Chapter Five

Financial Plan

5.1 Business Analysis

Directing a business analysis encompasses more than planning pro-rata financial statements. It
also involved cost analysis alongside studying the feasibility of the project. Settling on the
costs and estimation of demand appropriately in a way that will not leave the company with
exaggerated or downplayed costs and revenues.

5.1.1 Cost Analysis: Variable & Fixed

Costs incurred by Guidie comprise of fixed and variable costs. Variable costs do not stay
consistent when production levels change. Then again, fixed costs remain steady regardless of
service levels. For Guidie, variable costs incorporate variable selling and administrative
expenses.

Table 5.1 Variable Expenses

Variable Selling and Administrative

Y1 Y2 Y3 Y4 Y5
Variable Expenses
Variable Selling and Administrative
Guide's Phone 4,860,000 4,900,000 5,000,000 5,100,000 5,050,000
Cost
Variable land 1,440,000 1,504,512 1,571,914 1,642,336 1,715,913
line
subscription
Electricity 600,000 660,000 726,000 798,600 878,460
prorated for
administrative
Drinking 200,000 208,960 218,321 228,102 238,321
water
Salaries 122,400,000 122,400,000 122,400,000 122,400,000 122,400,000
Water Of 360,000 370,000 386,576 403,895 421,989
Lebanon
Total Variable 129,860,000 130,043,472 130,302,812 130,572,933 130,704,683

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 selling and
administrative
Total Variable 129,860,000 130,043,472 130,302,812 130,572,933 130,704,683
Costs
VC/Unit
5,924.16 4,943.78 4,198.00 3,824.27 3,480.12

Moreover, fixed selling and administrative expenses are advertisement, salaries, rent,
employees’ insurance, DSL internet subscription, fixed line subscription, and water.

Table 5.2 Fixed Expenses

Fixed Selling and Administrative

Y1 Y2 Y3 Y4 Y5
Fixed Expenses
Fixed selling and administrative
Advertisement
28,800,000 30,090,240 31,438,283 32,846,718 34,318,25
1
Rent
7,200,000 7,228,800 7,257,715 7,286,746 7,315,893
Audit fees
4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
Employee Insurance (7 16,710,06
Employees) 16,380,000 16,461,900 16,544,210 16,626,931 5
Office Insurance
5,400,000 5,400,000 5,400,000 5,400,000 5,400,000
DSL internet
subscription 10,800,000 11,283,840 11,789,356 12,317,519 12,869,34
4
Total Fixed Costs 80,613,55
72,580,000 74,464,780 76,429,563 78,477,914 3

Moreover, fixed costs consist of fixed selling and administrative expenses. The administrative
part includes estimations of Advertisement, rent, Audit fees, insurance, and internet

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5.1.2 Demand Forecasting & Revenue Estimation
Guidie used the Chain-Ratio Method to estimate demand for the application. This technique
calculates total market demand for a product where the base number, which is the total
population of Lebanon, is multiplied by several percentages, such as the number in the
population who might use the application. In order to arrive at a rough estimate of the
potential demand for Guidie, the number of people in Lebanon was divided by an estimated
average of members in any given household. The result of this operation is then multiplied by
the percentage of individuals who are considered to use the application. Then, this number is
further segmented by taking into consideration that of that innovators and early adopters will
be the first customers. Moreover, Guidie determined that the potential market size for the
product is relatively 20% of the market. Thus, the forecasted demand for year 1 is 21,920
bottles. Then, the demanded units are assumed to grow proportionally with sales at a rate of
20% for year two, 18% for year three, and 10% for years four and five.

Table 5.3 Demand Forecast

Customer Analysis using Chain Ratio Method

Number of people in Lebanon (Millions) 6,089,000

Average number of members per household 4

Number of households 1,522,250

Percentage of individuals who might use the application 45%

Households who might use the application 685,013

Innovators & early adopters % 16%

Innovators (2.5%) and early adopters (13.5%) 109,602

Potential market share size 20%

Year 1 forecasted demand 21,920

Year 2 forecasted demand 26,304

Year 3 forecasted demand 31,039

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 Year 4 forecasted demand 34,143

Year 5 forecasted demand 37,558

Sales forecasts
  Y1 Y2 Y3 Y4 Y5
Forecasted
demand 21,920 26,304 31,039 34,143 37,558
Service Price
(Min 6 hours 120,000 120,000 120,000 120,000 120,000
a day)

