This is a modified version of the report for Enterprise in Action in Bath Full Time MBA Class of 2020.

Financial projection of a Meal Kit Start-Up

Introduction

This article will show how to make financial plan for a start-up using an example which is a meal kit start-up. This figure is the result of financial projection.

Figure EA

Funding (Key Resource)

There are mainly three option to fund the money to start the business. First, to borrow the money from the financial institution such as banks (called debt) and second, to be funded by venture capital (VC) and crowd funding. however, it is assumed the business will be fully funded by VC with 10% cost of capital. this is primary because debt is less likely to be borrowed by the firm which do not have more than several years cash generating history and the crowd funding has ambiguously when and how much the firm can borrow the money.

Projected turnover

It is assumed until FY2021 (Year 1 of financial projection), the business will have a half of the target market. The total number of the international students in Bath and Bristol from East Asia and South East Asia was 6,671 people according to UK government statics. therefore, the projected turnover (revenue) would be £720,468 as a result of the assumptions which revenue would be £4.5 per unit and average purchase times per customer would be 48 (or monthly the customer would purchase 4 unit on general). From Year 2 (2022), it is projected the business will expand to other areas in UK. Hence the number of the target customers will be also enlarged to 184,955 people according to the UK government. It is estimated the share of the market in Year 2, 3, 4 and 5 are 10%, 30%, 40% and 50%. As a result of estimations of the market share, the projected turnover would be calculated to ‘£3,995,028’, ‘£11,985,084’, ‘£15,980,112’ and ‘£19,975,140’ respectively in the same split of the calculation of Year 1.

Projected gross profit and GP% (Financial projection)

Projected gross profit is earned by projected turnover minus material cost which is assumed £2.9. Therefore, it would be £ 1.6 (£4.5 - £2.9) multiplied by units sold which are the number of the customer the business will earn multiplied by 48 (average purchase times per customer). In addition, projected gross profit margin (GP%) would be projected gross profit divided by projected turnover.

Projected EBITDA (Financial projection)

Other costs would also be charged to run the business. Assumed to omit minor part of costs, the ones are mainly application maintenance fee, rent fee (even if the business will not have any facilities such as kitchen and warehouse, still the function of these one will be required in the farm then this fee is for that), marketing cost and human resource cost (other cost in the financial projection). In Year 0 (2020), it is required to invest to build the application which is estimated to spend £720,000 and from Year 1, it will be charged 20% of development cost (£144,000) as a maintenance fee. The rent fee will depend on how many sales units the business will need. it is projected one sales unit has the function of kitchen and warehouse for 1,000 customers, which will cost £18,409. £8,917 rent fee in Year 0 means the business will offer the farm some materials to run. In Year 1, the business will target roughly 3,500 people and therefore it will be required 3.5 sales units. In the same spirit, the rent fees each year will be the number of sales unites multiplied by rent fee per sales unit (£18,409). On the other hand, marketing cost will be customer acquisition cost (per customer), which is assumed £0.5, multiplied by the number of the customer the business will earn each year. Finally, other costs (human cost) will required two person who are one chief and one staff charging £48,000 per sales unit from Year 0. Projected EBITDA is estimated projected turnover minus the sum of the costs each year and the numbers will be ‘- £720,000’, ‘- £121,934’, ‘£1,644’, ‘£385,409’, ‘£577,292’ and ‘£769,175’.

Free Cash Flow Forecast, NPV and IRR (Financial projection)

Free cash flow will be projected EBITDA minus amortization and depreciation (A&D) and income tax (17% of EBIT) and to be simplification, it is assumed A&D is zero. Therefore, projected EBITA is equal to projected EBIT here. As a result of the tax calculations, free cash flow will be ‘-£720,000’, ‘-£121,934’, ‘£1,364’, ‘£319,890’, ‘£479,152’ and ‘£638,415’. NPV will be projected free cash flow multiplied discount factor which is the reciprocal of 1 plus the cost of capital (10%) and multiplied the number of years. As a result of that, NPV will be £134,290 (> 0). IRR will also be 14.2%.

Break even analysis

Break even units sold is total fixed cost divided by the number that revenue per unit minus valuable cost per unit. fixed cost is equal to application maintenance and marketing cost and therefore other costs belongs to valuable cost. Hence valuable cost per unit is valuable cost divided by units sold each year. Therefore, break even units sold are ‘160,000’, ‘982,644’, ‘880,178’, ‘880,178’, ‘880,178’ and ‘880,178’.

Reference