From Heart To Heart

To be Submitted to
Bank Muscat S.A.O.G

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Section One: Pages

 Executive Summary 3

 Description of the Business 3-4

 Description of the Market 4

 Description of the Location 4

 Description of the Competition 5

 Description of the Management & Personnel 5

 Pricing Strategy 6

Section Two:

 Funds Required 7

 The Basic Assumptions 7-8

 Profit & Loss Account, Balance Sheet & 9 - 10

Cash Flow Statement
 Analysis of the financial Statements: 11 – 16

1. Ratio Analysis

2. Break Even Analysis

3. Decision Making Analysis

4. Sensitivity Analysis

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Executive Summary

From Hearts to Hearts (FHTH)is a sole trader business, it imports natural flowers from

Holland, gifts, baskets, chocolates and accessories from the United Arab Emirates (UAE).

The shop is located at the City Center, Muscat. Such shops are not available at the City

Center and the people who are leaving near that area should come so far only to purchase

from such shops. They are available only in the Qurm area. The shop aims to provide

unique and exclusive products to its consumers, and the target consumers are girls/

women in the age of 15 and above (not more then 65).

Objectives:

1. Minimum drawings.

2. Sales of R.O. 130,000 in the first year.

3. Net profit margin of 20%.

Description of the Business

The shop plans to attract its consumers by offering new types of gifts for every occasion.

FHTH projected sales are approximately 135,000 R.O. by the end of the first year of

operation. For the following years, the shop plans to expand the sales to around 200,000 –

250,000 O.R.

FHTH will expand in the 3rs year by adding some more different kinds of flowers and

flower arrangements. The shop will take home delivery orders with no delivery charges

from the first day of the business. After establishing a firm reputation, FHTH plans to

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import products other then the pervious products, but all will still be related to flowers.

These will be produced by Indonesian artisans in various cities in the original region, all

managed by the same artist. The products will include silk jewelry boxes, all with hand-

painted flowers.

Start-up costs are approximated at R.O. 35,000, which primarily consists of product costs

and expenses associated with establishing a marketing program and opening up FHTH`s

first distribution center.

FHTH imports natural flowers and other accessories. These products provide consumers

with a wide variety of product lines and allows for individual customization of orders.

Description of the Market

FHTF will be selling to retail consumers only, not to the wholesalers. The goal of the

shop is to provide unique quality of gifts and related accessories.

The gift industry is growing in Oman, as lot of Omani who are not even educated a lot

may get jobs at lest at the restaurants, and that encourage them to buy some good gift

material. The shop will also attract it consumers by offering an especial discount to

regular consumers.

Description of the Location

FHTH is currently located at the City Center in Al Seeb. The area is zoned for

commercial use, people from all over Oman come to visit this place and especially people

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who live in Bashar and Seeb will shop from the City Center. The percentage distribution

of total population by age groups (15-64) is around 71.6% according to 2003 statistics.

Since our target consumers are women between the age of 15 – 65 years, according to

2003 statistics (Census report), the total population of Walayat Bawshar is 23.8% which

is near to Al Seeb, and of Al Seeb is 35.4%.

Description of the Competition

There are two main competitors for FHTH, one is the Bella Rose and the other one is Al

Sereen, and both are located in Al Qurm area and this is an opportunity for the FHTH

since it is located in the main shopping area. The prices of the Bella Rose and Al Sereen

are very high; FHTH will compete in its prices with them, since it will follow the

penetrating pricing. On the other hand, the shop has lack of expert advice and lack of

personal service in this area. Once the business is set up, it will offer the expert staff of its

competitor to join the shop with higher salary. FHTH focuses on providing high-quality

products to consumers with outstanding service. Customization of orders and

specialization of services will create a competitive advantage. The display of Al Sereen is

poor where as the display of the Bella rose is very attractive. This is a threat to the shop

but the shop will over come this threat by using attractive colors for the display. The

shop will have wide rang of quality products in order to attract its consumers.

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Description of the Management & Personnel

FHTH will start with two qualified and experienced employees. There salary will be R.O.

350 each per month. An increase of three staff in the third year and to anther two in the

fifth year is likely needed, since the number of consumers will increase. One of these

staff will be the expert of the competitors that will be appointed in the third year of the

business. My self will be in the management it self and will with draw as a yearly salary

of R.O. 2,500.

