Cost Statement
*[Contribution = Price – Variable cost]
Profit & Loss statement:
Pitch to potential investors:
Introduction:
This Pitch book or pitch report is for attracting investment to a newly conceptualized business. The business is of a chain of pizzerias that sells organic pizzas. The report is based on forecasted profits & loss statement, cash flow statement and balance sheet of one year after from the date the business starts its operations. The aim of this pitch report is to give a clear idea to prospective investors about the business model, the revenue model and the wealth that can be generated from the business if they invest in the business.
Financial forecasts
The business is a chain of pizzerias where pizzas are made from organic ingredients only. The pizza made by the company will use only fresh, organic raw material. Organic ingredients are those which are grown and produced without using any inorganic substances like synthetic pesticides or chemical fertilizers. Organic farming focuses on preserving the ecological balance.
Every raw material that will be used in the pizzas will be sourced from a supplier who is a certified organic supplier. The proposed name of the chain is Organic Pizzeria. The chain will serve only vegetarian pizzas. In the first year only one pizzeria will be opened. If this pizzeria succeeds then the chain will be expanded further.
The idea is to add another pizzeria to the chain only if the previously opened one has become profitable. The focus of the business will be more on bottom-line than on top-line. Only by being profitable, the business will be able to generate wealth for investors.
The initial investment required is $ 1 million. Much of this investment will go in setting up the first pizzeria of the chain and meeting the initial working capital requirements. Based on conservative financial forecasts, it is estimated that the pizzeria will become profitable in the first year itself.
Target customer segment of the business: The target customer segment of the business will be consumers who believe in responsible consumption. Responsible consumption is a fast growing segment. Increasing number of consumers are becoming conscious of what is the health & environmental impact of what they are consuming.
The cost statement gives out the cost of making one unit of the pizza. A pizza will be sold for $20. Variable cost per unit of the product will be $10 per unit. Variable costs are costs that vary directly with the level of production. Variable costs include the cost of raw materials. Fixed costs per unit of pizza at the current level of production/ demand will be $3. Fixed costs are not dependent on the level of production. They remain fixed irrespective of the output. Higher the output, lesser is the fixed cost per unit of the product. So as demand for our pizzas increase there is the potential of substantial economies of scale. We intend to pass on the cost savings because of economies of scale to customers in the form of lower prices. This will enable the chain to increase its market share fast. Other expenses include various miscellaneous expenses. At the forecast level of demand other expenses per unit will come to unit $2 per unit.
Forecasted profit after taxes in the first year of operations is $294000. The tax rate has been taken at 30%. This level of profit will be generated at a demand level of 100000 pizzas in the first year. Total sales in the first year will be $2000000. Gross profit will be $1000000.
At this level of net profit Return on Equity generated by the business in the first year will be :
(294000/ 1000000) * 100 = 29.4%
[Return on Equity = Profit after tax/ Total equity]
Note only equity capital will be employed in the first year; no debt will be employed. From the second year onwards, for raising capital for further expansion of the chain, equity will be the preferred source of financing. However any shortfall in financing that cannot be met through equity will be met through debt.
The balance sheet at the end of first year will have assets of $1250000 and liabilities of the same amount. The assets include net fixed assets (fixed assets minus depreciation), current assets like cash & cash equivalents and inventory and net other assets. Fixed assets include the production facility of the pizzeria and the dining space. Other assets include fittings, installations, the vehicles that will be used for home delivery, the art works that will be used for decorating the interiors etc.
The forecasted net cash flow from operations will be $424000 in the first year of operations. Cash outflow from financing activities will be $94000. This outflow will be in the form of dividends paid to investors. Out of the total estimate net profit of $294000, $94000 will be paid as dividends to investors or shareholders. Therefore the dividend payout ratio in the first year will be:
(94000/294000)*100 = 31.97%.
The net cash inflow during the year from the business will be $340000. All the sales will take place on cash basis. The business is one which has low cash conversion cycle. Cash conversion cycle is the amount of time that it takes for a business to convert resource inputs into cash.
In the second year of operations one more pizzeria will be added to the chain. Without taking inflation into account, total revenues are likely to go up by 120% to $352800. All other costs will go up by same proportion that is 120%, except for fixed costs. Fixed costs will double in the second year because of the addition of one more pizzeria to the chain.
