220941 231988 243587 Unmet demand 237720 240300 242499 244052 245173 $4,516,68 $4,565,70 $4,607,48 $4,636,98 Value of unmet demand $4,658,278 0 0 1 7 As we indicated before, the unmet demand stems from increases in demand due to: 1) the diseases that occur more often in the elderly increase as the population ages; 2) medical advances which allow for better management of chronic and incurable diseases; 3) Medicare’s diagnosis-related groups (DRGs) which has resulted in earlier discharge of hospitalized patients; 4) patients and caregivers desire to avoid expensive end of life care; and 5) patients prefer to have care at home (Montauk, 1998). In addition, the growth in population in East Hawaii due migration has increased the demand of such a service.
  6. 6. The current unemployment rate in Hawaii, 3.2%, is the lowest in the nation, creating a shortage in labor that is willing and able to provide such services. The main limiting factor is the supply side of the equation. This limits the availability of professionals who are reliable and willing to do the task in the long run. Therefore, we recommend that the cooperative provide incentives that include training and licensing their employees, as well as fringe benefits. Quality control, training, certification and supervision of the workers will become a very important task. 600000 500000 400000 300000 200000 100000 0 2007 2008 2009 2010 2011 Met demand Unmet demand Figure 3: Demand for Home Aide Services in East Hawaii Market Potential of Hawaii Health Care Cooperative The following analysis is based on the assumptions that the cooperative will cover 14% of unmet demand. The cooperative will start with 40% caregivers,15% part-time and 35% casual. As the cooperative gets to be known in the community, more workers will be willing to join. Because of the health insurance and other fringe benefits, the retention among cooperative workers members is expected to be higher than the competition. We predict that with strong management, the cooperative will reach its members’ goals. Therefore, we recommend starting with highly skilled Executive Director (ED) and Registered Nurse (RN). This will be further explained in the human resource section. The projected caregivers, number of caretakers, and the cooperative share of unmet demand is present in Table 4. Table 4: Hours Coved by Caregivers Cooperative Year 1 Year 2 Year 3 Year 4 Year 5 HC 9,800 9,400 9,000 8,500 8,000 CNAs 22,800 24,200 25,500 26,900 28,400 Total Hours 32,600 33,600 34,500 35,400 36,400 Market Plan Products and Services
  7. 7. There are three categories of care providers: certified home care providers, licensed home care providers who are not Medicare certified, and non-licensed home care providers who are also not Medicare certified. The proposed cooperative will need to be certified and will provide adult care home services for those who live in East Hawaii. The following are detailed services that are recommended by the steering Committee: Home Chore worker/aide Home chore worker’s responsibilities includes chore services, laundry, leisure skills, housekeeping, meal preparation, transportation companionship and assistance with bathing. Certified Nursing Assistants (CNAs) The CNA’s responsibilities includes ambulation, medication reminders, changing incontinence supplies, assistance with dressing and undressing, eating/tube feeding, exercising, personal care (oral, hair, skin care), leisure skills, positioning, companionship assistance in transferring in/out of bed or wheelchair, changing bed linens, running errands (shopping, outings, doctor appointments), administer medications and treatments, monitor the status of patient care, report to and taking orders from the physician in charge Promotion and Market Access Word-of-mouth is a very effective way of advertising in small communities like East Hawaii, through personal referrals by physicians and clients, families, friends, neighbors, hospitals, church leaders and others in the community and in the health care industry. The following outlines a promotional plan: Selective Advertising: the most effective way of reaching potential customer is through physicians and individuals who process discharges from the hospital. Reaching these groups is very important to the success of the cooperative. They can be reached through clinics and hospitals. The advertising to these groups has to be selective advertising methods through personal visits and mail brochures. The objective of the market promotional plan needs to be designed to persuade these influential groups to recommend the cooperative. Promotion also should target various agencies that deal with the aging population such as the Executive Office on Aging and the Hawaii County Office of Aging. Selective advertising methods and personal visits will be very effective ways of selling the cooperative services. Mass media: Family members, neighbors and friends also play a major role of selecting the home care providers. This group can be reached thought mass media such as radio and newspaper. Inviting them to visit the cooperative office and discuss the cooperative services should be included in the promotional plan. The cooperative needs to develop promotional materials brochures, flyers, and folders to be handed to the customers, along with advertisements via direct mail, local newspaper ads, and TV/radio spots. Advertising Budget: We have budgeted $12,700 in the initial year for promotional and other advertising costs. Website: The cooperative needs to use modern technology in communicating its messages and its services by developing a website and a database, to reach both clientele and future members. The website will be feature the cooperative’s services to the clientele, charges, testimony of other patients, contact information, and frequently asked
  8. 8. questions. The web site will be developed in the first year of operation. The budget for website development is $10,000. Source of revenue The majority of revenue will come from private funds as well as some insurance companies that provide long term care insurance. The cooperative is intended to service individuals and health care organization as well. In the first year of operation the cooperative needs to concentrate on CNAs and home chore workers. Additional services could be added such as providing staffing service to other institutions such as hospices or even medical care equipment rentals. Strong sales and promotion will make the cooperative will reach it sales goals. Again there is a need for an experienced E.D. with a sales background to manage the cooperative. Pricing Strategy The cooperative will charge competitive prices in the first years of operation. In order to forecast the price in 2008, secondary information of the prices the competition is currently charging was used and CPI for medical care services is used to forecast the prices the competition will be charging for similar services. CPI indicates the 5% is the annual inflation on medical care services. In East Hawaii there are 5 home care providers. In 