Credit & Collection Policies
Credit will be granted to retailers on the basis of creditworthiness as judged by both a credit application and Dun & Bradstreet rating. The Dun & Bradstreet rating will be obtained through Dun & Bradstreet's Business Solutions in a Box, which is particularly geared for small businesses.
Since cash flow is a priority, credit terms of 1/10 net 30 will be offered to provide an incentive to retailers to make prompt payments. If a customer does not make payment in accordance with previously agreed to terms, a phone call will be made to assess the situation, and to encourage prompt payment. If this does not work, consideration will be given to whether or not future credit orders will be permitted from the company.
The order form for The Chicago Lounge™ states: "All chairs will be warranted against defective materials or workmanship for a period of one year after delivery. This warranty does not cover misuse or abuse. In the event of a covered defect, J. H. Reid Corporation will at its option repair the defect, replace the chair, or refund the purchase price." A number of chairs have been in use for a number of years, and Mr. Albecker believes that the likelihood of defects is quite remote, probably less than 1% of sales. It should be noted that in the development stage, potential problem areas have been given careful attention, and have been corrected in successive designs.
The projected sales volume of the first year reflects the gradual but substantial increase in sales from only 75 chairs per month in the first month, to 700 units per month in the twelfth month. This increase in sales volume was covered in the marketing and operations sections, and was due to the diversification of the distribution channels and using the 3 phase step-by-step production expansion schedule. Note that the manufacturing volume increases less dramatically than the sales volume, making the production expansion smoother.
The revenue of the company was calculated using an average wholesale price of $204 (This is the amount JHR receives from the retailer.) multiplied by the unit sales per month. Note that there is a two-month gap between the actual sales and revenue, since the delivery of the chairs is made about one month after the retailer orders the product, and the retailer does not pay until about a month after receiving the chairs under the credit terms: 1/10 net 30 from our clients. The cumulative revenue is also provided.
The variable and fixed costs for the production are illustrated in Table 1. The variable costs include unit material cost, utilities, etc. Monthly expenses are tabulated to show the cash requirements for each month, and used as the basis for the cash flow statement. The average material cost is a weighted average based on sales of each model of The Chicago Lounge™, and takes into account reasonable economies of scale that will be achieved as production levels increase. Two-month material costs are accrued before sales revenues are generated since we carry one month of inventory for production. We estimate the cost for the returns and allowances at 0.5% of total sales that are returned due to defects and dissatisfaction. There are no shipping costs itemized since we are selling FOB (freight on board) our dock. There is a variable cost portion and a fixed cost portion of utilities. The variable portion of utilities ($1.50) is the energy cost associated with the production of a unit, while the fixed energy cost is associated with the lighting and heating of the factory.
Major fixed costs include monthly rent ($2,000), initial cost for equipment purchased ($10,000), insurance ($3,000), etc. The monthly rent will be increased to $4,500 in the third year when we are going to expand the size of the plant from 3,000 square feet to 10,000 square feet. The insurance cost will also increase in the year 3 to $6,500.
The labor cost consists of workers' wages and benefits and the salary of a manager. The production workers' wages and benefits are $38.50 per chair is based on the average labor cost of manufacturing the Prairie and Metro models. The manager's salary begins at $40,000 (plus $8,000 in benefits) in the first year and increases to $60,000 in the fifth year. Under "Management Salaries and Fees", a provision is made to pay either outside management support (such as an accountant), one or more administrative assistants, and additional managers as is appropriate as the production volume and labor force increases.
Based on sales revenue and expenses, the income is calculated monthly. In the first year, we will have a positive income stream, except during the first two months of operations (based on the conservative sales projections and the initial required investment).
|J.H. Reid Corporation|
|Table of Contents||Appendices|
1. Executive Summary|
2. Business Overview
3. Marketing Plan
5. Operations Plan
7. Financial Plan
Cost of Manufacturing|
United States Patent
Cash Flow Statement
Break Even Point
|All information herein is confidential and belongs to J.H. Reid Corporation|