Business Plan Trading Company

Business Plan For A Trading Company

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Table of Contents

1. Executive Summary Business Opportunity Product/Service Description

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2. Company Background Business Description Company History

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3. Business Plan For A Trading Company

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4. Services

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5. The Industry, Competition, and Market Market Definition Primary Competitors Customer Profile

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6. Marketing Plan

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7. Financial Plan Investment Plan Break-even Analysis Liquidity Plan Earnings Plan Risk Analysis

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8. Conclusion

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1. Executive Summary Due to shrinking profit margins the local wholesale industry is turning toward new and innovative business concepts. Logistics, just-in-time and business optimization especially are such concepts that lately showed significant growth potential. For the selected countries where the company operates the industry expects significant growth rates to persist in the near future so that investments in that segment are very profitable. The goal of this start-up is the operation of a trading company that offers a selected range of products. Products will be offered with a focus on regional markets. Additional to this core business the company offers a selection of logistic and transportation services for their customers which will help to increase sales revenues and utilize personnel capacity. 1.1 Business Opportunity

The trading industry shows currently a strong growth marked by a higher demand but also growing costs. The development of new business strategies and solutions seems critical for new industry players to get market shares and survive in this highly competitive industry. The choice of services as well as the development of applications can be one strategy in this field of business. Additionally a sound cost management is of critical importance for a solid stream of revenues. Big industry players have shown that even in a competitive market growth rates of more than 20% can be sustained. The operation of a trading company that offers the following products and services is the core of this start-up Industry products Raw materials Storage Trading products Wholesale services A strong focus of this business will be placed on the development of new and innovative trading strategies for the customers that deliver a significant value. As an add-on a broad range of customized services will be offered, which will help utilize company and employee capacity. The range of products is selected to provide solid growth potentials. This can lead to a fast change of goods or whole item groups as well as service elements. The operation of this business requires a good knowledge of the trading markets as well as a competitive logistic service concept to increase customer satisfaction. The demand to explain the handling of special services for other companies is likely to require a high degree of individual customer advise. However, it is critical that this service is offered with a strong focus on cost management. The required investment for the proposed business is relatively low compared to other companies in the industry. A warehouse and labor are expected to be the main cost driver. For the future there are further substantial investments in fixed assets required.


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This will be financed through retained earnings. Depending upon the initial demand the minimum required investment amount ranges between $50,000 and $60,000 in the start-up phase based on a 20-25% average revenue margin. This amount is well within the financial requirements observed for other comparable companies. 1.2 Product/Service Description

The business will operate in the trading industry with a variety of goods that will be bought and sold. An additional source of revenues is the sale of customized logistic and transportation services. This can range from storage space to a worldwide trading logistics and coordination. Cross selling is planned to be one of the prime strategies in this business since all products are targeted to serve a similar need and can easily be combined. Synergies in selling product across business segments is likely to boost earning further. Net earning are expected to be at least 1% above traditional trading businesses with only one or two sales segments. Figure 1.1 shows the revenue mix across segments in the start-up phase. This projection is based on the expected strategic direction, investment amount and business environment. Being the core business the trading segment is expected to generate the largest share in revenues. The sale of logistic services is expected to be another important generator of revenues which also helps utilize invested capacity. The sale of storage capacity is expected to be intensified depending upon market conditions.


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2. Company Background The goal of this start-up is the operation of a trading company for a comprehensive range of products and accessories. The focus of this business will be on the trading segment for national customers which shows the highest profits. It is planned to reach an optimal utilization of personnel and company capacity. An initial investment amount of at least $100,000 to $120,000 is required, which will allow the operation of an industry business with 4 to 6 employees, a warehouse and the required equipment for the distribution process. Leasing and rent will be one element to reduce investment costs. Sales revenues are expected to range between $450,000 and $600,000 in the start-up phase and the operation is expected to generate profits starting in the second or third business year. 2.1 Business Description

Management is expected to have a solid knowledge of the trading markets and the offered services to influence the customers. The goal is to create an innovative business in which the customer experiences competent service. A well chosen and targeted selection of offerings will complement this strategy. Both a spects are a core requirement to build customer loyalty. In the mean run repeat customers are expected to generate revenues of 40% and more. Although this strategy is likely to require additional investments it is expected that revenues per customer will increase significantly and range above industry average. Furthermore this strategy will provide a clear entrance barrier for prospective competitors. The development and promotion of a corporate identity is another central task for management. Given the homogeneity of businesses in this industry the development of a corporate identity will markedly increase sales revenues and build a customer base. Furthermore a corporate identity will support expanding the business to a larger international target market. 2.2 Company History

