Navigating Profitable Skies: Financial Strategy for Drone Division

Assignment Taken

Airway Delivery, an courier company is aiming to accomplish its 3 major goals. Suggest the Financial planning and strategy to achieve the company's goals.

Case Understanding

The courier company is embarking on a significant venture into the hyper-local delivery space using drones, aiming to achieve specific goals, including breaking even in the first year, establishing a strong brand presence, and becoming a market leader. With a set budget of Rs. 10 Crore for the Drone Division in the financial year 2023-2024, the company has conducted successful trials and received positive feedback on time-saving benefits, particularly for local deliveries. However, several financial challenges might hinder the successful execution of these ambitious goals: 1. Budget Allocation and Break-Even: The allocated Rs. 10 Crore might be insufficient for the scale of operations and marketing needed to achieve break-even. Conducting a thorough cost-benefit analysis and exploring additional funding options could be viable solutions. 2. Revenue Projection Accuracy: Revenue projections based on assumptions might deviate from the actual market response. Regular monitoring and agile financial planning are crucial to adapt to changing circumstances. 3. Personnel Costs and Retention: High personnel costs and retention issues could impact the budget. Implementing competitive salary structures, incentives, and development programs could aid in retaining skilled professionals. 4. Drone Maintenance and Fuel Costs: The estimate for maintenance and fuel costs might not accurately reflect actual expenses. Regular assessment, preventive maintenance, and negotiating favorable contracts with suppliers could help reduce operating costs. 5. Marketing and Branding Expenses: The allocated budget might be insufficient for establishing a strong brand presence. Prioritizing high ROI marketing channels and cost-effective digital strategies, along with partnerships, could be beneficial. 6. Software Maintenance and Updates: Insufficient budget for software maintenance and updates might affect the end-to-end drone operations system. Collaboration with the software team and allocating a contingency fund could address unexpected expenses. 7. Office Expenses and Facilities Utilization: The contribution of Rs. 30,000 for office space might not cover actual expenses. A detailed review of expenses and negotiations with facility providers could help align costs. 8. Unforeseen Expenses: The miscellaneous expenses budget might not cover unforeseen challenges. Creating a contingency fund within the budget and reassessing it regularly could mitigate risks. In conclusion, successful execution necessitates meticulous financial planning, continuous monitoring, and adaptive strategies. By addressing potential financial challenges through optimization, monitoring, and flexibility in resource allocation, the company can increase its chances of success in the hyper-local delivery market with drone technology.

BCS Solution Summary

The Drone Division aims to establish itself as a market leader in the hyper-local delivery space. The budget for FY 2023-24 is set at Rs. 10 Crore, with the primary revenue source being local drone deliveries charged at an average of Rs. 150 per delivery. Financial Projections: • Projected Sales for FY 2023-24: Rs. 110,693,817.00 • Projected Other Income: Rs. 11,069,380.17 • Projected Total Revenue: Rs. 111,800,755.17 • Total Estimated Expenses: Rs. 13,865,839.87 • Profit Projection for FY 2023-24: Rs. 97,934,915.30 Break-Even Point Calculation: • Break-even point: 100,600 deliveries • Assumptions: Full drone capacity operation, average delivery charge of Rs. 85, variable cost per delivery at Rs. 35 Branding and Expansion Budget: • Total Budget: Rs. 52,00,000 1. Logo and Visual Elements: Rs. 1,50,000 2. Digital Marketing Channels: Rs. 18,00,000 3. Strategic Partnerships: Rs. 1,00,000 4. Content Marketing: Rs. 8,00,000 5. Customer Testimonials: Rs. 50,000 6. Community Engagement: Rs. 5,00,000 7. Employee Advocacy: Rs. 30,000 8. Monitoring Tools: Rs. 1,20,000 9. Adaptability Fund: Rs. 50,000 Innovation for Market Leadership: 1. Optimized Route Planning: Implementing advanced route planning algorithms to optimize drone delivery routes, reducing fuel consumption. 2. Predictive Maintenance for Drones: Utilizing predictive maintenance algorithms to anticipate drone maintenance needs, minimizing downtime and repair costs. 3. Real-Time Financial Reporting: Implementing a real-time financial reporting system for agile decision-making and cost management. 4. Customer Loyalty Programs: Introducing a customer loyalty program to enhance customer retention and increase drone usage frequency. 5. Strategic Vendor Partnerships: Establishing strategic partnerships with vendors for bulk purchases, negotiating favorable terms, and reducing procurement costs. This comprehensive approach aims to achieve the Company’s goals, including break-even within the first year, brand establishment, and innovation for market leadership in the drone delivery space.

Solution

Revenue, Expenditure & Profit Projection-

Budget for whole division for Financial Year 2023-2024 is Rs. 10 Crore.

