Bicyle industry

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Setting up a bicycle manufacturing company, planning its resources and marketing strategy

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Bicyle industry

  1. 1. Entorno Cycles We are passionate about kids & environment25th July, 2012 1
  2. 2. Executive SummaryIndian Bicycle Industry is very large with India producing almost 10% of total Bicycleproduction of the world and exporting around $200 million of it. Out of the complete sales ofbicycle, around 13% is constituted by the kids segment with CAGR (Compounded AnnualGrowth Rate) of around 20%. With many brands present in the bicycle industry, a newapproach towards marketing is needed and also to penetrate competitive market costcompetitiveness is required. The kids segment of bicycle is mostly unorganized with very fewcompanies focussing on this quickly growing and lucrative section. Most of the parents whohave higher purchasing power and less time to spend with their kids are mostly lookingtowards buying things online. This provides a good opportunity to provide various designs ofhi quality kids bicycles online for the parents to buy and free them off of going to the marketthemselves as free home delivery is provided by the company. Also since many of the kidsare very choosy and would like to customize the cycle with various models, designs and alsodifferent accessories, the online portal will provide a platform for the various people to comeand select their unique cycle in terms of colour and accessories.Currently in the marketplace, a prospective customer usually goes out on their own to huntfor a bicycle either for themselves or for the kids. This usually involves dedicating some timeand energy along with the money spent in transportation to and from the market and homerespectively. Also transportation of the cycle to home is also a major problem. But with homedelivery of the cycle along with customization of accessories and an option of Cash OnDelivery with almost the same price as that with the retailer, this service provides anadditional value that customer can drive out of the company.Although the online e-portal is a good way to enter the marketplace, the bulk sales in thebeginning will have to be made by the retailer’s dealer network where both a discount and acredit period will have to be provided to the retailer to promote the sales. But in the long runit not only creates a valuable dealer network but also a loyal direct sales network with benefitof both the models. 2
  3. 3. ContentsBICYCLE INDUSTRY .................................................................................................................................. 5 Indian Bicycle Industry ........................................................................................................................ 5 Global Bicycle Industry........................................................................................................................ 6 Segments within the Indian Bicycle Industry ...................................................................................... 8 Kids Segment................................................................................................................................... 9 Indian Bicycle Industry - Manufacturing .......................................................................................... 10 Government policies ......................................................................................................................... 11 PORTER’S ANALYSIS FOR BICYCLE INDUSTRY.................................................................................... 12COMPANY DETAILS ............................................................................................................................... 14 Mission .............................................................................................................................................. 14 Vision................................................................................................................................................. 14 Keys to Success ................................................................................................................................. 14 Legal Status ....................................................................................................................................... 14 About Promoters .............................................................................................................................. 15MARKET ANALYSIS ................................................................................................................................ 15 SWOT ANALYSIS ................................................................................................................................ 15 Competitor Analysis .......................................................................................................................... 19 Market Share of Major players ........................................................................................................ 20 Sales over the years .......................................................................................................................... 21 Survey Analysis.................................................................................................................................. 21 Purpose of visit to Kids Bicycle Store ............................................................................................... 22 USPs Determining Purchase Decision ............................................................................................... 22 Preferred Amount to be spend on Kid’s Bicycle ............................................................................... 23 Customization in Bicycles.................................................................................................................. 23 Online Purchase of Bicycles .............................................................................................................. 24OPERATIONS ......................................................................................................................................... 25 Technical Requirements.................................................................................................................... 25 The Fixed costs for manufacturing and operations would include: .............................................. 25 The Variable costs for manufacturing and operations include:..................................................... 26 Operations Strategy ........................................................................................................................... 26 Through retailers ........................................................................................................................... 26 E-Portal ......................................................................................................................................... 26 The model describes the process of billing the customer online................................................... 27 3
  4. 4. Flow of supply chain:........................................................................................................................ 27MARKETING STRATEGY ......................................................................................................................... 28 Our Marketing Strategy: ................................................................................................................... 28 Branding: ........................................................................................................................................... 29 Logo ............................................................................................................................................... 29 Marketing Mix: .................................................................................................................................. 29 Product:......................................................................................................................................... 29 Price: ............................................................................................................................................. 30 Place: ............................................................................................................................................. 