In the start-up phase the business is operated as a one-man-business. This set up carries a certain risk potential because of the high equity stake the manager bears and the personal and statutory liability assumed. However, this set-up preserves a high degree of flexibility in managerial decision taking. The number of personnel to be employed depends on the structural complexity of the operations and the desired size. Figure 2.1 shows a break up of costs in the industry. It is expected that the target employee earns a monthly salary of $4,500 to $6,000 based on 42 hours per week. The sales and service area requires 1 to 2 employees on average working in 2 shifts. Due to illness and vacation times in the long run an average of 4 permanent employees will be required after the start-up phase. With increasing sales and better utilization of employee work time revenue margins will and thus costs per employee will decrease on average. With revenues ranging around $500,000 capacity utilization is expected to be around 85%. During the start-up phase a single person will attend to all necessary management task, coordinate employees and provide strategic direction to the developing business. Accounting, administrative and machine maintenance will be


outsourced to external partner since those tasks can typically be provided at better rates externally. Sourcing and marketing will require one employee. Finding the optimal location for a business is one of the success factors in the short and long run. This is also important for virtual businesses because taxes, employees and additional costs are crucial for all businesses. The following analysis is based on 10 businesses in the trading industry. Since a small company is recruiting its customers typically from the home country and later from a worldwide area a national location is considered as the core market. For the location with a core market in the selected region following factors are relevant: The taxes and other administration costs are low. Administrative costs are expected comparably small given the expected revenues. The possibility to recruit additional personnel is favorable. Public institutions are expected to provide additional sponsoring. It is easy to find appropriate employees. Because of the favorable growth perspectives in the chosen market and growing investment activities we expect to realize yearly growth rates in revenues of 15-20% given a 4% economic growth rate.

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3. Business Plan For A Trading Company One of the key elements of a successful business in the trading industry is the selection of goods and good groups that are currently as profitable as possible. One key element of a profit maximization strategy is to minimize the costs and to increase the sales volume. The following goods show the highest demand and the best profitability depending on procurement and distribution costs on the one hand and sales revenues on the other hand. Consumer goods Technical equipment for consumer Technical equipment for firms Raw materials Used goods The specific selection of services and applications offered will be monitored constantly and vary according to business needs. The selection will include low and high priced combinations as well as new and innovative products. This strategy provides a competitive edge against other companies in the environment and is expected to generate an additional demand and the possibility for a price mark-up.

The development of warehouse and a storage system are two key elements of a successful trading business in a national environment. To utilize the capacity external customer can also use storage space for their goods. Especially the following industries will show a high demand for this service due to the fact that just-in-time delivery becomes more important. Component suppliers Industry companies Trading companies Retail companies Wholesale companies The estimated revenue is highly correlated with the development of the whole trading industry.


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4. Services Additional service offerings related to the core business are another field of business. The available competence will be used for further business activities that will generate additional revenues. While this is not a core business segment this concept has growth potential because the demand for logistics and transportation services is rising. Initially the investment in inventory, technical equipment and personnel capacity of this segment is limited. Especially the supply of complex logistics planning with a higher priced range will require extensive service. This strategy will help utilize the capacity in personnel since it allows for an optimal coordination of employees. All employees will be trained to cover all aspects of individual services for the customer. Therefore it is necessary to have a high knowledge about the offered services. This concept is adaptive to changes in customer demand.


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5. The Industry, Competition, and Market A careful analysis of the market and competitive forces in this industry is a key element in assessing the business potential of our project. This analysis will provide marketing and sales data that are indispensable to develop the business potential optimally. The main competitors are medium and large trading companies in the national environment with a similar selection of products and services and comparable size. Since the planned project is of national scope with a single headquarter the competitive analysis will have to focus on the national and local market. The market and competition analysis will be based on the entire market. 5.1 Market Definition

Figure 5.1 shows average growth figures in revenues of typical trading companies during the past 10 years. Despite slowing global economic growth in general and in the most local industries in particular, a lot of companies have experienced constant growth rates of more than 15% to 20% since 1999. For 2005 a growth of 17% is expected with a strong development in the third and last quarter. Despite decreasing customer demand the national trading industry underwent a relatively favorable development. New and innovative business concepts in the sector still show high growth potentials while growth rates of traditional businesses in that industry were below average. The significant growth of new business concepts is primarily due to sharp cost control and more efficient business strategies that accounted for higher revenue and earning figures. According to industry estimates 30% of such innovative businesses gained from cross-selling activities between their business segmen ts. Sinking prices of input products and service costs have allowed the industry to partially compensate for slowing demand. Savings in input costs were also due to decreased labor costs. However, starting in 2006 this trend is expected to reverse and growth rates will pick up markedly despite the uncertainty in the development of input prices and worldwide economic developments.

