Assignment Taken

Finance Department: Develop and propose a financial plan with allocated budget for International expansion.

Case Understanding

Case Background: The problem from the finance perspective would be - the company expanding into a new country, there are more chances of unexpected costs. The company is not familiar with various expenses that can arise during the operations and hence it is necessary to prepare a thorough and detailed budget. Even in the same region, the cost can vary from country to country depending on legal requirements like testing and approval, tax rules, other regulations, supply chain characteristics specific to the country, etc. Hence a conservative budget with sufficient scope for flexibility becomes essential Cultural and language differences are important for expansion. We will need to do market research to get a local person's perspective (cultural taste), hire a translator, a lawyer, etc. These are deciding factors for choosing the region of expansion. Packaging and safety standards need to be looked at specifically country-wise. The food labels and instructions of use ought to be printed in the local language, increasing cost. Other packaging standards defined by the country's food authority body will also be important. If these things are not looked at specifically, it can cause a delay. Some countries also have lots of paperwork that's necessary for entering the market. All this requires time and appropriate fund allocation.

BCS Solution Summary

BCS Solution Summary: With the 50-crore set aside for expansion, the company aims to strongly penetrate the market covering all essential aspects. By exporting from Indian factories to UAE, the company aims to generate a revenue of 20 crores for the first year (from international markets). The highest expense is the Cost of manufacturing (10.5 crores) followed by marketing and salary. An operating income of 6.3 crores and net income of 1.8 crores is projected from the 30-crore revenue. A feasible allocation of the 50-crore assigned by Ramalingam Foods for expansion is determined. In the allocation, warehouse and retail store the major investment followed by working capital. In the next year, factories will be set up abroad to boost sales and reduce the cost of export.

Solution

Sales & Revenue

The company has a target of 20 crores revenue for the first year from all the regions combined. This has been decided based on 2 things: the current production capacity of the factories in India and a 5-7% penetration in overseas markets. The sales target increases from 28k units /month (April FY ‘19-20) to 3.2 lakhs units /month (March FY ‘19-20). This is a 25% increase each month. Such growth can be expected since we are entering an FMCG market where the customer base is largely untapped. Our primary target category will be the Indian population living in these countries. The revenue from foreign markets will be much higher once the factories abroad are set up. This will be because of the cheaper labor and lower transportation costs. 

The prices of the already existing products have been kept the same, roughly because of the similar standards of living of these countries with India. The export costs are not extremely high and hence there is no need to increase the mark-up of the existing products. 

Revenue from product type as a percentage of total revenue:

Out of the existing products, south Indian dishes will contribute about 45% and north Indian mix has a 20% contribution. The details are given in the table below

Product Type	Revenue Percentage
North Indian dishes Instant Mix	20%
Dessert Mixes	15%
Chutney Powder	15%
South Indian Instant Mix	45%
Instant Coffee Mix	5%

 

Running Expenses

Cost of manufacturing

This cost comprises of cost of raw materials and the regular maintenance of the machinery in factories. The production in current factories will be ramped up (assuming the factory utilization can be increased) and more quantities produced for export. Hence this cost can be estimated accurately as the company has past data of production. The increase in employees and machinery in each factory can help to achieve better economies of scale. This increased production in current factories will also help to capture the market while the new factory in a foreign country will be set up in 1 year. Hence, by the time factories are functional after a year, there will be a large demand in international markets. So, going for exports in the first year and then having factories in foreign countries is a feasible choice. 

HR - Salaries

There are 11 employees which will work as our international team. The head of the team will have a salary of 70,000 per month, the assistant managers are given 50,000 per month, operations staff will get 35,000 per month and customer service executives will get 28,000 per month plus 5000 incentives according to performance. For all the employees there will be a 3% increment on their salaries annually. This amount has been fixed by taking into consideration the cost of living in these countries. The salaries have been decided taking into consideration the Purchasing power Parities (PPP) of the countries. Dubai, Sharja and Abu Dhabi have PPPs roughly close to that of India’s. This means that the cost of living is almost the same in these countries compared to India and hence the salaries seem appropriate. 

Note: calculations henceforth are also done in rupees itself, due to roughly equivalent PPPs as well as to maintain uniformity and ease of calculations. The Currency conversions can be used to derive country-specific budgets based on the Conversion units to the country's national currency.

Marketing and Advertising Expenses

The marketing will contain a mix of both traditional and digital marketing strategies. Since the brand name will be new to the target customers, the spending for marketing and advertising is expected to be on the higher side. Even a 5% penetration in the market requires a good budget since the company is a new entrant in the international market. With a target of roughly 30 crores revenue, the marketing, advertising and promotion is given a budget of 4.65 crores (23.25% of revenue). The traditional marketing will mostly involve TV Advertising, Out of home advertisements such as billboards, and newspapers. The digital means involve Social media, website designs and video advertising. Note that TV ads are costly and hence will have a major share of the marketing expense. The marketing has a sufficient budget of 4.65 crores (roughly 23.25% of revenue) allotted. This is essential since the company is entering into a new market where there are some international competitors such as MTR and local competitors too. 

