Strategic Decisions and its Implications on the Financial Statements

OverviewOverview

This presentation is based on a fictional case study, which consider the expansion of Medical Logistics operations and organic growth in the field of medical supplies and services both local and in the Sub-Saharan African region.

This expansion is based upon the implementation of a new sales and marketing strategy that consist of investing in new market niches and the improvement of the already existing ones.

Situational Situational AnalysisAnalysisMedical Logistics is a limited liability company that operate in the Sub-Saharan African region.

They are specialised in the selling of medical products as well as medical health services, with their operations covering Ghana, Togo and Benin.

Their market value as per 2013 was estimated at 2300 Million USD.

They are aiming at reaching a 20% market share by 2018

Company overview as per 2013:

-100 Million USD as turnover

-150 Employees

-4% of market share

-8% average yearly growth in market value for the coming 5 years

-460 Million USD of market value in the rural areas and 1840 Million USD of market value for the urban areas.

Financial Financial AssumptionsAssumptions

These assumptions are a bit simplistic for the sake of making this case study analysis a more straight forward of an exercise.

Some other parameters should have been taken into consideration in a more detailed presentation, just to mention few:

-Business risk rate

-Weighted Average Cost of Capital

-Competitors analysis

-Seasonality

-Market Penetration

-Etc

BenchmarkingBenchmarking RatiosRatiosFinancial ratios varies widely from one industry to another. A service company’s operations are different from a production and manufacturing company and so it is for a financial institution.

In this study we have considered the average ratios of around 250 American companies in the medical supplies and services sector to set our benchmark comparison.

Visualise Visualise ItIt

The aim of this study as we have mentioned earlier, is to explain the effect if the implementation of the expansion project which will enable the company to reach its primary objective of acquiring 20% of market share in 5 coming years from an actual figure of 4% of market share as already mentioned.

To achieve this set objective, resources are needed: Financial, human, logistical as well as technological.

Financial Financial Analysis (Revenue)Analysis (Revenue)

The first step is to project the right amount of revenue that enable the company to reach a higher profit.

Revenue ProjectionsIn USD Year 1 Year 2 Year 3 Year 4 Year 5USD/GHC Rate estimate 3,7 3,9 4,1 4,3 4,5 Local MarketNumber of Units 360.000 540.000 621.000 707.940 736.258Unit Price 100 115 132 152 175Total 36.000.000 62.100.000 82.127.250 107.668.825 128.771.914

Foreign Market          Number of Units 1.440.000 2.160.000 2.484.000 2.831.760 2.945.030Unit Price 105 121 139 160 184Total 151.200.000 260.820.000 344.934.450 452.209.064 540.842.040

Net Revenue 187.200.000 322.920.000 427.061.700 559.877.889 669.613.955

Financial Financial Analysis (Personnel)Analysis (Personnel)

The second step is to project the right number of personnel that enable the company to reach its financial targets

Personnel Plan Year 1 Year 2 Year 3 Year 4 Year 5In USDTotal Number of employee 198 251 303 353 403 Total Salary & Wages 3.636.000 5.574.000 7.670.520 10.034.772 12.795.169 Total Benefits 872.640 1.337.760 1.840.925 2.408.345 3.070.841 Total Compensation 5.066.640 7.451.904 10.105.603 13.096.692 16.584.941 % of Revenue 2,7% 2,3% 2,4% 2,3% 2,5%

Financial Financial Analysis (Logistics and ICT)Analysis (Logistics and ICT)

Property and EquipmentIn USD

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Actual

Net Revenues Assets 187.200.000 322.920.000 427.061.700 559.877.889 669.613.955

Capital ExpendituresFurniture 500.000 100.000 100.000 100.000 200.000 500.000 Equipments 1.500.000 250.000 250.000 250.000 250.000 400.000 Vehicles 2.500.000 500.000 1.000.000 2.000.000 5.000.000 8.000.000 Total Capital Expenditures 4.500.000 850.000 1.350.000 2.350.000 5.450.000 8.900.000

% of Revenue 0,5% 0,4% 0,6% 1,0% 1,3%

The third step is to project the needs in terms of equipment, warehousing facilities, logistics and information technologies.

By analysing the financial standing of the company, we can easily draw the conclusion that the expansion plan can be generated internally.

