Business
Plan
Living Skies Organic Bird Seed
Braden Michnik
1
December 7, 2011
Comm 447
TABLE OF CONTENTS
EXECUTIVE SUMMARY ..........................................................................................................4
1.0 INTRODUCTION ....................................................................................................................5
1.1
1.2
1.3
INDUSTRY OVERVIEW .....................................................................................................5
MISSION STATEMENT ......................................................................................................5
GOALS AND OBJECTIVES ..................................................................................................5
2.0 OPERATIONS PLAN ...........................................................................................................6
2.1
ORGANIZATIONAL STRUCTURE .......................................................................................6
2.2
SITE PLAN ........................................................................................................................6
2.2.1 Floor Plan...................................................................................................................7
2.3
MANUFACTURING PROCESS .............................................................................................8
2.4
QUALITY CONTROL ..........................................................................................................9
2.5
THE BUSINESS CYCLE.......................................................................................................9
2.6
THE CAPITAL BUDGET ....................................................................................................9
2.7
PRODUCTION COST ........................................................................................................10
2.8
OPERATING EXPENSES ...................................................................................................11
3.0 HUMAN RESOURCES PLAN...........................................................................................12
3.1
3.2
3.3
3.4
JOB DESCRIPTIONS .........................................................................................................12
TRAINING PROGRAMS ....................................................................................................13
HUMAN RESOURCE STRATEGY.......................................................................................13
HUMAN RESOURCE COST.......................................................................................14
4.0 MARKETING PLAN ..........................................................................................................15
4.1
THE MARKETING OUTLINE ....................................................................................15
4.2
THE MARKETING MIX..............................................................................................15
4.2.1 Products ....................................................................................................................15
4.2.2 Pricing ......................................................................................................................15
4.2.3 Promotion .................................................................................................................16
4.2.4 Place .........................................................................................................................16
4.2.5 Channels of Distribution ...........................................................................................17
4.3
SEGMENTATION, TARGETING AND POSITIONING ..........................................................18
4.3.1 Segmentation.............................................................................................................18
4.3.2 Targeting ..................................................................................................................18
4.3.3 Positioning ................................................................................................................18
4.4
MARKET ANALYSIS ........................................................................................................19
4.4.1 Potential Markets......................................................................................................19
4.4.2 Market Factors .........................................................................................................20
4.5
CERTIFICATION PROCESS ...............................................................................................20
4.5.1 Labeling & Packaging Requirements .......................................................................20
4.6
COMPETITION ANALYSIS ...............................................................................................21
4.6.1 Barriers to Entry .......................................................................................................21
4.6.2 Competition...............................................................................................................21
4.7
MARKETING SUPPORT ....................................................................................................22
4.7.1 Buying Local .............................................................................................................23
4.8
SALES AND PROFIT PROJECTIONS ..................................................................................23
2
4.9
