Business Description
This paper evaluates the financial business plan of CITI groups expansion to Europe. The company prefers to have operations in Europe as part of its growth strategy. Consequently, CITI group incurs costs so as to have operations running in Europe.
The projected costs for CITI Group
CITI group will have to acquire two buildings from which its operations will be run. The project cost of one of the buildings will be $1,000,010. The other building will be acquired under financial lease terms; it has an estimated value of $1,180,000. The company will purchase equipments worth $545,000 while the initial inventory is estimated to cost $20,0000. In addition, there will be no asset contributed by any other interested party (Leimberg, 2007).
The working capital requirement and the fixed assets requirement will be financed from both equity capital and debt.
CITI group will acquire a long term loan estimated at $1,805,310. This amount will be used in acquiring the assets required. The loan period is estimated to be 15 years with an interest rate of %. The value of the short term loan is $152,190 payable in 5years and the estimated interest rate is 7%. The owner will contribute $720000 in cash which will form part of the equity capital. In addition shares valued at $100,000 will be sold to meet the remaining cost requirements.
CITI group is projected to have a cash surplus at the end of the first year of operations. The cash receipts and the payment during the first year of operation are expected to be as follows;
The value of expected cash sales is $4,767,810 while the value of credit sales expected to be paid during the year is $1,890,510. The amount of equity and debt contributed during the year will also form part of the cash receipts at $ 820000 and $1,957,500. During the year the business expects to purchase equipments valued at $1,644,350. The company expects to pay expenses value at $2,339,670 with cash; this will be the value of total expenses excluding the depreciation. The business expects to pay dividends and tax during the year valued at $37,730 and $133,160respectively. The company will have a surplus of $678,970 and the business will not have a minimum amount of cash.
The company’s projected statement of comprehensive income indicates that the company will make a profit during its first year of operation
The projected value of gross profit is $3,336,460 this after taking into consideration the value of sales less the cost of sales. The purchases are expected to be valued at $1,641,350 while the value of closing inventory is $210,000. The company expects to incur $1,550,400 on salaries and wages, the interest expense will be paid on both the long and short term loans. Given interest rates an amount of $110,920 will be paid. The general expenses are inclusive of legal fees, telephone charges, power, office supplies and business rates that the company expects to incur. The value earnings before interest tax and dividend are expected to be $887,790. The company will pay tax at the rate of 15% and the equity holders earn be given dividends valued at $37,730 from the net income. The profit from the operations of the first year is expected to be $716,830. The amount will be retained by the company and used to finance further operations.
The company statement of financial position indicates the projected value of the company’s assets, liabilities and capital.
The leasehold and the building are not expected to depreciate over their lifetimes. However, the equipments will depreciate at a rate of 20% this will be calculated on a reducing balance base. The value of non-current assets are expected to be $2,616,010. The current assets will include an inventory and the cash in hand and are projected to be valued at $ 210,000 and $678,970 by the end of the first year. The value of the long term debt is expected to decline by the end of the year because of the payment the principle and interest. The retained earnings will be added to the equity capital. As such it is projected that the statement of financial position will balance at $3,504,980.
The projected financial ratio analysis
The current ratio of the predicted working capital indicates that the company will be highly liquid during the year. As such the company will be able to meet its current obligations.
The company can be able to convert its assets very quickly to cash according to the ratio. It will be able to meet its current obligations.
The value of debt to equity is 1.28:1. The company will be able to cover its debts using the projected value of equity.
The value of inventory turnover indicates that the company will convert its inventory to sales just after 16 days.
The company will be able to pay its account payables just after 36 days.
The value of sales converted to profit will be 15% of the sales.
The ratio indicates that the equity holders will have a return of 49% from their investment in the company.
The risks facing CITI groups expansion
Economic risks
There are various economic risks facing CITI group the company had been adeversely affected by the liquidity and solvency problems during the fianacial crisis. As a result most investors will take caution when investing funds in the proposed expansion strategy. The company will face the risk of not getting the necessary fund to start its operations in Europe considering the stability problems.
Competition
The finacial services industry is very competitive. Europe is no better and CITI group will have to face other financial services giants in Europe. There is risk that the company will not meet its targets because of the competitive nature of the industry.
Finacial risks
CITI group is will be highly liquid according to the projected liquidity ratios. However, there is a risk the company will not be liquid enough due challenges in making the necessary sales. This will heavily impact on the company,s functions by limiting the flow of cash.
References
Leimberg, S. R. (2007). Financial planning. Cincinnati, Ohio: National Underwriter Co.
Forsyth, P. (2002). Business planning. Oxford: Capstone Pub.
O'Conor, D. (2000). Business planning.Broadstairs [England: ScitechEducationa
