Prepare a financial plan for the organization that you select for your business plan.

Prepare a financial plan for the organization that you select for your business plan.

Describe the organization, including the type of business.

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Create the business case.

Determine why funding is needed for the company.
Determine the sources of funding. Consider self-funding, borrowing, loans, equity, venture capital, etc.
Evaluate the requirements of each of the funding sources that you plan to use.
Analyze the risks that are associated with each funding source.
Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Create a table or chart to display this information.

Estimate direct costs, including capital, marketing, labor, equipment, and inventory/supply costs.

Prepare a budget that includes starting balances, monthly costs, loan/investment payments, cash flow projections, and required revenue.

Create a profit-and-loss statement for a 3-year period. Provide a revenue forecast, stating realistic assumptions, such as growth per year, in your projections.

Cite references to support your assignment.

Format your citations according to APA guidelines.

Sample Answer

Name: Amazon (AMZN)

            Description of Organization:

Amazon is an online marketplace that sells various products, from books and electronics to clothing and furniture. Customers can also sign up for Amazon Prime, a membership program that offers free two-day shipping and other benefits, such as access to Prime Video. This streaming service offers movies and TV shows.

Type of business:

Initially founded as a book marketplace in 1994 by Jeff Bezos, Amazon swiftly expanded to sell computers, clothes, household items, food, toy software, and much more. The company is among the most valuable firms in the world and offers many jobs. Online shoppers can order products and deliver them to their homes or places of business. Several services are offered by Amazon, including Amazon Prime, which provides free shipping on a variety of purchases, as well as AmazonFresh, which sends groceries and other items right to customers’ doorsteps (Robischnon, 2017).

            Create the business case:

Amazon has been overgrowing, adding new products and services, and expanding into new markets. In recent years, they have been investing heavily in warehouses, logistics, and other infrastructure to support its growth, leading to declining free cash flow. Amazon is also a company that is constantly innovating and looking for ways to improve its operations. Amazon could improve its operations by developing a department that develops and maintains robots in its warehouses. There are many reasons why Amazon should develop a department that develops and maintains robots in its warehouses. First, robots can help to improve the efficiency of Amazon’s operations. Robots can automate warehouse tasks, such as sorting products and packing orders (Li et al., 2016). This can help to free up employees’ time so that they can focus on other tasks. Second, robots can help to improve the safety of Amazon’s warehouses. Robots can be equipped with sensors that can help to detect hazards in the warehouse, such as slippery floors or falling objects. This can help to prevent accidents and injuries in the workplace.

Why funding is needed:  Amazon needs funding for various reasons, but one of the most common reasons is to support expansion or other growth initiatives. In order to finance these activities, a company may need to take on debt, sell equity, or use other forms of financing.

Sources of financing

Self-Funding Borrowing

Self-funding is when a company funds its operations and growth without borrowing money from outside sources. This can be done through the company’s revenue, profits, and cash reserves. Self-funding can be a good option for companies that avoid debt (Carrion Alvarez & Yustas, 2013).

When self-funding, a company must have substantial revenue and profit growth to support its operations and growth. The company will also need a good handle on its cash flow and enough cash reserves to cover any unexpected expenses. Amazon has a strong balance sheet because it is a profitable company with solid revenue growth. It also has a good handle on its cash flow and enough cash reserves to cover unexpected expenses. These factors give Amazon the financial flexibility to self-fund its robotics research.

There are a few risks that are associated with self-funding. First, self-funding can put a strain on the company’s cash flow. This can make it challenging to cover unexpected expenses or unexpected fund growth. Second, self-funding can also deplete the company’s cash reserves. This can leave Amazon vulnerable to financial difficulties if there is a sudden drop in revenue or an unexpected expense.

Loans or Debt-financing

Loans or debt financing is a type of funding where a company borrows money from a lender and then repays the loan over time with interest (Obuya, 2017). This type of funding can be a good option for companies that need a large amount of money for a short period.

There are a few things to consider when evaluating loans or debt financing as a funding source. First, Amazon will need to ensure they can qualify for a loan. This means that the company will need to have a good credit score and a solid financial history. Second, Amazon will need to ensure that it can afford the loan payments. This means the company will need a good income and low expenses. Third, AMZN must ensure that it is comfortable with the risks associated with this type of funding. This includes the risk of defaulting on the loan and interest rates rising.

