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Updated (2012) biodiesel financial plan

Updated (2012) biodiesel business plan

Clean Fuel of Future

BUSINESS PLAN

 

MYKHAYLO SPIVAK

http://education.kulichki.net

 

TABLE OF CONTENTS

Executive Summary *

1 Project Introduction *

1.1 Start-up Summary *

1.2 Team Introduction *

1.3 Keys to Success *

2. Production Summary *

2.1 Plant Location *

2.2 Biodiesel Production Technology *

3. Marketing Plans *

3.1 Market Analysis *

3.2. Market Trends *

3.3 Marketing Strategy *

3.3.1 Strategy Pyramid *

3.3.2 Value Proposition *

3.3.3 Competitive Edge *

3.3.4 Positioning *

3.3.5 Price *

3.3.6 Promotion *

3.3.7 Distribution *

3.4 Strategic Alliances *

3.5 Product *

3.5.1 Product Description *

3.5.2 Product Performance *

3.5.3 Key Advantages of Biodiesel *

3.5.4 Sourcing *

3.5.5 Future Products and Services *

4. Sales Plans *

4.1 Product Assortment *

4.2 Sales Strategy *

4.3 Sales Scenarios *

5 Milestones *

6. Risk Analysis *

7. Financial Planning *

7.1 Project Financing *

7.2 Important Assumptions *

7.3 Projected Profit and Loss Reports *

7.4 Projected Balance Sheets *

7.5 Projected Cash Flow Statements *

7.6 Key Financial Indicators *

7.7 Break-even Analysis *

8. Exit Scenarios *

9. Project Enhancement Opportunities *

10. Appendix *

Please review also Updated (2012) biodiesel financial plan

Executive Summary

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 teams 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.

1 Project Introduction

    1. Start-up Summary

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.

Objectives

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.

Mission Statement

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.

Our product replaces conventional diesel and becomes the most perspective fuel of 21 century due to its environmental friendliness, renewability and low costs.

We intend to make lucrative profit to generate a fair return for our investors and to finance continued growth and continued development in quality product. We also maintain a friendly, fair, and creative work environment, which respects diversity, new ideas, and hard work.

1.2 Team Introduction

 

Mykhaylo SPIVAK

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.

1.3 Keys to Success

The key success factors in the biodiesel project are:

2. Production Summary

2.1 Plant Location

The project is planned to serve Poltavas and neighboring regions (see map). Total projects 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.

Exhibit 1. Project Area

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.

Exhibit 2. Biodiesel Plant

Details are available in full version.
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Please review also:
Updated (2012) biodiesel financial plan
Updated (2012) biodiesel business plan

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

Details are available in full version.
Please support the author and buy this essay online (Product 1) only for 5$. .

2CheckOut.com Inc. (Ohio, USA) is an authorized retailer for goods and services provided by Spivak.

Please review also:
Updated (2012) biodiesel financial plan
Updated (2012) biodiesel business plan

3. Marketing Plans

3.1 Market Analysis

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.

Table 1. Market Segmentation

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

Chart 1. Market segmentation.

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.

3.2. Market Trends

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.

3.3 Marketing Strategy

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)

3.3.1 Strategy Pyramid

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 products 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.

3.3.2 Value Proposition

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.

3.3.3 Competitive Edge

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.

3.3.4 Positioning

Were 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.

3.3.5 Price

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.

3.3.6 Promotion

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.

3.3.7 Distribution

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.

3.4 Strategic Alliances

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 Oelmhle Leer Connemann GmbH & Co, to sell our products on European market.

3.5 Product

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.

3.5.1 Product Description

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.

3.5.2 Product Performance

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 3C.

3.5.3 Key Advantages of Biodiesel

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 200C compared to petroleum diesel fuel, which has a flash point of 70C.

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.

3.5.4 Sourcing

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.

3.5.5 Future Products and Services

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.

4. Sales Plans

4.1 Product Assortment

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.

4.2 Sales Strategy

Our major intention is to keep levels of monthly production, sales, and collections together. For this reason we planned storage capacities only for one months 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).

4.3 Sales Scenarios

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 plants capacity by 2004. We plan to decrease gradually the sales of rape-seed and increase the sales of biodiesel instead. Nevertheless, it will still remain important so as to ensure cash stability during the year between possible interruptions in biodiesel production cycles (due to technological, organizational reasons, etc).