Export and operation expenses

The export and transport cost will be paid to the export agent and distributors. Since the company is not having factory production for the first year, they do not require a full-time logistics team. If needed, we can hire workers on hourly basis in the foreign countries. This will be cheaper compared to having a full time dedicated logistics and operations team. Another advantage of local suppliers is the strong supply chain they have established in the food industry in these countries. The waterways are a very cost-efficient method that minimizes the transport cost. The company’s export partners and distributors in foreign countries reduce the burden on the manpower required. Roughly 7.5% of revenue or 1.5 crores is allotted for this expense 

Legal Costs- Licenses and Tax

There are various one-time costs for permissions such as; 

• IEC Import-export code, 

• FSSAI License,

• NOC Certificate, 

• RCMC (Registration cum membership certificate)

Permission for corporate offices and trade in the 5 countries also include approval from;

• Dubai: The cost of the license will be around 4,80,000

• Sharjah: The cost of the license will be around 4,60,000

• Ajman: The cost of the license will be 4,80,000

• Ras Al Khaimah: The cost of the license will be 4,00,000

 

The countries also have a GST of 6-8% which includes cost, insurance and freight (CIF) plus other chargeable costs. Note that the FTAs that India has signed with ASEAN countries have reduced the excise taxes and customs duty. And hence GST tax will be the main expense paid towards foreign government

For the taxes to Indian government, all income whether from domestic or foreign sales is taxed at a corporate tax rate of 22% (since the total operating revenue is less than 250 crores- 150 from domestic sales and 30 from foreign sales). This effectively makes a tax of 25.17% including cess and surcharges (for manufacturing companies in India) on the operating profit.

 

Other Expenses

IT Front

Investment on IT is essential since data management and IT solutions have proven to be game changers in cost optimisation. Being a large company with expansion to 5 different countries, big data analytics and latest IT software/systems are prioritised. The table below shows the expenses for IT Department.

Department	Name of Software	Total Price
Business Expansion and Marketing	AI-based servers (Microsoft Azure)	1,26,380
	Hadoop	8,52,000
	Mobile App and Website Designing	10,00,000
	Cloud-based ERP Skype/Zoom/Teams	4,50,000
Finance Department	Financial Management Software	11,36,000
HR	HR Cloud	1,01,672
Business Advisory	Cloud-Based Transport Management System	1,50,000

 Miscellaneous and Overheads:

A 5% overhead and miscellaneous expense on revenue is accounted for since the company is expanding into new markets and there are uncertainties in expenses. Besides, a manufacturing plant can have other expenses and supply chain intricacies may also add to the miscellaneous costs.

Expenses Summarised

Expense Category	Amount Estimate (in crores)
Cost of manufacturing	10.5
Marketing	4.5
Salary	3.8
Rent	0.4
Other HR Costs	0.2
Exports and operations expenses	1.5
Tax	4.5
Miscellaneous & Overheads	1.5
IT	0.3
Permissions and Licenses	1.0
Total	28.2

 

Operating and net Income

An operating income (operating Revenue of 30 crores - operating cost of 23.7) or EBITA (Earnings Before Interest, tax and amortization) of 6.3 Crores is projected. The net income (operating income - tax of 4.5 crores) of 1.8 crores is estimated. Note that these figures are derived by taking costs on the higher side (Conservatism principle of accounting). The profit is expected to go up considering that factories will be setup in these countries and economies of scale can be achieved in the coming years.

 

50 crores Budget allotment

Investment	Budget allocation (in crores)
Working Capital	9.85
Marketing	4.65
R&D	5
Land and factory	20
VC Investment	7.5
Machinery	3
Total	50

 

Product Categories	Name	Weight	Price
1	North Indian dishes Instant Mix	200 Gms	89
2	North Indian dishes Instant Mix	500 Gms	199
3	North Indian dishes Instant Mix	1000 Gms	389
4	Desert Mixes	200 Gms	110
5	Desert Mixes	500 Gms	249
6	Desert Mixes	1000 Gms	499
7	Chutney Powder	200 Gms	75
8	Chutney Powder	500 Gms	199
9	Chutney Powder	1000 Gms	329
10	South Indian Instant Mix	200 Gms	89
11	South Indian Instant Mix	500 Gms	199
12	South Indian Instant Mix	1000 Gms	389
13	Instant Coffee Mix	200 Gms	149

 

Sales Target for FY'19-20

From the above revenue projections, a sales target (quantity) has been made. Here the main assumption is that 200 grams, 500 grams and 1000 grams are sold in the ratio of 3:2:1. This assumption is based on the notion that people tend to buy smaller packets more. The sales targets are made using size of target consumers in each country. A 10% monthly growth has been projected based on a 5% penetration in the markets.

FY 19-20	Sales Target
April	55000
May	63250
June	72738
July	83648
August	96195
September	110625
October	127218
November	146301
December	168246
January	193483
February	222506
March	255882
Total	1595092

 

Conclusion

The budget of 50 crore has been allocated taking various facts and assumptions in mind. And it is done in a way to maximize our revenue and to reach breakeven point at earliest.And with a view to expand not only in UAE but also in other countries in long run.

Attached File Details

Video

https://www.youtube.com/watch?v=TKRPioxOhbQ