Feasibility Study. (Small Workshop Startup)

Transcription

1 Feasibility Study (Small Workshop Startup) Furniture Pakistan Ministry of Industries & Production Government of Pakistan HEAD OFFICE A subsidiary of PIDC, Ministry of Industries & Production 4-A Lawrence Road, Lahore Tel.: Fax: Note: All Services / information related to PM's Youth Business Loan are Free of Cost February, 2014

2 Table of Contents 1. DISCLAIMER PURPOSE OF THE DOCUMENT INTRODUCTION TO FURNITURE PAKISTAN INTRODUCTION TO SCHEME EXECUTIVE SUMMARY BRIEF DESCRIPTION OF PROJECT & PRODUCT CRITICAL FACTORS INSTALLED & OPERATIONAL CAPACITIES GEOGRAPHICAL POTENTIAL FOR INVESTMENT POTENTIAL TARGET MARKETS PRODUCTION PROCESS FLOW PROJECT COST SUMMARY PROJECT ECONOMICS PROJECT FINANCING PROJECT COST SPACE REQUIREMENT MACHINERY & EQUIPMENT RAW MATERIAL REQUIREMENTS HUMAN RESOURCE REQUIREMENT REVENUE GENERATION AND PRODUCTION MIX O T H E R C O S T S K E Y A S S U M P T I O N S ANNEXURE INCOME STATEMENT (ANNEXURE 1) 14.2 BALANCE SHEET (ANNEXURE 2) Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 2 of 14

3 1. DISCLAIMER This information memorandum is to introduce the subject matter and provide a general idea and information on the subject. Although, the material included in this document is based on data / information gathered from various reliable sources; however, it is based upon certain assumptions which may differ from case to case. The information has been provided on as is where is basis without any warranties or assertions as to the correctness or soundness thereof. Although, due care and diligence has been taken to compile this document, the contained information may vary due to any change in any of the concerned factors, and the actual results may differ substantially from the presented information. Furniture Pakistan, its employees or agents do not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The contained information does not preclude any further professional advice. The prospective user of this memorandum is encouraged to carry out additional diligence and gather any information which is necessary for making an informed decision, including taking professional advice from a qualified consultant / technical expert before taking any decision to act upon the information. For more information on services offered by Furniture Pakistan, please contact our website: Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 3 of 14

4 2. PURPOSE OF THE DOCUMENT The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document / study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The purpose of this document is to facilitate potential investors in Small Workshop Startup by providing them with a general understanding of the business with the intention of supporting potential investors in crucial investment decisions. The need to come up with feasibility reports for undocumented or minimally documented sectors attains greater importance, as the research that precedes such reports reveal certain thumb rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and it s successful management. Apart from carefully studying the whole document one must consider critical aspects provided later on, which form basis of any investment decision. 3. INTRODUCTION TO FURNITURE PAKISTAN For many decades, since independence of Pakistan, Textile and agro based products were considered to be the major commodities for export purposes. Unfortunately, little concern was given to other industrial sectors for export promotion. Due to drastic increase in population of Pakistan, the exports of these products were not only reduced; instead, these commodities are imported from around the world in order to fulfill the requirements of local population. The need of time is to focus on different industrial sectors other than Textile and agro-based products for diversification of our exports and uplift our economic plight. The new sectors may involve labour intensive products, the quality of labour intensive products are totally dependent on the skills of artisans and craftsmen. The export from Sialkot in surgical and sports products is an example of labour intensive diversification of products that can be exported and are readily acceptable in the international markets. Through promotion of labour intensive products, the job opportunities are enhanced and resources are utilized in an appropriate way. To promote and enhance the compatibility of the furniture industry and craftsmanship of Pakistan in international markets, the Government of Pakistan developed a strategy. Establishment of the company Furniture Pakistan is the major component of the strategy as envisioned by the eminent Government Authorities. Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 4 of 14