The risks associated with loans or debt financing include the risk of defaulting on the loan and rising interest rates. Defaulting on a loan can result in the loss of their collateral, damage to their credit score, and legal action from the lender. Interest rates can result in higher loan payments, which can be challenging if Amazon is on a tight budget.

 

 

Equity

Equity financing is where a business generates funds by selling stock in a public exchange. This is different from debt financing, where a business generates funds by receiving money and then paying interest on the loan. Equity financing is often used by startups and small businesses, as it can be easier to raise money this way than by taking out a loan (Tykvova, 2018).

There are a few requirements that a company must meet to be eligible for equity financing. First, the company must have a good business idea that investors are interested in. Second, the company must have a good business plan that shows how the company will make money. Third, the company must have a good management team that investors can trust.

There are a few risks that are associated with equity financing. First, the company will have to give up a portion of its ownership in the company. This can be a risk if the company is not successful, as the investors will then own a portion of the company. Second, the company may have to give up some control over the company to attract investors. This can be a risk if the investors are not aligned with the company’s goals.

Venture Capital

Private equity finance is offered in the form of venture capital by investors to startups and small businesses. Venture capitalists are usually firms or investment firms that specialize in investing in early-stage companies. Venture capital is a high-risk, high-reward sort of venture, and project capitalists typically expect to see a return on their investment within 5 to 7 years (Tykvova, 2018).

Companies must meet a few requirements to be eligible for venture capital financing. First, the company must be a startup or a small business. Second, the company must have high growth potential. Moreover, the company must be able to generate a return on investment for the venture capitalists.

There are also a few risks that are associated with venture capital financing. First, the company may not be able to meet the expectations of the venture capitalists, and the venture capitalists may then pull their investment from the company. Second, the company may not be able to generate a return on investment, and the venture capitalists may then lose money.

Most Suitable Source of Funding for Amazon

Equity financing is suitable for Amazon because it is a high-growth company that needs much capital to fund its operations and expansion. First, equity financing will allow Amazon to raise the money it needs without taking on any debt. This is important because it will allow Amazon to avoid the risks associated with loans or debt financings, such as the risk of defaulting on the loan or rising interest rates. Second, equity financing will allow Amazon to sell a portion of ownership in the company to investors. This can be a good option for Amazon because it will allow the company to raise the money it needs without giving up complete control over the company.

The Cost of Capital Estimation

Cost of capital is the rate of return a business must earn on its investments to cover its operating costs. The cost of capital is used to gauge the present-day worth of impending cash flows and is a critical component in financial decision-making. In summary, it is the return rate the investors require as a reward for their input (gurufocus.com, 2022).

Weighted Average Cost of Capital (WACC %) = E/E (E + D) * Cost of Equity + D/ (E + D) * Cost of Debt * (1- Tax Rate)

  1. Weights

Assets of a corporation are usually funded by equity and debt. The following factors are used to determine. First, the Market Cap of Amazon as of June 2022 is $1159139M (1.15T), which is given as E in the formula.

Secondly, the value of debt (D) is determined by averaging short-term debt, long-term debt, and capital lease obligation. As such, total D is $100,392 M (100B)

Weight of debt = D/ (E + D)

100392/ (1159139 + 100392) = 0.0797

Weight of Equity = E/ (E + D)

1159139/ (1159139 + 100392) = 0.9203

  1. Cost of Equity

To determine E, the following formula has to be applied;

The risk-free rate of return + Beta of Asset * (Expected return of the market * Risk-Free Rate of Return)

The risk-free rate is 3.687% for a 10-year Treasury Constant Maturity rate.