30 Promotion: .................................................................................................................................... 30FINANCIAL PROJECTIONS ...................................................................................................................... 34 Assumptions & Facts Used in Financial Projections: ........................................................................ 34 Analysis of Balance Sheet (Normal Scenario) ................................................................................... 35 Application of Funds: ................................................................................................................... 35 Sources of Funds: .......................................................................................................................... 36 Analysis of Income Statement (Normal Scenario)............................................................................ 37 Cash Flow Statement ........................................................................................................................ 39 BREAKEVEN ANALYSIS ....................................................................................................................... 40 SCENARIO ANALYSIS ......................................................................................................................... 41 Scenario 1...................................................................................................................................... 41 Scenario 2...................................................................................................................................... 42 Scenario 3...................................................................................................................................... 42 FINANCIAL RATIO ANALYSIS .............................................................................................................. 43 Liquidity Ratios .............................................................................................................................. 43 Profitability Ratios ......................................................................................................................... 45 WORKING CAPITAL FINANCING ........................................................................................................ 46ANNEXURES .......................................................................................................................................... 47 4
  5. 5. BICYCLE INDUSTRYIndian Bicycle IndustryThe size of the Indian bicycle industry stands at US $1.2 billion. The number of units(finished bicycles including all segments) produced is around 12 million, according to anindustry source. Of this, the number of units exported annually is about two to three million,which points to a huge demand in the domestic market. According to figures from theEngineering Exports Promotion Council, in 2007-08 India exported bicycles and componentsworth US $185.42 million.The market for the premium or the lifestyle bikes targeted towards the lifestyle consumer isjust about emerging. The definition of high end bikes itself is changing. Earlier the high-endbikes were considered as those selling between Rs. 5000 to 8000. However now with globalbrands moving into the country this definition is also changing with price-points starting fromRs.15000 to as high as a few lakhs!The country today is on the threshold of globalisation and teaming million are looking forhigher level of growth together with equitable distribution of income to improve their lots.Generally the economic signs appear to be favorable for the country to improve itsperformance and in turn improve the lot of its people. Obviously; this improvement is goingto reflect upon the Bicycle Industry in particular and transport segment in general. Withcustomers of the country aspiring for higher and higher the current Bicycles users will begraduating to auto two-wheelers, but there will be a new population looking to the bicycle asmeans of transport. Similarly a new generation of buyer will look to bicycle as a mean ofleisure recreation and good way to keep fit.We, therefore, see a healthy sustained growth of cycle industry. Presuming that growth of last3-4 years is sustained for next 10 years i.e. the time we reach the year 2010, the Indianbicycle industry would need to produce about 1.75 crore bicycles to plug the demand andsupply gap. However, there will be a change in the demand pattern linked with consumerchanging aspiration and choice giving way to latest technology and newer marketingconcepts. Industry is already witnessing this to some extent.The new millennium has brought new challenge of opening up of import of Cycles. The 5
  6. 6. manufacturers in India agree to the point that Indian Bicycle Industry does not foresee anyproblem as the product offered today by Indian manufacturers in the market are best suited toIndian conditions and are most economical and value for money products.On the whole the future for Indian industry including Bicycle will be challenging. Thedomestic market will be open to good and services from global companies with low tariffs.Protection will be a thing of the past. The companies that will survive will be those whichsuccessfully restructure and modernise to achieve global competitiveness in terms of bothquality, cost and distribution system.Global Bicycle IndustryThe bicycle is an important means of transportation in most developing and under-developedcountries like China, India and Vietnam. In the developed world, especially in the Europeanand North American countries, however, bicycles encompass multiple functions from basictransportation to sports. Consequently, the bicycle’s utility varies depending on the region,nationality and level of economic development.Global economic prosperity and seasonal factors heavily influence the bicycle industry.Economic downturns affect bicycle demand as well. Moreover, traditionally, spring andautumn are peak seasons for bicycle sales worldwide. Therefore, manufacturers adjust theiroutput accordingly in order to avoid excess inventory.China, with a population of around 1.2 billion, consumes 25-30 million bicycles a year and inaddition, exports around 15 million units. USA and Japan, with an estimated population of250 million and 125 million respectively, consume around 20 million and 7 million bicycles ayear respectively. In contrast, India, with a population of 1 billion only consumes around 12million bicycles a year, which indicates its low penetration levels.Global bicycle production, which is today estimated at approximately 100 million units perannum, has grown at a CAGR of 0.94% between 1990 and 2000. China, which is known asthe kingdom of bicycles, is the world’s largest producer of bicycles and accounted for 52% ofthe world’s bicycle production in 2000, followed by India (11%), Taiwan (7%) and Japan(5%). 6
  7. 7. Chinas bicycle industry comprises 1081 plants (including component makers) with a totalcapacity of around 70 million units. As a result of the prosperity in the home market in thelate 1980s, production grew rapidly in the 1990s and a multitude of small assembly plantswere set up. For the most part of the 1990s, however, production in China was volatile due tothe changing domestic demand. China witnessed a spurt in production towards the end of thelast decade as over 100 Taiwanese manufacturers shifted base to different Chinese citiesbecause of the availability of cheap labour.USA, which was once among the top five global producers, has gradually lost market shareas Chinese and Taiwanese products have flooded the US market. Of the approximately 19million bicycles sold in the US market in 2001 (compared to 21 million in 2000), importsaccounted for over 90% of the pie. USA, in fact, is the largest importer of bicycles andimports from China and Taiwan accounted for 75% and 15% of its total imports in 2001. Theunit price of Chinese bicycles was lower at around US$ 41, however, compared to US$ 94per unit for Taiwanese bicycles since the former are mainly traditional light bikes.The global trade in bicycles is estimated at around 30 million units, with Europe, NorthAmerica and Japan accounting for around 70% of it. These markets are characterized by 7