Sales

The primary source of revenue will come from local drone deliveries. Assuming that based on feedback and demand, we estimate that we can achieve an average charge of Rs. 150 per delivery.

• FY 20 (A) FY 21 (A) FY 22 (P)
• 82250000.00* 89200000.00* 99450000.00*
• Sales of FY20 - 1502.283*365*150
• Sales of FY21 – 1629.223*365*150
• Sales of FY22 - 1816.438*365*150
• Based on this, the projected sales of FY23- 24 is 110693817.00* 2021.804*365*150

Other Income

Airway Delivery will offer end to- end drone operations and management software to other companies in the industry. We estimate the software licensing revenue:

• FY 20 (A) FY 21 (A) FY 22 (P)
• 2520000.00 2670000.00 2800000.00
• Based on this, the projected other income of FY23- 24 is 11069380.17 * 202.180*365*150

Total Revenue:

The total estimated revenue for the FY 20,21 & 22 are:

• FY 20(A) FY 21 (A) FY 22 (P)
• 84770000.00 91870000.00 10225000.00
• Based on this, the projected Total Revenue of FY23- 24 is 111800755.17*
• 2042.022*365*150

Expenditure for Airway Delivery

Following are the estimated expenses as per the rates mentioned in the case study.

• Drone Operators (4)  = 4 * Rs. 50,000 * 12 months = Rs. 24,00,000
• Management Team (5) = 5 * Rs. 1,00,000 * 12 months = Rs. 60,00,000
• Software Development Team (2)  = 2 * Rs. 70,000 * 12 months = Rs. 16,80,000
•  Support Staff (4) = 4 * Rs. 20,000 * 12 months = Rs. 9,60,000

Drone Maintenance & Fuel

• We estimate the annual maintenance and fuel cost for the drones to be. =Rs. 18,00,000

Office expenses = Rs. 3,50,000

•  Marketing & Branding-
  • To establish and promote the brand, we allocate = Rs. 52,00,000
• Software Maintenance-
  • For software maintenance, we allocate = Rs. 2,00,000

Miscellaneous Expenses = Rs. 5,00,000

• Total Expenses = Rs. 1,90,90,000
• Profit Estimation- (FY2022)
• Total Revenue- Total Expenses
  • =Rs.10,22,50,000 - Rs. 1,90,90,000
  • =Rs. 8,31,60,000
  • Profit Projection (FY23-24)
• Total Revenue estimated= Rs. 11,18,00,755.17
• Total Expenses estimated= Rs. 1,38,65,839.87
• Profit= Rs. 9,79,34,915.30

Break-even Point Calculation

The break-even point is the point at which a company's revenues equal its expenses. To calculate the break-even point for the drone delivery division, we need to identify all of the costs associated with the business.

Fixed costs:

• Drone purchase costs: Rs. 12,50,000 for 4 short-range drones and Rs. 650,000 for 1 long-range drone

• Software costs: Rs. 25,00,000 for end-to-end drone operations and management system

• Office space rental: Rs. 30,000 per month

• Management team salaries: Rs. 2,50,000 per month

• Support staff salaries: Rs. 80,000 per month

Variable costs:

• Drone maintenance costs: Rs. 10,000 per month per drone
• Drone fuel costs: Rs. 5,000 per month per drone
• Delivery charges: Rs. 60 to Rs. 110 per delivery, depending on the weight of the package
• Total fixed costs: Rs. 50,30,000
• Total variable costs: Rs. 60 to Rs. 110 per delivery
• To calculate the break-even point, we need to divide the total fixed costs by the average profit margin per delivery.
• Average profit margin per delivery: Rs. 50 (assuming an average delivery charge of Rs. 85 and a variable cost of Rs. 35 per delivery)

Break-even point:

• Break-even point = Total fixed costs / Average profit margin per delivery
• Break-even point = Rs. 50,30,000 / Rs. 50
• Break-even point = 100,600 deliveries
• This means that the drone delivery division needs to make 100,600 deliveries in order to break even. Once the division has surpassed this number of deliveries, it will start to generate profits.

Assumptions

The above calculation is based on the following assumptions:

• The drone delivery division will operate at full capacity, meaning that all of the drones will be in use all of the time.
• The average delivery charge will be Rs. 85.
• The variable cost per delivery will be Rs. 35.
• The drone delivery division will not face any unforeseen challenges or setbacks.