5.2 Primary Competitors

The competitive environment is primarily determined by the choice of item groups but also the regional location. But regardless of the selection of items high mark-ups are not


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feasible in the long run since this will attract competitors who compete away any rents. With a high density of businesses in one location businesses with the highest marginal cost will be driven out of the market. Such locations will yield a return of 12-14% on average. This is the expected equilibrium return in a saturated market. To further analyze the competitive environment it is necessary to define the players in that environment. A firm that generates $300,000 to $1,000,000 in revenues and employs 5 to 10 people should regard a firm with revenues and personnel 3 times this figures as a viable competitor. On the product and service side, businesses with a comparable selection of offers are regarded competing in the same market segment. Figure 5.4 shows the size of businesses in this market segment which also includes different products and services that will be sold worldwide. The numbers are based on average revenues of companies that run their business more than five years.

5.3 Customer Profile

The specialized way of distribution and offerings are primarily targeting large national companies. A possible segmentation to identify different customer groups is by segmentation of different lines of business. Figure 5.2 shows the demand for trading services from different lines of business. Numbers are based on averages per company of a particular group multiplied by the number of companies in the respective group. This gives total demand share per group. As can be seen companies in the industry segment like car manufacturer have a high demand for goods and trading services. Also other industries like telecommunication and information technology have a growing demand especially in the field of procurement. Figure 5.3 shows revenues by yearly revenues of potential customers. The figure shows revenues generated per profit group. Numbers are based on the average profit per customer and the number of customers per profit group. As can be seen customers in the middle income cohort generate the highest revenue streams. High frequented low income groups such as small and medium companies generate relatively low revenue streams.


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6. Marketing Plan In the start-up phase it is a central task of the marketing concept to establish a name recognition and own trade mark. Later on the strategy will primarily be targeted to gain new customers and create customer loyalty of repeat customers. Several marketing and sales promotion strategies are available in the trading industry. Figure 6.1 shows different marketing elements and their use in marketing strategies as well as their estimated potential success factor. The figure can serve as a direction for the planning of a marketing and sales promotion strategy. The numbers are based on typical businesses in the trading and wholesale industry. As can be seen printed advertisements targets a large potential customer group but at a relatively high cost. Printed advertisements in national newspapers and magazines is regarded as very beneficial in the start-up phase to attract a large group of potential customers and draw attention to the range of articles offered. 49% of businesses in the trade industry use printed advertisements and about 60% of this group regard this as the most beneficial form of marketing. Sales promotion strategies have temporary effects only. They are used at business openings primarily and offer special discounts. 49% of businesses use sales promotion strategies frequently and 81% of the users responded that this instrument is successful. Marketing alliances with other trading businesses to generate cost savings and increase efficiency are used rarely. Such strategies include mutual use of marketing and web promotion events and joint promotion arrangements. Only 45% of businesses have used these elements and 55% of these regard this instrument as beneficial. Web and e-mail marketing is used frequently in the trading industry although this would be a relatively inexpensive additional effort. Direct mailings are a very efficient strategy that sends mailing to selected customers or businessmen groups. Since spreading costs of such mailing are very low this marketing element provides a useful tool for special offer promotions. The use of marketing and sales promotions proceeds as follows: to a broad base attract new customers the strategy will include a combination of printed advertisements and special offers with opening discounts. Furthermore a group of customers will be selected for direct mailings. This strategy is expected to continue for 3-4 months after which the effort will turn towards creating a customer loyalty for regular customers. This strategy is supplemented by a regular marketing strategy and direct mailings to regular customers. A marketing alliance and online advertisements will also come to use.