  8. 8. their large and steady demand and high retail prices. China exports around 25-30% of itsbicycle production to Europe and USA. Chinese bicycle makers have secured a foothold inthe high-end export markets due to their superior products, which use high-tech raw materialslike titanium alloy, chrome-molybdenum alloy and carbon fibre. Europe is the largestdestination for Taiwanese bicycles followed by USA.Overall, bicycle exports from China amounted to around US$ 1 billion in 2001 compared toaround US$ 0.8 billion of exports by Taiwan and US$ 0.03 billion by India. India’s exportsare mainly to the African and South Asian nations. Also, a major portion of India’s bicycleexports comprises standards due to the similar consumer demographics. Hero plans toincrease India’s presence in the high-end segment through its recent tie-up with JapansNational Bicycle Industries whereby it will produce high-end bicycles.Segments within the Indian Bicycle IndustryThe Indian bicycle market comprises two segments: “standards” and “specials”. Standardsare the workhorses of the rural economy. These cheap and rugged bicycles have remainedunchanged for decades. The specials or “fancy” segment comprises new generation bicycles,which are more expensive. Differentiation is the name of the game here.Specials Out-pacing Standards: Standards, which accounted for over 90% of the market inthe early1990s today account for only 66% of cycle sales in the country. This is mainlybecause:A new class of bicycles called juveniles, which are categorized in the specials segment, haveover-taken the standards. The juvenile is, in effect, a standard bicycle with a more urban look,which is targetted at the rural and semi-urban youth. Its popularity can be gauged from thefact that while standard bicycles registered a compound annual growth rate (CAGR) of 2.7%between 1996-97 and 2001-02, juveniles raced ahead at 12.6% in the same period.Manufacturers have also increasingly attempted to wean away consumers to the specialssegment through greater marketing push and by attractively pricing specials. This has, to anextent, hurt standard sales in semi-urban areas.Higher disposable income levels of the middle and lower middle class in urban and semi-urban areas have led to higher specials sales. 8
  9. 9. To some extent, standards sales have also been affected by the irregular monsoons in recentyears since rural incomes are dependent on the monsoons and standards are predominantlysold in the semi-urban and rural areas. In the last six years, standards achieved double digitgrowth (12%) in just one year, 1999-2000, due to unusually large purchases by the stategovernments of Gujarat and Andhra Pradesh for free distribution.Kids SegmentThe kids segment constitutes 6.4% of the total market share of bicycles.As per estimates, theproportion of those going in for standardised bicycles has come down from 90-95 per cent to50-55 per cent in the last five-10 years. The consumer segment that is speedily getting biggercomprises kids. This brings relief to cycle-makers as the affordability range is higher andthere is more scope for innovations.The available bikes from China are mostly for kids, in sizes up to 18 inches. These bikescome with attractive designs as well as features. For instance, Indian companies have justrecently launched battery-operated cycles but Chinese companies had offered them muchearlier. Local markets still have battery-operated bikes from China for children. 9
  10. 10. Even as their designs and colourful appearance remain a plus point, a quick survey by TheTribune revealed that many local manufacturers or dealers import bikes from China and sellthese under their own label.Since people do not have much faith in Chinese cycles using our Indian labels, we are able tosell them. They look quite attractive — a factor that attracts kids.The pricing too came in theway of China capturing this market. Owing to heavy duties, the difference in the pricing ofIndian and Chinese bikes remained small.Indian Bicycle Industry - ManufacturingLudhiana is the hub for bicycle manufacturing in India. “More than 25,000 cycles per day aremanufactured in Ludhiana alone. The city is home to over 1,500 factories making bicyclesand components, providing employment to 0.25 million people and today it is a jewel in thecrown of India’s industrial cities,” according to the All India Cycle Manufacturers’Association.At present. there are five major units in organized sector. accounting for 80% of the totalproduction of bicycles. The total production of bicycles was of the tune of 15.018 millionunits in 2000-01 as compared to 37.000 units produced just after Independence Annualproduction of bicycles since 1991- small units in the non-organized sector are also accountingfor a limited production of bicycles 10
  11. 11. Government policiesBudget 2012 -13The Budget has proposed an increase in basic excise duty from 10% to 12% and one to two%on bicycles. Service tax has also been increased from 10-12%.It has also raised import duty on bicycle and bicycle parts from 10% to 30% and 10% to 20%respectively to save the local industry from the "dumping" of cheap bicycle and parts fromChina. 11
  12. 12. PORTER’S ANALYSIS FOR BICYCLE INDUSTRYRivalry among Existing Competitors • Main competitors include Hero Cycles, Firefox, Atlas Cycles • It has long history and established significant market size • Increasing rivalry expected as more firms enter the attractive market (both domestic and foreign import)Threat of New Entrants • Expectation of long term demand for bicycles for kids segment remain strong • However, increased competition into the market from imports from the China makes it less profitable for new entrantsThreat of Substitutes • Kids Bicycles are common and range in prices • Different styles and makes are widely available through many outlets • Alternative recreational equipment widely available 12
  13. 13. Bargaining Power of Buyers • Buyers demand depends on discretionary income for recreational equipment • Variety of distribution channels • Higher income households comprises a major portion of the market • Buyers demand depends on level of real disposable income and health of householdBargaining Power of Suppliers • Primary Assembly unit is located in Ludhiana so the supplies of raw materials in assembling the cycles take less time. 13
  14. 14. COMPANY DETAILSMissionTo provide the eco friendly mode of transport that is based on the needs of customersOur mission is to build the best service model that is based on the needs of the customerswhich aim at providing best services to customers with accountability and achieves maximumcustomer satisfaction.Vision • To be the largest retail service provider in northern India in next 10 years. • To provide holistic solutions to customers needs. • To incorporate a technology to create best services experience for the customers. • To bring consolidation and standardization in the Bicycle industryKeys to SuccessWe believe our keys to success will be: • Knowledge, Understanding and Expertise of the sector. • Price Competitiveness, Quick Decision Making and Understanding Customer requirements to the last detail. • Educating the customers and being holistic centre for fulfillment of their needs. • Assigning the non-core work to an experienced and qualified third-party contractors and sub-contractors.Legal StatusEterno Cycle will be registered as separate legal entity by registering as private limitedcompany. • 14
  15. 15. About Promoters MARKET ANALYSISSWOT ANALYSISStrengthsThe Indian bicycle industry is almost entirely self-sufficient, with more than 95% of bicyclecomponents supplied from domestic sources. It also obtains most of its raw materials, such assteel tubes, from within the country.· It concentrates on producing a simple, cheap, and rather old-fashioned roadster model. Thecould be seen as a deliberate attempt to satisfy the basic transportation needs of the lessaffluent segment of the population. The industry is capable of producing roadster model athighly competitive Price.· It has made minimal use of foreign technology, creating or adapting most of the technologyit employs and emphasizing labour-intensive production techniques.· Although it procures a substantial volume of its components from a large number of smallproducers, final production is strongly concentrated.· More than 90% of its exports are directed towards other developing countries where thebasic transportation needs of large numbers of less affluent people are far from beingsatisfied.· India has been eminently successful in entering into joint venture and licensing agreementsfor the production of bicycles and components in many developing countries. Thisbreakthrough might be attributed to the fact that India offers a technology appropriate to theneeds of many developing countries.· The domestic market is far from saturated. The replacement market alone is likely togenerate annual sales of 3 million bicycles in the near future, The leisure market is just 15