Pricing Strategy

FHTH sets standard prices for each product line. These prices are not expected to

experience significant change over the next five years.

 Roses with gift rapping – R.O.2.500

 Chocolates 1 KG – R.O. 2.500

 Gift boxes – R.O. 2.500

 Other accessories – R.O. 2.500

 Other/Seasonal bouquet – R.O. 2.500

These prices exhibit quality products at reasonable costs to consumers.

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Other Relevant Information:

o The business needs around R.O.20, 000.

o Savings are R.O. 5,000

o Loan of R.O. 15, 000, interest paid 7.5%

o Location of the shop is at the City Center, Muscat

o The competitors are Bella Rose & Sereen, both are located in Al Qurm

Initial Capital Expenditure

 Two delivery vans, costing R.O. 6,000 each, Depreciation at 33.33% on straight

line method.

 Two tables, costing R.O. 200 each, Depreciation at 33.33% on straight

 Refrigerator, costing R.O. 1,700, Depreciation at 33.33% on straight

 Stock R.O. 1,500

The basic Assumptions

Once the business started operating, the following will be the revenues and the expenses:

 First 2 months, the shop will be open for 6 days per week, and the

expected sell on average is 100 items (flowers, chocolates, gifts, etc) per

day at R.O. 2.500.

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 Next 10 months the sales are expected to increase to 200 items per day,

selling at the same price, which is R.O. 2.500. Each year the number of

items sold will increase by 15%.

 Stock is expected to remain at a similar rate thought the first 5 years. Stock

will increase by 25% each year.

 My self will employ two assistants initially at R.O. 350 per month each.

This will increase to 3 in the third year of the business at the same price.

Another 2 assistants will be employed at the 5the year at R.O. 425.

 Insurance will be R.O. 750 per year, and rent will be R.O. 1,015 per

month.

 Electricity and water is expected to be R.O. 100 per month in the first 3

years, increasing to R.O. 115 per month in the other years.

 Sales are made on the cash basis in the first 5 years.

 Other expenses such as advertising and delivery expenses are expected to

be R.O. 400 per month in the first year. And will increase to R.O.675 per

month in the following years.

 Fuel and maintenance expenses will start in the 2nd year of the business

and will be O.R 350 per month.

 My self intend to repay the loan at the end of each year if possible.

 The drawings from the business will be at R.O. 2,500 each year.

 The shop purchased 55,000 items in the first year of the business at the

rate of 0.750 Baiza each. In the 2nd and the 3rd year the shop increased its

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 purchasing to 60,000 items at the rate of 0.800 Baiza and to 70,000 items

in the 4th and 5th year at the same rate.

Projected Profit & Loss

Account 1 2 3 4 5
Sales 132,000 165,600 190,800 219,600 252,000
Opening Stock 1,500 1,500 1,875 2,344 2,930
Purchases 41,250 48,000 48,000 56,000 56,000
Closing Stock -1,500 -1,875 -2,344 -2,930 -3,663
Cost of Sales 41,250 47,625 47,531 55,414 55,267
Gross Profit 90,750 117,975 143,269 164,186 196,733
Salary 8,400 8,400 21,000 21,000 31,200
Insurance 750 750 750 750 750
Rent 12,180 12,180 12,180 12,180 12,180
Electricity & Water 1,200 1,200 1,200 1,380 1,380
Fuel & Maintenance   4,200 4,200 4,200 4,200
Depreciation 4,700 4,700 4,700 4,700 4,700
Interest 1,125 375      
Other Expenses 4,800 8,100 8,100 8,100 8,100
Expenses 33,155 39,905 52,130 52,310 62,510
Net Profit 57,595 78,070 91,139 111,876 134,223

Projected Cash Flow

Statement
Opening Cash   54,195 129,090 221,960 335,450
Cash inflow          
Capital 5,000        
Loan 15,000        
Sales 132,000 165,000 190,800 219,600 252,000
  152,000 219,195 319,890 441,560 587,450
Cash outflow          
Stock 1,500        
Salary 8,400 8,400 21,000 21,000 31,200
Rent 12,180 12,180 12,180 12,180 12,180
Insurance 750 750 750 750 750
Electricity & Water 1,200 1,200 1,200 1,380 1,380
Fuel & Maintenance   4,200 4,200 4,200 4,200
Interest 1,125 375      
Other Expenses 4,800 8,100 8,100 8,100 8,100
Purchases 41,250 48,000 48,000 56,000 56,000
Capital expenses 14,100        