Revenues 2,630,448,000 3,156,537,600 3,724,714,368 4,097,185,805 4,506,904,385

Table 5.4 Forecasted Revenues

5.1.3 Breakeven Analysis

Break-even analysis is helpful to determine the level of users that used the application. The
analysis is used by management only as the metric and calculations are often not required to
be disclosed to external sources such as investors, regulators or financial institutions. Break-
even analysis looks at the level of fixed costs relative to the profit earned by each additional
service sold. The concept of break-even analysis deals with the contribution margin of a
service.

The contribution margin is the excess between the selling price service of Guidie and total
variable costs. Guidie sells for 120,000 LBP for a minimum of 6 hours/tourist, and the total
variable costs for year 1 is 5,924 LBP, the product has a contribution margin of 14,076 LBP.
This amount reflects the amount of revenue collected to cover fixed costs and be retained as
net profit. Fixed costs are not considered in calculating the contribution margin.

At that point, the total fixed costs are divided by the unit contribution margin. Total fixed
costs are 72,850,000 LBP. With a contribution margin of 14,076 LBP, the break-even point in
customers is 5,156 customers. Upon the sale of the service to 5,156 customers, all fixed costs
will be paid for, and Guidie will report a net profit or loss of $0.

4
Alternatively, the break-even point in sales dollars is calculated by dividing total fixed costs
by the contribution margin ratio. The contribution margin ratio is the contribution margin per
unit divided by the sale price. Therefore, the break-even point in sales is 103,127,075 LBP.

Table 5.5 Break Even Analysis

  Y1 Y2 Y3 Y4 Y5
Service 20,000
Price/hour 20,000 20,000 20,000 20,000
(LBP)
Variable
Cost/unit (LBP) 5,924 4,944 4,198 3,824 3,480
Contribution
Margin/unit 14,076 15,056 15,802 16,176 16,520
(LBP)
   
Fixed costs
(LBP) 72,580,000 74,464,780 76,429,563 78,477,914 80,613,553
   
Break Even 5,156  
Point (in units)
Break Even 103,127,075        
Point (in LBP)

5.3 Projected Financial Statements

The projected financial statements analyze the existing market patterns and expectation to
come up with an estimated version of how the company will operate during the coming years.
It will also help the company estimate the amount that it will need to operate and expand in
the future.

5.3.1 Projected Income Statements

The statements are IFRS adopted as required by the Lebanese ministry of finance since the
year 1996. Some cost objects have been forecasted either using the inflation rate or percentage
of sales method depending on the nature of the account. For example, the cost of goods sold

5
(COGS) is forecasted according to sales growth. For the purpose of preparing a statement of
comprehensive income under IFRS, non-manufacturing expenses were separated into two
main categories, distribution costs and administration costs. Distribution costs include Rent.
As for administrative costs, those include salaries, advertising/promotion, DSL internet
subscription, land line subscription fees, audit fees, insurance, electricity prorated for
administration, and machinery and water.

After deducting cost of goods sold, distribution costs, and administrative costs, the result is
operating profit. This leads to a positively increasing net income as it appears in all years.
Regarding taxes, the Lebanese government do impose a 17% tax on service companies.

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   2020 20212021 2022
Sales (LBP) 2,630,448,0 3,156,537,6 3,724,714,3
00 00 68
Less Cost of Goods Sold (LBP) 30,000,000. 60,000,000. 70,000,000.
00 00 00
Gross Profit (LBP) 2,600,448,0 3,096,537,6 3,654,714,3
00 00 68
Distribution Costs (LBP)
Rent 7,200,0 7,228,8 7,257,7
00 00 15
Total Distribution Costs 7,200,0 7,228,8 7,257,7
00 00 15
Administrative Cost (LBP)  
Salaries Of 7 Employees 122,400,0 122,400,0 122,400,0
00 00 00
Advertising/Promotion 28,800,0 30,090,2 31,438,2
00 40 83
DSL internet subscription 10,800,0 11,283,8 11,789,3
00 40 56
Guide's Phone fees 4,860,0 4,900,0 5,000,0
00 00 00
Land line subscription fees 1,440,0 1,504,5 1,571,9
00 12 14
Audit fees 4,000,0 4,000,0 4,000,0
00 00 00
Office Insurance 5,400,0 5,400,0 5,400,0
00 00 00
Employee Insurance 16,380,0 16,461,9 16,544,2
00 00 10
Electricity prorated for administration 600,0 660,0 726,0
00 00 00
Water 360,0 370,0 386,5
00 00 76
Total Administrative Costs 72,640,0 74,670,4 76,856,3
00 92 38
Total Distribution and Administrative 79,840,0 81,899,2 84,114,0
Costs 00 92 54
Operating Profit 2,520,608,0 3,014,638,3 3,570,600,3
00 08 14
Earnings Before Tax 2,520,608,0 3,014,638,3 3,570,600,3
00 08 14
Tax Expense (17%) 428,503,3 512,488,5 607,002,0
60 12 53
Net Income for the year 2,092,104,6 2,502,149,7 2,963,598,2
40 96 61
5.3.2 Projected Balance Sheets

