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Chartered Management Institute

Diploma in Strategic Management and Leadership

FINANCIAL PLANNING

INDIVIDUAL PROJECT

Submitted byAyaz Akhtar

Reg no LPC/SBM/CMI/0156-ENR

LEEDS PROFESSIONAL COLLEGE

Table of Contents

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Task 1

Financial Plan

Financial Plan of Webster Bookstore

Mitigation Strategies

Task 2

Strategic Objectives of Webster Bookstore

Financial Plan of Webster Boosktore

Alignment of Webster’s Strategic Objectives with Financial Plan

Components of Financial Plan 20X3

Task 3

Webster Bookstore – Company Information

Webster Bookstore – Current Strategy

Webster Bookstore – Porter’s Five Forces Analysis

Webster Bookstore - SWOT analysis

New strategy for Webster

Conclusion

Bibliography

IntroductionThis report is addressed to the management of Webster Bookstore. The aim of this report is to prepare a financial plan for Webster Bookstore, to identify the component parts of the financial plan and their importance. It is also to identify mitigation strategies for the high risk component of the plan. The report will also assess whether

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the financial plan supports strategic objectives of Webster Bookstore. The impact of the current strategy on the financial plan will also be discussed. An analysis of Webster’s current strategy will be conducted and a new strategy will be proposed. The company’s core competencies will be identified and recommendations suggested to keep the business viable.

Task 1Financial PlanThe aim of making a financial plan for an organisation is plan for the long term so that the organisation can generate a greater return on its assets, achieve growth in its market share and work towards solving its foreseeable problems (business dictionary (2010). In an organisation, a financial plan is an important document that clearly outlines the company’s current financial status, its financial goals, the timeframe for when the company wants to achieve them and the strategies that company has to meet these goals. The financial plan serves as a benchmark to measure the progress the company is making to achieve its goals. The company regularly updates its progress as the goals and the timeframe to achieve the plan are subject to change (thefreedictionary 2010).

Financial Plan of Webster Bookstore The financial plan of Webster Bookstore has been developed using the income statement (figure 1). Webster Bookstore’s income statement summarises the company’s income (sales) and expenses for the year 2003 and also shows forecasted figures from 2004 – 2006 using trend analysis.

The objectives of the financial plan are to launch a website for the company toincrease sales and improve profits. This is expected to incur a change in sales, investment and maintenance costs. Let us now discuss each component of thefinancial plan.

The sales figure on the income statement refers to the total value of Webster’s sales of products to its customers. The sales figure is the most important aspect of the income statement as it is the main source of generating revenue for the company. In the financial plan, sales in 2003 were £1569600. Webster is planning to start selling its products online. A market research by the management has shown that this will result in 40% increase in sales. Hence, figures for 2004-2006 are estimated with 40% increase in sales. Hence the sales figures show a successive increase of 40% from 2004 – 2006.

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The cost of sales shows the total cost producing the final product. For Webster bookstore, it is the cost of the amount of stock the company had at the beginning of the financial year and at the end and the number of purchases made. As shown in the case study, the trend for opening inventory is 33%, 15% for purchases, 19% for closing inventory. Hence figures for 2004-2006 have been estimated with this trend. They show a steady increase across the years.

Estimated gross profits show an increase from 2004 – 2006 mainly due to an increase from online sales.

Webster plans to make an initial investment of £400,000 to set up the online business. This investment is depreciated using the straight line method of depreciation over a three year period. Hence depreciation of £133330 has been taken as an expense for years 2004-2006. By the end of the three years, the investment is fully depreciated.

Setting up the website will require maintenance costs of £20,000 on an annual basis. It is assumed that the website was set up in 2004. The costs of £20,000 have been taken into account for years 2005-2006. Expenses also other expenses have been estimated to increase by 10% over the three year period. Similarly staff cost are estimated to increase by 20% and technology cost by 50%. The marketing costs for Webster have been kept constant at £6000 over the three years.

The financial plan has shown that the changes in income and expenses the company can expect by launching its website. It is remembered that these figures are estimations and need to be reviewed regularly. Actual figures need to be compared with budgeted figures throughout the three year period so that management has a clear idea of where the company is going in the future. This will greatly assist the company in assessing the result of its proposed strategy of setting up a website.

Figure 1: Webster’s Financial Plan 2004-2006Webster

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BookstoreForecasted Income StatementJanuary 1, 2003 to December 31, 2006

Income   20x3 Trend 20x4 20x5 20x6    £000   £000 £000 £000

Sales  1569.

6 40%2197.

443076.