5 Milestones

The following table lists the first year milestones, with dates and budgets for each. The milestone schedule indicates our emphasis on planning the implementation. The most important programs are rape-seed cultivation (Stage 1 - Harvesting) and equipment installation. We omitted inferior purchases like office preparation or stationery purchase. Detailed description of each milestone is given below.

Table 2. Milestones

 

Milestone

Start Date

dd.mm.yy

End Date

dd.mm.yy

Capital expenses

1

Equipment order

1.01.03

 

676,000

2

Purchase of tools and tractors

1.01.03

 

158,000

3

Site preparation

1.02.03

1.03.03

110,000

4

Installation of oil processing equipment

1.03.03

1.04.03

30,000

5

Farm preparation

1.03.03

1.04.03

 

6

Rape-seed stage 1

1.04.03

30.04.03

 

7

Rape-seed stage 2

1.06.03

1.07.03

 

8

Rape-seed stage 3

1.07.03

1.08.03

 

9

Rape-seed stage 4

1.08.03

1.09.03

 

10

Rape-seed stage 5

1.09.03

1.10.03

 

11

Rape-seed harvesting

1.10.03

1.11.03

 

12

Equipment payment 50%, installation

1.06.03

1.10.03

676,000

13

Equipment and maintenance

1.07.03

1.11.03

 

14

Oil processing

1.04.03

31.12.03

 

15

Biodiesel processing

1.12.03

31.12.03

 

16

Sales of biodiesel

15.12.03

   
 

Total capital expenses in EUR

   

1,650,000

  1. Equipment orders will be possible after negotiations with producers of different parts and having completed the installation plan. This plan will be done by design institution using equipment producers drawings and specifications. Milestones budget is a cost of equipment (50%) plus cost of installation plan.
  2. Quantity of agricultural tools needed was estimated for a farm with a total arable area of 5-10 kha.
  3. Site preparation includes mainly construction works: fence, building, roof repair, building bases for equipment and storage capacities, installation storage reservoirs, energy supply and fire detection equipment. These works will be performed by subcontractors.
  4. We can start the oil processing right after site preparation, because this does not require complicated technology. So, installation of oil processing equipment (oil presses, filters, cisterns) and the offer of oil processing services can be started at the beginning of the year. (Milestone 14) We did not plan cash inflows from these services.
  5. Farm preparation is soil fertilizing (depends on qualities of soil, may be omitted) and processing. Milestones budget includes costs of fuel, fertilizers and labor force.
  6. Stage 1- Sowing of rape, cost of seeds, fuel and labor force costs are assigned here.
  7. Stage 2- Stage 5: entering of herbicides and chemicals additives to fasten the rape ripening. Costs of herbicides and accelerators were included.

  1. Harvesting will be done by subcontractor (lease terms), because this stage requires expensive and productive equipment. Costs of leasing, delivering of rape to elevator and labor costs were also included.
  2. Payment of another 50% costs of equipment will be done after delivering it to the site, inspection, installation and testing. Works will be done by subcontractor (construction works) and equipment supplier. Budget includes costs of equipment, installation, labor force.
  3. Equipment and maintenance includes works with electricity, water, air supply equipment, biodiesel processing equipment, and implies the testing and the improvements.
  4. Oil processing costs include energy, labor force, maintenance.
  5. Processing of biodiesel is possible when sufficient (100 tons) quantity of oil will be pressed. Costs include chemicals, energy, labor force.
  6. Sales are possible when minimum railway transporting quantity (60 tons) produced. By that time, well find clients, sign sales agreements and plan delivery for the next 3 months.

Rape cultivation timing has key importance in the project implementation. While any short delay in the equipment installation can be bearable, the first year harvest of the rape-seeds can`t be missed.

6. Risk Analysis

All the three types of risks were analyzed in the risk pyramid: Country risk, Sector risk and Company risk.

Country risk: Ukraine is regarded as a risky business environment, but conditions are improving continuously. The country has entered a stable growth period after the former years decline. Country risk of the project is minimized in our case, due to the personal experience of one of the authors. Moreover, we determined the electricity costs to be higher than in normal cases, so as to finance the assurance of continuous electricity supply, an extra service in the country.

Sector risk: The main sector risk is the unpredictable output of the rape in each year. The necessary measures are assured in the project budget to cover this risk. The appropriate cultivation conditions can be maintained by the proposed agricultural equipment, moreover, insurance was also planned to cover weather risks.