A balance sheet reports a company's assets, liabilities and partners’ equity at a specific point
in time and provides insight to the company’s performance. It is a financial statement that
provides a snapshot of what a company owns and owes, as well as the amount invested.

Guidie's assets are divided into current and non-current assets. The non-current assets are
comprised of property, plant, equipment, and intangible assets. Current assets are assets that
will be turned into cash within one year of the operating cycle, whichever is longer. As for
Guidie's current assets, they are expressed from the least to most liquid elements in the
statement of financial position. Components include prepaid insurance, prepaid rent,
supplies, accounts receivable, and cash.

In subsequent years, the net income derived from the statement of comprehensive income has
been partially added to partners’ capital accounts after subtracting an average of 25% of
income distributions to partners. Thus, 75% of the profit of the year is retained in the
business.

The liabilities section of the balance sheet is also partitioned into current and non-current
classifications. The non-current part incorporates the long term debt less the current
maturities. The company has no long term debts because an investor fully covered the start-
up-costs and expenses. No loan was taken by the company. Whereas the current portion is
composed of accounts payable.

The company capital is divided between three partners and the investor where the division of
income, withdrawals and capital are distributed and added to each partner throughout the
years. The general purpose of the fiscal reports is to provide information about the results of
operations, financial position, and cash flows of an organization. These data are used by the
readers of financial statements to make decisions with respect to the allocation of resources.
The whole arrangement of financial reports can also be assigned several extra purposes,
which are: credit decisions, investment decisions and taxation decisions.
 Statement of financial position
  2020 2021 2022
ASSETS- Non Current Assets
(LBP)

Property, plant, and equipment

1,462,500 1,462,500 1,462,500
Less: Accumulated Depreciation
23,400 46,800 70,200
Net property, plant, and
Equipment 1,439,100 1,415,700 1,392,300
Intangible assets
947,092,031 941,064,964 1,123,508,445
Total Non-Current Assets
948,531,131 942,480,664 1,124,900,745
Current Assets (LBP)
Prepaid insurance
21,780,000 21,861,900 21,944,210
Prepaid rent
7,200,000 7,228,800 7,257,715
Accounts receivable, net
789,134,400 946,961,280 1,117,414,310
Cash
30,449 79,703 181,716
Total Current Assets
818,144,849 976,131,683 1,146,797,951
Total Assets (LBP)
1,766,675,980 1,918,612,347 2,271,698,696
Equity & Liabilities (LBP)
Total Partners' Capital
1,745,675,980 1,876,612,347 2,222,698,696
Current Liabilities (LBP)
Accounts payable
21,000,000 42,000,000 49,000,000
Total Current Liabilities
21,000,000 42,000,000 49,000,000
Total Liabilities (LBP)
21,000,000 42,000,000 49,000,000
Total Liabilities and Partners'
Equity (LBP) 1,766,675,980 1,918,612,347 2,271,698,696
 5.4 Financial Feasibility

A feasibility study is an analysis utilized in measuring the capacity and probability to finish a
project effectively including every single important factor. It must record for variables that
influence it, such as economic, technological, legal and scheduling factors. A financial feasibility
study projects how much start-up capital is needed, sources of capital, returns on investment, and
other financial contemplations. It looks at how much cash is required, where it will originate
from, and how it will be spent.