5 The project was taken up as a joint collaboration between Small and Medium Enterprise Development Authority (SMEDA) and USAID. Renowned international consultancy firms like J.E Austin were involved for this purpose. An organization was formulated under the name of the Strategic Working Group (SWOG), consisting of 27 members that included stakeholders from all major furniture business and production clusters from across the country, as well as representatives from SMEDA. The SWOG carried out cross-country studies of the major furniture exporters of the world, and drafted the plan of incorporating their techniques and technologies into Pakistan's industry, which then resulted in the inception of Furniture Pakistan as a sector development company. The basic structure of the company was formulated in and in 2009, Furniture Pakistan initiated its operations under the administration of Pakistan Industrial Development Corporation (PIDC). 4. INTRODUCTION TO SCHEME Prime Minister s Youth Business Loan scheme, for young entrepreneurs, with an allocated budget of Rs. 5.0 Billion for the year , is designed to provide subsidized financing at 8% mark-up per annum for one hundred thousand (100,000) beneficiaries, through designated financial institutions, initially by the National Bank of Pakistan (NBP) and the First Women Bank Ltd. (FWBL). Loans from Rs. 0.1 million to Rs. 2.0 million with tenure up to 8 years inclusive of 1 year grace period, and a debt: equity of 90: 10 will be disbursed to SME beneficiaries+ across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwa, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA). 5. Executive Summary: The proposed project is for setting up a Small Workshop Startup. This unit will be capable of integrated wooden furniture manufacturing from sourcing and cutting of wood, to retailing of product to the end customer. The project will focus and cater to the growing needs of domestic wooden furniture market. Housing and construction industry has seen a steady growth over the last many years due to a number of factors. These include; development of new housing schemes, introduction of housing finance schemes / loans by different banks, increased urbanization, a growing middle class and enhanced purchasing power of the public. All these factors have contributed directly and indirectly towards an increased demand for wooden furniture. The wooden furniture business venture entails a total investment of about Rs. 545,400/-. This includes a capital investment of Rs.211,000/- and a sum of Rs. 240,000/- as initial working capital. The project is financed through 90% debt and 10% equity. The project will generate direct employment opportunity for 3 Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 5 of 14

6 persons. 6. BRIEF DESCRIPTION OF PROJECT & PRODUCT This unit is capable of producing different sort of wooden furniture i.e. bed sets, dinning sets, sofa sets, center tables, tables for sofa set and office furniture. The entire finished product depends on the quality of wood. Detailed technical know-how about the quality of wood and the use of seasoned / dry wood plays a vital role in the manufacturing of quality furniture. Wood obtained from the forest is of prime quality. Therefore, it is recommended to use dry wood, from forests for manufacturing quality wooden furniture. Forest reserves like Changa Manga, Pakhowal, Kundian, Chicha watni, Bahawalpur and other forests are potential sources. Furniture manufacturing units in Pakistan mostly use Sheesham wood. Other types of woods used in manufacturing furniture are; Teak wood, Walnut wood and Keekar wood. Besides this, substitute material like lasani and vinboard are also used in the manufacturing of furniture. Other materials used in furniture manufacturing process are nails, screws, glue/solution, spirit, lakh, thiner, lacquer, sealer, hardener etc. These raw materials are easily available in the market. The demand for wooden furniture in the domestic market is consistent throughout the year, however, it significantly increases during the period of October to March due to wedding season. The demand for furniture almost doubles during this period and is a good time to enter the market. Since strong competition already exists in the domestic market, manufacturing of high quality trendy designs and aggressive marketing is essential to get a prominent place in the market. Despite the introduction of new/alternative materials in furniture manufacturing, wooden furniture is still preferred in the domestic market, as well as in the international market due to its traditional appeal and durability. Over the years, entry into the global market has also become more competitive, due to demanding factors like green furniture, multi-functionality, simplicity and neutral colors, Ready-toassemble (RTA) and Do-it-yourself (DIY) furniture. Malaysia, Philippines, Indonesia and China have established strong brand names and have emerged as key market players. 7. CRITICAL FACTORS Ensuring availability of seasoned (dry) wood for high quality furniture manufacturing. Seasoned (dry) wood minimizes deforming that may occur due to dampness in wood. Selection of skilled and responsible labor is an important factor, as it can improve quality of finished product by better craftsmanship & lower wastage. It is recommended that specialized labor is hired for this business. Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 6 of 14