  16. 16. beginning to be tapped.· Highly skilled entrepreneurial community capable of adapting to any environment withremarkable resilience.· Low labour cost and reasonable quality/price mix, This becomes crucial as in low endsegment buyer looking for reliable quality at affordable price, cost accounts for 80% to 90%of competitiveness.· Concentration of industry in Ludhiana makes it possible to benefit from collective efficiencyarising out of pool of skills availability, specialized suppliers and attracting buyers besidespossibilities of joint action to undertake collective facility like customs clearance.· Large numbers of supplier at same place have been instrumental in low cost infrastructureand jus-in time deliveries.· The small/tiny units in bicycle parts industry have mastered the art of manufacturing acomprehensive range components which are sturdy, reliable for both OEM and replacementmarket.· Industry has evolved a system of using efficient and simple technologies. The closeintegration of manufacturers of degeral parts has ensured that each and every portion of thebasic raw material e.g., steel is used-waste generated in one activity becomes input for someother part. Besides minimizing the waste, this has resulted in better price utilization.· Indian bicycle industry has achieved a certain level of product quality standard undercompetitive price parameters, which makes imports of comparable Chinese, or other foreignmade products uneconomical at present. An elaborate system of dealers/sub dealers has beenset up over the years. These dealers assemble the bicycles making it possible for companiesto dispatch cycle units in CKD form and save on cost. Such an arrangement is difficult toduplicate and given the popularity of Indian brands and lack of any well-known internationalbrand of bicycle in that price category acts as a significant entry barrier for imports fromother low cost countries like China. With the availability of spare parts all over the country atvery reasonable prices, it will be difficult for any foreign player to match that advantage. 16
  17. 17. · Some of the units have developed technological, capabilities and quality reputation to be aglobal sourcing center. For instance, Continental AG of Germany will source its tyrerequirements for global market from Metro Tyres in Ludhiana.· Many of the Cycle entrepreneurs are aware of the emerging global challenges and are in theprocess of leveraging and upgrading their units by undertaking value addition, instituting costcutting measures and setting up websites.· The United Cycles & Parts Manufacturing Association (UCPMA) is organizing a virtualexhibition on Internet as a part of its upgradation mission. The online exhibition will alsofeature a virtual buyer-seller meet.Weaknesses· The Indian share in the global bicycle business is around one percent, this too is in the lowcost and low quality products. For producing higher end bicycle for global and domesticmarket, there is need for overall improvement in vendor base as well as in the basicinfrastructure and resolution of logistic issues.· The Indian Industry, however, recognizes that the quality of its bicycles has to be improvedin order to increase its competitiveness in foreign markets. Upgradation of technology andquality has to b3 built in every part, every dimension of bicycle within this context,opportunities for foreign collaboration exists, although mainly for the production of certaintypes of components.· The basic mechanical skill of entrepreneurs is better suited to copy/adapt rather thandevelop new technologies. There is a need to provide technological support in the form ofdeveloping and making available superior technologies through innovative R&D efforts.· Due to lack of development of new models and use of better and lightweight material suchas Aluminium alloy, India is left behind in developed markets, which are largest importers ofbicycle and components. 17
  18. 18. · There are too many tiny units, most of them nut and bolt shops operating with low-endobsolete machinery resulting in deterioration of the components.· Inelegant design and unattractive retailing· Lack of expert mechanics with dealers to assemble CKD kits following all quality norms.· Lack of technical, design and financial support from larger units for upgrading vendorsespecially at the lower end.· Shortage of working capital and lack of funds to meet just in time norms of assemblers.· Except for about 150 units excluding larger units, other small/tiny units do not havecomputer facilities and this digital divide can further exclude them from emergingpossibilities of e-commerce· It is unlikely that SMEs will collaborate in product development since each firm will seethis as a specific competitive advantage. This explains the secretive nature of small units andlackluster performance of various e-commerce initiatives.Opportunities· Enormous potential to operate in a global market, though challenges of quality, cost deliveryare equally large.· Germany will source its tyre requirements for global market from Metro Tyres in Ludhiana.Many of the Cycle entrepreneurs are aware or the emerging global challenges and are in theprocess of leveraging and upgrading their units by undertaking value addition, instituting costcutting measures and setting up websites.· The United Cycle & Parts Manufacturing Association (UCPMA) is organizing a virtualexhibition on Internet as a part of its upgradation mission. The online exhibition will alsofeather a virtual buyer-seller meet. 18
  19. 19. ThreatsIncreased competition from foreign producers especially China, which competes on the basisof lower costs of production.Fluctuating demands as a result of economical changes.The specials would be majorlyaffected , as they are priced higher.Competitor AnalysisThe domestic bicycle industry is oligopolistic in nature, dominated as it is by three organizedplayers: Hero Cycles Limited (Hero), Tube Investments of India Limited (TI) and AtlasCycles (Haryana) Limited (Atlas). These players account for over 90% of the country’s totalbicycle sales. Fringe players include Avon Cycles and Hamilton.While TI is the clear market leader in the specials segment, Hero, which is also the largestbicycle producer in the world, is a clear leader in the standards and in the overall domesticmarket. As TI has the largest presence in specials, and as this segment has registered thefastest growth in recent years, TI’s volumes have recorded the highest growth.Although Hero has a large base of standard bicycles, it has achieved moderate, albeit,consistent growth through its strong focus on increasing its specials volumes. Of the threemajors, Atlas is the most dependent on standards. Hence, its volumes have faced the greatestpressure in the current environment. The ongoing dispute in the promoter family over thedivision of the company’s assets has further added to Atlas’s woes 19
  20. 20. Market Share of Major players 20
  21. 21. Sales over the yearsAccording to industry estimates, the bicycle market in India is 14 million units a year, ofwhich 5-7% belongs to the premium segment, growing at 25-30% annually. Firefox is one ofthem,which has a manufacturing facility in Sri Lanka from where the bicycles are imported.The Trek products are imported from China and the US. While the Firefox range is pricedbetween Rs 4,000 and Rs 18,000, the Treks bicycles are priced at Rs 20,000-85,000. FirefoxBikes claim that they plan to capture 2.5-5% of the total bicycle market in India by growingat the rate of 40% per year.Survey AnalysisA questionnaire was prepared and asked to the parents & students. The objective of thequestionnaire was to understand the consumer’s purchasing behaviour in bicycles. A total of160 respondents were recorded for initial study. Stratified Random Sampling was used andthe survey was conducted in Delhi- NCR region. 21