2005, they charged between $18.75 and $23.50 for CNA services. The average price was $21.35 per hour. For home chore workers, the charge in 2004–2005 was $15.50 to $20.00 per hour. The average was $17.40. After adjusting for annual inflation of 5%, we predict that the average price will be $24 for CNA and $20.00 for home chore providers. We have used $23.50 for CNA and $20 for Home Chore to predict the future income. The cooperative could later year develop a list of different services they provide and different prices. For simplicity we used no premium charges for evening and weekend. Distribution Strategy As indicated by the steering committee, their target market is East Hawaii, from Honokaa to Volcano and Puna. Hilo and Keaau represent most of the population in the area. Puna district is the most growing in term of population. In the early years the cooperative may not have enough staff and caregivers to cover the total target market; therefore, in the first stage of development the cooperative should concentrate its marketing effort on the Hilo, Keaau and Pahoa areas. In later years the cooperative can add other market segments. Competitive Analysis
  9. 9. The consultants surveyed the existing companies that provide home care service. There are five small companies currently operating. They are small in size and face a shortage in CNAs. They provide services similar to the proposed cooperative. The competitions obtain reimbursement for their work from Medicare and Medicaid and other private contribution. These programs are administrated by the Hawaii Executive Office on Aging and the Hawaii Department of Health. The average reimbursement amounted to $40 per visit. Other sources of competition come from future companies entering the market. The faster the cooperative starts, the faster it will develop name recognition and loyalty among its clientele. III. Technical Feasibility Facility The main facility is office space to accommodate a manager, a bookkeeper/secretary, a CNA manager, an RN nurse, a small garage, and storage; 1,000 square feet will be adequate for this operation. Equipment Office equipment, printer/fax/photocopier, office furniture, computers, and a refrigerator are needed. Human resources The present home health care workers do not currently enjoy adequate wages or benefits. The demand is expanding and there is a shortage of reliable workers in the field. Training members in getting certification and knowing about the philosophy of the cooperative is an important element for success. The following section is the human resources needed to manage the cooperative. We included human resources development as part of the expense. Member-Workers Care providers We project with good management the cooperative can provide 32,600 hours of home care in the first year and reach 36,400 hrs in the fifth year of operation. Wages and Benefits The calculation of the benefits was based on three types of health care providers’ employment. Full-time defined as those who average paid hours is 35 or more per week, part time those who average paid hours 20-34 hrs per week and casual employment who average less than 20 paid hrs per week. All three types are paid a rate that includes Medicare at the rate of 1.45%, workman’s compensation at the rate of 3.0% and FUTA at the rate of 0.23% in addition to the basic wages. Part-time workers (20-34 hrs) will cover an additional 50% of the cost of individual medical plan. Full time workers will cover an additional 6.2% for FICA and full coverage of medical health plan HMSA this includes medical, drug, vision, and dental (HMSA $220 per month). The CNA as a member- worker and is paid $11 per hour for 35 hours direct contact with care receivers and $6.50 per hour for 5 hours of travel (of the existing companies, four out five do not pay for driving between the clienteles and one company provides reduced wages during driving
  10. 10. between clienteles which they reported as $3.00 less). The Home care as a member- worker starting wages at $9.00 hour for 35 hours direct contact with care receiver and $6.50 per hour for five hours of travel Owner providers will also receive a patronage refund based on number of hours of work performed. These will put them above the existing wages and benefits paid by other home care providers Certified Nursing Assistants (CNAs) Thirteen full-time equivalent member-workers will be needed to start the CC-Coop, with a total of 22,800 hours. Then the cooperative needs conduct training and certification and increase the total hours of service to 28,400 by the end of the fifth year of operation. CNAs will report to the CNA manger. His/her key responsibility is to care for the elderly and/or disabled people. This includes helping people with their Activities of Daily Living (ADLs); and routine assistance such as bathing, dressing, eating, and trips to the rest room, hair care, and brushing teeth. The CNA will also consult with the RN if any problems arise. Home Chore Member Workers Six full-time equivalent member-workers will be needed to start the CC-Coop or 9,800 hours. The cooperative will need to conduct training and certification and decrease the hour of service to 8,000 by the end of the fifth year of operation. The Home Chore member-workers report directly to the RN. Their major responsibilities are personal care, medication, housekeeping, laundry, menu planning, meals, shopping, social arrangements, social activities, appointments, transportation, companionship, and other services. The steering committee has already started developing interest in the CC-Coop concept among home health care workers in our community. Forty-four names of home care workers have been provided by the Steering Committee as potential members of the cooperative. Among them are one RN nurse, one massage therapist, one hospice nurse and one care provider. This will provide an adequate supply of services during the first year of the proposed operation. Their names and addresses will be used to develop a database which can be used to bring people together and provide a further commitment to the cooperative. In summary, the cooperative need to provide 32,600 hours of services in the first year of operation and continue to increase these hours to 36,400 hours by the end of the fifth year of operation. The cooperative needs train member-owners for the next three years of operation. We have budgeted $22,500 for professional training and certification. This will help to increase their income and provide quality service for the patients. 3.3.2. Management The Executive Director (ED) The ED will be key personnel for the success of the cooperative. Therefore a detailed description of job specification is given in this section. The Executive Director reports directly to the Board of Directors. The Director serves as a leader to do outreach/selling, makes assessments of future clientele, recruits working members, achieves the cooperative objectives and goals, and insures a sense of common purpose among all members in a way that builds respect and recognition.