Forecasted Profit & Loss statement for the second year (20X2)
After the second year profit after taxes will increase to $728000 – a year-on-year increase of 147.6%. Total capital employed by the end of the second year in the business will be $2000000. If all of this comes through the equity route then Return on Equity of the shareholders will be :
(728000/ 2000000)*100 = 36.4%.
We expect to add another pizzeria in the third year of the business. At the same rate of growth in revenues and costs in the second year, the net profit in the third year will grow to $1074528. An additional investment of $1000000 will have to be made in the business in the third year. Return on equity at the end of the third year will be:
1074528/3000000 = 35.82%.
Assuming the same rate of growth in the fourth year, profit after tax will grow to $1579556; in the fifth year profit after tax will be $2321947.
The business has the potential to generate substantial returns for shareholders. The differentiated value proposition in the form of pizzas made from organic ingredients will give the business a significant competitive advantage over competitors. Competitors of the business will include restaurants and pizzerias that sell organic food as well as those restaurants and pizzerias that sell non-organic traditional food.
The dividend payout to shareholders will be increased in future as investments needed for growth will come down. After five years of operations the company intends to get publicly listed at a major stock exchange. Investors who invest in the company right now will get the opportunity to unlock value when the company gets publicly listed. The amount raised through the public offer will be used for fuelling future expansion.
A conservative estimate of the market value of the business can be made by assuming that Earnings at the end of five years at $2321947 and that the shares of the company get listed at a price-to-earnings(P/E) ratio of 15. At this P/E ratio the market value of the company at the time of listing, five years from now, will be $34829205. The total investment of shareholders over the five year period will be $5000000. Therefore at the time of listing they are likely to enjoy capital gains of:
((34829205 – 5000000)/5000000) * 100= 596.5%
Industry size:
The annual revenue of the nation-wide pizza industry was in excess of $3 billion. It is growing at an annual rate of 3%. In the next ten years if Organic Pizzeria is able to take 0.5% market share of the pizza industry then it will have annual revenue of $201 million. If it is able to maintain a net profit margin of 25% (a conservative estimate) then it will have net profit of $50.25 million by the 10th year of its operations. The pace of expansion of the chain will pick up after its public offer five years hence. In the long run, the aim is to transform Organic Pizzeria into an international chain.
Vision of the business:
The vision of the business is to become the market leader in the organic pizza segment.
Mission of the business:
The mission of the business is to create value for shareholders and other stakeholders by turning out high quality of products and services for customers. The main stakeholders of the business are: shareholders, suppliers, customers, employees, state and the community.
Business strategy:
The business strategy will be to become a product leader in the organic pizza segment. The pizzas of Organic Pizzeria will be made from the best quality of ingredients. The business intends to use product leadership to become a market leader in the organic pizza segment in the country. In the long term international expansion is also a possibility.
In the initial years all the pizzerias will be owned and managed by the company. The franchise route will not be taken so as to ensure that quality of product and service is not compromised in any way. Once the chain becomes big enough then the franchise option may be considered for increasing market penetration through more intensive distribution.
Marketing strategy:
The marketing strategy will be underpinned on the 4Ps, which are:
i)Product: To become a product leader in the organic pizza segment by producing high quality pizzas.
ii) Price: The pricing will be in line with the positioning of the business. However the pricing strategy will also aim to make the product affordable to a large segment of target customers.
iii) Place: Distribution will be the key to the success of the chain. The pizzerias of the chain will be located on prime shopping centers and high streets.
iv) Promotions: The promotions will be done through promotional offers and word-of-mouth publicity. The promotions budget has been kept limited.
Conclusion:
The business has the potential of being highly profitable for investors if the strategic implementation happens according to the plan. It is in a segment that has a lot of untapped growth potential. If the business fails to perform as per estimates then it will be liquidated and wound up by the end of the first year. In that scenario part of the $1 million invested by the investors can be recovered by sale of assets. In the worst case scenario the investors will end up losing around $750000.
The upside potential of profits for investors, given the quantum of risk that they will be taking by investing in this venture, is very high.
Appendix:
Cost Statement
[Contribution = Price – Variable cost]
Profit & Loss statement
