Please read the case “Nature Bros. Ltd.”
1. Summarize the information presented regarding the present and proposed products. Briefly describe the company’s 2004 and 2005 objectives.
For the year 2006, Nature Bros Ltd set its objectives that mainly focused on the market ownership and share of the existing market segments. One of the objectives for 2006 was to stabilize the company’s existing markets and to attain a five percent market share in the seasoned salt category. Alongside this, the company also had an objective of achieving a 10% market share in the salt substitutes while at the same time working to attain a five percent market share in MSG products. it was projected that with the objectives about the seasoned salt market set, the market would have a dollar volume amounting to about 7,931,889 dollars in 2006. Another important objective for the year 2006 related to establishing a fully-functional advertising component for the market to boost the success of sales in the existing seven markets.
For the next year of 2007, the company set its objectives, mainly/ expanding the clientele base by opening eight new markets. These new market zones included Toronto, Windsor, Winnipeg, Ottawa, Halifax, Montreal, Quebec and Saint John. These new markets have a significant meaning to the operations of Nature Bros Ltd since they account for about 17.1% of the grocery store sales. This year also had a five percent penetration objective where the company set a conservative projection of penetrating about 5% of the seasoned salt category. In order for the firm to achieve this objective, it set to use the strong health consciousness of the shoppers in the target market and introduce the products in shippers. Concerning pricing for customers, the company has set to provide customers with a 17% price advantage on the Windsor salt; and this is hoped not to affect the company’s profit margins.
2. After reviewing this material, make a list of additional information which should be supplied to support the sales projections.
While there are a number of ways of projecting a company’s sales, each of these methods and techniques needs almost similar type of information. For sales projections to be made or supported effectively, the first and foremost information needed relates to the sales numbers of each of the products; which need to be broken down by month of the year to help in understanding any changes that take place on the monthly sales basis of the products. Closely related to actual sales are the number of sales that are canceled or returned. Equally important to know is the level and change in levels of competition (Morse et al 2001). When the level of competition increases, it is highly likely that the existing market will be shared among the competitors hence reducing the possible maximum sales volume. On the contrast, if competition level reduces by some competitors quitting, it might be expected that the level of sales might increase for the players who remain. This is of course unless the type of market is a shrinking market as opposed to stable or growing market. Other information that can help in supporting sales projection exercise include factors related to the external environment such as economic forecasts, prevailing employee contract negotiations, price changes related to prices of raw materials and changes in tax laws as well as any change in competition. In summary, the following is the list for relevant information to aid sales projection:
- Monthly sales numbers of the product in question;
- Buyer or consumer behavior that impact fluctuations in demand;
- Levels and direction of competition in the market;
- Economic forecasts;
- Prevailing employee contract negotiations;
- Price changes related to prices of raw materials;
- Changes in tax laws
3. Comment on objectives: Are they reasonable, optimistic, or conservative? What marketing mix would best support this growth rate?
The objectives are largely conservative though some parts seem very optimistic. For instance, the objectives that are related to expansion in top new markets are quite optimistic since the objectives set for gaining control of the existing market are as low as 5% while that for expanding into the new markets stands at 17%.
4. Evaluate the information supplied regarding a new product development and physical assets in light of the pro forma income statements Morris developed.
Research and development is always a key component for any organization that wishes or plans on having new products or introducing new methods. For this reason, research and development, which has been going on and supported by the company is given as one major vital component to support new product development. Furthermore, four new products have already been developed and it is hoped that they will be successful in the market as well as easy to produce. Further information provided shows that the new product in development is intended to target a new market segment and bringing it online would not cost more than $25,000 since it would not require new machinery but the existing machinery would be sufficient in its launch. There is also information provided relating to the capital assets and equipment. From the information, it is evident that the company has a lease agreement that limits rent payments to no more than 300 dollars monthly. Given that the company has plans for increasing the number of plant personnel by two in order to increase the monthly production level to 300,000 units, it would be reasonable to take the $15,000 additional investment needed as justifiable. This additional investment is needed for installation of a bigger conveyer system. However, Morris seems to have provided a more conservative figure of $14,000 in his pro forma statements while it is also evident that other assets have been mentioned in the notes (such as filling machine projected to cost $22,000; rebuilding seaming machine projected to cost $25,000 as opposed to buying a new one at $50,000).
5. Is the capital sought appropriate for the circumstances? If more information is needed, state what it is and how it could be obtained.
In general circumstances, a great deal of information is needed when more capital is sought. The first part of the information needed is to know what the capital is needed for. On this part, Morris has elaborately showed the need for the additional capital; which is mainly to aid in expanding the capacity of the existing production facilities. Tied close to this is the knowledge or information on how much capital is needed. It would not be prudent to understate the figures and take chance at the intended success. Another bit of information needed is the value of the company requesting or seeking capital (Morse et al 2001). Since repayment of the capital is integrally tied with the current value of the company, it would not be reasonable for the company to seek for capital that would put it on its financial knees. And this also goes a long way by providing information relating to the company’s future value, how long it is likely to take to create the future value and the likelihood of success in creating that value. Beside the above information, the following is a list of important information that is necessary:
- Information on timing of the investment
- Return on investment
- Timing of the return on investment to the financier
- Information on control in terms of who makes vital decisions in case things do not go as planned
- Legal responsibilities of the business to the financiers
6. What sources should Morris approach for this amount of capital?
The capital needed can be secured from the bank. While public offering does make a good source of financing, it is reasonable to seek financing from the public when the amount needed is enormous. Another good source for funding would be through angel equity where Morris decides to give up part of the company’s equity to another investor (Rao, 2010)
7. Based on the current balance sheet, how much equity should he give up for the investment?
Since giving part of the company’s equity involves getting capital but also giving up control of the business, the current market share of Nature Bros Ltd does not warrant giving up of much control to outsiders or competitors as it might lose more control and fail on its market share objectives (Morse et al 2001). Since the company generally makes a net loss, it can give up to $9,422.76, which is the part of the owner’s equity account.
Morse, W. J., Davis, R. J. & Hartgraves A (2001) Management Accounting. New York: Sage Publications
Rao, D. (2010, June 10). The 12 Best Sources Of Business Financing. Forbes. Retrieved October 22, 2013, from http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-entrepreneurs-finance-dileep-rao.html