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7. Financial Plan A sound financial plan is the key factor for the success of a business start-up. Investors and banks will base their funding decision on the information given in this plan. Besides a plan of the financial needs this plan must insure that the business is always liquid and ultimately profitable. Since the sales and earnings projections in the business plan are based on expectations, the financial plan has to be revised and refined on a constant basis so that discrepancies can be uncovered and solved instantly. The inputs for this financial plan are based on 22 businesses of different size and market segments in the national trading industry which serve as a group of comparable firms as well as own estimates based on the planned business environment. Revenue estimates are conservative and expense projections include a cushion for unforeseen contingencies. The initial capital requirement is estimated to be $50,000 to $60,000. The sales margin is expected to be 7-10% whereby each business segment contributes differently to sales and earnings. The classical wholesale segment will of all segments have an average contribution to sales in relative terms (6.5%) but given the high sales volume the largest in absolute terms. Revenues from transportation and logistic services can be differentiated into those from low priced single services to comprehensive and long-term transportation. The sale of services is expected to generate a 12% to 15% sales margin while the margin from sales of storage places is expected to be closer to about 10%. Figure 7.1 shows the source of revenues by segment during the start-up phase. Depending on the initial investment sum cost and revenue estimates vary. Figure 7.2 shows the expected relationship of cost and revenues. As can be seen the relationship is not linear everywhere but costs decrease relative to sales at an initial investment of $50,000. This effects is due to the better utilization of capacities in personnel at rising revenues at constant cost. If capacity is fully utilized additional personnel must be recruited. At an investment sum of $100,000 administrative costs are expected to return to a linear relationship of sales. At sales levels between $1,000,000 to $2,000,000 costs increase by the factor 1,85. The cost revenue relationship is important not only during the start-up phase but also for planned further expansion. Often such expansion strategies are based on this relationship. Other industries are able to generate cost savings of 30-50% during expansion periods while for the trading industry this factor is close to 15%. At a specific size this relationship reverses because administrative costs rise sharply. This affects small businesses between 10 and 20 employees most severely. The details of the financial plan are laid out in more detail as follows: Section 7.1 gives an investments schedule. This includes all investments necessary during the start-up phase. Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Every additional sales revenue adds to profit and vice versa.


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Section 7.3 gives a liquidity plan. This plan is based on current cost and revenue estimates from Section 7.2. Liquidity must always be positive. Section 7.4 contains a long-term profit projection for the first 4 years of business. The projection shows that the critical amount of revenues at which the business is profitable and how profit develops over time. Section 7.5 provides a risk analysis. The risk analysis contains critical factors that may impact the financial numbers presented in this plan.

7.1 Investment Plan

The investment plan comprises primary capital needs for the foundation and operation of an trading company with a national focus and different products and services for sale. The plan also includes initial marketing and sales promotion expenses. The figures are based on a business with 3-5 employees and expected revenues of $950,000 in year 2-3.


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7.2 Break-even Analysis

The break-even analysis shows how earnings rise as a function of sales. The break-even point is the point at which revenues from sales cover total costs (fix costs and costs rising with sales). This analysis is important for the developmen t of the liquidity plan. If the break-even point is not achieved in the long run the business loses liquidity and may become insolvent. This requires that a critical amount of revenues must be generated. At a sale revenue of $600,000 and given fixed costs the business will generate a profit. Fixed costs are estimated at $120,000 to $130,000 and variable costs at $480.000. At a realizable revenue of $1,000,000 after 2-3 years profits will rise to $70,000 pre-tax. This represents an earnings margin of 10% pre-tax and 7% after-tax. These estimates are realistic in this market segment. Increasing sales volume will increase pre-tax earnings margins but this development reverses when administrative costs begin to rise sharply. Up to a sales volume of $3,000,000 earnings margins rise to 12.5% after which the


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margin decreases to constant 11.5%. Figure 7.3 shows at which critical sales volume the business generates a profit. This serves as a base for a pricing strategy. Additionally the graph shows the amount of sales at which a marketing campaign can be run profitably.

7.3 Liquidity Plan

The liquidity plan shows the amount of finances necessary to assure permanent liquidity of the business. The plan is based on 4 representative months of a typical business with 3 to 5 employees, annual sales of $1,300.000 and net profits of about $300,000. Revenue estimates are drawn from a standard normal distribution.


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7.4 Earnings Plan

The earnings plan shows the results from ordinary operations. The plan is based on the first 4 years of business. Revenue estimates are drawn from a normal distribution with an estimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.


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7.5 Risk Analysis

The risk analysis considers critical factors that may lead to a failure of the business concept. Such factors can involve failures during the implementation phase as well as during operations. Such potential factors are ordered according to the probability at which they can arise. Shown is the key factor that led to the failure only. Data are drawn from questionnaires of 10 trading businesses with comparable product offerings and revenue- and cost structures that went bankrupt during the last 3 years as well as analyses of different research institutes. 1. Insufficient demand: This is the most frequent reason that leads to business failure. This includes permanently low demand as well as a temporary collapse in demand. Often demand estimates were too optimistic at the outset. Such failures might also come from external shocks instead of operating deficiencies. 19% of businesses with insufficient demand go bankrupt. 50% of these businesses report that once demand slacked they did not react accordingly because they believed that this phenomenon was only temporary. Since the expected frequency of customers during the start-up phase are