Other part of the sector risk comes from the technology itself, the greatest threat may come from latest developments in the biodiesel processing. A more cost effective production method requiring totally new equipment could make our plant obsolete. Therefore new inventions concerning the biodiesel fuels should be closely tracked, the cooperation with the local scientific organizations in the region is primarily aimed at minimizing this type of technological risk.

Company risk: Because of the newest technology, the company has a bit more risk than that of a traditional firm. The highly qualified and fully committed management team will do its best to decrease it as much as possible.



The overall risk of the project is moderate, which is expected to decrease over time.

Having considered all these types of risks, the following weigting allocation has been made for the three profitability scenarios:

Normal scenario 50%

Optimistic scenario 25%

Pessimistic scenario 25%

7. Financial Planning

7.1 Project Financing

All the project financing is expected from private investors at the beginning of the project in the amount of 2,000,000 EUR.

The financing needs in the following operational years will be fully covered by the autofinancing capacity of the company if the organic growth remains within the projected scenarios.

7.2 Important Assumptions

The financial calculations of the business plan are based on the following real-life assumptions:

Table 3. Important Assumptions

2003

2004

2005-

Short-term Interest Rate %

10%

10%

10%

Long-term Interest Rate %

10%

10%

10%

Payment Days Estimator

5-15

5-15

5-15

Collection Days Estimator

15-30

15-30

15-30

Tax Rate %

50%

50%

50%

Personnel Burden %

50%

50%

50%

 

7.3 Projected Profit and Loss Reports

The financial reports are prepared in a yearly split, they were intended to be comparable with each other. Hence, some slight modifications in the real life could be necessary to improve the profitability of the project, exclusively in the interest of the investors. Such changes may include an additional capital expenditure in fixed assets for higher return in the optimistic case, if the cash balance is too high to keep it lying on bank deposits without yielding interests.

Details are available in full version.
Please support the author and buy this essay online (Product 1) only for 5$. .

2CheckOut.com Inc. (Ohio, USA) is an authorized retailer for goods and services provided by Spivak.

Please review also:
Updated (2012) biodiesel financial plan
Updated (2012) biodiesel business plan

 

Details are available in full version.
Please support the author and buy this essay online (Product 1) only for 5$. .

2CheckOut.com Inc. (Ohio, USA) is an authorized retailer for goods and services provided by Spivak.

Please review also:
Updated (2012) biodiesel financial plan
Updated (2012) biodiesel business plan

 

7.4 Projected Balance Sheets

Here follow the balance sheets of the biodiesel project. Please note that in the first two years of the pessimistic scenario, additional loans would be necessary to borrow. However, in the third operational year, all these loans would be paid back.

NORMAL SCENARIO

2003

2004

2005 -

Assets

Cash and Securities

7,690

602,575

1,328,010

Accounts Receivable

13,000

170,000

160,000

Inventories

34,000

32,000

32,000

Total Short-term Assets

54,690

804,575

1,520,010

Capital Assets

1,700,000

1,712,000

1,724,000

Accumulated Depreciation

50,000

186,360

322,720

Total Long-term Assets

1,650,000

1,525,640

1,401,280

Total Assets

1,704,690

2,330,215

2,921,290

Liabilities and Capital

Accounts Payable

16,000

16,000

16,000

Short-term Loans

200,000

0

0

Other Short-term Liabilities

0

0

0

Total Short-term Liabilities

216,000

16,000

16,000

Long-term Liabilities

0

0

0

Total Liabilities

216,000

16,000

16,000

Paid in Capital

2,000,000

2,000,000

2,000,000

Retained Earnings

0

-511,310

314,215

Earnings

-511,310

825,525

591,075

Total Equity

1,488,690

2,314,215

2,905,290

Total Liabilities and Capital

1,704,690

2,330,215

2,921,290

 

Details are available in full version.
Please support the author and buy this essay online (Product 1) only for 5$. .

2CheckOut.com Inc. (Ohio, USA) is an authorized retailer for goods and services provided by Spivak.

Please review also:
Updated (2012) biodiesel financial plan
Updated (2012) biodiesel business plan

 

7.5 Projected Cash Flow Statements

The following Cash Flow Statements show, that even in the optimistic case, the treasury control should be tight till 2005, in spite of the huge expected profit in 2004.