The estimated needs in resources are:-- New recruits 1,250,000 USD-- In house training 50,000 USD-- New Equipments and warehousing spaces 250,000USD-- Furniture 100,000USD-- New Fleet 500,000USD-- Marketing plan execution 2,600,000USD-- Working capital to invest in inventories level 20,000,000USD-- Miscellaneous 250,000USD

Total Needed 25,000,000USD

he project is going to be financed through a loan of 20M USD and Internal Cash flow 5M USD, Although the company can afford to finance the project entirely from internal sources, its wiser to loose 2,43% of net profit margin (4548000 USD), than to loose the 25M USD in case the implementation did not yield the expected effect. In this the company would have shared its financial risk 80/20 to a financial institution.

Income StatementIn USD

Year 1 Year 2 Year 3 Year 4 Year 5

NET REVENUES 187.200.000 322.920.000 427.061.700 559.877.889 669.613.955

COST OF REVENUE 94.787.200 162.157.584 214.729.947 281.522.595 337.763.953 % of Revenues 50,6% 50,2% 50,3% 50,3% 50,4%

GROSS PROFIT 92.412.800 160.762.416 212.331.753 278.355.294 331.850.002 % of Revenues 49,4% 49,8% 49,7% 49,7% 49,6%

OPERATING EXPENSES Sales & Marketing 163.680 327.360 414.110 455.521 501.074 General and Administration 21.525.760 27.020.293 34.059.670 42.619.804 54.807.826 Total Operating Expenses 21.689.440 27.347.653 34.473.781 43.075.326 55.308.900 % of Revenues 12% 8% 8% 8% 8%

         EARNINGS FROM OPERATIONS 70.723.360 133.414.763 177.857.972 235.279.969 276.541.102

         EARNINGS BEFORE INTEREST & TAXES 70.723.360 133.414.763 177.857.972 235.279.969 276.541.102

INTEREST INCOME / (EXPENSE) -6.000.000 0 0 0 0

NET EARNINGS BEFORE TAXES 64.723.360 133.414.763 177.857.972 235.279.969 276.541.102

TAXES -16.180.840 -33.353.691 -44.464.493 -58.819.992 -69.135.276          

NET EARNINGS 48.542.520 100.061.072 133.393.479 176.459.976 207.405.827 % of Revenues 25,9% 31,0% 31,2% 31,5% 31,0%

Balance SheetIn USD

Begin Year 1 Year 2 Year 3 Year 4 Year 5

ASSETS CURRENT ASSETS Cash 10.000.000 59.783.320 124.955.178 142.416.407 186.081.837 213.288.163 Accounts Receivable 12.500.000 28.080.000 40.478.022 53.446.772 70.068.718 83.802.186 Inventories 13.000.000 29.203.200 42.091.976 55.584.643 72.871.466 87.154.274 Other Current Assets 0 0 0 0 0 0

Total Current Assets 35.500.000 117.066.520 207.525.177 251.447.822 329.022.022 384.244.623 PROPERTY & EQUIPMENT 4.500.000 3.940.000 3.486.667 3.306.667 5.490.000 8.660.000

TOTAL ASSETS 40.000.000 121.006.520 211.011.843 254.754.488 334.512.022 392.904.623

LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable & Accrued Expenses 10.000.000 22.464.000 32.408.251 42.757.417 56.054.974 67.041.749 Current portion of long term debt 0 0 0 0 0 0

Total Current Liabilities 10.000.000 22.464.000 32.408.251 42.757.417 56.054.974 67.041.749

LONG TERM DEBT (less current portion) 0 20.000.000 0 0 0 0

STOCKHOLDERS' EQUITY CommonStock 30.000.000 30.000.000 30.000.000 30.000.000 30.000.000 30.000.000 Retained Earnings 0 48.542.520 148.603.592 181.997.071 248.457.047 295.862.874

Total Equity 30.000.000 78.542.520 178.603.592 211.997.071 278.457.047 325.862.874 TOTAL LIABILITIES & EQUITY 40.000.000 121.006.520 211.011.843 254.754.488 334.512.022 392.904.623

Break-Even AnalysisIn USD

Year 1 Year 2 Year 3 Year 4 Year 5Revenue 187.200.000 322.920.000 427.061.700 559.877.889 669.613.955

Unit PriceVariable 93.819.200 161.147.440 213.605.789 280.269.020 336.315.021 Fixed 968.000 1.010.144 1.124.158 1.253.574 1.448.932 Total 94.787.200 162.157.584 214.729.947 281.522.595 337.763.953

