Case Study on Healthy Snacks Manufacturing Financial ModelWania Shoaib
Case Study on Healthy Snacks Manufacturing Financial Model
This case study is about a healthy snacks (chips) manufacturing company based in KSA. It was a start-up company and wanted to have the market validation, forecast of the financial statements, and other financial metrics to enter the market of healthy snacks. The company was facing financial limitations and needed help in this area. Oak Business Consultant specializes in helping companies with financial analysis and modeling, particularly for start-ups. We have extensive experience working with companies in the food industry. And we are ready to provide strategic guidance and support to this healthy snacks manufacturing company. After conducting a thorough assessment of the company’s current needs and goals, Oak Business Consultant worked closely with the client to develop a customized financial model that included projections for sales, costs, margins, and other key metrics related to the production and marketing of healthy snacks. Using our expertise in financial modeling techniques, we were able to help the client make informed business decisions based on their financial models and forecasts.
The challenging part was identifying the serviceable obtainable market (SOM) of the firm. The reason is the market’s saturation, and penetrating the new market is arduous. Another challenge was to determine the sales from the different sales channels. Consumers have different preferences for obtaining the product, i.e., some find online shopping comfortable, while others still prefer brick-and-mortar.
Our experts formulated the model for five years. So, it was also a challenge to identify when to increase the production capacity. As the market has a significant per-annum growth rate, we cannot ignore the potential entry of new competitors. Hence the fluctuations in the sale of healthy snacks were non-negligible while moving on to the new production line.
Oak Business Consultant provided a deep analysis of financial highlights by market research. According to the article in Saudi Gazette, 40% of Saudis prefer healthy food options. So, we identified our client’s total available market (TAM) by taking this percentage of the total snacks market. We found online sales to be significantly less, making the other two channels, wholesale and retail, the dominant channels.
The issue of production capacity utilization was resolved as if the ratio of total quantity to be produced and the production capacity per month exceeds or becomes equal to the maximum machine hours per day, they will equally distribute the production load on both of the production lines. A few of the other financial metrics we included in the financial model were:
We constructed the input assumptions as per the client’s business model. For example, production capacity was assumed based on the maximum machine hours available per day and batch capacity. It also includes the assumptions for the capital structure, price, cost of goods sold, and operating and capital expenditures.
We forecasted the financial statements for the first five years of the company. In a statement of profit and loss, we included the research and development cost, legal expenses in the formation and documentation of the company in KSA, and marketing expenses. For the first year, the marketing cost was around 317% of the total revenue. We needed an aggressive approach to penetrate the saturated market and also include pre-operational marketing expenses as the production will commence in the 10th month of the business.
Based on the Forecasts, the startup year incurs the most cash inflows as Financing and outflows for Investments as the company is looking to acquire funding and a small percentage of debt to cover its startup expenses and manage its operations until stability is achieved. The buying of production machines is also a major capital expenditure incurred in the startup year.
We observed from the statement of financial position that around 94% of the capital structure is equity. It means the firm has obtained fewer loans and relied on its investment. The other reason for the following capital structure could be that it’s a startup company and will take time to build the market and satisfy the creditors for the issuance of loans. Also, as a manufacturing company, operational/production costs are high, due to which it takes longer to achieve breakeven, i.e., coming to a position where the company will be able to cover interest expense. This presented the opportunity for our financial analysts to conduct a break-even analysis.
The figures show that if the market is stable and everything goes well, the company could achieve breakeven sales in the third year while keeping the contribution margin almost the same for the next five years.
The calculated NPV, from the free cash flows at the constant growth rate of 4% after five years, is positive and the IRR of the firm is greater than the hurdle rate, which shows satisfactory results in favor of the growing healthy snacks market in KSA.
We did a sensitivity analysis for the client to analyze the impact on the company’s net present value by considering actual, optimistic, and worst-case scenarios. It was also essential to calculate the payback period in all three scenarios, and so we did. As a result, our financial analysts conducted the price sensitivity analysis and achieved the breakeven of the net income in the company’s third year.
The dashboard shows the most relevant KPIs’ graphical representation of the financial model and depicts the key financial metrics to understand the performance measures better.
Overall, the healthy snacks industry has a lot of potential for growth in KSA. By adopting an aggressive marketing approach, the firm can easily capture sufficient market share. In addition, the firm can achieve a sustainable competitive advantage by focusing on research and development.
Oak Business Consultant is keen to provide the most profound and best financial services. We come up with the finest solutions to satisfy the financial needs of the firms and ensure professionalism and timeliness. We always stand ready to help our clients achieve their goals.