MARKETING BUDGET .....................................................................................................24
5.0 FINANCIAL PLAN .............................................................................................................25
5.1
5.2
5.3
5.4
5.5
5.5.1
5.5.2
5.6
5.7
5.8
CAPITAL REQUIREMENTS..................................................................................25
PROJECTED INCOME STATEMENT ...................................................................25
DIVIDEND POLICY ...............................................................................................26
ECONOMIC FORECAST........................................................................................26
CRITICAL VARIABLES & RISK ..........................................................................26
Challenges and Risks ................................................................................................27
Risk Management......................................................................................................28
SCENARIO ANALYSIS..........................................................................................28
CONTINGENCY PLAN ..........................................................................................29
CONCLUSION.........................................................................................................30
6.0 REFERENCES .......................................................................................................................31
7.0 APPENDICES.........................................................................................................................32
Figures
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Organizational Structure
Building
Seed Mixer
Packaging machine
Sealing machine
Tables
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Capital Budget
Cost of Goods Manufactured
Operating Costs
Annual Salaries & Wages
Sales Projections
Marketing Expenses
Financing Budget
Projected Net Incomes
Dividends Paid
Scenario Analysis
Appendix A
Appendix B
Appendix C
Appendix D
Capital Budget
Cost per Unit
Pricing Strategy
Break Even Analysis
3
Executive Summary
Living Skies organic birdseed will offer customers organic and locally grown, chemicaland preservative-free birdseed. The creation of this business is in response to the growing
demand for a healthy alternative to standard/conventional birdseed. Today’s consumer is
also reading labels, getting educated and becoming more concerned with how and where
their food is being produced.
The following document will highlight how Living Skies will gain market share in the
already mature bird seed industry. Living Skies will work with Saskatchewan growers
and promote safe farming practices. Living Skies will develop an advertising campaign
focused on buying local products and inform customers on the benefits of organic food.
The employees at Living Skies will be dedicated to providing a high quality product for
its customers and remain committed to supporting Saskatchewan farmers.
Financially, Living Skies requires a capital investment of $50,000 with high possibilities
of return. Net income is expected to increase from $3,400 in the first year to $110,000 by
2015.
This business plan will provide an in depth analysis of the Living Skies strategy for
establishing itself as the first name in organic bird seed for North American bird owners.
4
1.0 Introduction
1.1 Industry Overview
The market for bird seed is growing rapidly. By some estimates, growth is 4% per annum
(Stats Canada). The growth of the bird food industry has led to greater sophistication in
formulating small-grain mixtures. While the actual number of ingredients used in bird
food formulations is relatively small, packers and distributors are increasingly
segmenting their offer to cater for specific bird species or consumer expectations.
According to Agriculture Canada, the volume sales of bird seed reached 2,766 tonnes in
2010, up from 2,727 tonnes in 2009, making it the category with the highest consumption
among pet food. More disposable income and more leisure time in industrialized
countries have led to an increased number of people keeping companion birds. This
fascination with birds has led to a birdseed industry that dispenses over 500,000 tons of
birdseed per year.
1.2 Mission Statement
“For the bird owner who wants their feathered companion to enjoy a healthy and
balanced diet, Living Skies Organic Birdseed provides essential nutrients that contribute
to a long-lasting life.”
1.3 Goals & Objectives
The goals of Living Skies create a balance between earning a profit and introducing
organic birdseed to a market ripe with opportunity. Living Skies will establish a strong
brand image of high quality ingredients and offer bird owners a healthy alternative to
conventional birdseed. The objectives for Living Skies are:
1) To market organic birdseed and maintain a positive cash balance
2) To educate consumers on the benefits of organic birdseed
3) Expand market presence across Canada and the United States
4) Generate a net profit in the first year by developing a strong customer base
5) Make quality control a top priority
5
2.0 Operations Plan
This section will describe the manufacturing facility and operations for bird seed
production. Quality control and organic certification are detailed to ensure customer
satisfaction.
2.1 Organizational Structure
Living Skies is an incorporated business located in Saskatoon. The processing and
