Updated (2012) biodiesel financial plan

Updated (2012) biodiesel business plan

http://education.kulichki.net

Executive Summary *

1 Project Introduction *

2. Production Summary *

3. Marketing Plans *

4. Sales Plans *

5 Milestones *

6. Risk Analysis *

7. Financial Planning *

8. Exit Scenarios *

9. Project Enhancement Opportunities *

10. Appendix *

Please review also Updated (2012) biodiesel financial plan

Clean Fuel of Future (CFF) is a producer of renewable and environment friendly fuel, the biodiesel, delivered from vegetable oils. The company is located in the eastern part of Ukraine, in the Poltava region, and it is intended to provide full technological cycle of production: cultivation of oil seed (rape), processing them into oil and final production of biodiesel. Purpose of the business plan is to attract investment in the creation of biodiesel production plant and rape cultivation farming.

Our major advantage is the competitive price of the biodiesel, due to high productivity in cultivation (the best soils in the world and favorable climate) and the lowest variable and fixed costs in Europe (labor, land rent, transportation, facilities, utilities, chemicals).

We offer fuel with the same performance as that of conventional diesel, at competitive price and ecologically safe. Our markets expand rapidly all over the world due to growing concerns about levels of environmental pollution and limited supply of energy sources. Our target customers are transport companies inside Ukraine and the Western European countries.

Our team’s skills cover all aspects of creating and managing the biodiesel production project: organizing, financing, auditing, marketing, promoting business, solving technical and organizational problems. The capacity of the plant is 5,000 tons per year, the full capacity is intended to be reached by the end of the second operational year. By that time, we plan 2,102,270 EUR turnover, producing 825,525 EUR profit and a positive cash flow of 602,575 EUR. To reach these goals, we need 2,000,000 EUR investment payable up-front, so as to invest it in procuring the processing equipment, agricultural machinery and chemicals. The two project launchers require 10% of the initial investment by the end of the third operational year and 10% of the net after tax profit in each consecutive year thereafter. Having considered these contributions, the weighted average return on investment is 23.5% from the fourth operational year. The biggest risks for investors are the unfavorable weather conditions, therefore fall in yield, but only in short term; in the long term, this risk is being offset.

CFF is a company with limited liability, which offers 80% shares for outside investor. Other 20 % owned by its founder and director, Spivak Mykhaylo.

The start-up costs associated with legal expenses, maintaining office and facilities, salaries, etc are to be financed by direct owner investment. We expect investor to finance purchase of machinery, equipment, chemicals and fuel. The assumptions are shown in section 7.1. Project Financing.

1. Start production of biodiesel by the end of 2003.

2. Maintain Net Profit Margin 30% with selling price no higher than that of conventional fuels.

3. Increase the sales to more than 2 million EUR by the third year.

CFF is a manufacturing company dedicated to developing better energy solutions for benefit of a whole society. We bring innovative technologies and unlimited supply of energy sources without damaging and polluting environment.

Ukrainian, 35 years old, engineer with entrepreneurial and managerial experience since 1993. Worked on agricultural market for 5 years: invested in cultivation of wheat, sunflower, rape. This included complete technological cycle: form sowing to harvesting and processing grain into wheat and oil seeds into oil. Exported grain to Hungary and Russia. Knows very well technology of oil processing and esterification. Worked on fuel market for 6 years: purchase, delivering and sales of diesel, lubricants, petrol; created idea and technology of this project.

More detailed Resumes can be found in the Appendix session.

The key success factors in the biodiesel project are:

• Competitive Prices: Unless the importance of the biodiesel products is fully understood by consumers, we’ll not be able to sell it above market price of conventional diesel.
• Constant Product Quality: This makes sense in any case but because we are first on the market, good reputation and constant conformance to performance standards of conventional diesel are especially important.

• High-profile Management Team: products delivered on time, costs controlled, marketing budgets managed.

The project is planned to serve Poltava’s and neighboring regions (see map). Total project’s area is approximately 30,000 square km, of which the total arable land is 18,000 square km, that includes 3,000 square km (300,000 ha) for rape cultivation.

Physical location of the processing plant is 30 km from Poltava, near a railroad station and an elevator with total storage and processing capacity of 10,000,000 tons of grain per year. Cultivation of rape-seed requires 5,000 ha of arable land and will take place on the rented fields of local agricultural enterprises.

Company has the following facilities: garage for agricultural machinery with a total surface of 1,000 square meters, an administrative building of 100 square meters, the plant building for the biodiesel production of 1,000 square meters. Territory of the plant is fenced; available for storage and other equipment in 5,000 square meters.