  11. 11. Full-time CNA Manager/RN The CNA manager reports to the Executive Director. His/her main task is developing nursing policies and procedures, handle patient admissions, application processing, assessment and monitoring, provide employee assessments and feedback for field staff and clients, coordinates employee and client scheduling and quality matching, and working with clients’ doctors, families, and the assigned Staffing Coordinator/CSR to create care plans, and also ensures that the plans are being carried out. CNA manager instructs home helpers and CNAs, provides Skilled Nursing Assistance, observes and monitors patient care, instructs and supervises Home Helpers CNAs. Provides hands-on skilled nursing care, administers medications and treatments, monitors the status of patient care, reports to and takes orders from the physician in charge. Membership and Employee Training and Development One of the most important elements of the success of the service organizations is to provide reliable and excellent services to their clientele. The cooperative needs to develop complete and extensive training to member-workers, and staff. This includes material on the job descriptions and what is expected from each member in the organization. Managerial staff (ED and RN) training toward how to develop strategic alliances with referral sources like doctors, discharge planners, Hilo hospital, occupational therapists, and other care providers. IV. Financial Feasibility Capital requirements We have presented in the following section an analysis of the key factors in the financial success of the CC-Coop East Hawaii and provide suggestions below on how the project might be financed. Capital Expenditure The following equipment will be purchased for the use of the CC-Coop East Hawaii: an office, two computers, an all-one one printer/copier and fax machine, a TV/VCR/DVD for training, telephones and cell phones for the staff, office furniture (chairs, desks, filing cabinets, etc.), a refrigerator, and website development. The estimated total fixed cost amounted to $28,000. The list and costs are provided in Table 5. Table 5: Capital Expenditure Item amount price per unit Total Office Equipments 2 5,000 10,000 Office Furniture 2 2,500 5,000 Website development 1 10,000 10,000 Software-electronic records. 1 3,000 3,000 Total Capital Expenditure 28,000 Investment and Cash Flow Projection
  12. 12. In order to determine the amount of cash needed to start the operation, it was assumed the following: • All capital assets will be purchased at the beginning of operation. • In first two months, the board of director will rent office, pay utilities, office expenses and recruiting the ED . • After the ED is hired she/he will recruit qualified RN/office manager, this processes will take additional 2 month. • The office manager will hire and train the CNAs and HC. We have budgeted $5,000 for training and certification in the ramp-up period. • The 6th month will be the first month of operation and the cooperative projected to start by providing 815 hours per month for first 3 months, then will increase to 1350 hours by the end of the 6th then it reaches full operation in the end of the 7th month by providing 2717 hrs of services. • Last month of the ramp-up period revenue is accounted as account receivable and will be entered in the 1st year of operation as part of the cooperative assets. • No services on debts is due during the ramp-up period
  13. 13. Table 6: Pro-Forma Cash Flow Statement for the Ramp Year Total Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Operating Receipts for services 201355 18305 18305 18305 24407 30508 30508 61017 Operating Expenses Wages/salaries and fringe Executive Director 66,672 7408 7408 7408 7408 7408 7408 7408 7408 7408 7408 Office Manager 51,336 6417 6417 6417 6417 6417 6417 6417 6417 C.N.A./ Home chore 124,163 11288 11288 11288 15050 18813 18813 37625 Workman comp 7,487 222 222 415 753 753 753 866 979 979 1544 Staff development 5,000 5000 mileage 8,085 735 735 735 980 1225 1225 2450 Advertising 10,000 1000 4000 5000 Rent 20,100 1675 1675 1675 1675 1675 1675 1675 1675 1675 1675 1675 1675 Utilities 4,300 200 300 300 300 400 400 400 400 400 400 400 400 legal services 5,000 5000 Accounting services 2,500 2500 Office expenses 3,000 100 300 300 300 250 250 250 250 250 250 250 250 Total Operating Expenses 307643 1975 3275 13905 14905 24065 33926 28926 28926 33046 37167 37167 57769 Capital Expenditure Office furniture 5,000 5000 Website development 10,000 10000 Office Equipment 7,500 7500 Refrigerator 1,500 1500 Generator 1,000 1000 Software 3,000 1000 1000 1000 Total Capital expenditure 28,000 13500 1000 1000 1500 10000 Total Cash Outflow 335,643 15,475 4,275 14,905 14,905 24,065 35,426 28,926 28,926 33,046 37,167 37,167 67,769 Ending Balance (134,288) (15,475) (4,275) (14,905) (14,905) (24,065) (17,121) (10,621) (10,621) (8,640) (6,658) (6,658) (6,752) Accumulated debts (15475) (19750) (34655) (49560) (73625) (90746) (101367) (111988) (120627) (127286) (133944) (140696) Interest charges (6,798) (1,238) (314) (994) (894) (1,283) (799) (425) (354) (230) (133) (89) (45)