424306.

00Less cost of sales            Opening Inventory  

176.89 33%

235.26

312.90

416.00

Purchases   952.2 15%1095.

031259.

281448.

00

Closing Inventory  

-339.8

6 19%

-404.4

3

-481.2

7

-572.0

0Total cost of sales  

789.23  

925.86

1090.91

1292.00

Gross Profits  780.3

7  1271.

581985.

513014.

00             Expenses            

Other expenses  281.9

3 10%310.1

2341.1

3375.0

0Staff cost   33.12 20% 39.74 47.69 58.00

Depreciation      133.3

3133.3

3133.3

3Marketing cost   6 0% 6.00 6.00 6.00Technology cost   13.5 50% 20.25 30.38 45.56Maintenance         20.00 20.00

Total Expenses  334.5

5  509.4

4578.5

3637.8

9           

Net Profit  445.8

2 0762.1

41406.

982376.

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Figure 2 graphically illustrates the trend in net profits from 2003-2006 of Webster.

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Forecasted Net Profit

0

500

1000

1500

2000

2500

20x3 20x4 20x5 20x6

Net Profit

Yea

rs

Net Profit

As is evident from the figure above, the company’s website will result in a gradual increase in net profits over three years.

Mitigation StrategiesIn order to identify the high risk component of the financial plan, a sensitivity analysis has been carried out.

Sensitivity analysis (figure 3) has been carried out for Webster. Sensitivity analysis is a technique that is useful to determine how change in the value of an independent variable such as sales will impact a particular dependent variable such as net profit under a given set of assumptions.

The assumptions used in carrying out the sensitivity analysis are shown below.

Condition 1: Impact of 10% decrease in sales on profitsIf sales decrease by 10% i.e. from £2197 to £1977, all other costs remaining constant, the net profit becomes £542.00.

Condition 2: Impact of 10% increase in cost of sales on profitsIf the cost of sales increase by 10% i.e. from £926 to £1018.6, all other costs remaining constant, the net profit becomes £669.40.

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Figure 2: Forecasted Trend in Net Profit 2003-2006

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Condition 3: Impact of 10% increase in other expenses on profitsIf expenses increase by 10% i.e. from £509 to £559.9, all other costs remaining constant, the net profit becomes £711.54.

Figure 3: Sensitivity Analysis

Income 2004Forecasted sales

Forecasted cost of sales

Forecasted expenses

  £000 £000 £000 £000

Sales2197.

44 1977.30 2197.44 2197.44Less cost of sales        Opening Inventory

235.26 235.26 299.6 235

Purchases1095.

03 1095.03 1169 1095

Closing Inventory

-404.4

3 -404.43 -450 -404Total cost of sales

925.86 925.86 1018.6 926

Gross Profits1271.

58 1051.44 1178.84 1271.44         Expenses        

Other expenses310.1

2 310.12  310.12 360.58Staff cost 39.74 39.74 39.74 39.74

Depreciation133.3

3 133.33 133.33 133.33Marketing cost 6.00 6.00 6.00 6.00Technology cost 20.25 20.25 20.25 20.25Maintenance        

Total Expenses509.4

4 509.44 199.32 559.90         

Net Profit762.1

4 542.00 669.40 711.54

The sensitivity analysis is graphically illustrated in figure 4.

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Sensitivity Analysis

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100

200

300

400

500

600

700

800

2004 Forecasted sales Forecasted cost of sales Forecasted expenses

Assumptions

Net

Pro

fit

Net Profit

It can be seen from the above figure that the sales figure is the most volatile and has the greatest impact on the overall functioning of the company. A 10% decrease in sales results has the highest impact on net profit and is evident in the reduction of net profit. A 10% increase in cost of sales has a medium impact on net profit as is evident from reduction in net profit. A 10% increase in expenses has the least impact on net profit when compared with changes in expenses and sales figures.

Hence with these assumptions, it can be said that Webster needs to carefully monitor its sales figures as they pose the highest risk to the overall working of the financial plan. Launching of the website is expected to increase sales. However, if the actual sales figures do not match with budgeted ones, then the company immediately needs to review its strategy to increase sales or sustain current levels. It is important for Webster to keep up with the changes in its current environment, understand changing customer needs and have a culture of continuous learning and development within the company.

Task 2This section evaluates whether Webster’s financial plan supports its strategic objectives. It also explains the impact of the current strategy on the financial plan and identifies the component parts of Webster’s financial plan in year 20X3.

