Drawing feasibility from SWOT analysis
In modern day business planning is very much essential. If we do not have proper planning, then we will not be able to project the future prospect of business. If the business will not able to provide any returns, then no point of taking risk for the same activity. That is the reason financial analysis and business analysis is occupying a major role in current business world. Previously financial analysis was restricted to analysing only actual accounting data like Ratio analysis, Du-pont analysis, Trend analysis, CMA data and business analysis, which was restricted in gathering data and providing reports to management.
Now a day the entire environment of the finance has been changed. Finance is not only limited itself in bookkeeping, it has moved far beyond of that. Financial Planning and Analysis (FP&A), Business Strategy, Budgeting and Forecasting, Feasibility Study, Revenue Maximization Plan, Cost Minimization Plans are now main KRAs of senior people in finance.
Budgeting and forecasting is a vast field. Main part of budgeting is Revenue planning, Cost planning, Expenses planning, preparing a forecasted profit and loss, preparing a forecasted cash flow etc.,
Budgeting function is easy when you have all data related to revenue and cost is available, but in today’s cut throat competition era it is very difficult to have it, so a detailed feasibility study is required to understand the same. It is a good exercise for big companies where cash flow is strong but in SME sector doing this kind of extensive analysis is not cost effective and also very time consuming. But in changing environment, management need to take a quick decision so they need to have an alternative to deal with the same. Today we will discuss a less expensive and less time consuming way to find out the company’s projected profit and loss account. Though there is probability of standard error +-10% but still it is a very effective one.
Projecting Profit and Loss from SWOT analysis: –
SWOT analysis is the process where one defines the company’s strength, weakness, opportunity, threat.
Strength: – What is company’s core competency? What is there unique selling power? What is main fundament advantage any company use to have to carry on its operations?
Weakness: – What is main problem or operational fault or management failure within the company?
Opportunity: – What is weakness of its competitor, supplier, customer, Industry or economy?
Threat: – What is risk associated with the business which is coming from outside?
Here we will first describe The SWOT of a hypothetical company called ABC Ltd. and finally define the projected profit and loss and cash flow of the company. ABC Ltd is a establish food retail company and planning to open a new store in residential area, but company does not have any data except the population of the area (30,000 family, total members 1, 50,000 and average member per family is 5). So it is very tough to calculate the feasibility of the project from the above information so company need to rely on some other analysis. SWOT analysis is one of the process by which we can try to analyse the feasibility of the project. Here is the existing SWOT analysis of ABC Ltd. Company.
Analysis of the above points: – From the above points we will try to draw profit and loss account, which will prove whether the opening of new branch is feasible or not?
Revenue Plan: – Market size ₹ 60 Cr. (30,000 Family Size * ₹ 20,000 average spending per family) and as new 1,000 flats will open so market size will increase another ₹ 2 Cr. So total market size will be ₹ 62 Cr. As the company has a good experience in setting up new branch and having good promotion plans as well as backed by good and young management team so company is expected to earn a good market share. In the area there is no presence of big brand in the area and the company has got a good brand image so it is expected ABC ltd will acquire 20% of the market share (PM revenue of the company will be ₹ 12.4 Cr.).
Direct cost: –As the company has got a good reach in the village market so it is expected, company will get the product at a lower cost and expected to get the product maximum of ₹ 8.5 Cr. As the market is still virgin so company need to spend a good amount of money for the development of market and also company need to bear transport cost and freight.
Indirect expense: –As company need to maintain trained and experienced staff so company need to bear a huge amount of salary. As the company is self-financed company so there is no interest cost. As the company is in B2C segment, they need to keep good number of support staff, experienced management and strategy team, for which company need to bear a good portion of shared service expenses. As the threat of substitute channels like online delivery and local unorganised local market is high, so CRM expenses is also huge. Advertisement and promotion cost is high.
Capital Expenditure: – As the company need a set up a full retail super market so it need to purchase many assets like trays, racks, chairs, tables, swapping machine etc. and the total cost of the same is around ₹ 4 Cr. which will be amortize in 6 months.
We can see from the above P&L, company has started to earn profit from Oct-20, after sales has increased and initial Capex and Advertisement expenses has decreased. So after 6-months incurring loss, company will start to earn profit from 7th month which is really good. So it is concluded, if the company is having sufficient money to fund the CAPEX and initial advertisement and business promotion expenses then it is really a feasible option.