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still low a critical success factor is to focus promotional effort so as to generate customer loyalty early on which will help minimize the effects of demand fluctuations. This is also important for the future development of the business. 2. Behavior of Competition: Due to low entry barriers additional businesses can enter the market at low cost. Approximately 16% of insolvent businesses were driven out of the market by that competition. A better service concept, innovative ideas and concentration on core businesses are an easy means for an entrant to gain a competitive edge. 3. Personnel and capacity utilization: Often personnel capacity cannot be adjusted flexibly easily when demand slows down. Currently wholesale businesses have a capacity utilization rate of personnel of 70%, i.e. 70% of employee working hours can be directly credited to sales. At small businesses this value is often lower which means that 30% of working hours arise without generating any further revenue. 13% of such businesses go bankrupt for this reason. 4. Liquidity constraints: Another frequent reasons for bankruptcy is in sufficient liquidity. In that case it is possible that all liquid funds are used to cover losses or that liquidity needs were planned too tight. To be able to flexibly react to changing liquidity needs it is important that sufficient funds be planned even during the start-up phase thus 5-10% of the investment sum should be held as liquidity reserve permanently. 13% of insolvent businesses reported liquidity as the reason for bankruptcy. 5. Over-indebtedness: Many business are run on a small equity base. The majority of investments are funded by debt. If the business becomes unprofitable, debt obligations cannot be covered. Little more over 10% of insolvent firms reported over-indebtedness as the reason for going bankrupt. It is therefore important that a share of earnings is retained for debt service. 6. Macroeconomic Conditions: In a cyclical downturn revenue expectations my not come in according to expectation. Although this factor does not affect the business in itself it does have an impact on profitability, liquidity and leverage. Cost remain constant during such period but revenues typically decrease which affects overall profitability. 10% of all insolvent businesses report that they went bankrupt due to macroeconomic conditions although the relevant indicators of the business looked healthy. 7. Location and market: The market of the business and the selection of the right potential customers is an important success factor and one of the fundamental decisions that have an impact on the future prosperity of the firm. Therefore a careful analysis is necessary. More than 10% of insolvent businesses reported that they went bankrupt because of the wrong market selection. Often start-ups did not consider that even when the choice of market may not be wrong at the outset it may later become so when economic conditions worsen. This may be due to structural changes or different interest of customers.


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8. Wrong Business Decisions: Often wrong business decisions and difficult situations go unnoticed for some period which can lead to a failure of the business. A critical and independent reflection of a decision are critical factors to determine the value of a management decision and evaluate the business' profitability. Studies have shown that many businesses fail in their start-up phase because of management’s inability to make sound business decisions while one a business is settled such mistakes are very rare. A critical management instrument is the ability to detect potential failures and problems. Certain key figures can help measure this ability and allow to objectively determine a decision's chance for success. Small businesses should use such indicator ratios to assess their business outlooks. Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt. The numbers are based on the most relevant reason that triggered bankruptcy but not the reason responsible for bankruptcy. As can be external factors that changed the competitive environment and changing macroeconomic conditions were the most important reasons relative to internal factors.


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8. Conclusion Trading and logistics services are a growing business that shows a positive dynamic between 4% to 5% per year for the next few years depending on the national demand. The competition in this field of business shows a low development with high entry barriers. Only few companies operate in this field of business. The relatively modest investment requirements and running costs (compared to industry businesses) are a favorable argument since external funds from banks becomes more difficult since the risk aversion to finance such ventures has risen. A company with specific knowledge and innovative ideas has good chances to move into profitable market niches and run a successful business. Market conditions change constantly as do customer demands. This is the chance for businesses with innovative ideas and new offerings to secure a dependable customer basis. Service is a critical factor that can earn a competitive edge. This is also true for new trends in the industry to better control costs and increase efficiency. For a successful operation of a trading 5 factors are critical and central for the business strategy: -

In the national trading industry it is important that the customer experiences a comprehensive and competent logistics service. This will secure customer loyalty in a market that is very fast and competitive.

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The utilization of personnel capacity is critical for the long-term profitability because of changing margins and the constraints to flexibly reduce personnel. Therefore the additional selling of transportation and logistic services is a further segment of the business that is integrated in the sale of the whole business process.

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A carefully selected assortment of goods as well as the selected choice of new technologies is a potential to gain a competitive edge against competitors. Furthermore a service that aims to give the customer an added value through new services can justify price mark-ups.

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A critical factor in the trading industry is quality management. Better quality at lower cost increases customer satisfaction. Deficiencies in service quality can lower demand while good service quality can help create customer loyalty.

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Cost management is a critical success factor for businesses in industries where margins are low. Computer aided planning is an integral part of cost management.

Business Plan Trading Company

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