The process Technological Scheme can be seen in the following chart:

Although biodiesel can be marketed as an ordinary fuel and our calculations in the financial section are based on the present market price of conventional diesel, we believe, that most perspective customers are farms, in-city transport companies and those who need the lowest possible pollution levels in their technological processes: warehouses, owners of generators, etc. The reasoning is the following: farms are suppliers of raw materials and can receive biodiesel as a payment, in-city transport companies feel constant pressure to reduce their fleets’ pollution levels and will be happy to buy biodiesel, other users may also need non-polluting fuel for such reasons as safety, comfort, ecological concerns. These customers will definitely choose the biodiesel against the conventional diesel, if the product pricing is approximately the same in both cases.

A summary of the market analysis is given in Table 1 and Chart 1. Assumptions about annual growth are based on historical trends and the current economic situation in Ukraine. It is necessary to underline that this market segmentation does not differ significantly from that of the EU countries, our potential customers, except broader usage of biodiesel in on-highway transportation. Columns show number of potential (corporate) users around the country (except for farms) according to statistical data: transport companies, wholesalers, and other organizations, whose annual consumption of biodiesel may exceed 1,000 EUR. For this reason, the market for biodiesel is worth an estimated 150 million EUR in 2003, and is projected to grow at 37% per year.

Potential Customers	Growth	2003	2004	2005	2006	2007
In-city	15%	2,200	2,530	2,910	3,347	3,849
Farm	50%	500	750	1,125	1,688	2,532
Other	10%	3,600	3,960	4,356	4,792	5,271
Total	16,62%	6,300	7,240	8,391	9,827	11,652

Rape meal is a by-product of oil extraction and is valued for high protein content. We are planning also to sell rape-seeds in order to stabilize cash position in the periods when production of biodiesel would be insufficient: at the end of season, between production cycles. Our primary target customers for these two types of products are agricultural enterprises of Poltava region and exporters. The demand in this market segment, especially in the latter one, can be regarded practically unlimited in our case.

The most important trend in the fuel market is the growing prices. Although with some limitations, this was true for years and seems to be accelerating due to political and economic reasons. Biodiesel prices may grow even faster, because of its “ecological friendliness” and concerns in all industrialized countries about the level of environmental pollution. It is necessary to assume, however that because of a future increase in the biodiesel production over the world and possible inventions of other alternative fuels (methanol, etc), prices of biodiesel can not exceed those of petrodiesel more than 10% (as it takes place in Germany now).

We are part of the rapidly growing biofuel business, which also includes producers of heating oils and oleochems. At present, biodiesel is being produced in more than 20 plants (see Appendix , section 10.5), most of which are located in Germany, with capacities ranging from 1.000 to 80.000 tons of biodiesel per year and total annual production of 1.020.000 tons. In this respect, in the long term, our plant with the capacity of 5.000 tons per annum may appear uncompetitive on European market. However, because production of biodiesel in countries of former Soviet Union did not start yet, we believe in rapid growth and production expansion.

Market prices of biodiesel are 10-15 % higher than those of conventional diesel despite of tax exemptions for biofuels in many European countries (Germany, France, Czech), which is explained by high labor and energy costs in Europe. Because in Ukraine they are 30-35 times less than in Europe, our project will be able to generate competitive (5% less than market) prices for such sustainable fuel, as biodiesel.

Our main competitors in Ukraine are the producers of petrodiesel. As long as the sale of petrodiesel is subject to excise and other taxes, our product would remain competitive on the Ukrainian market. Biggest problem may appear if state imposes the above-mentioned taxes for biodiesel, which however, is highly unlikely, because of the strategic importance of alternative fuels for the country.

1. Emphasize inherent qualities of biodiesel and focus on target markets.

We must differentiate biodiesel from other fuels. We need to establish our business offering as a clear and viable alternative for our target markets.

2. Produce high quality fuel.

3. Offer competitive price at the level of the conventional diesel fuel.

4. Create strong distribution channels to ensure stability of production.

5. Emphasize key advantages of our product.

6. Build a relationship business: long-term relationships, not single-transaction deals with customers.

Become their fuel supply department, not just a vendor. Make them understand the value of our relationship for the whole society and economy.

7. Focus on fuel distributors and big consumers as key target markets (see Sales Strategy)

For placing emphasis on quality, our main tactics are technology expertise and developing our own supply network. Our specific programs for technology are continuos learning and research. Specific programs for supply include cultivation of rape-seed and cooperative agreements with local farms.