7 New designs and styles can build brand equity for the business. Creation of new designs and styles is vital for setting new trends as the market is quite competitive. Aggressive virtual marketing needs to be undertaken in the absence of a physical showroom. Though skilled labor is available in the market, additional manufacturing workload can be sub-contracted to save time and resources. The manufacturing unit will require selling directly to showrooms and direct clients, for which the owner would need to develop extensive knowledge of the market. Higher return on investment and a steady growth of business is expected with the entrepreneur having some prior experience/education in the related field of business. Easy access to raw material should be ensured. 8. INSTALLED & OPERATIONAL CAPACITIES The proposed project is capable of manufacturing complete range of wooden furniture and other allied products to meet the demand of domestic market. The Unit will work on 8 hours shift for 300 days. This unit is capable of producing different types of wooden furniture i.e. bed sets, dinning sets, sofa sets, centre tables, tables for sofa set and office furniture. Total number of furniture items produced in year 1 would be GEOGRAPHICAL POTENTIAL FOR INVESTMENT The demand for wooden furniture is higher in densely populated cities of Pakistan i.e. Lahore, Multan, Karachi, Peshawar, Rawalpindi and Islamabad, making all these options viable. However, establishment of the unit in the vicinity of established wooden furniture clusters i.e. Lahore, Chiniot or Gujrat gives the added advantage of easy availability of skilled labor. 10. POTENTIAL TARGET MARKETS Potential markets for wooden furniture can be categorized into the following; newly constructed house, gift on weddings, for renovations, institutional buyers, for offices (public & private sector), etc. Majority of customers in the domestic market belong to first and second category. These customers require furniture for their newly built houses and usually buy a range of products like bed sets, dining sets and sofa sets with other decorative material for their entire house. Initially, entrepreneurs should target these customers to establish the business and increase their customer base. Flourishing hotel and tourism industry can considerably increase the demand for wooden furniture. Large orders can also be secured to supply wooden furniture to hotels and resorts. Wooden furniture retail clusters are found in most areas of all big cities of Pakistan, where manufactured furniture can be sold. Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 7 of 14

8 11. PRODUCTION PROCESS FLOW 12. PROJECT COST SUMMARY A detailed financial model has been developed to analyze the commercial viability of Small Workshop Startup under the Prime Minister s Youth Business Loan scheme. Various costs and revenue related assumptions along with results of the analysis are outlined in this section. The projected Income Statement, Cash Flow Statement and Balance Sheet are attached as annexure Project Economics: It is estimated that around 200 sets per year will be produced by the proposed small workshop startup program and the cost of each set produced would be Rs on an average. The commercial viability of this project will depend upon the expertise and creativeness of the workmen and their knowledge about the trends of furniture components manufacturing. Regular orders from customers will play a vital role in sustainability of the project and delivering orders on time will add to the credibility of the business. Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 8 of 14

9 12.2 Project Financing: Details of the equity required and variables related to bank loan are as follows: Table 1: Project Financing Description Details Total Equity (10%) Rs. 60,600 Bank Loan (90%) Rs. 545,400 Markup to the Borrower (Percentage / annum) 8% Loan Tenure (years) 8 Years Grace Period (years) 1 year 12.3 Project Cost: Following requirements have been identified for operations of the proposed business. Table 2: Capital Investment for the project Cash Outflow Sr. Description Cost in PKR No. 1 Equipment Basic Machinery (Thickesser planner, cutter, hands tools) 150, ,000 Sr. No. Operating Cost (Per Month) Description Cost in PKR 1 Utilities 10,000 2 Labour (2 PKR 9,000/- per person per month) 18,000 3 Raw Material / working capital 20,000 4 Rent (500sqft shop) 5,000 53, Space Requirement: The project is proposed to be set-up in rented premises. In this way, the initial capital cost of the project will be far less. Table 3: Space Requirement Space Requirement (in ft) Sq.ft Workshop 500 Total Area 500 Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 9 of 14

10 Sr. No Machinery and Equipment: Following combination of tools is required for this program: Table 5: List of tools included in tool kit Description Qty Rate Amount 1. Saw ,000 20, Cutter sliding 1 15,000 15, Cutter round 1 15,000 15, Planer / Shaper ,000 20, Spindle Moulder Machine 1 20,000 20, Chapaka 1 10,000 10, Hand Chapaka (jug saw) 1 7,000 7, Grinder 1 5,000 5, Drill machine 1 2,000 2, Compressor 1 16,000 16, Miscellaneous Tools (Hand Tools, Paint Gun 1 10,000 10,000 etc.) 12. Installation costs for machines 1 10,000 10,000 Total 150, Consumables and Raw Material: The details of the consumables and raw materials required per year are as under: Table 4: Consumables and raw material Description of Item Total Cost Wood 200,000 Misc Hardware, Colour, etc. 40,000 Total 240, Human Resource Requirement: Table 5: Human Resource Requirement Description No. of employees Salary per person Per Month Salary Rupees Annual Salary Rupees Rupees Workmen 2 9,000 18, ,000 Total 216, Revenue Generation: Table 6: Revenue Generation (at 60% of production capacity for first year) Product Sales price First Year Production First Year Sales Revenue (Rs.) Furniture parts (sets) ,000 Total Sales Revenue ,000 Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 10 of 14