  22. 22. Purpose of visit to Kids Bicycle Store Purpose of visit to Kids Bicycle Store 60 55 50 45 40 32 28 30 20 10 0 Buying a New Checking out the Buying Bicycle For Services Bicycle latest models Accessories55 out of 160 respondents had stated that they visited the Kid’s Bicycle Store for some repairor service work. 45 respondents had stated that they used to visit the kid’s bicycle Outlet topurchase accessories. 32 out of respondents had stated that they used to go to the kid’sbicycle store to buy a new bicycle.USPs Determining Purchase Decision USPs Determining Purchase Behaviour 60 48 35 32 40 25 20 20 0 Features Price Safety Colour of After Sales Aspects the Bicycle ServiceThe survey results indicated that 48 out of 160 respondents had considered Bicycle Featuresas one of the key factor in determining the Consumer Purchase. These features included theRim Size, Chain Wheel, Bike frame, Bike Fork, Crank, Fly wheel etc. 35 out of 160respondents had considered price as one of the key factors that determines the consumerpurchase behaviour. 32 respondents had also considered colour of the bicycle as one of thedistinguishing factors that aided in their purchase decisions. Although Safety aspects are 22
  23. 23. important, only 25 respondents had considered it as one of the main factor in determining thepurchase behaviour. The focus of the consumers was mostly on the features of the bicycle.Preferred Amount to be spend on Kid’s Bicycle Preferred Amount to be spend on Kids Bicycle 70 63 60 47 50 40 28 30 20 12 10 10 0 Rs 1000-1200 Rs 1200-1500 Rs 1500-1750 Rs 1750-2000 More Than Rs 200063 respondents had preferred to spend around Rs 1500 to 1750 on a kid’s bicycle. 47 out of160 respondents had preferred to spend around Rs 1200-1500 on a kid’s bicycle. As it isevident from the survey, majority of the consumers had preferred to spend in the bracket ofRs 1200 to Rs 1750.Customization in Bicycles Favours Customisation in Bicycles Cant Say 30 No 40 Yes 90 0 20 40 60 80 100 23
  24. 24. 90 out of 160 respondents were in favour of the customization in their bicycles. Thesecustomizations were mostly in the rim size, size of wheel and other basic features of bicycles.However, the consumers also complained that it was very difficult to get the customizationfrom the outlets owners.Online Purchase of Bicycles Online Purchase of Bicycles Cant Say 35 No 40 Yes 85 0 20 40 60 80 10085 out of 160 respondents surveyed stated that they favour online purchase of bicycles. Therespondents were in favour of the online purchase because they believed that it was easy toget customization in the bicycles through online purchase. 24
  25. 25. OPERATIONSTechnical RequirementsThe business involves the sourcing of bicycle parts from various suppliers and semiassembling them in a plant location in Ludhiana. The then semi assembled bicycle would bepacked into boxes there and would be sent to Delhi for supply in various locations. Based onthe requirements of the retailers as well as other players, the bicycles will either be sent as abox or would be assembled fully at the location in Delhi before it is sent. Locations have beenchosen strategically to reap the benefits of being closer to the suppliers in Ludhiana and closeto the customers in Delhi. A facility of 500 sq. yds. In Ludhiana and 200 sq. yds. In Delhi isneeded and will be taken up on lease basis with 3 months of the rent provided as security. InLudhiana the rent would be around Rs. 50000/ month and in Delhi it would be around Rs.30000/ month.A website will be needed for promoting and selling the bicycles online. The e-portalconstruction will cost around Rs. 300000 and its maintenance cost would be Rs. 60000/ year.The e-portal will list various bicycles along with their technical features and would alsodisplay the MRP price for the bicycle. Also online payment feature would be provided bytying up with the service providers like CCAvenue for collection of the online payment.Another option of Cash on Delivery (COD) will also be provided since many of the users areapprehensive of making payments through debit/credit card.The division of whole cost will be like: 1. Fixed Costs 2. Variable CostsThe Fixed costs for manufacturing and operations would include: One time website creation charges. Yearly charges for website maintenance. Stationary expenses related to invoicing of products to retailers / direct customers. Advertising expenses for print ads circulated via local daily newspapers/ comics or magazines for kids/ promotion in schools, etc. Salary and wages: including the Rs. 108000 paid to the two promoters in a quarter, and semi assembling the cycles in Ludhiana plant at a labour cost of Rs. 8000/ month/ worker. 25
  26. 26. Rent of Rs. 80000/ month for two locations, one in Delhi and other in Ludhiana. Operating expenses including Rs. 25000/ month for two persons sales and marketing.The Variable costs for manufacturing and operations include: Cost of the components that would be sourced from the suppliers. Cost of the material used for packing at Rs. 30/ cycle. Cost of transportation including both from Ludhiana Warehouse to Delhi Warehouse and from Delhi Warehouse to the Retailers/ Customers. The amount would beRs. 25 from Ludhiana to Delhi and Rs. 20 from Delhi to retailer / Rs. 200 in direct selling. Cost of assembling the cycle completely at Delhi Warehouse for some of the customers and retailers. Its cost will be around Rs. 30/ cycle.Operations StrategyThe operations of the company would be based on two selling models.Through retailersIn the first year almost 80-90% of the sales will be done through this model. It involvesfinding the perspective clients in terms of retailers in a particular locality and pitching to himto buy the cycles from us. A salesman will go out in the market and search for retailers whoare selling cycles at their counters and present them with the models and prices of our cyclesand would pitch them to buy it. An order for some cycles will be taken from him and a creditperiod for the goods will be provided after the cycles reach him. As soon as the payment ismade fully, the next order if any will be processed. So it will remain on a single bill systempolicy. The order taken from the retailer will be sent to the company for processing and nextcustomer will be searched for.E-PortalThe second model will constitute about 10-20% sales of the company and will includeplacement of the orders online via an e-portal. The customer will visit the website and seevarious models which are available. The customer will then choose the model he/ she likesand click on buy button. Then the details including name, address, mobile no. etc will betaken from them and various payment options will be given including COD, CC, DC etc. Thedetails of the order will reach the company and the delivery of the order will be made within5-7 days. A confirmation of order by telephone in case of COD will be done before thedelivery is made. 26
  27. 27. The model describes the process of billing the customer onlineFlow of supply chain: 1. The supply chain consists of the components provider, who on our need basis will provide the components to us and we will get a credit period of 8 days in the beginning. 2. Then inventory of the parts would be of around 10 days and the cycles will assembled daily at the plant. 3. The packed cycles will be booked to a transporter on contractual basis and would be shipped to Delhi Warehouse. 4. Depending on the orders for cycles, a tempo/ three wheeler goods vehicle will be used to supply the cycles to either retailers or the customers directly. 5. The payment is collected from the Retailers within 45days of the supply of the cycles and directly from the end consumers. 27
  28. 28. MARKETING STRATEGYOur Marketing Strategy: 1. Understand our Customer As Peter Drucker has said, Marketing is all about knowing your customer. Therefore, understanding their requirements and making them understand the benefits of our product is the heart and soul of our marketing strategy. In order to develop a clear picture of our target customer we will use market research and analysis tools. In our case the consumers are the kids and the customers are the parents. 2. Analyse the Market Some basic market research should allow us to find market data such as total available market, market growth (historical numbers and projections), market trends, etc. 3. Analyse the Competition While designing a marketing strategy we have to ask ourselves what other choices our target customers have to gratify their needs. Researching and assessing the strengths and weaknesses of each is, therefore, must. We face competition from some well established brands like Hero, Atlas and Firefox and thus designing a unique and attention grabbing marketing strategy becomes a vital part for the sustenance of the company. 4. Research Distribution Channels 28