packaging facility is located on 3206 Wells Avenue. The company will have two
managers and one full-time employee.
Figure 1
Organizational Structure
2.2 Site Plan
The building has been built over the last two years and is 120 ft. long, 25 ft. wide and 17
ft. tall (3000 sq. ft.). It is a fully finished and insulated building with electricity
installation and natural gas heating. The building is a pre-engineered steel building that
has two grad level 12’ x 14’ overhead doors located on the side for unloading and
loading shipments. There are finished washroom areas and space for an office area.
6
Figure 2
Building
2.2.1 Floor Plan
Equipment
Storage
7
2.3 Manufacturing Process
The following list is the steps taken to produce organic birdseed from start to finish.
1. The seed is purchased from organic growers pre-cleaned
2. The canary seed, millet, and canola seed are stored in bins
3. Seed quantity is carefully measured using a digital scale, screening for moisture
and dust
4. Product is then placed in a tub to ensure an even mixture
5. Product is placed into seed mixer
6. The 2kg plastic bags are filled and sealed.
7. The handler takes sealed bags off the machine and boxes the product.
8. The finish product is stored until shipped and delivered.
Figure 3 Seed Mixer
Figure 4 Packaging Machine
Figure 5 Sealing Machine
8
2.4 Quality Control
To remain competitive, Living Skies needs to deliver high quality, nutritious and healthy
bird seed every time. In order to do this, the business will develop and implement a
comprehensive quality assurance program that will include:
1. Contractual agreements with suppliers and growers ensuring that only high
quality grain and seed ingredients will be accepted.
2. Traceability to producers of all ingredients in case there is a problem.
3. An education and training program for employees put into place systems,
outlining procedures that ensure the quality, safe storage, and handling of
materials.
Living Skies is certified by Quality Assurance International, Canada’s foremost organic
certification body. To ensure compliance will all organic regulations and standards,
“certified organic” producers and processors are regularly inspected by an independent
third party. Furthermore, every package of birdseed has a unique lot number. This
number enables the consumer to track the birdseed back to the field and to the farmer
who grew the seed.
2.5 The Business Cycle
From the date an order is placed by wholesalers or retailers, the production time for an
order of 100 units will take 3 hours. At full production, Living Skies can produce over
50,000 units (2 kg each) of birdseed in its current facility. For customers that order from
the website, Living Skies will receive payment upon purchase. Shipments will be sent on
airfreight across Canada and will take approximately 4 working days to customers to
receive their order.
2.6 The Capital Budget
The capital budget for manufacturing the product covers the building, equipment, and
machinery. Living Skies does not own any physical assets such as the land or building.
The largest expense in the capital budget is the purchasing of machinery for production.
9
In addition, buying ingredients is a major expense (over 50% of unit cost). A more
detailed breakdown of the capital budget can be found in Appendix A.
Table 1
Capital Budget
Initial Capital Budget
2011
Plant Equipment
38,000
Office Equipment
2,200
Working Capital
28,000
Total Capital Investment
$68, 200
2.7 Production Cost
The cost of production per unit in year 1 is $3.57 (Appendix B) and decreases every year
after. The cost of goods manufactured is the total cost for all direct inputs used in the
organic birdseed production process. These costs include direct materials (cleaned seed,
packaging material), direct labor (operations manager and production staff), and
manufacturing overhead (rent of equipment and utilities and liability insurance).
The cost for the first year of operations is illustrated in the table below:
Table 2
Cost of Goods Manufactured
Direct Materials
Direct Labour
Manufacturing Overhead
Cost of Goods Manufactured
86,554
26,231
12,660
$125,445
10
2.8 Operating Expenses
This table outlines the operating expenses for Living Skies during the first year of
operation. The main expenses for the company are salaries and the monthly lease.
Table 3
Operating Expenses
Operating Expense
2011
Lease ($10.sq ft.) – 3000 sq. ft. 30,000
2,000
Property Tax
5,000
Labeling/Nutritional Analysis
200
Business License
6,000
Freight Expense
2,000
Website Development
5,000
Utilities
3,000
Insurance
3,000
Legal & Accounting
40,000
Manager Salaries
Total
$96,200
11
3.0 Human Resources Plan
It is crucial that Living Skies employs knowledgeable and dedicated staff members. This
business strives to ensure a high quality product; therefore all employees will have to
possess a perfectionist mentality. This organic birdseed business uses a simple
organizational structure that incorporates an operations manager, marketing manager, and
machine operator. Each of their job responsibilities will now be explained.
3.1 Job Descriptions
Manager
This individual will also act as the operation manager and will play the role of president
and operations manager. The organizational structure of Living Skies is set up so that the
president has the most responsibility in the hierarchy.
The president of Living Skies has to be a dedicated individual. This person needs to
possess leadership skills and communication skills. The president will report and
