Business Plan For Establishment Of Liquid Detergent Plant

PINACLE

LIQUID DETERGENT

Business Plan to Establish Small Scale Liquid Detergent Production and Sales

December, 2015

TABLE OF CONTENTS

I.

SUMMARY..........................................................................................................1

II.

PRODUCT DESCRIPTION AND APPLICATION...............................................2

III.

MARKET STUDY AND PLANT CAPACITY.......................................................3

IV.

MATERIALS AND INPUTS.................................................................................6

V.

TECHNOLOGY AND ENGINEERING................................................................7

VI.

HUMAN RESOURCE AND TRAINING REQUIREMENT..................................9

VII.

FINANCIAL ANALYSIS....................................................................................10

Appendix 7.A: FINANCIAL ANALYSES SUPPORTING TABLES..........................13

2

I.

SUMMARY

This profile envisages the establishment of small scale plant for the production of liquid detergent with a capacity of 30 tons per annum. Liquid detergent is extensive used in households, guest houses, hotels, canteens, hospitals, schools, higher institutions, offices, etc., as a general cleaning agent. The country’s requirement of liquid detergents is largely met through import. The present (2015) demand for liquid detergents is estimated at 277 tons. The demand for liquid detergents is projected reach 393 tons and 527 tons by the years 2021 and 2026, respectively. The principal raw materials required are Sodium lauryl ether sulfate or SLES, Cocodiethanolamide or CDEA, STPP, Cooking salt, Dye - water soluble and Synthetic Fragrance. All raw materials can be obtained locally. The total investment cost of the project including working capital is estimated at Birr 50,000. Both fixed investment and initial working capital have equal 50% share. The project is financially viable with an internal rate of return (IRR) of 252% and a net present value (NPV) of Birr 438,000, discounted at 10%. The project can create employment for 6 persons. The project will also create forward linkage with the service sector such as hotels, restaurants and hospitals and back ward linkage with the chemical manufacturing sub sector and also generates income for the Government in terms of tax revenue and payroll tax. II.

PRODUCT DESCRIPTION AND APPLICATION A liquid detergent is a surfactant or a mixture of surfactants with "cleaning properties in dilute solutions." These substances are usually alkyl benzene sulfonates, a family of compounds that are similar to soap but are more soluble in hard water, because the polar sulfonate (of detergents) is less likely than the polar carboxyl (of soap) to bind to calcium and other ions found in hard water. Liquid detergent finds extensive use in households, guest houses, hotels, canteens, hospitals, schools and higher institutions, offices, etc. as a general cleaning agent. It is used to wash hands, dishes, cooking and other household utensils, tiles, walls, kitchens, motor vehicles, furniture, clothes etc. Industrially, liquid detergent is used in large quantities in manufacturing industries where conveyor belts are employed in their production lines in order to lubricate the rolling sections of the chains so as to allow easy and effective movement of the belts on these bearings. Such industries include but are not limited to breweries, food processing, pharmaceutical, beverage, chemical and allied industries, glass, etc. III.

MARKET STUDY AND PLANT CAPACITY A.

MARKET STUDY 1. Past Supply and Present Demand The country`s requirement of detergents is largely met through import. Although some brands of detergents in a limited quantity are locally manufactured, the data which is published by the Central Statistical Agency on the survey of Medium and Large Scale and Electricity Industries lumps together with soap. Hence, in order to analyze the unsatisfied demand for detergents the data obtained from the Ethiopian Revenues and Customs Authority on the import of detergents for the past nine years is presented for analysis (see Table 3.1). Table 3.1: IMPORT OF DETERGENTS Value Year

Volume (Tons) (‘000 Birr) 2006 2007 2008 2009 2010 2011 2012 2013 2014

2,316.60

12,005.00

165.70

1,364.00

1,096.60

8,554.00

1,270.70

14,953.00

780.30

13,674.00

541.30

15,253.00

817.52

19,164.76

868.93

31,490.40

946.05

37,109.94

Source: Ethiopian Revenues and Customs Authority

As could be seen from Table 3.1, the imported quantity during the past nine years was highly erratic, which ranges from the lowest 165.70 tons (year 2007) to 2,313.6 tons (year 2006). In the absence of a clear trend in the data set the recent four years average is

believed to indicate the present demand. Accordingly, present demand (year 2015) for detergents is estimated at 793 tons. Since there is no disaggregated data on the amount of powdered and liquid detergents, the views of knowledgeable people in the area have been collected. Accordingly, it was learnt that about 65% of the total volume of imported detergents constitute powdered and the remaining 35% liquid. Taking this as a base, the current demand for liquid detergent is estimated at 277 tons.