  29. 29. What is the best way to deliver our product or service to our target customers? This will impact our sales strategy and our financials, as well as our marketing mix.In addition to exploiting the existing distribution channels, we are looking into the feasibility of an e-portal for direct distribution. 5. Define Your Marketing Mix Product, Price, Place and Promotion, the 4Ps of marketing are the keys to defining a proper marketing mix. By pricing our cycles to give us a competitive edge and promoting not only in traditional manner but using internet and other mass media techniques, we are aiming at an optimum marketing mix of these 4Ps. 6. Analyse the Financials Finance is the base of any organisation. Without proper financial analysis, feasibility checks etc. a company cannot run. Thus, putting together our marketing budget and evaluating projected marketing ROI, customer acquisition costs, etc. is important. 7. Review and Revise Continuously evaluating the effectiveness of our marketing strategy, and revision is necessary to maintain optimum efficiency.Branding:LogoLogo is a graphic mark or emblem commonly to aid and promote instant public recognition.In our case, as our tag line says “We are passionate about kids & environment”, our logorepresents a cycle and green colour has been used the signify the importance of environment.Marketing Mix:Product:In the first year of operation we would be launching cycles for kids up to the age of 9 years. We willhave special bicycle ranges for boys (superhero series) and girls (bubbles series). Superhero series 29
  30. 30. will have Batman Black, Spiderman Red, Hulk green etc and bubbles series will have bubble red,bubble blue and bubble green etc. Customizationoptions in terms of colors, seats etc. would be made available.By the third year we plan to extend our offerings to adults as well through our ranges – Outdoor fun(Adventure Series), For racers (Pace series) and for city riding (Joy series).Price:Our strategy is to be cost leaders in the bicycle business but we won’t be compromising on qualityand our prices would be the best prices available in the market.Place:Initially our target market would be concentrated in northern India especially Ludhiana and Delhi.We would be selling our bicycles through retailers and through our online portal. Amongst theretailers our main targets would be exclusive multi brand cycle stores, sports good stores etc.Promotion:Since our budget is limited we will go for cost effective promotion strategy.Advertise for free by word of mouthWord of mouth is the best way to advertise for free. Word of mouth advertising depends onreliability of the brand and for that quality is must. There are two ways to promote your business byword of mouth: 30
  31. 31. Get others to talk about - The best way to do this is to surpass customers’ expectations. This may include free gifts with each product, taking feedback from customers using our product etc. Another way to get people talking is to provide extra information like information about the history of our business. Other methods include: o Sending thank-you, birthday and seasonal cards o Offering special sales for loyal customers. o Handling customer complaints quickly and to their satisfaction o Being professional and respectful to all customers o Offer discount coupons in fliers o Offer free evaluations or consultations. o Giving free T-Shirts having company’s logo and name with our products. Talk about yourself. (explained in detail)Press ReleaseA well written press release is an excellent way to make the public aware of our product orcompany. We can submit a press release to local and national newspapers, radio, television,magazines and trade publications both online and off. Making our press release attention grabbing,truthful and newsworthy to get an editor’s attention is necessary. For best results focus of thearticles should be on a targeted audience instead of a wide readership.Print Media Advertising in local free shopper magazines. Distribution of fliers through newspapers etc.Sponsor contestsAnother way to receive free advertising is to offer to sponsor a contest for a community event orlarge publicationCommunity Involvement can be done in many ways: Having a "happening" -- contests, parties or picnics for our customers. Givingcycles or service donations to a charity auction. Givingfree talks to community groups on the health benefits of cycling. Running booths at local fairs. Attend local businessgroups meetings and business card exchanges.Radio AdvertisingRadio Advertising has many advantages: Radio is a universal medium enjoyed by people at one time or another during the day, at home, at work, and even in the car. The vast array of radio program formats offers to efficiently target our advertising money to narrowly defined segments of consumers most likely to respond to our offer. Gives our business personality through the creation of campaigns using sounds and voices Free creative help is often available Rates can generally be negotiated During the past ten years, radio rates have seen less inflation than those for other media 31
  32. 32. Fig. Pricing of radio advertisementsRadio marketing would be used intensively in the initial phase to provide momentum for word ofmouth marketing. We would normally go for Super Prime time slot and would aim at advertisingcontinuously for the first week and then monthly.Local Television:Advantages of Television advertising: Television permits us to reach large numbers of people on a national or regional level in a short period of time Independent stations and cable offer new opportunities to pinpoint local audiences Television being an image-building and visual medium, it offers the ability to convey our message with sight, sound and motionPricing: Day Price Monday to Saturday Rs 1000-1500 per 10 sec Sunday Rs 2000-2500 per 10 secWe would go for local television marketing from 2nd year onwards as budget constraints do not allowus to use it in the first year. We would distribute advertisements in the ratio of 2:1 for weekdays andSunday respectively.Mailing ListsThe internet has hundreds of thousands of mailing list that we can subscribe to and sell your productor service. Even if the list group does not allow you to sell your product, it is common practice tohave a 6-8 line "signature line" that is automatically put at the bottom of all outgoing messages, e-mail responses and forwarding e-mails. It is easy to find specific mailing lists like biking groups etc.Mobile Marketing: 32
  33. 33. We would send SMS to retailers to advertise our products and various schemes.Social Media:Social media sites are great for building customer relationship and offer an incredible reach and theopportunity to connect with customers in an entirely new way. They also offer a wide reach, with itspotential for viral marketing and traffic generated can be extremely targeted. Moreover, Socialmedia tools are relatively inexpensive. Facebook: With millions of members with most being young and thus our potential customers, Facebook is must to advertise about our products. Easiest way is to create a Facebook page of the company and constantly update it with all the events and new products. Twitter: Twitter is yet another social media tool which can be used for protmotion of our products. Our company can make an account and people can follow it to know about the latest happenings in the company.Website: E-portal - Our website will host an e-portal for dealing directly with customers and to cater to people who want to buy bicycles online. It will provide customization options and 360 degree view of final selection. Users will have the option to pay online or opt for Cash on Delivery. Blog – Another section of the website will incorporate a blog which will provide bicycle enthusiasts to communicate with each other, share their experiences and offer help to newbies.. 33