  14. 14. Profitability Analysis in the Next Five Years of Operation At the present time there is an unmet demand and growing population in the target market. The following assumptions were made to calculate the market size for the proposed cooperative. The main limitation will be worker-owner availability which will be addressed later. Assumptions: • A 12 months ramp-up time is needed for hiring executive director and RN, and developing the market plan. • The cooperative will meet up to 32,600 hrs in the first year and reach 36,400 hrs in the fifth year of operation. • 4% inflation rate annually. • 2% wages and salaries increase annually. • The collection rate is 99%. • The cooperative will start with the ratio between customers serviced by CNA and Home Chores worker being 70:30. The ratio will be change as more workers/members get certified. The ratio of CNA to Home Chore will increase by 2% annually until it reaches 80:20 by the fifth year of operation. • Interest rate is 8%, the same as the present interest in 2006 for financing fixed assets. • The charges for CNAs and Home Care Workers are $23.50 an hour and $20.00 respectively. A minimum 2 hours of service is required. • No price premium for evening or weekends is accounted for in this plan. This provides a more conservative approach on revenue but these issues should be dealt with in the pricing strategy as part of business plan. • Advertising $10,000 annually, plus an additional of 0.25% of the total gross revenue in the first 3 years of operation. $5,000 plus an additional 0.25% in years after. • Mileage cost is based on 20 miles round trip and only 20% (the mileage will be given for health care workers who provide services outside Hilo and Keaau. This market segment represents 20% of the total target market). The travel is paid by the cooperative. The payment to the worker is $0.448 per mile, the same as the federal rate. • The average hourly wage paid is $9.00 for home chore workers. • The average hourly wages paid to CNAs is $11. • Due to traveling, care provider workers will perform 35 hours and get paid for 35 regular hours and 5 hours at $6.50 • The health insurance, sick leave, paid vacation and other fringe benefits are calculated at 30% for full time workers only. Part-time and non member will not received fringe benefits. • It assumed the cooperative start with 40% the labor force are full-time workers (35 hrs and higher), 15% part-time (20-35 hrs/week) and 45% causal workers (less than 20hrs/week). The ratio of full-time to part-time will increase as the cooperative becomes established. • Capital expenditure depreciates at 5 years period. • Workers’ Compensation at 3%. • The majority of patients will pay from their own savings for their Home Chore and CNA services in advance. Limited income will comes from Medicare and Medicaid
  15. 15. patients in the first five years of operation. Therefore we budgeted for one month account receivable. The uses of credit cards can substitute the cash. • The cooperative will charge 23.50 for CNAs services and $20.00 for HC • Patients will be used to encourage early payment; the sale is discounted by 1% to adjust for sales discount. In order to come up with an accurate estimate of the profitably of the business, we applied all net income to the payment of the loan; however, we provide the reader with a cash flow statement. The net losses in the first year amounted to $31,900 and the CC- Coop will start to show profits in the end 3rd year of operation. (Table 8) Table 7: Pro-Forma Income Statement CC-Coop at East Hawaii in the Next Five Years of Operation Year 1 Year 2 Year 3 Year 4 Year 5 Net Service Revenue Revenue from CNA 536,500 590,500 648,900 712,000 780,200 Revenue from HC 195,700 195,400 194,000 191,400 187,300 Total Revenue 732,200 785,900 842,900 903,400 967,500 Variable Costs CNA and HC Wages and Benefits 451,500 474,900 499,200 524,300 550,300 Mileage 10,200 10,900 11,700 12,500 13,300 Workers Comp 18,500 19,300 20,200 21,000 21,900 Total Variable Costs 480,200 505,200 531,000 557,800 585,500 Gross Margin 251,900 280,700 311,900 345,600 381,900 Fixed Costs Salary and Benefits 166,000 169,300 172,700 176,200 179,700 Liability Insurance 36,000 37,400 38,900 40,500 42,100 Rent 20,100 20,900 21,700 22,600 23,500 Staff Development 7,500 7,500 7,500 0 0 Accounting Service 5,000 5,200 5,400 5,600 5,800 Office Expenses 3,000 3,100 3,200 3,400 3,500 Miscellaneous Expense 3,000 3,100 3,200 3,400 3,500 Advertising 11,800 12,000 7,100 7,300 7,400 Service Contracts 2,000 2,100 2,200 2,200 2,300 Legal Service 3,000 3,100 3,200 3,400 3,500 Util./Tel./Internet Connection 4,800 5,000 5,200 5,400 5,600 Depreciation 5,600 5,600 5,600 5,600 5,600 Total Fixed Costs 267,800 274,300 276,100 275,500 282,600 Earning Before Interest and Taxes -15,900 6,400 35,800 70,100 99,300 Interest Cost 16,000 16,000 16,000 14,000 9,000 Net Income -31,900 -9,600 19,800 56,100 90,300