Our second strategy is the product’s low cost. The tactics are reaching the lowest possible cost of raw material by using most productive breeds of rape, fertilizers and herbicides, implementing the most effective operations in production.

We think our value proposition is quite clear and can be quite easily distinguished from most of the others in the market. We offer ecology-friendly and renewable type of fuel at a reasonable market price. Our project brings also new jobs and high-technology to Ukrainian agriculture and makes a further step towards the energy independence of the Ukrainian economy.

Our most important competitive edge is entering Ukrainian agriculture and fuel supply industry with the most advanced technologies and gaining experience and market share before the intrusion of new competitors.

We’re positioning our product for those, who need and want to use non-polluting, ecologically friendly fuel. Unlike mineral fuel, biodiesel is renewable energy source, with comparable cost and performance.

We must charge appropriately for this unique type of fuel, but we want also to predict revenues as close as possible and to eliminate market risk, so we plan to sell biodiesel at current market price for petrodiesel.

We depend on direct contacts as our main way to reach new buyers. As we grow, however, we need to change the way we promote ourselves:

1. Advertising: We'll be developing our core positioning message: "Clean Fuel of Future" to differentiate our service from the competition. We will be using local newspaper advertising, radio, and cable TV to launch the initial campaign.

2. Seminars, exhibitions and other promotion and charity campaigns.

We focus on the market need for environment friendly fuel distributed through the authorized gas filling stations. We will also maintain close relationship with transport companies and agricultural enterprises.

We depend on our alliance with local producers of rape-seed (and their state representative Ukrripak) to generate continuos supply of raw material in the future, with Ukrainian diesel traders (especially gas filling station and bigger regional company: Poltavanaftoproduct) to ensure stable and planned production and sales.

Because we plan to rent land and cultivate rape, cooperative agreement with neighboring agricultural enterprises is essential. They are suppliers of labor force, additional raw materials and equipment. We plan to outsource rape cultivation in the future, so this cooperative would be a base for creating a suppliers’ network. This cooperative would provide joint cultivation, harvesting of rape, production of vegetable oils.

Creation of distribution network requires a reliable and strong partner, so we plan to start strategic cooperation with Poltavanaftoproduct, the biggest fuel trader in the region. The reasoning is the following: one of the authors already has good experience doing business with this company; the company has selling capacity (gas filling stations, delivery services, certification laboratories, etc.) of 5 million tons of fuel per year and is in good financial condition. We want underline, however, that we are not limited only by this option of cooperation: the further we move, the more options would appear.

Use of biodiesel in Germany increased from 10 million liters per year in 1992 to 300 million liters in 2001 with prices at petrol stations around 1.5 DM per liter. We plan cooperation with one of the biggest distributor of biodiesel in Germany, company Oelmühle Leer Connemann GmbH & Co, to sell our products on European market.

Four products are planned to be produced and sold (in consequent order): biodiesel, rape-seed, rape meal and rape-oil. Production starts with cultivation and harvesting of rape-seed, processing it into rape-oil with rape meal as a by-product, and ends with the final production of biodiesel from oil (see the chapter on the Technology). The explanation for such a long technological cycle is a necessity to ensure the supply stability of the raw material, the rape-seed, to produce final product biodiesel of premium quality.

Biodiesel is the name for the methanol-ester-based biofuel made from vegetable oils or animal fats. In this business plan biodiesel will be produced from rape-oil, but equipment could be utilized also for processing other vegetable or waste cooking fats. Rape (canola), however has proved to be a best crop for the production of biodiesel, because of high productivity and oil content (45%).

Biodiesel is a clear liquid, without unpleasant odor or handling characteristics, of virtually the same viscosity as mineral fossil diesel oil. For this reason, it may be used in a standard diesel engine without additional modifications. It may also be blended with petrodiesel to improve quality of latter. There are also examples of crude rape-oil usage (not processed into biodiesel) in specially designed diesel engines, or blended (50/50) with petrodiesel oil in ordinary diesel engines.

Biodiesel shows similar fuel consumption, horsepower, torque, and haulage properties as conventional diesel fuel and provides significant lubricity improvement over petroleum diesel fuel. Lubricity results of biodiesel and petroleum diesel using industry test methods indicate that there is a marked improvement in lubricity when biodiesel is added to conventional diesel fuel. Even biodiesel levels below 1 percent can provide up to a 30 percent increase in lubricity.