Branding and Expansion

Considering the allocated budget for the branding and expansion to be Rs. 52,00,000, following is the suggested breakdown for branding of the company-

1. Logo and Visual Elements: Rs. 1,50,000
   • Develop a professional logo and visual elements.
2. Digital Marketing Channels: Rs. 18,00,000
   • Invest in targeted online advertising and SEO.
3. Strategic Partnerships: Rs. 1,00,000
   • Collaborate with businesses for joint marketing efforts.
4. Content Marketing: Rs. 8,00,000
   • Create educational content about drone deliveries.
5. Customer Testimonials: Rs. 50,000
   • Gather and showcase positive customer experiences.
6. Community Engagement: Rs. 5,00,000
   • Participate in local events and outreach programs.
7. Employee Advocacy: Rs. 30,000
   • Encourage employees to be brand advocates.
8. Monitoring Tools: Rs. 1,20,000
   • Implement metrics for brand performance.
9. Adaptability Fund: Rs. 50,000
   • Keep a contingency for strategy adjustments.
   • Total Branding Budget: Rs. 52,00,000

The above suggested plan will help ensure strategic allocation of funds for maximum impact, aligning with the finance perspective and the overall goals of the Company.

Innovation for becoming a Market Leader

To become a market leader, it's crucial to innovate processes in a way that not only enhances operational efficiency but also aligns with the financial goals of the Drone Division.

Following are the suggestions for the same-

1. Optimized Route Planning:

• Innovation: Implement advanced route planning algorithms to optimize drone delivery routes, minimizing fuel consumption and maximizing the number of deliveries per charge.
• Financial Impact: Reduces fuel costs and increases the overall efficiency of the drone fleet, contributing to cost savings.

2. Predictive Maintenance for Drones:

• Innovation: Utilize predictive maintenance algorithms to anticipate drone maintenance needs, reducing unexpected breakdowns and increasing the lifespan of drone components.
• Financial Impact: Minimizes downtime, lowers repair costs, and extends the overall lifespan of the drone fleet, optimizing maintenance expenses.

3. Real-Time Financial Reporting:

• Innovation: Implement a real-time financial reporting system that provides instant insights into expenses, revenues, and key financial metrics related to drone operations.
• Financial Impact: Enables agile decision-making, allowing the finance department to proactively manage costs, assess the impact of strategies, and make timely adjustments.

4. Customer Loyalty Programs:

• Innovation: Introduce a customer loyalty program that rewards frequent drone users with discounts, exclusive offers, or priority service.
• Financial Impact: Encourages customer retention, increases the frequency of drone usage, and enhances overall revenue through repeat business.

5. Strategic Vendor Partnerships:

• Innovation: Establish strategic partnerships with vendors for bulk purchases of drone components, fuel, and maintenance services, negotiating favorable terms and securing cost savings.
• Financial Impact: Reduces procurement costs, ensures a stable supply chain, and enhances overall financial efficiency.

Conclusion

Conclusion: In the pursuit of establishing the Drone Division as a market leader in the hyper-local delivery space, a comprehensive financial strategy has been devised, aligning with the division's goals of break-even within the first year, brand establishment, and innovation for market leadership. This conclusion encapsulates the key aspects of the proposed solution, emphasizing the financial projections, break-even analysis, branding and expansion plan, and process innovations. Financial Projections: The financial projections for FY 2023-24 indicate a promising outlook for the Drone Division. With estimated sales of Rs. 110,693,817.00, other income at Rs. 11,069,380.17, and total revenue projected to be Rs. 111,800,755.17, the division is poised for robust financial performance. The calculated profit of Rs. 97,934,915.30 showcases the potential for substantial returns, contributing to the division's goal of achieving break-even within the first year. Break-Even Analysis: The break-even point calculation, based on meticulous consideration of fixed and variable costs, emphasizes the need for 100,600 deliveries to reach the break-even threshold. Assumptions related to full drone capacity operation, average delivery charges, and variable costs provide a realistic perspective on the division's operational requirements to start generating profits. Branding and Expansion: The suggested branding and expansion plan, with a budget of Rs. 52,00,000, outlines a strategic allocation of funds for maximum impact. From logo development to digital marketing, community engagement, and employee advocacy, each component aims to enhance brand visibility, customer trust, and overall market presence. The adaptable fund ensures the ability to make strategic adjustments as needed. Innovation for Market Leadership: The proposed process innovations focus on optimizing route planning, implementing predictive maintenance for drones, real-time financial reporting, customer loyalty programs, and strategic vendor partnerships. These innovations not only enhance operational efficiency but also contribute to financial goals by reducing costs, increasing customer retention, and establishing strategic collaborations. In conclusion, the financial strategy outlined for the Drone Division is a holistic approach that addresses key facets of revenue generation, cost management, and market positioning. The projections indicate a promising financial future, and the break-even analysis provides a clear target for operational success. The branding and expansion plan aligns with the division's goal of becoming a recognizable market player, while process innovations ensure adaptability and efficiency.

Attached File Details

View Attachment file (Profit Estimation & Projection.pdf)