Amazon beta is the anticipated surplus asset earnings volatility against the anticipated maximum market yields. Value is 1.20

Market premiums (expected return of the market – a risk-free rate of return) = 6%

E = 3.687 + 1.20 * 6% = 10.88%

 

  1. Cost of Debt

It is identified by assessing the interest expense of Amazon in the previous financial year. Therefore, the cost of debt is 1.80%

  1. Average Tax Rate

The previous rate of tax for two years on average is 12.2%

As such, the Cost of Capital (WACC) is;

E/ (E + D) * Cost of Equity + D/ (E + D) * Cost of Debt * (1 – Tax Rate)

= 0.9203 * 10.89 + 0.0797 * 1.8019 * (1 – 12.2%)

= 10.15%

Annual Rate of Return for Sources of funding

Source APRs
  Short-term Long-term
Loans or Debt-financing 12% 7%
Equity 10.75%
Venture Capital 37.5% 15.5%

 

 

 

 

Estimated Capital, Marketing, and Labor Costs

Item Cost
CAPITAL
Rent $1,000/month (Florida)
Utilities $1,000
Renovations and enhancements to buildings $1,200
LLC & Corporations $500
Attorney Fees $1,500
Business Insurance $2,000
Software Expenses
Internal Communication Tool $20
Accounting & Invoicing Software $50
CRM Software $300
Employee & Freelancer Expenses
Payroll Costs & Fees $250
Vehicle Expenses $10,000
Website Costs
Web Designer $6,000
Domain Name $200
Website Hosting Costs $300
WiFi & Internet $100
Total $24,240

 

MARKETING

Business Cards $50
Facebook & Instagram Ads $350
Business Signage $2,400
Google Ads $300
Total $3,100

 

  LABOUR

Robotics engineers No. of personnel (5) $92932 per year
Website Maintenance 1  $48,000
Software Engineer 2 $126366 per year
Secretary 1 $20,000
Total 9 $785,392

 

Total startup costs

$812,732

6-Month Budget

October September November December January
Operating cash flow (begging) 250,000 95440 262,740 77700 251000
Cash sources
Sale of shares (Equity)  250,000 0 250000 0 250000
Uses of Cash
Payroll 65,500 65,500 65,500 65,500 65,500
Rent 2,000 1000 1000 1000 1000
Taxes 1,200 1200 1200 1200 1200
Loan payments 0
Capital 24,240 12,000 6500 5000 5000
Utilities 2,500 3000 3500 4000 4500
Total uses of cash 95,440 82,700 77,700 76,700 77,200
Cash flow 154560 12740 185040 1000 173800

 

Profit-and-loss statement for three years.

  Year 1 Year 2 Year 3
Income from Operations $1,050,000 $1,670,000 $2,245,000
Other income $250,000 $300,000 $350,000
Total Income $1,300,000 $1,970,00 $2,595,000
Expenses  
Direct and operating expenses $812,732 $812,732 $812,732
Other expenses $20,000 $20,000 $200,000
Total Expenses $832, 732 $832, 732 $832, 732

 

Assumptions;

The profit will increase yearly as the marketing team works to ensure that Amazon makes more sales and fulfillment.

Other income will arise from software subscriptions and updates.

The company will aim to maintain expenses at the same amount while profiting increases. This ensures that investors receive returns from their input.

Conclusion

In conclusion, Amazon should develop a department that develops and maintains robots in its warehouses because it can help to improve the efficiency of Amazon’s operations and the safety of Amazon’s warehouses. The most suitable source of funding for Amazon is equity financing because it is a high-growth company that needs much capital to fund its operations and expansion. Equity financing will allow Amazon to raise its money without debt. It will allow Amazon to sell a portion of ownership in the company to investors.

 

References

Amazon.com WACC % | AMZN – GuruFocus.com. Gurufocus.com. (2022). Retrieved 25 September 2022, from https://www.gurufocus.com/term/wacc/NAS:AMZN/WACC-/Amazoncom.

Carrion Alvarez, M., & Yustas, E. (2013). Self-Funding Portfolios and Collateralised Derivative Pricing. Available at SSRN 2196713.

Li, J. T., & Liu, H. J. (2016). Design optimization of amazon robotics. Automation, Control and Intelligent Systems4(2), 48-52.

Obuya, D. O. (2017). Debt financing option and financial performance of micro and small enterprises: A critical literature review. International Journal of Business and Management12(3), 221–231.

Robischon, N. (2017). Why Amazon is the world’s most innovative company of 2017. Fast Company Magazine2.

Tykvová, T. (2018). Venture capital and private equity financing: an overview of recent literature and an agenda for future research. Journal of Business Economics88(3), 325–362.

 

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