Interpret how the components of a balance sheet and income statement communicate the financial position of an organization.
Interpret the components of a cash-flow statement to describe the liquidity of an organization.
Evaluate financial ratios to differentiate profitability and liquidity across organizations.
Analyze leverage and activity ratios to review operating performance across organizations.
Determine current values of cash streams utilizing discounted cash flow techniques.
Critique organizational investments using forecasting scenarios.
Scenario
You recently went to a dealership for an oil change on your vehicle, as no independent oil change companies or auto repair shops are within 50 miles of your home. You paid $250 for this oil change on your Chevy Camaro.
Given your entrepreneurial spirit and frustration with the cost of the oil change, you have an idea for a mobile oil change company. You have completed a marketing survey to determine potential interest in such a company. The marketing survey results suggested that 50% of vehicle owners would entertain using a mobile oil change company for oil changes if such a company existed.
You live in a town with 30,000 registered vehicles, of which their owners take 15,000 to the dealerships for oil changes. Most owners take their vehicles to the dealership three times a year.
You will need the following to start this business and to gain funding from investors.:
3 Mobile Oil Change Trucks (General Modifiable Flatbed Commercial Trucks)
Oil Changing Supplies (i.e., motor oil, clean cloths, drip pans, and oil filters)
Oil Changing Tools (i.e., Motor Oil Tank, Motor oil extractor, and a Fluid Flush Machine Mobile Oil Dispensing Kit)
Insurance (i.e., Auto for all three trucks and General Liability Insurance for the Business)
Budget for 3 Employees (Hourly Pay)
Pro forma financial statements, a financial plan, and a business plan are required for all potential investors and creditors.
Business Plan for Mobile Oil Change Company
Executive Summary
With increasing frustration over high oil change costs at local dealerships, I propose launching a mobile oil change company that addresses this gap in the market. After conducting a marketing survey in a town with 30,000 registered vehicles, we found that 50% of vehicle owners would consider using a mobile oil change service. This business plan outlines our financial projections, operational needs, and strategies for attracting investment.
Financial Statements Overview
Balance Sheet Components
The balance sheet provides a snapshot of the company’s financial position at a given point in time. It consists of assets, liabilities, and equity.
- Assets: The mobile oil change company will have both current and non-current assets. Current assets will include cash, oil changing supplies, and tools. Non-current assets will encompass the three mobile trucks.
- Liabilities: Initial liabilities will include loans for purchasing trucks and equipment as well as any short-term debts incurred while starting the business.
- Equity: Reflects the ownership value invested by the owner and any profits retained in the business.
Income Statement Components
The income statement communicates the company's profitability over a specific period. It includes:
- Revenue: This will be generated from performing oil changes. Given that 15,000 vehicles are serviced at dealerships three times a year, we can estimate potential revenue based on market interest.
- Expenses: This includes costs related to supplies, employee wages, truck maintenance, insurance, and other overheads.
- Net Income: Calculated by subtracting total expenses from total revenue, showing the profitability of the business.
Cash Flow Statement Components
The cash flow statement is essential for assessing liquidity, which indicates the company’s ability to meet its short-term obligations. It consists of three sections:
- Operating Activities: Cash received from oil changes minus cash payments for supplies and employee wages.
- Investing Activities: Cash spent on purchasing trucks and equipment.
- Financing Activities: Cash inflows from loans or investments and outflows for loan repayments.
Financial Ratios Analysis
Profitability Ratios
1. Gross Profit Margin: This ratio helps determine how efficiently the company is producing goods (in this case, services) relative to its revenue. A higher margin indicates better operational efficiency.
2. Net Profit Margin: This ratio will illustrate overall profitability after all expenses are deducted from revenue.
Liquidity Ratios
1. Current Ratio: This ratio measures the company's ability to cover short-term obligations with short-term assets. A ratio above 1 indicates sufficient liquidity.
2. Quick Ratio: Similar to the current ratio but excludes inventory from current assets. It gives a clearer picture of liquidity in emergencies.
Leverage and Activity Ratios
Leverage Ratios
1. Debt to Equity Ratio: This ratio evaluates the level of debt used to finance the company relative to equity. A lower ratio indicates less financial risk.
2. Interest Coverage Ratio: This reflects the company’s ability to pay interest on its outstanding debt.
Activity Ratios
1. Inventory Turnover Ratio: While not directly applicable in service industries, this can be adapted to measure how quickly we can turn around oil change services in a day or week.
2. Receivables Turnover Ratio: This assesses how effectively we manage customer payments.
Discounted Cash Flow (DCF) Analysis
To determine the current value of projected cash flows from the mobile oil change service, we will apply discounted cash flow techniques. By estimating future cash flows based on expected revenues and expenses and applying an appropriate discount rate (reflecting the risk of investment), we can ascertain the present value of cash streams over a defined timeframe (e.g., 5 years).
Example Calculation
Assuming an estimated annual cash flow from operations of $100,000 with a discount rate of 10%, the present value (PV) can be calculated using:
[
PV = \frac{CF}{(1 + r)^n}
]
Where:
- CF = Cash flow for each year
- r = Discount rate
- n = Year number.
Investment Evaluation with Forecasting Scenarios
To critique organizational investments, various forecasting scenarios should be developed:
1. Best Case Scenario: High customer adoption rates leading to increased revenue and profitability.
2. Worst Case Scenario: Low adoption rates and high operational costs resulting in minimal profitability.
3. Most Likely Scenario: Moderate customer engagement with steady growth leading to sustainable profitability.
By analyzing these scenarios, we can present potential investors with a comprehensive understanding of risks and rewards associated with the mobile oil change venture.
Conclusion
This business plan outlines a viable strategy for launching a mobile oil change company that meets an existing demand while providing key financial insights through balance sheets, income statements, cash flow statements, and ratio analyses. By focusing on integrity in financial reporting and operational accountability, this venture can garner investor interest while also enhancing community convenience in vehicle maintenance.