Case Study- Cosmetic Business Start-Up Financial Model

Background 

This case study is about a cosmetics manufacturer who wanted to acquire investments based on a cosmetic industry financial model presenting detailed but realistic financial projections. The cosmetic business of our client is a startup company in Africa aiming to capture the market of the country and other regions.

In this Case Study, we have presented the process and analysis techniques used to prepare a detailed cosmetic industry financial forecast model for our client. Moreover, we have provided a separate input sheet with input tables linked to other model tabs through complex formulas. This functionality makes this cosmetic business model dynamic such that it can be updated anytime by changing the input values. 

Challenges 

• As start-up companies are usually not in the revenue phase, estimating the number of sales and the costs incurred is tough. 
• During this start-up cosmetic business financial modeling, the main challenge was consolidating the equity and debt-based funding types into the model structure so that they could be adjusted from input tables.
• Moreover, there are different products, and each has separate working for its selling price and cost per product. Dynamic rows are provided to calculate the project’s cost and add data if the project expands significantly. 
• Another significant challenge is calculating separate pricing for retailers, wholesalers, and direct customers.  
• Ultimately, we must provide a Net Present Value and IRR to help the client make the best possible decision for future strategies.
• One of the significant issues for us is to give them flexibility and to keep input dynamics, which requires implementing complex logic through excel formulas.
• Another challenge for us is to prepare a complete investment and returns management schedule. This is important to estimate the best strategy for return distribution while keeping a cash reserve to avail of a good opportunity.
• Another challenge was keeping each product dynamic’s launch date in case there is a delay in operations or a change in plan. The client wanted the flexibility to be able just to adjust dates and all the working fets updated accordingly. 

Solution 

• We researched several cosmetic industries worldwide and estimated the profit margins, costs, and other expenses using estimations and assumptions from other cosmetic startups. 
• We incorporated equity and debt funding into this cosmetic business financial model to consider financing forms. Moreover, we made it dynamic so that the amount of debt or equity can be adjusted at any time depending upon the equity raised or debt acquired. 
• Different funding types with varying cost options are provided to calculate and adjust the model per the changes. 
• We prepared a separate price sensitivity sheet to calculate the prices of the products. Our client company start-up looks forward to selling its product to wholesalers, retailers, and end-consumers. The end consumer purchases the product at the market price. However, wholesalers and retailers demand discounts, so discounted prices are calculated to facilitate them. 
• We created separate schedules for each product to show proper working with all the calculations. Moreover, as the start-up was acquiring the raw materials in bulk and consuming them in minimal quantities per each packet of the cosmetic product, a very detailed calculation was done to reach the final cost. 
• The client was still determining when to hire the employees and at what compensation and benefits. So we prepared a separate payroll sheet that includes the basic salary, compensation, and employee benefits section. Moreover, it includes the date of joining tab with a dynamic complex excel formula structure to calculate the employee’s total income since they joined the company.  
• Estimating the correct month when the inventory will be sold and revenue for the company will start. For this purpose, we prepare a dynamic model that can be updated by entering the date the company will start selling its inventory.   

Market Validation 

As this cosmetic business startup aimed to operate in South Africa, the primary target market for the company is the South African market. Moreover, as the startup deals in women’s beauty products, the main target is African women. However, the company aims to export its products to foreign markets. 

Business Highlights

The portfolio of our client’s cosmetic business includes different beauty-related products. Our client company plans to introduce 11 products in its portfolio. Moreover, they need to figure out the product line’s expansion plan soon. Some of the essential products of our clients include different creams and oils. Furthermore, we prepared a dynamic sheet for the extra three products, which can be adjusted by simply putting in the base values or the figures. 

Our client’s cosmetic business is a startup company in its initial stages. It will not be making any sales in the first year of its operations. One of the most challenging tasks is estimating the expenses and sales units and suggesting the price. After extensive research, we prepared a dynamic financial model which can be adjusted from the input sheet. The company will start capturing the market in its second year of operations. The company will generate good revenue in its second year and be profitable in the third year.

Financial Highlights

Input Assumptions 

We developed the assumptions considering the startup for the cosmetic industry. Being a start-up cosmetic business, one significant cost is capital expenditure investment, including equipment, fixtures, fittings, and other related costs. Assumptions include packaging and logistics costs, employee payrolls, operating expenses, and other pre-operational expense assumptions.

Revenue Analysis

Revenue depends on the number of units sold of different products. So, we built a dynamic revenue model that considers all factors affecting revenue generation. This allowed us to identify the areas to increase revenue and profitability. 

Financial Statements 

The company statements of our client initially show a negative net profit margin due to no sales in the first year of its operations. However, as the startup starts to sell its products, the net loss will be minimized and will be profitable in the third year of its operations.  

Furthermore, the gross profit margin is also stable after the initial phase of two years. This states that the company will achieve a good position financially. 

Cash Flow Statement 

In addition to the financial statements, we create a cash flow statement for our client. These statements consider the timing and amount of inflows and outflows from operations. This lets us quickly identify potential funding requirements for our client’s cosmetic business. 

Balance Sheet

The total assets and the breakup of current and noncurrent assets are represented in the balance sheet. It also represents the company’s liabilities, including all the short-term and long-term liabilities. Collectively, the balance sheet summarizes the company’s financial position at a given point in time. 

Breakeven Analysis 

Break-even is when the company is at a stage with no loss or profit. Break-even analysis is an essential technique for evaluating your business. Hence, we perform a breakeven analysis for our client, estimating the minimum number of units sold to reach the breakeven point. It gives a roadmap for the company as it tells the number of units sold to remain profitable. 

Price Sensitivity 

Our expert financial analysts design the price sensitivity sheet to integrate the price changes and calculate the selling price for different customers. The client company has mainly three customers: wholesalers, retailers, and direct customers. Hence, separate pricing is calculated for each of them.  

Diagnostic Sheet

The diagnostic sheet represents critical information like profitability, liquidity, cash flow, etc. We prepare a diagnostic sheet for our client’s cosmetic business so that they can assess the company’s financial position and take corrective measures if the company leads toward losses.

Loan Schedule 

We have calculated our client’s loan amount, interest, and monthly principal repayment in the loan schedule table.

Company Valuation

The company valuation represents various critical information about the company. We estimated the weighted average cost of capital. Moreover, we projected Net Present Value and IRR for our client’s cosmetic business to present them to the investors to attract investments. 

Conclusion

The cosmetic industry has excellent potential to grow in the future. This is because of the increase in the use of beauty-related products for many reasons, like high living standards, self-care, and awareness through social media and other platforms. 

In this regard, Oak Business Consultant makes businesses stand out and perform exceptionally well. We go through a deep analysis of market research and financial forecasting. Finally, we consider every aspect of the company to give our clients a critical viewpoint in developing their journey.