  34. 34. FINANCIAL PROJECTIONSAssumptions & Facts Used in Financial Projections:We have taken few assumptions & facts for the Financial Projections. These assumptions &facts are based on the current market scenario. 1) The selling price for retailers will be Rs 1200 in the first year increasing to Rs.1600, Rs. 1900 & Rs. 1900 in the next three years respectively. This is because of the increase in the component cost. 2) But the selling price through online portal will be bit higher. The reasons for this are the different customized services provided by us. This will be cheaper as compared with the retailer price to the customers. 3) The Component cost forms around 77% of the total cost whereas the remaining 23% is composed of packing & transportation. 4) The total cost to us in the first year will be Rs. 1000 (925 + 30 +25 + 20).In the second year the cost to us is expected to increase due to surge in the component prices. 5) The other expenses include Advertisements & Stationary which is around 1% of the cost to retailer. 6) The total annual rent expenses at both the places (Ludhiana + Delhi) are summed up to Rs. 9,60,000. 7) The fixed assets are depreciated at the rate of 10% per year. 8) Our online portal needs maintenance which costs us Rs. 60,000 per year. 9) The Interest rate on working capital Loan & Loan from relatives is 15% p.a. 10) The tax is calculated on the rate 38.5%. Table 1: Assumptions & Facts Used for Financial Projections Unit price for retailers 1200 1600 1900 1900 Unit price through online 1500 2000 2300 2300 Component cost/ cycle 925 1200 1475 1475 Packing/ cycle 30 30 30 30 Transportation from Ludhiana to Delhi 25 25 25 25 Transportation from Delhi to retailer 20 20 20 20 Direct Selling 200 200 200 200 Final Assembly @ Delhi/ cycle 30 30 30 30 Website Maintenance Charges 60000 60000 60000 60000 Stationary Expenses/ cycle 2 2 2 2 Advertising Overheads/ cycle 8 8 8 8 Salary 34
  35. 35. Operation Expenses 25000 25000 25000 25000 Rent Expenses at Ludhiana 600000 600000 600000 600000 Rent Expenses at Delhi 360000 360000 360000 360000 Depreciation (% of gross Block) 10 10 10 10 Interest (%) 15 15 15 15 Tax (%) 38.5 38.5 38.5 38.5Financial Statements: 1) Balance Sheet 2) Income Statement 3) Cash Flow StatementAnalysis of Balance Sheet (Normal Scenario)(Refer: annexure)The balance sheet includes Application of Funds & Sources of Funds.Application of Funds: 1) Fixed Assets 2) Current AssetsFixed Assets The fixed Assets comprises of: Sales Tax Security Deposit Website Creation Plant and Machinery Car & Bikes Mobiles Office furnitureThe fixed assets values Rs. 20, 50, 000 initially. It is 53% of total assets at the inception ofthe business.But its value remained only 36% at the end of 1st year and 19% in the 2nd year.The reason for the decrease in the fixed assets is the increase in the current assets.Our business is basically dependent more on the working capital as we rely on outsourcing &assembling components. Our credit policy is such that increases our working capital to alarge extent.Current Assets The Current Assets includes: 35
  36. 36. 1) Component 2) Cash in Hand 3) Sundry DebtorsComponents:The components are outsourced from Ludhiana local suppliers. Initially the inventory in handis 10 days in the first year. But second year onwards we started to optimize our resources byJIT approach. The inventory days are 8 days & 5 days respectively in the second & third yearrespectively.Cash in Hand:The cash / bank balances initially are around 9 lakhs. But at the end of first year cashbalances will be around Rs. 1 lakh. But it increases after that as we receive the accountreceivables in the 2nd year onwards.Sundry Debtors:The credit policy for the retailers is 45 days. Because of it the accounts receivable increasesby huge amount. It sums up to around Rs. 19 lakhs at the end of 1st year.Total AssetsAt the inception of the business total assets is Rs. 39 lakhs. It is projected that it will grow upto Rs. 51 lakhs at the end of first year & Rs. 82 lakhs at the end of 2nd year.Sources of Funds:The sources of Fund include: 1) Current Liability 2) Working Capital Loan 3) Loan from relatives 4) EquityCurrent Liabilities:The Current Liability includes Sundry Creditors.Initially the credit policy for suppliers is 8 days. But due increase in trust & credit worthinessthe credit policy will increase to 20 days. This will help us to decrease the cash conversioncycle.Working Capital Loan:The WC will play the most important role in the carrying out the business.The working capital requirement in the initial two years is very crucial.The working capital margin for each year calculated as: 36
  37. 37. Working Capital Margin = 60% of Components & Sundry Debtors.We expect from bankers about 60% of components & Sundry Debtors.In the year 1, WC loan required will be around Rs. 14 lakhs which is just less than theWorking Capital Margin.In the year 2, WC loan will increase to Rs. 20 lakhs in the 3rd quarter of the 2nd year. But ourcash in hand increases and loan repayment is expected from the 4th quarter of 2nd year.At the end of 2nd year it will be around Rs. 14 lakhs and at the end of 3rd year all the WCLoan will be repaid.Loan From relatives:In the first year due to cash crunch and more working capital requirement short term loanfrom relatives will be required.The interest rate on the loan will be 15% p.a.The loan requirement for the first year of operation is expected to rise up to Rs. 6.5 lakhs.The loan will be repaid by the end of the 2nd quarter of the 2nd year of operation.Equity:There are 6 promoters of the business and they will raise Rs. 6.5 lakhs each. The total equityraised amounts to Rs. 39 lakhs.The promoters will benefit from year 3 quarterly. The dividend in the 3rd quarter of 3rd year isexpected to rise up to Rs. 5 lakhs. In the 4th year it is expected to pay Rs. 9 lakhs per quarterto the promoters.Analysis of Income Statement (Normal Scenario)(Refer: annexure)Sales Revenues:There are two modes of sales. They are 1) Selling via Retailers 2) E-commerceInitially in the first year the contribution expected from the former mode is 90% of total salesrevenue whereas the remaining sales revenue is from E-commerce mode.Here is the Figure 1 showing the projected sales every year. The sales are increasing year byyear. Our number of cycles produced per day increases from 25 initially to 50 at the end offirst year. The Figure 2 shows the projected number of cycles produced every day onquarterly basis. 37
  38. 38. Expected Sales Year Wise 25000000 20000000 15000000 10000000 sales in Rs. No. of Cycles/Day 5000000 Sales* 0 Quarter 1 Quarter 3 Quarter 2 Quarter 4 Quarter 1 Quarter 3 Quarter 2 Quarter 4 Figure 1: Expected Sales year wise in INR (Normal Scenario) No. of Cycles/Day Assembled 120 No. of Cycles per day 100 80 60 No. of Cycles/Day 40 20 0 Q2 Q4 Q5 Q7 Q10 Q12 Q13 Q15 Figure 2 : No. of cycles assembled per day every quarterVariable CostThe variable cost includes: 1) Components Cost 2) Packing 3) Transportation 4) Assembling The average component cost per cycle during the first year is expected to be Rs. 925. This increases to Rs. 1200 in the 2nd year. This is because we will be coming with other models of adults apart from kids segment. This will increase our average cost of components. The average packing cost is Rs. 30 per cycle. Transportation cost: The transportation expenses increases from first year to 2nd year. This is because of cost of home delivery as our share of E-commerce will increase. 38
  39. 39. Assembling: It includes final assembling at Delhi. It will cost Rs. 30 per cycle.Expected Profit The profit expected in the first year is negative. The profit will be on increasing trend. In the second year the expected profit is around Rs. 17 lakhs. But in the 3rd& 4th year of business it is expected to increase to around Rs. 33 lakhs. Expected Profit After Taxes 6000000 5000000 4000000 Profit in Rs. 3000000 2000000 1000000 0 Year 1 Year 4 Year 2 -1000000 Year 3 -2000000 Figure 3: Expected Profit after Taxes on yearly basisCash Flow Statement(Refer: annexure)Closing Cash Balance:We as an organization would like to keep an optimum level of cash balances i.e. Rs. 2 lakhs. Closing Balance 3500000 Closing Cash Balance in Rs. 3000000 2500000 2000000 1500000 1000000 500000 0 39