coordinate all aspects of the business to the rest of the staff. Part of the president job is
being responsible for the internal business operations including the processing/packaging
process, budgeting, and human resource management. Shipping and receiving of products
is also another responsibility.
Sales Manager
Living Skies will hire a marketing/sales manager. This well-rounded individual will run
the daily activities of marketing, selling, customer contact/interaction, advertising,
attending trade shows, and representing the company.
This position will require an individual that possesses a university degree or community
college diploma in sales and marketing. Past experience in sales and marketing is an
essential qualification because he/she will be responsible for organizing the ad campaign.
This person should be able to demonstrate excellent relationship and communication
skills, proven sales techniques, and time management skills; as well as advanced oral and
writing skills. He/she will have to be a dedicated individual that shows outstanding
12
initiative because this is a very demanding position. This person will be responsible for
finding new markets and buyers for the product. Given the location of the target market
and the extent of marketing needed for this type of product, the marketing position will
be quite time consuming. Living Skies is very dependent on the performance and skills of
this individual in order to succeed as a company.
Machine Operator
The machine operator will work on a full-time basis; preferably a licensed fork lift
operator with a strong work ethic. The machine operator would assist and work under the
authority of the manager. This person’s duties would include blending the ingredients,
packaging the mixtures, transferring finished products to storage, cleaning the facilities,
etc. This individual will be paid by the hour.
3.2 Training Programs
Living Skies will have basic training programs to increase employee knowledge and
capabilities. The operations manager will provide on-the-job training for staff. The
marketing manager will learn more about selling techniques and the pet food industry as
he/she becomes comfortable with his/her duties. The operations manager needs to be
ready for changes that may occur and be ready to adapt to new methods and techniques. It
is recommended that the operations manager be trained in fork lift operation and heavy
machinery safety.
3.3 Human Resource Strategy
Living Skies plans on attracting and retaining high quality employees through autonomy
and open communication. Good communication skills, interpersonal skills, and trust in
the workplace are important for the HR strategy to succeed.
As Living Skies grows, additional staff will be required. This may include a whole range
of positions from sales personal, buyers, information technologists, HR clerks, etc.
These staff members will be hired only as resources permit and the volume of sales
justifies the added costs. It is possible that several of the needed skills can be found in
13
one individual. Most work may be initially contracted out rather than given to employees.
Administrative and overhead costs will be kept to a minimum.
3.4 Human Resource Cost
The machine operator is paid by the hour. At full production, approximately 40 hours of
work will be needed during one week. This works out to be an average of 2000 hours a
year during full production.Table 5 provides a list of the wages for the employees at
Living Skies. The operations manager is taking a smaller salary in the first year to
maintain a positive cash balance.
Table 4
Annual Salaries &Wages
2011
Salary/Wages
Manager
10,000
Sales Manager
40,000
Machine Operator
2000 hours
@11/hour
=22,000
Total Cost
$ 72,000
14
4.0 Marketing Plan
4.1 The Marketing Outline
The goal of Living Skies marketing plan is to sell the maximum number of its organic
bird seed. This will be accomplished by positioning the products as a chemical free,
nutritious, and healthy alternative to conventional bird seed. The target market will be
bird owners in Canada and the US. The marketing will target bird owners who are
interested in maintaining or increasing their bird’s well-being. The brand will be one of
expertise, quality, and dedication to customers.
4.2 The Marketing Mix
4.2.1 Products
Living Skies product line will consist of three blends:
Canary Combo- for the household canary; this mixture of canary seed, millet, and
sunflower seeds will be sure to make that canary sing.
Budgie Blend- for the energetic and cheerful budgie; this blend of canola seed, millet, and
sunflower seeds will have its beak chirping.
Finch Formula- for everyone’s favorite feathered bird, this mixture of canary seed and
canola seed will have your bird flying high.
4.2.2 Pricing
Ideally, Living Skies would like to establish its wholesale price ($5.25) based on a
markup of 40% of the cost of production ($3.57). This will enable the retailer a further
margin of 25% to 30% on their sale price ($6.99). The product will be priced at a
premium compared to other bird seed products. Organic food is more labor intensive
since the farmers do not use pesticides, chemical fertilizers or drugs. Organic certification
and maintaining this status is expensive. Refer to Appendix C for more detailed info.
15
4.2.3 Promotion
To promote Living Skies products to veterinarians and other distributors, the business
will use several different promotional and advertising strategies.
Veterinarians