 

 

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7.6 Key Financial Indicators

The following tables include all the important key financial ratios related to the project:

(The key financial ratios within the Profit and Loss Statements can be found in Chapter 7.3)

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PESSIMISTIC SCENARIO

2003

2004

2005 -

Profit Margin Ratio

-639.0%

9.2%

9.2%

Total Assets Turnover Ratio

4.9%

63.4%

63.4%

Rate of Return on Assets (ROA)

-31.5%

5.8%

5.8%

Leverage Ratio

1.08

1.15

1.06

Rate of Return on Equity

-34.0%

6.7%

6.2%

Return on Investment Ratio

-29.0%

4.9%

4.8%

Days Accounts Receivable

26.1

17.0

28.7

Days Accounts Payable

11.2

14.4

14.1

Days Inventories Held

13.6

15.3

14.1

Current Ratio

0.13

0.95

14.32

Quick Ratio (Acid Test)

0.06

0.85

13.32

Total Debt to Equity Ratio

15.8%

9.9%

1.0%

 

7.7 Break-even Analysis

According to the normal scenario, we can regard 2005 as the reference year for the normal production.

Total sales 2,130,680 EUR

Production quantity: 5,000 tons

Unit sales price: 426 EUR / ton

Total costs are 538,060 EUR

Variable costs can include chemicals and energy (see Appendix), since farm cultivation costs are fixed costs. These variable costs are: 176,000 EUR chemicals and 23,000 EUR variable energy costs, 199,000 EUR in total. Labor is not regarded as a variable cost, no worker should be fired in a bad situation, even if some money could be saved for a short time.

Thereby the unit variable cost: 39.8 EUR / ton

Fixed costs are 339,060 EUR

As a result, the break-even quantity of the biodiesel production is 878 tons / year.

The gross margin / sales ratio is above 80%, thats why the break-even quantity is so low, due to the exceptional conditions of the project. Let us think a little bit longer. Total payroll burden of the plant is 89,250 EUR / year. If we were giving 8 times more wages for everyone (not a good salary in Western Europe), that would mean an extra 624,750 EUR / year.

Fixed costs in that case would be 963,810 EUR

The break-even quantity would immediately rise to 2,496 tons / year. Nearly 3 times more than it has been originally planned.

8. Exit Scenarios

Exit may take place in several possible ways:

1. Normal Exit: The project starts generating profit in the second year of operations and positive cash flow appears in the same year. It means that once spent, money can be fully recovered by investors. This creates very good chances for the initial shareholders to sell their participation at a very good price for other investors.

2. Project Failure: The total cost of the initial equipment is 1,540,000 EUR, with an annual depreciation of approximately 154,000 EUR. The market value of the assets differs type by type. The agricultural machninery can be sold at least for 70% of book value, oil processing equipment for 90-110% of book value (its already delivered, installed and buyer can start exploiting it), while market price of biodiesel production equipment is under question. The reasoning is the following: biodiesel production is still a unique business in Ukraine, and to sell the equipment we need to find a buyer. This may or may not take time, so the selling price of the equipment may vary from 20% (valued only such general parts as pumps, reservoirs, pipes, etc) to 110% (we found buyer, who is interested to start the production on the existing facilities). The sale of other current assets, such as final and by-products (biodiesel, rape meal, rape-oil, and rape-seeds), chemicals, herbicides and fertilizers are possible at full market price in a very short time: in one month maximum.

Other investments are planned to be around 60,000 EUR in the first year, consisting of office furniture and other small items. Their market value will be around 80-100% of their book value.

As a summary, we estimate that the investors could collect 30-100% of their initial investments, if they suddenly decide to sell everything.

The two project initiators require 10% of the initial investment at the end of the third year of the project and 10% of net profits thereafter. If the exit of investors was made due to unexpected causes (irrelevant from the project results) before the end of 2005, the 10% share will be still required. The only reason to cancel the share transfer can be a cumulated result below the pessimistic scenario. The payment of 10% of the net profits starting from the fourth operational year cannot be ceased.

10. Appendix

SALES PLAN

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Capacity of the plant is 5,000 tons of biodiesel per annum. Rape cultivation costs are expected to be the same in each scenario, the negative effects of the worse sales and weather conditions cannot be compensated by lowering the cultivation costs.

COST OF GOODS SOLD

In this section well indicate only such variable costs as costs of chemicals, fuel, energy, rape-seed cultivation, fertilizers. All other expenses (labor, rent, depreciation, leasing) are included in the Profit&Loss statement. Year 2003 contains a fraction of these costs, due to the proportional usage of the economic resources.