Strategic Objectives of Webster BookstoreThe strategic objectives of an organisation define the way in which the management wants to take the company forward. The strategic objectives clearly specify the targets the company wishes to undertake to successfully achieve its strategy. These are specific to the needs of the organisation and are set for a well-defined timeframe. The strategic objectives of Webster Bookstore are as follows:

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To provide excellence in customer service through provision of quality products and services in accordance with customer needs

To achieve maximisation of profits through launch of company website

To promote growth in sales in all stores

Webster is a small family run bookstore with six stores in the UK. Recent decline in sales is a major cause of concern for the company. Hence the company’s strategic objectives include providing customers with excellent service by offering them quality products and services which they need. It is to maximise profits in all its stores and by launching its website. The financial plan of the company has been developed to achieve these objectives. The financial plan fully supports the strategic objectives of the company.

Financial Plan of Webster BoosktoreThe financial plan has been developed so that the company has sufficient funds to launch its website. The plan gives the company the ability to adapt itself to the changing needs of its environment and to optimally utilise its scarce resources to successfully achieve its objectives. The company’s management will need to closely monitor and assess the actual figures with the budgeted ones to ensure that the company has sufficient funds to sustain itself.

Alignment of Webster’s Strategic Objectives with Financial PlanThe financial plan complements the company’s strategy and together they give future direction to the company. It is clearly evident from the company’s present situation that management need to turn the business around. The management has decided to accomplish this by investing in a website. This step is taken to boost sales and keep up with the trend in the retail sector. The financial plan has been prepared to ensure that the company is adopting the changing trends in the bookstore retail business, is diversifying its product range, is attracting younger customers to its stores and has appropriate strategies in place that are in line with its competitor’s.

Components of Financial Plan 20X3Webster’s financial plan of 20X3 shows that sales have been increasing by 20% since 20X1. These sales mainly come from selling books, in the ages between 41-50. Sales have also come from magazines, stationery, food and novelty items. The sales

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figure is very important and is a cause of great concern for management at Webster as it has been steadily declining over the last five years.

The financial plan of 20X3 shows an increase of 33% in opening inventory, 15% in purchases and 19% in closing inventory. Other expenses have increased by 10%, staff cost by 20%, technology cost by 50% and marketing cost has remaining static since 20X1. The gross profit and net profit in 20X3 have shown an increasing trend since 20X1.

Task 3

SWOT Analysis

Internal External

Strengths

The gross profit margin is increasingThe net profit margin in increasingSales is increasing with the rate of 20%New products are being addedThe management is experiencedSearching the books

Opportunities

Online businessNew products like magazines, music etcIncreasing outlets and furnishing existing outlets

Weaknesses

Decreasing sales of booksSources of funds are limitedBooks sales is being decreased

Threats

Inventory prices can be increasedChanging shopping trendCompetitorsNew technology if not adopted properly

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The study of the store indicates that the sales of books lie in the case cow column. The sales of the books are in its mature stage, and there is less growth of books sales in the market. But the organization is earning profit from them.

The blinking question mark indicates that the trend of purchasing magazines, music and food items on books stores is being increasing but the Webster store is not having much share of these products in the market.

The BCG matrix indicates that the organization should more focus on new products like magazines, stationary items, music, video games and food items.

This section will examine Webster current business by evaluating its current strategy using Porter’s five forces and SWOT models. It will also propose a new strategy for the company. Recommendations will be also be made on how to keep the business profitable.

Webster Bookstore – Company InformationFounded in the 1930s, Webster Bookstore is a small chain of bookshops located in the south of the United Kingdom. The company has a total of six small shops in the main towns in the area. Webster Bookstore is managed and operated by the Webster family. The image of the company is traditional and conservative and is described as old-fashioned by the younger members of the Webster family (Case study 2010).

Webster Bookstore – Current StrategyWebster current strategy focuses on the sale of books to earn revenue. The company sells a wide range and variety of books. The company’s customer based is mainly local who buy mainly from the company. There are occasional tourists but these are for a limited period only. Webster’s primary customer age range is between 41-50 years, followed by 51 +, followed by 31 – 40 years. The least products are being brought by customers ages ranging from 1 – 20 years. This shows that the company is generally targeting the middle aged and the elderly people of society. The company believes that it offers customers a wide range of books. It has adopted this strategy to attract a wide range of customers. Webster’s management team believes that this is its key strength over its larger rivals (Case study 2010).

Webster Bookstore – Porter’s Five Forces AnalysisLet us now use Michael Porter’s model to analyse Webster’s current strategy. Michael Porter’s five forces model provides a simple framework to analyse the competitive strength and position of a company. It helps in developing a sophisticated assessment of a company’s strategy, plans and its ability to make investment decisions (businessballs 2009).