Free samples

Select direct mailings

Sponsorship deals

Involvement in marketing campaign (making trade show presentations)
Internet

Contact organic pet food online stores to see if they wish to carry the product

Advertisements in online bird publications, forums, and newsletters

Advertise on websites targeted for breeders and new bird owners
Retail

Work with export specialists at S.T.E.P. to assist in identifying likely retail outlets

Telephone calls and personal visits

Industry trade shows
Consumers

Word-of-mouth referrals from satisfied customers

Media releases and paid online advertisements targeted at bird owners
4.2.4 Place
Living Skies plans to increase its consumer base in western Canada during the first year.
To accomplish this, the product will be sold in supermarket chains and independently
owned pet stores. Living Skies also sells the products over the internet. To increase sales,
Living Skies can reach independent pet stores in eastern Canada as well as the United
States. Living Skies is registered with the QAI (Quality Assurance International) so they
can ship their product into the USA.
16
Living Skies is a member of STEP (Saskatchewan Trade and Export Partnership). STEP
provides market research to help Saskatchewan companies in their marketing efforts.
STEP can provide Living Skies with a list of independent pet stores in Ontario, Manitoba,
Saskatchewan and British Columbia.
4.2.5 Channels of Distribution
Living Skies products will be distributed directly throughout Western Canada through
independent retailers and chains, like Critters. Expansion into eastern Canada and the
United States will be via wholesalers, like United Natural Foods and Tree of Life. The
product line will be primarily retailed through independent pet stores and pet products
chains, such as PetSmart and Global Pet Foods.
Living Skies products will be distributed through 3 distinct channels:
1. Veterinarians and vet clinics
This includes vets in Canada and the United States. Vets will have access to Living Skies
products for sale and as samples for clients.
2. Retail
Living Skies will sell to independent pet stores, natural health pet stores, and supermarket
chains for carrying the product
3. Website
Products will be sold directly to customers through the company’s website. All products
will be sold as FOB (freight on board), with shipping and handling costs being pushed on
the buyer.
17
4.3 Segmentation, Targeting and Positioning
4.3.1 Segmentation
Living Skies will segment people who live in small apartments or anywhere with a small
lot, where the only pet they can own is a bird. The company will target elderly people
who have pet birds and regularly spend money on pets. Living Skies will also target the
bird breeders that are willing to pay top dollar for high quality bird seed.
4.3.2 Targeting
Living Skies will target people who will settle for nothing less than the best for their pet
bird. Living Skies is targeting people of all ages, from young children to seniors. Petrelated spending will continue to increase rapidly across all age groups, due in large part
to the aging pet population, and owners seeking higher quality food for their pets.
4.3.3 Positioning
Living Skies will position its products towards the high end of the spectrum. The brand is
focused on convincing customers that Living Skies is a safe, healthy, wholesome
alternative to chemically handled birdseed. This positioning will be reflected in:
Pricing- towards the higher end of organic products
Packaging- quality, attractive, and informative labels and packaging
Advertising- professional looking and endorsed by veterinarians
Trade Shows- informative and professional displays
Living Skies will also have a 100% satisfaction guarantee on all its products. Consumers
can return their purchase for any reason and receive a full refund through the website.
18
4.4 Market Analysis
Currently, there are a few competitors in the birdseed industry selling organic products.
New regulations on pet food imports from the United States, which Canada introduced in
2009, have raised barriers to entry, and thus created new opportunities for the domestic
pet food manufacturing industry.
4.4.1 Potential Markets
Household birds are the preferred market. Living Skies has many opportunities available
in the upcoming years.
There are many good reasons why selling organic bird seed to bird owners is an attractive
opportunity for Living Skies. These include:

A large target audience of over 2.7 million household birds and over 11.5 million
birds in the United States (Consumer Trends Report).

A growing demand for products to treat dietary deficiency of aging birds suffering
from malnutrition

Research analyzing the chemical residue on conventional bird seed and a bird’s
sensitivity to toxins like pesticides and insecticides

People are becoming more aware of benefits from eating organic food for
themselves and their pets

Bird breeders are demanding a high quality bird seed to produce a healthy
offspring

Demand for pet health products is non-seasonal and relatively recession proof.

The development of healthy pet food products is creating greater segmentation
with factors such as age, breed, and health maintenance.

There is a large customer base of pet owners wanting to see bird seed ingredients
that are recognizable, and are similar to what they themselves are eating.

More people are moving to the city and buying smaller homes. Birds are great
companions for smaller houses and are affordable to care for.
19
4.4.2 Market Factors
Ongoing global economic uncertainty is having an impact on not only what pet owners
purchase, but also where they shop. While pet specialist retailers—especially pet
superstores—continue to help drive pet humanization, grocery retailers are receiving a
boost in pet food sales as consumers become more price conscious.
4.5 Certification Process
Living Skies is spending resources for organic certification to: highlight product
differentiation, increase the product’s value, protect consumers from fraud, and boost
consumer confidence. In today’s market, many products are advertised as “natural” or
“organic” but only the products labeled “certified organic” can be trusted to be grown and
packaged without the use of harmful chemicals or additives.
The labeling and advertising of pet food is regulated by the Consumer Packaging and
Labeling Act and the Competition Act, administered by Industry Canada. The Advertising
and Labeling of Pet Food is a guide developed to ensure consistency and accuracy on pet
food labels. These guidelines also help ensure that Canadian consumers clearly
understand the contents of each package of pet food.
4.5.1 Labeling & Packaging Requirements
The guide entitled, Advertising and Labeling of Pet Food, is an accepted standard in the
pet food industry. This guide recommends that pet food labels contain at least the
following information in addition to the Consumer Packaging and Labeling Act items.
The Consumer Packaging and Labeling Act mandates the following items be included on
pet food labels:

Net weight: amount of product within the package, measured in metric units.

The manufacturer's or importer's contact information.

Feeding instructions, nutritional content and intended shelf life.