11 12.9 Other Costs: Approximately 500 sq.ft of office space will be required to setup this p r o g r a m. Monthly rent is estimated up to Rs. 5,000/ month (5% yearly increase) and utility (10% yearly increase). In year 1, the total rent cost amounts to Rs. 60,000. Similarly, utility expense is estimated to be about 10,000 per month which comes to Rs.120,000 per annum Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 11 of 14

12 13. KEY ASSUMPTIONS Maximum Capacity Utilization 100% REVENUE ASSUMPTIONS Furniture sets sale/ unit (1 st year) 4800 Sale price growth rate (15.5%) OR (times) EXPENSES ASSUMPTIONS Electricity Expenses Per/Year (Rs) 100,000 Equipments/ Machine maintenance Cost /year (% of total machinery cost) 2.% Growth in maintenance cost (3 %) OR (times) 1.03 Pre-paid land rent (12 months) 60,000 Raw material 0.00 Consumables cost 240,000 Rent growth rate 5% COST OF GOODS SOLD ASSUMPTIONS COGS Growth Rate (21%) OR (times) 1.21 Financial Assumptions Project Life (Years) 08 Debt 90% Equity 10% Interest Rate on Long term debt 8% Debt Tenure (Years) 8 Debt payments per years 12 Grace Period (Year) 1 Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 12 of 14

13 Prime Minister Youth Business Loan Annexure-1 Furniture Pakistan Small Workshop Startup Income Statement Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Revenue 960,000 1,056,000 1,161,600 1,277,760 1,405,536 1,546,090 1,700,699 1,870,768 2,057,845 2,263,630 Cost of Good Sold Operation Cost 1 (Direct Labour) 216, , , , , , , , , ,317 Operation Cost 2 (Direct Electricity) 84,000 92, , , , , , , , ,068 Operation Cost 3 ( Raw Material) 240, , , , , , , , , ,907 Total Cost of Sales 540, , , , , , ,643 1,052,307 1,157,538 1,273,292 Gross Profit 420, , , , , , , , , ,338 General Administration & Selling Expense Administration expense Building Rental expense 60,000 66,000 72,600 79,860 87,846 96, , , , ,477 Utility expense 36,000 39,600 43,560 47,916 52,708 57,978 63,776 70,154 77,169 84,886 Travelleing expense Communciation expense Promotional expense Sub Total 96, , , , , , , , , ,363 Earning Before Interest 324, , , , , , , , , ,975 Interest Expense on long term debt 43,632 41,443 36,416 30,972 25,076 18,691 11,776 4, Earnings after Interest 280, , , , , , , , , ,975 Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 13 of 14

14 Prime Minister Youth Business Loan Annexure-2 Furniture Pakistan Small Workshop Startup Balance Sheet Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Current Assets Cash & Bank 606, ,368 1,051,325 1,406,949 1,807,221 2,256,513 2,759,628 3,321,837 3,948,936 4,643,459 5,407,434 Total Current Assets 606, ,368 1,051,325 1,406,949 1,807,221 2,256,513 2,759,628 3,321,837 3,948,936 4,643,459 5,407,434 Fixed Assets Machinery & Equipment - 150, , , , , , , , , ,000 Furniture & Fixture Office Equipment Total Fixed Assets - 150, , , , , , , , , ,000 Total Assets 606, ,368 1,201,325 1,556,949 1,957,221 2,406,513 2,909,628 3,471,837 4,098,936 4,793,459 5,557,434 Liabilities & Shareholder's Equity Current Liabilities Accounts Payable Total Current Liabilities Other Liabilities Long Term Debt 545, , , , , , ,956 97, Shareholder's Equity Paid up Capital 60,600 60, , , , , , , , , ,000 Retained earnings - 280, , ,949 1,351,221 1,800,513 2,303,628 2,865,837 3,492,936 4,187,459 4,951,434 Total Equity 60, , ,490 1,137,707 1,609,015 2,135,240 2,721,672 3,374,115 4,098,936 4,793,459 5,557,434 Total Capital and Liabilities 606, ,368 1,201,325 1,556,949 1,957,221 2,406,514 2,909,627 3,471,838 4,098,936 4,793,459 5,557,434 Furniture Pakistan-PM Youth Loan Scheme-Small Workshop Startup Page 14 of 14