  16. 16. 250,000 200,000 150,000 100,000 50,000 0 1st year 2nd year 3rd year 4th year 5th year -50,000 -100,000 1st year 2nd year 3rd year 4th year 5th year Figure 4 Project Profit or loss in the Next 5 Years The following assumptions are used to come with balance sheet: • The account receivable represents one month of the total annual revenue. • Accrual methods is used to estimate of the profitably of the business, we applied all net income to the payment of the loan. • Depreciation on capital expenses is 5 years. • For simplicity, no interest is paid on saving accounts. • One month collectable rate is used to estimate the account receivable. Table 8: Pro-Forma Balance Sheet for the CC-Coop East Hawaii Rump-up Year 1 Year 2 Year 3 Year 4 Year 5 year Cash 117,400 91,500 83,800 79,900 76,000 71,900 A/R 61,000 61,000 65,500 70,200 75,300 80,600 Total Current Assets 178,400 152,500 149,300 150,100 151,300 152,500 Net Fixed Assets 28,000 22,400 16,800 11,200 5,600 0 Total Assets 206,400 174,900 166,100 161,300 156,900 152,500 Loans 200,000 200,000 200,000 174,600 112,900 17,000 Equity Investment 6,400 6,800 7,600 8,400 9,600 10,800 Retained Earnings 0 -31,900 -41,500 -21,700 34,400 Net Profit -31,900 -9,600 19,800 56,100 90,300 Total Equity 6,400 -25,100 -33,900 -13,300 44,000 135,500 Liabilities and Net Worth 206,400 174,900 166,100 161,300 156,900 152,500
  17. 17. Cash Flow Projection for the First Five years of Operation The cash flow is calculated base in the following assumptions: • Interest rate is 8% • Equal principle • Length of the loan is 5 ½ years In the start-up year, the cooperative needs $200,000. The cooperative will pay only interest in the first 2 years of operation, then start paying principle and interest in the third year and the loan could be paid off by the fourth year of operation (Table 10). Table 9: Cash Flow Statement for the Next Five Years of Operation 2007 2008 2009 2010 2011 2012 Beginning Balance 0 4,295 39,912 47,712 95,812 186,112 Cash from Services 140,338 732,200 785,900 842,900 903,400 967,500 From account receivable 0 61,017 61,000 65,500 70,200 75,300 Membership 6400 800 800 800 800 From Loan 200,000 Total cash in Flow 346,738 798,312 887,612 956,912 1,070,21 1,228,912 2 Cash Expenses 335,643 742,400 773,900 801,500 827,700 862,500 Interest on loan 6,800 16,000 16,000 9,600 6,400 3,200 loan Payment 50,000 50,000 50,000 50,000 Total Cash Disbursements 342,443 758,400 839,900 861,100 884,100 915,700 Cash Balance 4,295 39,912 47,712 95,812 186,112 313,212 The cooperative will be profitable in the third year of operation and will continue to be profitable years after. The cooperative main bottle nick is hiring care providers that provide quality services and meet the existing demand. Therefore, there is a need to develop recruiting and training program. At the beginning, workers do not have to be members as but they can be recruited later as members. The population is growing at a rate of 3.2% in East Hawaii, the population is getting older, and there are more working families who require respite services. The current care workers are not reliable and the drop rate is higher due to inadequate pay and benefits. The demographic characteristics in East Hawaii have been changing as more people from the Mainland are moving into the target market. Given that the demand for care services is growing at a faster rate, the main problem is to provide the service at profit. From the feasibility analysis, we conclude that the CC-Coop can be profitable and it is feasible to achieve the goals that need to be set by the steering committee. Based on the above information we further examined the sensitivity of the profit to the change of some of the basic assumptions. These different scenarios are presented in the feasibility analysis. V. Some Example of Sensitivity Analysis In order to examine how sensitive the results are to various assumptions, the consultants changed one assumption and held all other constants. However, we developed a new interactive economic feasibility model that will help decision makers to change all or some of these variables and come up with different results. The figures presented in the
  18. 18. following tables represent net profit or loss the cooperative may incur given different assumptions. More details about profit and loss are presented in Appendix 1. Sensitivity to Change of change on Sales If the sales are changed by 1%, the average net income changes by about $8,900 annually. In all projections, the cooperative shows positive profit in the second or the third year of operation. An aggressive market plan to recruit and services more patients will help CC-Coop to reach its objective in short time. The cooperative can achieve such objective with good leadership. (Table 11) Table 10: Sensitivity to changes in sales Year 1 Year 2 Year 3 Year 4 Year 5 Annual % Averag changes e Decreased by 1% -31900 -9600 19800 56100 90300 24,940 Decreased by 2% -39300 -17500 11300 46300 79000 15,960 8,980 Decreased by 3% -46600 -25500 2800 36500 67800 7,000 8,960 Decreased by 4% -54000 -33400 -5700 26800 56600 -1,940 8,940 Decreased by 5% -61400 -41300 -14200 17700 46200 -10,600 8,660 100000 80000 60000 40000 20000 0 Year 1 Year 2 Year 3 Year 4 Year 5 -20000 -40000 -60000 -80000 Decreased by 1% Decreased by 2% Decreased by 3% Decreased by 4% Decreased by 5% Figure 5: Sensitivity to changes in sales Sensitivity to Change of the Charges for CNA We forecasted that the CC-Coop is planned to start in year 2008, therefore we used $23.50 per hour to calculate potential income. We changed the rate from by 5% and 10% in both directions.