  40. 40. Figure 4 : Closing Cash Balances at each quarter.Initially due to cash crunch & high working capital, the closing balance is low. The optimumcash balance for our organization is Rs. 12 lakhs.Net Operating Cash Flow:The Cash Flow from operations is expected to be negative in the first year. But second yearonwards it started increasing. Net OperatingCash Flow 1000000 Net operating CF in Rs. 500000 0 Q5 Q1 Q2 Q3 Q4 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 -500000 -1000000 -1500000 Figure 5: Expected Net Operating Cash Flow for each quarters.BREAKEVEN ANALYSIS(Refer: annexure)According to the projections, our businesses will break-even in the fifth quarter of our business operation.Our fixed cost keeps on increasing but on other hand our E-commerce business is also expected to increase. This will increase the contribution margin in the 2nd& 3rd year. Because of it we will be achieving the break-even in the start of the 2nd year. Contribution Margin = Selling Price – Variable price In the first year the contribution margin is equal to Rs. 182 which is about 17% of the variable cost. In the second year the contribution margin is equal to Rs. 361 which is about 26% of the variable cost. The margin is almost double the margin of the 1st year but due to increase in the average cost of components it is only 26%. In the first year, the expected lag in the break even quantity is around 5100 units of bicycles. But in the second year the break even quantity mark is lead by around 13000 units. Our business is expected to grow in the second year of its inception. 40
  41. 41. SCENARIO ANALYSISScenario analysis is a process of analyzing possible future events by considering alternativepossible outcomes. Here we are considering three scenarios based on the market demand.Scenario 1(Refer: annexure)During normal market condition we are assuming that we are able to manufacture and sell100 bicycles by the end of second operating year (2014-15), by gradually increasing the salesfrom 25 bicycles per day during first quarter of first operating year (2013-14). DetailedBalance Sheet, Profit Loss Statement and Cash Flow statement are given in Annexure. Table 2: Balance Sheet Scenario 1 Year 2013-14 2014-15 2015-16 2016-17 No. of Cycles/Day 50 100 100 100 Application of Funds (la) Fixed Assets (la) Other Fixed Asset 7.00 7.00 7.00 7.00 Net Block 18.45 16.40 14.35 12.30 Current Assets 25.74 60.00 69.20 70.45 Total Assets (la) 51.19 83.40 90.55 89.75 Sources of Funds (la) Current Liabilities 3.70 24.00 29.50 29.50 WC Loan 14.00 14.00 Loan from Relatives 6.50 Owners Fund (Equity +P/L) 26.99 45.40 61.05 60.25 Total Liabilities (la) 51.19 83.40 90.55 89.75It can be seen from the balance sheet that owners fund has been reduced to close to 27 lakhsby the end of first year due to cash losses during first year of operations, but it startsincreasing after first year. We will be start paying dividend to the owners from year 3onwards to increase our profitability on asset and owners equity. We will be paying INR8,50,000/ quarter as dividend from third quarter of year three onwards. 41
  42. 42. Scenario 2(Refer: annexure)In this scenario we are expecting higher demand from market than the normal. We areassuming that we are able to manufacture and sell 150 bicycles by the end of secondoperating year (2014-15), by gradually increasing the sales from 30 bicycles per day duringfirst quarter of first operating year (2013-14). Detailed Balance Sheet, Profit Loss Statementand Cash Flow statement are given in Annexure. Table 3: Balance Sheet Scenario 2 Year 2013-14 2014-15 2015-16 2016-17 No. of Cycles/Day 100 150 150 150 Application of Funds (la) Fixed Assets (la) Other Fixed Assets 7.00 7.00 7.00 7.00 Net Block 18.45 16.40 14.35 12.30 Current Assets 51.43 98.98 103.27 104.53 Total Assets (la) 76.88 122.38 124.62 123.83 Sources of Funds (la) Current Liabilities 7.40 36.00 44.25 44.25 WC Loan 29.00 10.00 Loan from Relatives 6.50 Owners Fund (Equity +P/L) 33.98 76.38 80.37 79.58 Total Liabilities (la) 76.88 122.38 124.62 123.83In an optimistic scenario we will be reaching 100 bicycles/ day by the end first year and willbe expanding to 150 cycles/ day by the end of second year. We will be start paying dividendto the owners from year 3 onwards to increase our profitability on asset and owners equity.We will be paying, INR 10,00,00 in the first quarter of year three and INR 15,00,000/ quarteras dividend from second quarter of year three onwards.Scenario 3(Refer: annexure) 42
  43. 43. In this scenario we are expecting a lower demand from market than the normal. We areassuming that we are able to manufacture and sell 75 bicycles by the end of second operatingyear (2014-15), by gradually increasing the sales from 20 bicycles per day during first quarterof first operating year (2013-14). Detailed Balance Sheet, Profit Loss Statement and CashFlow statement are given in Annexure. Table 4: Balance Sheet Scenario 3 Year 2013-14 2014-15 2015-16 2016-17 No. of Cycles/Day 40 75 75 75 Application of Funds (la) Fixed Assets (la) Other Fixed Assets 7.00 7.00 7.00 7.00 Net Block 18.45 16.40 14.35 12.30 Current Assets 20.48 47.21 52.72 53.41 Total Assets (la) 45.93 70.61 74.07 72.71 Sources of Funds (la) Current Liabilities 2.96 18.00 22.13 22.13 WC Loan 11.00 15.00 Loan from Relatives 6.50 Owners Fund (Equity +P/L) 25.47 37.61 51.95 50.59 Total Liabilities (la) 45.93 70.61 74.07 72.71In a pessimistic projection we are expecting 75 bicycles /day. We will be paying INR5,50,000/ quarter as dividend from fourth quarter of year three onwards.FINANCIAL RATIO ANALYSISFinancial ratios are useful indicators of a firms performance and financial situation.Liquidity RatiosLiquidity ratios provide information about a firms ability to meet its short-term financialobligations. They are of particular interest to those extending short-term credit to the firm. 43
  44. 44. Current ratio is defined as follows: Current Assets Current Ratio = Current LiabilitiesThe quick ratio (acid test ratio) is defined as follows: Current Assets - Inventory Quick Ratio = Current LiabilitiesCash ratio is defined as follows: Cash + Marketable Securities Cash Ratio = Current LiabilitiesLiquidity ratios of the company are given below for normal scenario (scenario 1): Table 5: Liquidity ratios (Normal Scenario) Year 2013-14 2014-15 2015-16 2016-17 No. of Cycles/Day 50 100 100 100 Current Ratio 6.96 2.50 2.35 2.39 Quick Ratio 5.40 2.19 2.10 2.14 Cash Ratio 0.29 0.09 0.07 0.11 44
  45. 45. Profitability RatiosProfitability ratios offer several different measures of the success of the firm at generatingprofits.The gross profit margin is a measure of the gross profit earned on sales. The gross profitmargin considers the firms cost of goods sold, but does not include other costs. It is definedas follows: Sales - Cost of Goods Sold Gross Profit Margin = SalesReturn on assets is a measure of how effectively the firms assets are being used to generateprofits. It is defined as: Net Income Return on Assets = Total AssetsReturn on equity is the bottom line measure for the shareholders, measuring the profitsearned for each dollar invested in the firms stock. Return on equity is defined as follows: Net Income Return on Equity = Shareholder EquityLiquidity ratios of the company are given below for normal scenario (scenario 1): Table 6: Profitability Ratios (Scenario 1) Year 2013-14 2014-15 2015-16 2016-17 No. of Cycles/Day 50 100 100 100 Gross Profit Margin 14% 18% 17% 17% Return on Asset -5% 9% 9% 9% Return on Equity -9% 19% 16% 16% 45
  46. 46. WORKING CAPITAL FINANCINGWe will be giving 45 days credit period for retailers and we will be expecting to receive rawmaterial from our supplier at a credit period of 8 days during first year and 20 days thereafter.We will be planning to keep inventory for 10 days of operation during first year and will begradually reduced to 5 days by third year. Since the higher credit period to retailers our cashflow will be limited during first two years of operation. In order to meet our short termliabilities we will be opting for working capital financing from commercial bank at an interestrate of 15% (Base rate +5). We are also expecting bank will be sanctioned working capitalloan upto 6o percentage of account receivables and raw materials. By considering this ourfirst year’s sanctioned working capital limit would be INR 14,79,600 and we will be usingINR 14,00,000 during first year . Since the account receivables are increasing due to increasein sales for the following year, we are expecting bank will be raising our working capitalfinancing limit to INR 34.5 lakh in second year and approximately INR 40 lakhs during thirdand fourth year. But we will be using working capital financing facilities only for the firsttwo years of operations. Summary of working capital utilization schedule is given below,detailed working capital management schedule is given in annexure. Table 7: Working Capital Financing 2013-14 2014-15 2015-16 2016-17 WC Financing Sanctioned 1479600 3466500 4033500 4033500 WC Loan Amount 1400000 1400000 0 0 46
  47. 47. ANNEXURES 47

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