Biodiesel will soften and degrade natural rubber compounds over time, so users must replace them with elastomers in order to use pure biodiesel in the engine. Cold weather can cloud and even gel any diesel fuel, including biodiesel, but users of a 20 percent biodiesel blend will experience even a further decrease of cold flow properties (cold filter plugging point, cloud point,) of approximately 2 to 3°C.

1. Biodiesel is the only alternative fuel that runs in any conventional, unmodified diesel engine. It can be stored exactly like petroleum diesel.

2. Biodiesel can be used alone or mixed in any ratio with petroleum diesel.

3. The use of biodiesel can extend the life of diesel engines because it is more lubricating than petroleum diesel fuel, while fuel consumption, auto ignition, power output, and engine torque are relatively unaffected.

4. Biodiesel is safe to handle and transport because it is as biodegradable as sugar (pure biodiesel degrades 85% to 88% in water within 28 days), 10 times less toxic than table salt (lethal dose is greater than 17.4 g/kg body weight, while for salt (NaCL) it is 1.8 g/Kg), and has a high flashpoint of about 200°C compared to petroleum diesel fuel, which has a flash point of 70°C.

5. Biodiesel is a proven fuel with over 20 years of use in Europe and 30 million successful US road miles.

6. Combustion of biodiesel provides over a 75- 90% reduction in environmental pollution and a 90% reduction in cancer risks.

7. Biodiesel is the only alternative fuel to meet all environmental and human health requirements for energy sources.

The major planned source of raw material is rape-seed. To ensure stability of supply, we are planning to cultivate them on 5,000 ha of rented fields. Cost allocation for this stage of business plan is presented in the Appendix part. The average yield from winter oil-seed rape in Ukraine is around 3 tons of seed per hectare during a 270 day growing season. The seed is pressed to extract the oil content of about 30% by weight, the remaining cake (rape meal) being used either as high protein content cattle fodder or burnt as an energy source for the production of electricity. Final output, therefore is 1 ton of biodiesel per hectare.

The energy cost of producing the crop is about 15% of the yield - the same as fossil oil. The main difference is that the energy is renewable and come from the eco-friendly crop itself.

Glycerol is a by-product of our technological process, but it needs further cleaning. We are not planning to install glycerol processing equipment in the first 3 years, because this equipment requires additional 40% investment and we want to ensure quality and uninterrupted production of biodiesel, as a flagship product. However, after successful implementation of this biodiesel project, we are also planning to sell cleaned glycerol, which could generate an additional 10% turnover.

Biodiesel is planned to be sold using direct mail, seminars, promotion programs and advertising in business newspapers. Because biodiesel is a valuable fuel for in-city transportation companies, direct mail to these and other companies would be effective tool in promotion. Ecology, energy, technology related seminars are effective in finding regional representatives, partners, suppliers and buyers of our product. Promotion programs are: discounts to those carrying our trademark and symbolic, support to ecology and renewable energy concerned organizations, participation in regional fairs and events. Total budget for all these programs is shown in the Profit and Loss Statements, among the Advertising and Miscellaneous expenses.

Rape-seed is a commodity product which sells on agricultural exchanges, to producers of rape-oil and exporters. We plan to contact directly all these customers, because they are not so numerous and can ensure reliable business relationships.

Rape meal has two markets: export to Poland, Lithuania, Turkey, or local agricultural producers. We prefer the latter option, because it would save a great deal of administrative and transport expenses, plus it would open the opportunity to use rape meal as a payment for rent, leasing of equipment, rape-seed (we plan also to buy rape-seed for further processing).

Rape-oil sales are omitted from the business plan due to high uncertainty factors. However, our plant will be able to provide this type of product and it remains a real option for us to sell rape-oil.

Our major intention is to keep levels of monthly production, sales, and collections together. For this reason we planned storage capacities only for one month’s production, located plant near elevator (rape storage facilities) and railway (transportation network). Because biodiesel is highly liquid product, this goal can be implemented with right choice of distributors and suppliers (see also: Strategic Alliances).

Because cultivation itself is a risky business (due to weather conditions), we prepared 3 variants of sales: normal, when yield of rape is normal and all sales would take place in Ukraine, pessimistic, when yield of rape is 50% of normal, and optimistic with normal yield and sales to Germany for 70% of German market price. Summary of the risk events is presented in the risk assessment chapter

We expect to start sales at the end of 2003 and to reach the full plant’s capacity by 2004. We plan to decrease gradually the sales of rape-seed and increase the sales of biodiesel instead. Nevertheless, it will still re