  19. 19. If the cooperative is able to get name recognition and is able to differentiate its services, the profitability will increase by $7061 annually for each 1% increase in the charges and vice versa without a decrease in the number of customers serviced. Again the cooperative can reach such goal with aggressive market plan that gears toward quality, trustworthy, and reliable services. Table 11: Sensitivity to Change of the Hourly Charges for CNA Services Year 1 Year 2 Year 3 Year 4 Year 5 Annual 0ne % Averag change e CNA Avg. Bill per Hour -10% -85400 -68500 -46900 -22500 -1700 -45,000 CNA Avg. Bill per Hour -5% -58600 -39100 -12600 18600 46300 -9,080 -7,184 CNA Avg. Bill per Hour 0% -31900 -9600 19800 56100 90300 24,940 -6,804 CNA Avg. Bill per Hour 5% -5100 19900 54300 96400 137200 60,540 -7,120 CNA Avg. Bill per Hour 10% 21600 51500 91300 139600 177100 96,220 -7,136 200000 150000 100000 50000 0 Year 1 Year 2 Year 3 Year 4 Year 5 -50000 -100000 CNA Avg. Bill per Hour -10% CNA Avg. Bill per Hour -5% CNA Avg. Bill per Hour 0% CNA Avg. Bill per Hour 5% CNA Avg. Bill per Hour 10% Figure 6: Sensitivity to Change of the Charges for CNA
  20. 20. IX Source of Information 1. Center for Medicare and Medicaid Services. (2006). 2. Coraziini. (2003). How state-funded home care programs respond to changes in medicare home health care: resource allocation decisions on the front line. Health Services Research. 38(5), 1263-1282. 3. Frederic H. Decker, et el 2003 “Survey of Nursing Staff Vacancy and Turnover in Nursing Homes Health Services Research and Evaluation” American Health Care” American Healthcare Association February 12, 2003 4. Department of Health and Human Services (DHHS). (2005). Federal Register. Center for Medicare and Medicaid Services. Medicare program: Home Health Prospective Payment System Rate Update for calendar year 2006; final rule. 5. DHHS. (2005). Medicaid at a Glance-2005. 6. DHHS. (2002). Medicaid Provider Manual. Home Health Services. 7. Entrepreneur Magazine in 2006 January Issue. “Home Helpers Inc. Number one Senior Care Franchise in North America” 8. Executive Office of Aging, “Profile of Hawaii’s Older Adults and Their Caregivers”, State of Hawaii Department of Health, Jan 2006 9. Fermazin, M., Canady, M., Milmine, P., Perron, J., and Cooper, L. (2004). Home health compare: website offers crucial information to consumers and professionals. Lippincott’s Case Management. 9(2), 89-95. 10. Island of Hawaii 2000 Census Tracts, Office of Planning, Department of Business, Economic Development and Tourism, State of Hawaii 11. Levine, S., Boal, J., Boling, P. (2003). Home Care. JAMA. 290(9), 1203-1207. 12. McCall, N., Komisar, H., Petersons, A., and Moore, S. (2001). Medicare home health before and after the BBA. Health Affairs. 20(3), 189-198. 13. The MetLife “Market Survey on Nursing Home and Home Care Costs”, Sept. 2005 Metropolitan Life Insurance Company New York, NY. 14. Moon, S., and Shin, J. (2006). Health care utilization among Medicare-Medicaid dual eligible: a count data analysis. BMC Public Health.6(88), 1-10. 15. Montauk, S. (1998). Home Health Care. American Family Physician. 58(7), 1608-1616. 16. Murkofsky, R. (2003). Length of stay in home care before and after the 1997 balanced budget act. JAMA. 289(21), 2841-2848.
  21. 21. 17. Sauer, J. Financing long term care in Hawaii: a survey of residents 18 and older. AARP. Mar, 1-16. 18. State of Hawaii Department of Health, Report to the Twenty-third Legislature State of Hawaii Regular Session of 2006. Department of Health and Department of Human Service, Jan 2006 19. State of Hawaii Primary Care Needs Assessment Data Book 2005, Family Health Services Division, Hawaii Department of Health, Dec.2005 20. Stevens, L., Lynm, C., Glass, R. (2002). Home Health Care. JAMA. 287(16), 2168. 21. Tinetti, M., Baker, D., Gallo, W., Nanda, A., Charpentier, P., and O’Leary, J. (2002). Evaluation of restorative care vs usual care for older adults receiving an acute episode of home care. JAMA. 287(16), 2098-2105. 22. US Labor, (June 2006) “Consumer Price Index Summary Report” June 2006, USD of Labor, Wash. D.C. Home Care Cooperative Production coefficients are estimated based on the information provided by the growers surveyed and validated with researchers at CTAHR and previous publications. These coefficients are kept constant in estimating the production function equation. The costs of these coefficients are variable; they vary with size and inflation rate. The program allows individuals to enter their values in an input sheet. The program enters these values in the production function and calculates their total cost. These variables—such as labor cost per plant, fertilizer cost per plant, chemical cost per plant, plants per SF, packaging material cost per plant, pot cost per plant, and media cost per plant, etc.—are given in Table 1. Other fixed costs such as establishment cost, deprecation, administrative salaries are treated as fixed costs but vary with the given size of the operation. The model was tested for its accuracy by comparing results obtained from the model to existing farm financial data. Local growers were also trained on how to use such model in financial management and other investment decisions.