Information on the minimum and maximum nutritional quantities. For example,
the analysis will include the maximum or minimum percentage of protein, fat,
fiber and moisture.
20
4.6 Competition Analysis
Living Skies is not the only company recognizing the opportunities in the North
American pet health markets. There are competitors vying for the dollars of bird owners.
4.6.1 Barriers to Entry
As Living Skies becomes successful, what will stop another company from creating a
similar product or blend to compete directly? Living Skies will develop a number of
barriers and obstacles to make direct competition difficult. These include:
1. Living Skies will depend on strong relations with distributors and retailers.
Hopefully, retailers are more likely to carry a product from an already established
and well-known brand rather than a new brand.
2. As Living Skies grows, contracts with growers will tie up a significant portion of
organic crop production in Saskatchewan. This will be unattractive for companies
entering into the market.
3. The calculated work, time, and capital required to establish Living Skies will
discourage most individuals from entering the business or see the market as too
small for generating the required return.
4.6.2 Competition
There are several different types of competition that Living Skies faces.
Organic Bird Seed
A handful of bird seed producers are selling organic bird seed in stores and online. ZuPreem and Ecotrition are two of the biggest players in this space and have acquired a
majority of the market share. Their product is sold in specialty stores and is premium
priced.
Conventional Bird Seed
There are about a dozen companies selling conventional bird seed. Brands like
President’s Choice and Seed to Sky sell their moderately priced bird seed in grocery
21
stores like Extra Foods and Co-op. There is no dominant brand in this field as variety and
product differentiation are not significant.
Pellets
The biggest competition facing birdseed manufacturing in the future is the trend to move
away from bird seed as the main source of nutrition toward food pellets. Pelleted food is
being marketed as “complete nutrition” and no additional supplements are necessary. But
the drawback to pellets is that some birds refuse to eat it. So in the future, Living Skies
will counter this competition by formulating mixtures with a more complete nutritional
balance.
4.7 Marketing Support
To acquire shelf space and increase consumer awareness, high level marketing support
will be implemented:
1. Comprehensive information about Living Skies products and ingredients for the
end user. This info will found on brochures, point-of-sale-displays, and on the
website.
2. The home webpage for Living Skies will have detailed information of the organic
grower, contact info for sponsored vet clinics, and info on sales outlets.
3. The latest research findings, articles, and information for consumers on the
benefits of organic products and bird care will be posted on the website.
4. Veterinarians can fill out forms on the website to receive free samples for their
clients to help them assess the products organic and nutrition quality.
22
4.7.1 Buying Local
Living Skies is focusing the ad campaign on creating more awareness on buying local
food. Some reasons why people should buy locally grown food:
Financial Benefits
Money stays within Saskatchewan, and strengthens the local economy. More money goes
directly to the organic farmer and stays in the province.
Transportation Issues
The less distance that food travels to consumers, the less fossil fuel used and carbon
dioxide emitted into the air.
Supporting Organic Farming
Organic farming is better for the environment. Organic farming practices also reduce
environmental pollution, conserve water, reduce soil erosion, increases soil fertility, and
use less energy.
4.8 Sales and Profit Projections
The table below outlines estimate sales for a three year period. It is estimated that Living
Skies will sell 20% of its product over the internet and the remaining 80% through retail.
Table 5
Sales Projections
Year
Internet Sales (20%)
Retail Sales (80%)
Total Sales
2011
2012
2013
48,600
52,000
58,400
194,400
208,000
233,600
$243,000
$260,000
$292,000
23
4.9 Marketing Budget
Income allocated to the marketing budget is budgeted at 5% of sales revenue. The
marketing budget and total costs are as follows:
Table 6
Marketing Expenses
Marketing Costs
Online Advertisements
Print Ads
Trade Shows
Travel Expenses
Samples for Vets
STEP Membership
Total
2011
3300
500
6000
500
400
600
$11,300
24
5.0 Financial Plan
5.1 Capital Requirements
Living Skies requires a total capital investment on $2,500 (Appendix E). With $35,000
being financed through debt, the remaining $50,000 comes from personal investment and
government grants for agricultural businesses in Saskatchewan. The anticipated capital
structure is below:
Table 7
Financing Budget
Long Term Debt
35,000
Shareholder's Equity
50,000
Total