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Loan 10,000 5,000      
Drawings 2,500 2,500 2,500 2,500 2,500
  97,805 90,705 97,930 106,110 116,310
Closing cash 54,195 129,090 221,960 335,450 471,140

Projected Balance
Sheet
Fixed Assets 9,400 4,700 0 0 0
Current Assets          
Cash 54,195 129,090 221,960 335,450 471,140
Stock 1,500 1,875 2,344 2,930 3,663
Debtors          
Current Liabilities          
Creditors          
Net Current Assets 65,095 135,665 224,304    
Long term liabilities 5,000 0 0 0 0
Net Assets 60,095 135,665 224,304 338,380 474,803
Capital 5,000 60,095 135,665 224,304 333,680
Net Profit 57,595 78,070 91,139 111,876 134,223
Drawings -2,500 -2,500 -2,500 -2,500 -2,500
Capital Employed 60,095 135,665 224,304 333,680 465,403

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Cash Flow Statement for the 12 months of the first
Year

1 2 3 4 5 6 7 8 9 10 11 12
Opening
Cash                        
Cash inflow                        
Capital 5,000                      
Loan 15,000                      
Sales 6,000 6,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000
26,000 6,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000
Cash
outflow                        
Stock 1,500                      
Salary 700 700 700 700 700 700 700 700 700 700 700 700
Rent 1,015 1,015 1,015 1,015 1,015 1,015 1,015 1,015 1,015 1,015 1,015 1,015
Insurance 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5
Electricity
& Water 100 100 100 100 100 100 100 100 100 100 100 100
Fuel &
Maintenance 0 0 0 0 0 0 0 0 0 0 0 0
Interest 93.75 93.75 93.75 93.75 93.75 93.75 93.75 93.75 93.75 93.75 93.75 93.75
Other
Expenses 400 400 400 400 400 400 400 400 400 400 400 400
Purchases 41,250 0 0 0 0 0 0 0 0 0 0 0
Capital
expenses 14,100                      
Loan 0 0 0 0 0 0 0 0 0 0 0 10,000
Drawings 0 0 0 0 0 0 0 0 0 0 0 2,500
59,221 2,371 2,371 2,371 2,371 2,371 2,371 2,371 2,371 2,371 2,371 14,871
Closing -
Cash 33,221 3,629 9,629 9,629 9,629 9,629 9,629 9,629 9,629 9,629 9,629 -2,871

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1) Ratio Analysis
  1 2 3 4 5
Profitability Ratios:
Net Profit Margin 43.71% 47.20% 47.82% 51% 53.30%
Return on Capital
Employed 95.84% 57.55% 40.63% 33.53% 28.84%
Gross Profit Margin 68.75% 71.24% 75.08% 74.76% 78.06%

Efficiency Ratios:
Stock turn over 3.63% 3.94% 4.93% 5.29% 6.63%
Fixed assets turn over 14.04% 35.11% 0 0 0
           
Gearing Ratios:          
 Times Coverage ratio 51.19%  208.18%  0  0  0 

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The net profit margin of the shop has increased during the five years. The incensement of

the net profit margin is reasonable since the sales and cost of sales are both increased.

The ROCE of the shop is decreasing from year to year. It has decreased from 95.84% in

year 1, to 57.55% in year 2, to 40.63% in year 3, to 33.53% in year 4 and to 28.84% in

year 5. The gross profit margin of the shop has also increased during the five years. Since

it’s a profitability ratio, a high ratio is always better. That leads to good performance of

the shop in its first five years of the business.

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 2) Break Even Analysis
         
Years 1 2 3 4 5
Break Even Point 48,226 56,014 69,425 69,965 80,070
Margin of Safety 63.45% 66.17% 63.61% 68.14% 68.23%

In year 1 if the sales fall down by 63.45%, the shop will survive but will not have losses.

In the 2nd year if the sales fall down by 66.17%, in the year 3 falls by 63.61%, in year 4

falls by 68.14% and in year 5 with 68.23% still it will not have losses.

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3) Decision Making Analysis
1) Pay Back Period: The length of time
needed before an investment makes
enough money to recoup the initial
outlay of cash.