  22. 22. Table 1: Physical Inputs Needed to Calculate the Financial Feasibility
  23. 23. III. Financial Feasibility Capitalization Cost The following assumptions were made: Price of inputs remained constant Amount used per acre is linear related to the size Simple interest rate is used by the end of the accounting period Jump start of operation is one year to complete the development No payment is required in the first year of operation 100% of the project is financed through financial institutions Table 2 shows the capitalization cost for a 4 acre anthurium farm. Individuals can calculate the capitalization cost for different sizes of operation. The total establishment cost for 4 acres of anthuriums amounted to about $640,000, $160,000 per acre and $3.68 per square foot. (Individual may use their own saving or other financing means; for more accurate analysis all financing is assume done by financial institutions)
  24. 24. Table 2: Capitalization Cost for Four Acres Anthurium Farm Per SF Per Acre Farm Total Land Clearing 0.06 2,500 10,000 Surveying 0.03 1,200 4,600 Cinder 1.15 50,000 200,000 Cinder Labor 0.02 800 3,100 Irrigation System 0.07 3,000 12,000 Irrigation System Labor 0 200 800 Shadecloth 2.32 101,000 404,000 Shadehouse Frame Labor 0.01 400 1,400 Shadehouse Panels Labor 0.02 700 2,900 Shadehouse Hole Labor 0.01 200 900 Capitalization Total 3.68 159,900 639,800 Profitability Analysis in the Next Five Years of Operation The following assumptions were made:
  25. 25. Average farm size of 4 acres was used (Average farm size estimated from information provided by Statistics of Hawaiian Agriculture 2003) Zero investment from the growers. 3% inflation rate annually. Wages and salaries increase 3% annually. Interest rate is 8%, the same as the present interest in 2006 for financing fixed assets. The average hourly wage paid is $8.50 for unskilled workers The health insurance, sick leave, paid vacation and other fringe benefits are calculated at 15% Capital expenditure depreciates at 10 years period. Workers’ Compensation at 5%. No production in the first year of operation and 71% in the second year, 86% in the third year and full production will be reached in the 4th year of operation. In the fifth year, 14% of the plants are replaced and 1% percent cinder will be lost during replacing there plants. The same replacements operation will continue years after. Table 3 lists the annual costs and return associated with producing cut anthurium for a 4 acre farm. The gross sales amounted to $372,700 in the fifth year of operation. The total variable cost amounted to $97,800. The gross margin amounted to $274,800 that pays for overhead cost. The net income from operation amounted to $39,400. The breakeven price is 0.997 per stem. Table 3: Profit and loss in the First Five Years of operation
  26. 26. Items Year 1 Year 2 Year 3 Year 4 Year 5 Per Stem SF acre Net Sales 0 281,600 351,300 420,700 372,700 93,200 1.065 2.142 Total Revenue 0 281,600 351,300 420,700 372,700 93,200 1.065 2.142 Variable Costs Prod. Wages & 48,900 50,300 51,900 53,400 55,000 13,800 0.157 0.316 benefits Post-Harvest 0 11,900 14,800 17,700 18,300 4,600 0.052 0.105 Wages &Benefits Workers’ Comp 3,800 4,500 4,800 5,100 5,200 1,300 0.015 0.03 Chemical 600 600 700 700 700 200 0.002 0.004 Material Fertilizer 3,600 3,700 3,800 3,900 4,100 1,000 0.012 0.023 Liming 1,200 1,200 1,300 1,300 1,300 300 0.004 0.008 Insect & Disease 2,700 2,700 2,800 2,900 3,000 800 0.009 0.017 Control Material Cinder 0 0 0 0 3,200 800 0.009 0.018 Sanitation 200 200 300 300 300 100 0.001 0.002 Harvesting 0 100 200 200 200 100 0.001 0.001 Material/Boxes Fuel 2,300 4,100 4,600 5,100 5,200 1,300 0.015 0.03 Water 1,200 1,200 1,300 1,300 1,400 300 0.004 0.008 Variable Costs 64,500 80,800 86,300 91,900 97,800 24,500 0.279 0.562 Gross Margin -64,500 200,800 264,900 328,800 274,800 68,700 0.785 1.58
  27. 27. Proforma Balance Sheet The following assumptions are used to come up with the proforma balance sheet: For simplicity we assumed the initial equity is zero The account receivable represents one month of the total annual revenue. Accrual method is used to estimate of the profitably of the business. We applied all net income to the payment of the loan. Depreciation on capital expenses is 10 years. For simplicity, no interest is paid on saving accounts. To establish four acres anthurium farm a loan of $1.385 million is needed; this include establishing cost and running the farm in initial year. No revenue is generated the first year of operation. Table 4: Proforma Balance Sheet for Four Acres Farms Balance Sheet Initial year Year 1 Year 2 Year 3 Year 4 Year 5 Cash 0 1,000 1,000 1,000 1,000 5,000 A/R 0 0 23,500 29,300 35,100 31,100 Total Current Assets 0 1,000 24,500 30,300 36,100 36,100 Net Fixed Assets 1,384,800 1,293,300 1,201,800 1,110,300 1,018,900 927,400 Total Assets 1,384,800 1,294,300 1,226,300 1,140,600 1,054,900 963,400
  28. 28. Loans 1,384,800 1,595,500 1,581,200 1,484,900 1,318,100 1,187,200 Retained Earnings -301,200 -354,900 -344,300 -263,200 Net Profit/Net loss 0 -301,200 -53,700 10,600 81,100 39,400 Total Equity 0 -301,200 -354,900 -344,300 -263,200 -223,800 Liab. and Net Worth 1,384,800 1,294,300 1,226,300 1,140,600 1,054,900 963,400 4. Cash Flow Projection for the First Five years of Operation The cash flow is calculated base in the following assumptions: Interest rate is 8% Equal principle Account Receivable is one month of the sales Collection is 100% of the sales Positive cash flow accrues in the fourth year of operations and will continue years after. The program helps management to conduct various analyses in order to adjust for its special situation regarding cash flow. Such as delaying some purchases, borrowing or paying debts etc.