85,000
5.2 Projected Income Statement
The projected net income shown table 8 is a positive indicator to the potential sales in the
bird seed industry. The table also highlights that expenses are minimal and largely
variable to units sold. These estimated figures are achievable based on the operations and
marketing plan.
Table 8
Units Sold
Selling Price
Revenue
COGS
Operating Expenses
Income Tax
Net Income
Projected Net Income
2011
2012
2013
2014
2015
46,286
5.25
243,000
48,600
5.36
260,253
53,460
5.46
292,004
61,479
5.60
344,200
76,849
5.74
441,006
124,862
113,574
593
3,970
133,877
99,026
3,556
23,795
147,248
117,597
3,531
23,628
168,239
136,536
5,125
34,300
206,760
156,309
10,132
67,805
25
5.3 Dividend Policy
When profits and cash flow reach a level that ensures there will be enough cash for
operating in the next year, the excess profits will be paid out in dividends. In the first year
Living Skies will not pay out dividends but hold them as a cash reserve for company
investment and cover any unforeseen expenditures.
Table 9
Year
Dividends
Dividends Paid
2011
0
2012
7,492
2013
11,744
2014
14,083
2015
18,168
5.4 Economic Forecast
To derive the base case in financial projections, an inflation rate of 2.5% has been used.
All expenses and wages were inflated at 2.5% per year for the five-year financial plan.
The current production capacity of the facility is 50,000 units each year. If production is
expected to scale the way it is projected, then more equipment and labor should be
budgeted for during the third year of operation. The financial plan outlines market growth
of 5% per year as the product reaches store shelves across Canada and the United States.
After 5 years in the marketplace, Living Skies should have excellent brand recognition
among bird owners who see value in paying extra for high-quality bird seed. The 2.5%
price increase is set to balance out the inflation and leave some cushion if crop prices
were to suddenly increase. The most critical variables are packaging expense, selling
price cost of ingredients.
5.5 Critical Variables & Risk
Studies on bird behavior estimates that the average household bird will consume 6 kg of
bird seed yearly, meaning that a customer could purchase up to three units during the
year. Living Skies will need to sell 21,633 units in year one to break even (Appendix D),
therefore the advertisements need to attract approximately 7,200 unique customers.
Living Skies predicts this is achievable, given that there are over 2,700,000 bird owners
in Canada, the goal should be attainable.
26
As Living Skies sales and brand recognition grows, it is expected that more units will be
sold through the website. Selling directly to customers cuts out wholesalers and retailers,
and leaves more of a profit margin for Living Skies.
5.5.1 Challenges and Risks
Living Skies faces a number of challenges and risks related to this venture such as:
Diseases
When dealing with any food product, discovery of a disease can have significant negative
consequences. The people involved in growing, processing, transport, and distribution
can all contribute to contamination and are subject to unsanitary conditions.
Liability
When producing food products, there is always concern about liability. Foodborne
illnesses and E.coli O157 are outbreaks that have affected the food industry in the past.
Supply
Although there is ample supply of grains and seeds now, there could be a supply shortage
due to harsh weather. If supply shortage were to develop, the costs to Living Skies would
escalate. These increased costs will be passed on to the consumer, which may make
Living Skies products less competitive in the marketplace.
Market
As Living Skies becomes more successful, other companies may enter the market for
organic products. These could be other bird seed companies and/or large pet food
manufacturers. These companies could have huge R&D and marketing resources. They
may develop directly competitive products to those being sold by Living Skies.
Operations
As with any business venture, there are always risks related to operations. The first
challenge is Living Skies being able to raise sufficient capital to fund its operations and
27
cash flow needs. Another challenge is finding and keeping the right people to work for
the business. Finding employees with proper qualifications and experience is difficult.
5.5.2 Risk Management
Living Skies is aware and preparing for any future challenges and risks. The business will
employ the following strategies to manage and/or reduce risks.
1. Diversify its portfolio of products to include bird treats and other organic bird food
products. Therefore, if issues arise with the main organic bird seed blends, the future
existence of the company is not dependent on one product.
2. Support Saskatchewan organic growers in their effort for government aid and defend
fair regulations for certifying organic seeds and grains.
3. Use only product ingredients that are certified as organic and are known to be of