57,595+ 4,700 (Net Profit + Depreciation) = 62,295

To recover 20,000 the initial investment

the shop will recover its capital with in the first year of the business it self
Therefore, it is safe to invest in the business since it has less risk. The pay
back period faster is better.

2) Accounting Rate of Return

Average Profit * 100 (total net profit of 5 years)

Initial Capital

57,595 + 78,070 + 91,139 + 111,876 + 134,223 = 472,903

20,000 20,000

= 23.65%
On an average the shop is making profit of 23.65%.
If I had not started a business and have kept my money in the bank rather then investing it, I would
paid interest on it, but now when I have invested the money in the business its making an average
profit of 23.65% which is very good.

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 4) Sensitivity Analysis
1) What if the sales decreased by 10%?

Sales 132,000 165,600 190,800 219,600 252,000

Decreased by 10% 13,200 16,560 19,080 21,960 25,200
Sales decreased by 10% 118,800 149,040 171,720 197,640 226,800
Net Profit 57,595 78,070 91,139 111,876 134,223
Decreased by 10% 13,200 16,560 19,080 21,960 25,200
Net Profit decreased by 10% 44,395 61,510 72,059 89,916 109,023
Gross Profit 90,750 117,975 143,269 164,186 196,733
Decreased by 10% 13,200 16,560 19,080 21,960 25,200
Gross Profit decreased by 10% 77,550 101,415 124,189 142,226 171,533

Even when the sales have decreased by 10%, the net profit and the gross profit are both

increasing from year to year. That is a good indicator and favorable to the shop it self.

1 2 3 4 5

Net Profit Ratio 37.38% 41.27% 41.96% 45.49% 48.07%

ROCE 73.87% 45.34% 32.13% 26.95% 23.43%

Break Even Point 50,791 58,645 72,082 72,691 82,650

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The net profit margin of the business has largely decreased after the decrease in sales.

Even thought the decrease is positive since it is improving from year to another. The

break even point has increased while comparing to the actual one.

2) What if the expenses increased by 10%?

Expenses 33,155 39,905 52,130 52,310 62,510

Increased by 10% 3,315.5 3,990.5 5,213 5,231 6,251
Expenses increased by 10% 36,470.5 43,895.5 57,343 57,541 68,761

1 2 3 4 5

Net Profit Ratio

43.71% 47.20% 47.82% 51% 53.30%
ROCE
95.84% 57.55% 40.63% 33.53% 28.84%
Break Even Point 53,048 61,615.5 76,367.1 76,961.5 88,077.6

The incensement in the expense not change the BEP a lot, the BEP has increased to some

extent while comparing with the actual one. Even when the expenses are increased by

10%, the net profit margin is positive, which is a good indicator.

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3) What if the sales decreased by 10% and the expenses increased by 10%?

Sales 132,000 165,600 190,800 219,600 252,000

Decreased by 10% 13,200 16,560 19,080 21,960 25,200
Sales decreased by 10% 118,800 149,040 171,720 197,640 226,800
Net Profit 57,595 78,070 91,139 111,876 134,223
Decreased by 10% 13,200 16,560 19,080 21,960 25,200
Net Profit decreased by 10% 44,395 61,510 72,059 89,916 109,023
Gross Profit 90,750 117,975 143,269 164,186 196,733
Decreased by 10% 13,200 16,560 19,080 21,960 25,200
Gross Profit decreased by 10% 77,550 101,415 124,189 142,226 171,533
Expenses 33,155 39,905 52,130 52,310 62,510
Increased by 10% 3,315.5 3,990.5 5,213 5,231 6,251
Expenses increased by 10% 36,470.5 43,895.5 57,343 57,541 68,761

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 1 2 3 4 5

Net Profit Ratio 37.38% 41.27% 41.96% 45.49% 48.07%

ROCE 73.87% 45.34% 32.13% 26.95% 23.43%

Break Even Point 55,869.7 64,509.1 68,730.4 79,960.1 90,915.4

The break even point (BEP) has increased while comparing the actual with the one since

the expenses are increased by 10% and the sales, net profit and the gross profit has

declined by 10%. This change in the BEP is favorable since there was a change of 10% in

the expenses, sales and the profits of the shop.

The analysis made above (Ratio, Break even, Sensitivity and the Decision making) was

done only to find out the position of the shop in various stages, to check out whether it is

safe to invest in such business or no and to what extend it is safe. All the figures above

were in positive; therefore it is safe to invest in this business.

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