  29. 29. Table 5: Cash Flow Projection Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash from Sales 0 0 258,100 322,000 385,600 341,600 From A.R. 0 23,500 29,300 35,100 From Loan 1,384,800 0 0 0 0 0 Total Cash 1,384,800 0 258,100 345,500 414,900 376,700 Operating Expenses 0 98,900 116,100 122,700 129,300 136,300 Loan Principle 173,100 173,100 173,100 173,100 173,100 Interest 96,900 83,100 69,200 55,400 41,500 Total Cash Disburs. 0 368,900 372,300 365,000 357,800 351,000 Cash Balance 1,384,800 -368,900 -114,200 -19,600 57,100 25,700 Loan Analysis of Anthurium Farm Operations In order to assess the financial feasibility from the lending institution’s and investor’s point view, the model also provides additional financial analysis. These are debts service, collateral, and cash coverage, outstanding loan and collateral coverage. Income before interest, taxes, and deprecation was used. Debt service cost (interest charges) is calculated at given interest rate (8.00%); cash conversion ratio is calculated by dividing EBITDA by debt service. The collateral used here is 75% of the account receivable of the
  30. 30. pervious year’s earnings. (It is expected that the financial institution will require the investor to come up with 30% equity to finance such venture.) Table 6: Loan Analysis
  31. 31. Item Year 1 Year 2 Year 3 Year 4 Year 5 EBITDA -98,900 165,400 228,600 291,400 236,300 Debt Service 234,900 234,900 234,900 234,900 234,900 Cash Coverage -0.42 0.7 0.97
  32. 32. Payoff period for Four Acre Anthurium Operation
  33. 33. Payoff Period Year 1 Year 2 Year 3 Year 4 Year 5 Loan Due, Beginning 1,384,800 1,595,500 1,581,200 1,484,900 1,318,100 Interest 110,800 127,600 126,500 118,800 105,400 Revenue 0 281,600 351,300
  34. 34. Sensitivity Analysis Solution Sensitivity to the Change in the price: The interactive model can be used to conduct sensitivity analysis to key important variables that affect the profitability of the business. Prices and number of flowers produced will affect the gross revenue and total profit. One percent change in the price of flowers resulted in an average increase in the profit by $4,600. A change of 0.01 in the equity ratio resulted in an average increase in the profit by $1,500. Many other variables can be changed and results can be analyzed with fast and accurate results. All of the variables which are listed in the entry data. Year 1 Year 2 Year 3 Year 4 Year 5 Price per Stem -20% -301,200 -110,000 -63,800 -13,000 -52,500 Price per Stem -10% -301,200 -81,900 -26,600 34,000 -6,600 Price per Stem 0% -301,200 -53,700 10,600 81,100 39,400 Price per Stem 10% -301,200 -25,600 47,800 128,200 85,400 Price per Stem 20% -301,200 2,600 85,000 175,200 131,400 Year 1 Year 2 Year 3 Year 4 Year 5 Equity Ratio 0 -301,200 -53,700 10,600 81,100 39,400
  35. 35. Equity Ratio 0.1 -290,100 -41,700 23,500 95,100 54,500 Equity Ratio 0.2 -279,000 -29,800 36,400 109,000 69,600 Equity Ratio 0.3 -267,900 -17,800 49,400 123,000 84,600 Equity Ratio 0.4 -256,900 -5,900 62,300 136,900 99,700 VI. Conclusion Finally, the software for cost of production and financial feasibility for cut anthuriums has been developed. It is located at the website,, and can be modified to include other horticultural commodities. This will provide a convenient and fast method for estimating the cost of production. The growers need to be trained to use this site as part of a farm management training program that can be conducted statewide. REFERENCES Hawaii Agricultural Statistics Service. 2003. Statistics of Hawaii Agriculture 2003, Hawaii Department of Agriculture, Honolulu, HI.