Operating ExpensesVariable 20.000.000 25.000.000 31.250.000 39.062.500 48.828.125 Fixed 1.689.440 2.347.653 3.223.781 4.012.826 6.480.775 Total 21.689.440 27.347.653 34.473.781 43.075.326 55.308.900

Total Costs & ExpensesVariable 113.819.200 186.147.440 244.855.789 319.331.520 385.143.146 Fixed 2.657.440 3.357.797 4.347.939 5.266.400 7.929.706 Total 116.476.640 189.505.237 249.203.728 324.597.920 393.072.852

Variable Costs/Revenue Ratio 0,61 0,58 0,57 0,57 0,58

Break-Even Point Revenues 6.779.331 7.927.759 10.190.879 12.257.682 18.665.684

Cash Flow StatementIn USD

Year 1 Year 2 Year 3 Year 4 Year 5OPERATING ACTIVITIES Net Earnings 48.542.520 100.061.072 133.393.479 176.459.976 207.405.827 Depreciation 1.410.000 1.803.333 2.530.000 3.266.667 5.730.000 Working Capital Changes

(Increase)/Decrease Accounts Receivable -15.580.000 -12.398.022 -12.968.750 -16.621.946 -13.733.469 (Increase)/Decrease Inventories -16.203.200 -12.888.776 -13.492.666 -17.286.824 -14.282.807 Increase/(Decrease) Accts Pay & Accrued Expenses 12.464.000 9.944.251 10.349.166 13.297.557 10.986.775 Net Cash Provided/(Used) by Operating Activities 30.633.320 86.521.858 119.811.229 159.115.430 196.106.326

INVESTING ACTIVITIES Property & Equipment -850.000 -1.350.000 -2.350.000 -5.450.000 -8.900.000 Other          

Net Cash Used in Investing Activities -850.000 -1.350.000 -2.350.000 -5.450.000 -8.900.000

FINANCING ACTIVITIES Increase/(Decrease) Long Term Debt 20.000.000 -20.000.000 0 0 0 Dividends Declared 0 0 -100.000.000 -110.000.000 -160.000.000

Net Cash Provided / (Used) by Financing 20.000.000 -20.000.000 -100.000.000 -110.000.000 -160.000.000          

INCREASE/(DECREASE) IN CASH 49.783.320 65.171.858 17.461.229 43.665.430 27.206.326

CASH AT BEGINNING OF YEAR 10.000.000 59.783.320 124.955.178 142.416.407 186.081.837

CASH AT END OF YEAR 59.783.320 124.955.178 142.416.407 186.081.837 213.288.163

Year 1 Year 2 Year 3 Year 4 Year 5Summary Financials in USD

Revenue 187.200.000 322.920.000 427.061.700 559.877.889 669.613.955 Gross Profit 92.412.800 160.762.416 212.331.753 278.355.294 331.850.002 EBIT 70.723.360 133.414.763 177.857.972 235.279.969 276.541.102 EBITDA 72.133.360 135.218.096 180.387.972 238.546.635 282.271.102 Net Earnings 48.542.520 100.061.072 133.393.479 176.459.976 207.405.827 Net Cash from Operating Activities 30.633.320 86.521.858 119.811.229 159.115.430 196.106.326 Capital Expenditures 850.000 1.350.000 2.350.000 5.450.000 8.900.000 Interest Income/(Expense) -6.000.000 0 0 0 0 Dividends 0 0 100.000.000 110.000.000 160.000.000 Cash 59.783.320 124.955.178 142.416.407 186.081.837 213.288.163 Total Equity 78.542.520 178.603.592 211.997.071 278.457.047 325.862.874 Total Debt 20.000.000 0 0 0 0

Growth Revenue Growth Rate - CAGR: 73% 32% 31% 20% Net Earnings Growth Rate - CAGR: 106,1% 33,3% 32,3% 17,5%Ratios Current Ratio 5,2 6,4 5,9 5,9 5,7 Debt to Capital (LT Debt + Equity) 20% 0% 0% 0% 0%Profitability

Gross Profit % 49,4% 49,8% 49,7% 49,7% 49,6%Operating Expenses % 11,6% 8,5% 8,1% 7,7% 8,3%Net Earnings % 25,9% 31,0% 31,2% 31,5% 31,0%

ReturnsReturn on Assets 40,1% 47,4% 52,4% 52,8% 52,8%Return on Equity 61,8% 56,0% 62,9% 63,4% 63,6%Return on Capital (LT Debt + Equity) 49,3% 56,0% 62,9% 63,4% 63,6%

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