Chemicals and energy

Table 4. Cost of Chemicals

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From year 2005 a +3.4% inflation has been built in the sales plans.

Table 5. Energy Costs

No.

Name

Quantity required per ton

Unit Price

Total quantity required

EUR / year

1

Energy for production: electricity, hot water, compressed air

100 kWh

0.046

500,000

23,000

2

Fixed energy costs

 

0.046

108,700

5,000

 

Total energy costs

     

28,000

Rape-seed

Total area of farm: 5,000 ha, Productivity: 15,000 tons of rape-seed or 5,000 tons of biodiesel per year. Rape meal is a by-product of rape-seed processing.

 

Table 6. Rape-seed Direct Cultivation Costs

No.

Name

Quantity per ha

Total quantity

Price

EUR / year

1

Fuel

300 kg

150 t

305

45,750

2

Seeds

15 kg

75 t

1,700

127,500

3

Fertilizers

30 kg

150 t

230

34,500

4

Herbicides

20 kg

100 t

230

23,000

 

Total

     

230,750

Estimates of production costs vary between reports due to the wide variation of cost and value of inputs and outputs. The most comprehensive report known is that of the University of Wales BEAM Project, carried out upon the request of the Rural Development Section of the Welsh Development Agency about two years ago. Without detailing the report, it calculates the 1997ish cost of production at between 17 and 27p per litre, taking into account the value of the by-products and allowing the input from set-aside grants. (Year 2000 £400/600 per hectare)

Other estimates have been produced, indicating costs of up to 63p per litre. Cost in the USA is currently about 34p per litre (penny is used to make comparable values). It would therefore be reasonable to assume a "worst case" cost of 40p per litre at the pump, allowing for storage and transport costs and profit margins to the distributor and supplier. Amortised in this cost is the capital value of the plant required, which is not comparatively high - an esterification plant to produce 5,000 tons of RME yearly at a rural location is estimated at less than £0.5m. To this must be added the cost of a seed crusher to recover the oil - about £120,000.

EQUIPMENT

Total cost of equipment is 1,540,000 EUR out of which the capital expenditure in:

Farming 158,000 EUR

Seed processing 64,000 EUR

Biodiesel production 1,318,000 EUR

Farming

Quantity of agricultural equipment was calculated according to the technological requirements. Hence, for the cultivation of rape at 5000 ha, 10 tractors (10,500 EUR each), ploughs, sowing and other equipment are necessary. Their total projected cost is 158,000 EUR.

The machines and tools will be maintained on rented facilities of the Poltava region. Gas filling station and garages are also available there.

Seed processing

Summary of the technical characteristics and costs is given in the table below.

Table 7. Seed Processing

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Biodiesel production

Summary is given in the table below. Esterification unit and catalyst preparation unit were offered by company Ekkoil Sk and were accepted after careful study. All other equipment are made in Ukraine.

Table 8. Biodiesel Production Equipment

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MANAGEMENT

Management summary

Our management philosophy is based on responsibility, mutual respect and entrepreneurial creativity. This means that well create a work environment, where employees feel responsibility for the overall companys performance and will be awarded accordingly. Although, better than projected results could be compensated with bonus payments, the most general way of extra remuneration is planned to be a centralized and controlled biodiesel product distribution for the workers (bonuses for extra quality production and so on). The latter method could increase the interest, on behalf of the workers, in working in our plant, and hopefully, it could help propagating the Companys environmental concern even further.

Organizational structure

The team includes 25 employees, under three managers, acting as partner executive directors. No important decision can be made in one person, at least two executive managers should approve them.

Our main management divisions are farming, processing, and sales. Farming handles cultivation of rape; processing-pressing of oil seeds and production of biodiesel.

Management team requirements

We believe we have an excellent team for covering the main points of the business plan: cultivation of rape, sale of final products. At present, we can improve mostly in the area of technical capabilities to manage the production of biodiesel.



Personnel plan

The Personnel Plan reflects the need to bolster our capabilities to match our positioning in the fuel market. Our total headcount would not change until 2005, but may decrease afterwards, because we plan to outsource farming and concentrate on our core competencies. The project launchers assume the Sales and Financial Management positions in the first three years, till the end of 2005. Employees are expected to work in teams, therefore huge salary inadequacies are not allowed. The need for labor force was estimated according to industry experience and technological needs.

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