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Porter’s first force is the degree of competitive rivalry in the industry. The book industry is intensely competitive as there are many big players in the market. A market analysis by Webster shows that there are a total of 15 stores in the same town as Webster’s bookstores. Out of these 15, 10 are large national or international retail chains (Case study 2010). Hence market competition greatly impacts on Webster’s operations.

Porter’s second force is the degree of threat of a new entrant in the market. It is easy for new entrants to enter the market but it is difficult for them to compete and sustain themselves in the competitive market. It will depend on their ability to satisfy the customers better than the competitors. Hence for Webster the threat of new entrants is medium.

Porter’s third force is the threat of substitution for a company’s products. Webster faces a threat of substitution for its products as its sales are coming mainly from books. There are high switching costs as customers can go to another store to buy similar books. The threat of substitution is also high due to the price and quality of the products. Porter’s fourth force is the degree of the bargaining power of buyers in the market. Buyers have a high bargaining power as they have a wide variety of stores from which they can buy their favourite books from. Also they can easily switch from one retail store to another if they find a better bargain elsewhere. This greatly impacts on Webster’s operations as it must have strategies in place to ensure that buyers mainly buy from its stores.

Porter’s fifth force is the degree of the bargaining power of suppliers in the market. Supplier power depends on the prices of goods bought from suppliers. Webster power over its suppliers is low as there are many international retail chains who are selling at discounted prices. These chains are able to negotiate prices with suppliers and also buy in bulk. This reduces the cost of products bought from the supplier and then sold to the customer. It is challenging for Webster to compete with this.

The five forces analysis has shown Webster’s position in the book industry. Webster needs to take all the issues identified from the analysis into account whilst planning its future strategy.

Webster Bookstore - SWOT analysisThe SWOT analysis is a very useful tool that is used by organisations in understanding and decision-making in all areas of business activity. The term SWOT stands for strengths, weaknesses, opportunities and threats. It is a useful framework for assessing a company’s strategy, position and to give future direction (Chapman 2009).

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StrengthsOne of the core strengths of Webster is that it provides an extensive variety and range of books to its customers. This is believed by Webster’s management to be its key source for attracting a wide range of customers.

Customer loyalty is strength. Customers are loyal to Webster and continue to purchase from its stores.

Webster’s store location is strength. The company’s stores are located in the city centre which is easily accessible by everyone.

WeaknessesWebster’s biggest threat is the continuous decline in its sales figures over the last five years.

Webster’s image of being a traditional store with a conservative image is a source of its declining sales figures. Webster’s store layout and décor is outdated as the stores were last refurbished six years ago. The latest trend is to have modern stores that are decorated to attract customers.

The company focuses only on the sale of books. Whereas the general market trend is to have a store that sells books, music, newspapers, magazines, computer games, in-store food and drinks.

One of the major weakness is the resistance of Webster’s staff to be open to change. Most of Webster’s staff have been with the company for more than 40 years. These staff members do not want to bring about any changes. It is only the younger staff that wants to develop the store and bring about improvements in the company.

OpportunitiesWebster can change the image of its stores by having a combination of traditional and modern infrastructure. It can refurbish its stores.

To attract the younger segment of the population, it can diversify its product range by having along with books, products such music, DVD’s, computer games.

It can develop a website and start selling online. This will be cost saving and will generate revenues quickly. It can have attractive features on its website that can enable customers to easily view books, music and movie titles easily. Its website should make the shopping experience a memorable one for the customer. Customers today want to have the flexibility to have alternative payment methods. Webster through its website can have such alternative

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methods which will help the company in attracting more customers and increasing its sales.

Webster can also have a loyalty card scheme through which it can offer customers points for shopping in store. The company can offer discounts to customers if they have collected a certain number of points. In this way, the company can understand the needs of its regular customers. It can have those products that are being sold more and also promote these products more in store. This can also serve to increase the company’s profits.

ThreatsOne of the main threats is the recession in the UK market. The economic environment is subject to rapid change. Consumer spending can rise or fall depending on market conditions. A decline in consumer spending will directly affect the Webster’s sales and the demand of its products in the market.

The business of selling books is very competitive. Webster’s competes directly with all the major booksellers on the high street.

To bring some changes in the company, the company will need finance. It will need to find out sources to finances the changes in its operations. In view of the current economic climate, this may prove difficult for the company.