excellent quality.
4. Implementing rigorous quality assurance systems to ensure product consistency, safety,
and efficacy.
5. Exploring financial alternatives to ensure that Living Skies has the financial resources
and cash flow to operate its business efficiently and effectively.
5.6 Scenario Analysis
The following table shows how changes in the critical variables impacts the Internal Rate
of Return, creating best and worst case scenarios. This scenario analysis was done by
changing the five critical variables by 20% in the positive direction for best case and 20%
in the negative position for the worst case.
Table 10
Scenario Analysis
Variable
Packaging
Selling Price - Internet
Selling Price - Stores
Quantity of Sales - Stores
Quantity of Sales - Internet
NPV
IRR
BEST CASE
BASE CASE WORST CASE
0.85
1.06
1.27
8.4
7
5.6
3.9
3.25
2.6
11520
9600
7680
2880
2400
1920
205102
4990
-158723
82.2
22 negative
28
5.7 Contingency Plan
Living Skies has a proposed implementation plan that is triggered by unfortunate event,
emergency, or new critical information. If the situation is liable to create significant
business problems, it must be dealt with quickly. Some planned for events are:
1. If Living Skies does not reach sales and revenue targets.
-The company would undergo a complete financial analysis to see where hidden costs
are increasing unexpectedly. There could be reduced wage expenses and trimming
excess costs in the advertising budget. Sales price would be affected as well.
2. If customer perception views Living Skies negatively.
- Complaints from customers, faulty products and accidents all make bad news stories.
If Living Skies is getting bad coverage in the media, management will respond quickly,
honestly and decisively. If the company is at fault, it will take responsibility and
apologize. The plan will be to keep the media, customers, staff and suppliers well
informed. A written statement will be made printed in the newspaper and on the
company’s website. Ongoing communication with the media will detail what went wrong
and what is being done about it.
3. If key staff member suddenly becomes ill, quits or dies unexpectedly.
-Living Skies will have up-to-date written job descriptions to begin the search for a
replacement immediately. Also, cross-training staff to handle other tasks for the short
term is desirable. All machinery and equipment should have detailed and organized
operations manuals so another employee could cover important temporarily. There will
be a succession plan for all senior staff, outlining replacements ahead of time.
4. If utility, fuel, or raw material costs were to suddenly increase.
-If various production costs were to fluctuate, Living Skies would either absorb the
additional costs, find new ways to mitigate the expenses, or pass a price increase along to
customers.
29
5. If a bird contracts an illness or dies from disease.
-To minimize potential liability and financial damage, Living Skies needs to be
proactive and have demonstrable systems in place to protect their consumers by
managing food-safety risks across their supply chain. There will be efficient productrecall processes set in place to cover the initial identification of the issue to disposal of
recalled product
Conclusion
Small grain mixtures are the mainstay of bird food. The business plan for Living Skies
shows that the business is a feasible enterprise, but it is sensitive to the quantity of units
sold and market price of direct materials. Upon analysis of the financial model, the
required rate of the return is achieved. Living Skies Organic Bird Seed has the potential
to be a very profitable company if it is able to properly market its product and achieve
sale and revenue projections.
30
REFERENCES
Organic Certification for Processors
(http://www.agriculture.gov.sk.ca/)
Production and processing of small seeds for birds
(http://www.fao.org/docrep/008/y5831e/y5831e00.htm#Contents)
Consumer Trend Report 2010
(http://publications.gc.ca/collections/collection_2011/agr/A74-1-17-2011-eng.pdf)
31
Appendix A – Capital Budget
2011
Leasehold/Asset
Improvement
Equipment
10,000
10,200
Service Vehicle
8,000
Forklift
7,000
Packaging Machine
3,000
Installation Cost (labor &
material)
Working Capital
Total Capital Cost
2,000
28,000
$68, 200
Appendix B – Cost per Unit
Unit Cost
Analysis
Canary Seed
Millet
Canola Seed
Packaging
Direct Materials
Direct Labor
Overhead
2011
0.27
0.26
0.28
1.06
1.87
1.27
0.43
2012
0.28
0.27
0.29
1.04
1.88
1.15
0.35
2013
0.31
0.29
0.32
1.02
1.94
0.98
0.28
Total Unit Cost
$3.57
$3.38
$3.20
Appendix C- Pricing Strategy
Total Unit Cost
$ 3.57
$ 3.38
$ 3.20
% Markup
Wholesale Price
41%
$ 5.25
47%
$ 5.36
53%
$ 5.46
% Markup
Retail Price
33%
$ 6.99
33%
$ 7.13
33%
$ 7.27
32
Appendix D- Break Even Analysis
Base Case
46,286 48,600
53,460
61,479
76,849
Break Even
44,811 43,408
48,407
54,326
63,058
90,000
80,000
70,000
60,000
50,000
Base Case
40,000
Break Even
30,000
20,000
10,000
0
1
2
3
4
33
5