5.4.1 Ratio Analysis

Ratio analysis is used to assess several facets of a company’s operating and financial
performance such as its efficiency, liquidity, profitability, and solvency ratios.

 Liquidity Ratios

Under liquidity ratios, Guidie’s current ratio is ranging between 38.9593 and
23.4040 for the years anticipated. Since this ratio is greater than 1.0, then this shows that Guidie
is well-situated to cover its short-term liabilities. Another liquidity ratio is the quick ratio which
is expanding from 37.5793 to 22.8081. This acid-test ratio is greater than 1.0 which implies that
Guidie is adequately ready to meet its short-term commitments. Since this ratio is decreasing,
this implies that the company is encountering problems in revenue growth, collecting its
accounts receivable and turning them into cash quickly.

 Solvency Ratios

These ratios incorporate debt-to-assets, debt-to-equity and equity multiplier. The debt-to-asset
ratio demonstrates what percentage of assets is financed by borrowing, contrasted with the
percentage of resources that are supported by the investors. Guidie's debt-to-asset ratio increases
from 0.0119 in year one to 0.0216 in year two, which means that it has more assets than
liabilities and could pay off its obligations by selling its assets if it needed to. The debt-to-equity
ratio is below 1 amid the primary year of activity. The last solvency ratio Guidie uses is the
equity Multiplier. This ratio demonstrates the percentage of assets that are financed or owed by
the investors. Guide’s equity multiplier is around 1 in a span of three years. This decrease
indicates that more assets are being fund by investors rather than debt along the years.

 Efficiency Ratios

Are encompassed of accounts receivable turnover, days sales outstanding, total assets turnover,
fixed asset turnover. Guidie has an accounts receivable turnover ratio of 3.33 which means the
company collects its money every 110 days or 3.3 times a year. Another efficiency ratio is days’
sales outstanding. This ratio measures the quantity of days it takes an organization to gather
money from its credit sales. Another ratio Guidie uses is the total assets turnover. This ratio
shows how competently a company can sell its assets to produce sales.
Guidie’s total asset turnover ratio increases from 1.4889 to 1.6396 from year one to year three.
Even though the ratio is increasing this means means that for every asset sold the company
makes approximately 1$, which in turn means the company is efficient with the use of its assets.
The last efficiency ratio used by the company is fixed asset turnover. This ratio calculates how
efficiently Guidie is producing sales via its machines and equipment. Along the years, this ratio
is decreasing from 0.5369 to 0.4952.

 Profitability Ratios

Are composed of the return on investment, gross profit margin ratio, operating profit margin, net
profit margin, return on assets, operating return on assets, and return on equity. ROI is a
performance measure to evaluate the efficiency of the investment. During the first 3 years the
ROI of Guidie is around 80% which indicates that returns are exceeding costs. The gross profit
margin ratio indicates how profitable a company sells its service. Operating profit margin is
another profitability ratio Guidie uses. The operating margin ratio determines how much revenue
is left over after all the variable or operating costs have been paid. Guidie also uses the net profit
margin which shows how much of sales is left over after all the expenses are paid. The net profit
margin is around 0.7953. These numbers indicate that after paying all expenses throughout the
years the company increased its profit margin by 79.53%.
   2020 2021 2022
Liquidity
Current Ratio
38.9593 23.2412 23.4040
Quick Ratio
37.5793 22.5486 22.8081
Cash Ratio
0.0014 0.0019 0.0037
Table 5.8 Solvency Ratio Ratio
Analysis Debt-to-assets Ratio
0.0119 0.0219 0.0216
Debt-to-equity Ratio
0.0120 0.0224 0.0220
Interest Coverage Ratio
5.8824 5.8824 5.8824
Equity multiplier
1.0120 1.0224 1.0220
Efficiency
Accounts Receivable turnover
3.33 3.33 3.33
Days sales outstanding
110 110 110
Total assets turnover
1.4889 1.6452 1.6396
Fixed asset turnover
0.5369 0.4912 0.4952
Profitability
Return On Investment 80% 79% 80%
Gross Profit Margin
0.9886 0.9810 0.9812
Operating profit margin
0.9582 0.9550 0.9586
Net profit margin
0.7953 0.7927 0.7957
ROA
1.1842 1.3041 1.3046
Operating ROA
1.4268 1.5713 1.5718
ROE
1.1984 1.3333 1.3333