The SWOT analysis has brought forward Webster’s core competencies i.e. its strengths, its weaknesses, opportunities and threats. The company needs to bring about a change to increase its sales and to attract new customers.

Let us now propose a new strategy for Webster based on the findings from the PEST and SWOT analysis.

New Strategy for Webster

The new strategy for Webster is composed of five parts.

Part 1: The customerThe vision of part 1 of Webster’s strategy is to understand the needs and requirements of the customers better than anyone else in the market.

The goals and objectives of part 1 of the strategy is to conduct a market research to understand what the customers would like to buy at Webster’s stores. The research should also focus on what sort of books are currently being bought by customers. What sorts of books are currently being sold by Webster’s competitors and at what prices?

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This data needs to be carefully collected, processed, analyzed and compiled in a report to the management of Webster’s stores. Customer data should be regularly collected to analyze customers buying trends.

Part 2: Diversification of product rangeThe vision for part 2 of Webster’s strategy is to provide customers with products and services that meet their needs and provide them with value for money.

The goals and objectives of part 2 of the strategy are to reevaluate the current products and services being provided by the company to its customers. Findings from part 1 of the strategy should also be incorporated here. The company needs to develop a product and service range that will satisfy the needs of its customers. Webster also needs to focus attracting the younger generation to buy from its stores.

Part 3: RefurbishmentThe vision of part 3 of the strategy is to change the image of Webster’s stores from traditional and conservative to being a combination of traditional and modern.

The goals and objectives of part 3 of the strategy are to refurbish Webster’s stores by modernizing their stores layout and structure in such a way that it maintains its traditional image but looks modern too.

Part 4: FinancesThe vision of part 4 of the strategy is to effectively manage the finances of the business.

The goals and objectives of part 4 of the strategy are to carefully assess the current financial position of Webster. The company must analyze the costs and benefits of having a new product range and of refurbishing its shops. It must identify the source(s) of funds to finance these new changes. It must also keep a careful watch over its cash flow position as its sales have been continuously declining.

Part 5: PeopleThe vision of part 5 of the proposed strategy is to develop a workforce that is committed to the company.

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The goals and objectives of part 5 of the strategy is to develop a company culture that is characterized by openness, team working and flexible to the changing needs of the organization.

This is the most important and yet the most difficult part of the proposed strategy. It is important as the commitment of all the company’s employees is crucial to the successful implementation of the new strategies. It is difficult as the majority of staff at Webster’s has been with the company for over 40 years and is very resistant to change and is content with the company’s current position.

Having examined the new strategy, let us now make recommendations for the future success of the company.

To be successful in the books market, Webster needs to understand the needs of its current customers and also of the general public. Understanding the wants and needs of its customers will provide the company with greater opportunities to earn their loyalty. Improving the shopping experience for the customer is the first step to retaining customers.

At this point, Webster has a culture that is not open to new changes. To be successful, the company must acquire the ability to adapt its operations to the changes in its macro and micro environment. The business world is completive and full of surprises and unexpected events. Being flexible and adaptable will enable Webster to adapt to changes in its environment.

Webster needs to change its attitude by being opportunity focused and continuously striving to find better ways to be more productive. Businesses face many problems everyday e.g. staffing issues, misunderstandings with customers, inventory shortages etc. Having an attitude of making every problem an opportunity to improve the business can make working life fun and energetic. There are always better ways of doing things. Having the attitude of always thinking of the present way to do things makes one focus on the critical issues that can increase sales and profits. Business productivity can be developed by technology, automation and improving business processes.

ConclusionThis report presented a financial plan for Webster Bookstore and also identified the component parts of the financial plan and their importance. A sensitivity analysis was conducted to find out the most volatile component affecting net profit. This component was found to be the sales figure. Mitigation strategies for the high risk component of the plan, sales were suggested. The financial plan supported the strategic objectives of Webster Bookstore. Webster’s current strategy was analysed using the five forces model and the

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SWOT analysis. A new strategy was suggested for the company. The key to Webster’s success lies in its ability to intelligently manipulate the key factors in its external and internal environment, listen to and engage with its employees, keep a close watch over its finances and strive towards achieving competitive advantages in the market.

Bibliography

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Chadwick, L. (2002) ‘Essential Finance and Accounting for Managers’ Harlow: FT Prentice Hall.

Case study (2010) Case Study, Financial Planning, Leeds Professional College.

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Chapman, A. (2009) SWOT analysis [online]http://www.businessballs.com/swotanalysisfreetemplate.htm [accessed 20.01.10].

Drury, C. (2006) Management Accounting for Business, third edition, Austrailia, Thomson

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