2. Demand Projection The factors that influence the future demand for detergents are numerous. Among the major ones population growth, income rise, urbanization, and increase of awareness of the population on sanitation can be cited. The population of the country in general is growing at a rate of about 3.2% per annum. The urban population, which is the major user of detergents, is also growing above 3.5%. Gross domestic product (GDP), which is one of the measures of income, has been growing by more than 11% in the past consecutive years and is forecasted to continue in the future. The sanitation awareness of the whole population is increasing due to the efforts underway by the Ministry of Health and other stakeholders. Hence, as the result of the above factors the demand for detergents in the urban as well as rural areas will increase substantially. By considering the combined effects of the above factors mentioned the future demand is forecasted to grow by 6% per annum. The demand projection made based on this assumption is presented in Table 3.2. Table 3.2: DEMAND FORECAST FOR LIQUID DETERGENTS (TONS) Year

Volume (Tons) 2016 2017 2018 2019

294.37 312.03 330.76 350.60

2020 2021 2022 2023 2024 2025 2026

371.64 393.93 417.57 442.63 469.18 497.33 527.17

The demand for liquid detergent will grow from 294 tons in 2016 to 393 tons and 527 tons by the years 2021 and 2026, respectively. 3. Pricing and Distribution The selling price is based on "Cost-Plus Method". A profit markup of 25% over the total product cost is very reasonable and competitive especially at this initial stage. Unit product cost is estimated at Birr 12.00. Adding the 25% profit mark up, the price is Birr 15.00 whether delivered or walk-in. The product can be classified as a consumer item. The end users of the product are numerous and widely distributed throughout the country. Hence, the project plans to sell the products to the retailers in Addis Ababa to reach the final consumers of the product. B.

PLANT CAPACITY AND PRODUCTION PROGRAM 1. Plant Capacity The market study shows that demand for liquid detergent increases from 294 tons in the year 2016 to 527 tons in the year 2026. Based on the market study and capital constraint, the envisaged plant capacity is 30 tons per annum on a single shift of 8 hours per day and 300 working days per year. 2. Production Program

In order to develop the operators’ skill in production and quality control, it is vital to have a gradual capacity buildup. In addition to this, a period is required to penetrate to the market. Hence, it is assumed that the plant will go into full capacity operation in four years’ time starting with 70% capacity in the first year and progressively developing to 80%, 90% and 100% in the second, third and fourth year and then after respectively. The production program of the envisaged plant is given in Table 3.3. Table 3.3: PRODUCTION PROGRAMME OF THE ENVISAGED LIQUID DETERGENT PLANT No.

IV.

Item Description

1st Year

2nd Year

3rd Year

4th – 10th

1

Production of liquid detergent (tons)

21

24

27

30

2

Capacity Utilization (%)

70

80

90

100

MATERIALS AND INPUTS A.

MATERIALS

The principal raw materials required are Sodium lauryl ether sulfate or SLES, Cocodiethanolamide or CDEA, STPP, Cooking salt, Dye - water soluble and Synthetic Fragrance. All raw materials can be obtained locally. The total annual cost of raw material at full capacity operation is estimated at Birr 126,450.00. The annual requirement of raw material and their estimated costs are presented in Table 4.1. Table 4.1: ANNUAL REQUIREMENT FOR RAW AND AUXILIARY MATEIRALS AND THEIR COST No.

Item Description

Quantity in tons

Cost (‘000 Birr)

Sodium lauryl ether sulfate or SLES 1

2.40

48.00

Cocodiethanolamide or CDEA 2

1.50

45.00

STPP 3

0.90

16.20

Cooking salt 4

1.50

7.50

Dye - water soluble 5

0.03

9.00

Fragrance - Synthetic 6

0.03

0.75

Total

B.

126.45

UTILITIES

Utilities required are electricity and water. The total annual cost of utilities is estimated at Birr 6,100. The annual quantities and cost of utilities are estimated as shown in Table 4.2. Table 4.2: ANNUAL UTILITY REQUIREMENT AND COST No.

Description

Quantity

Cost (‘000 Birr)

1Electric Power (kwh)

7,500

4.35

2Water (m3)

1,000

1.75

Total

V.

6.10

TECHNOLOGY AND ENGINEERING A.

TECHNOLOGY 1. Production Process The process of manufacture consists as follow: 

Mix sodium lauryl ether sulfate and water. Add small amount of water and mix it well.



Add coconut diethanol and mix it well using the stirrer. Continue mixing until it become sticky. Add small amount of water while mixing to avoid creating bubbles. Set aside the CDEA-SLES mixture when it turned cream.



In a separate mixing bowl, mix STPP. Set it aside.



Get your cream and mixed it again slowly. When the mixture bubbles, add slowly the STPP mixture while mixing using the electric mixer.



In a separate mixing bowl, dissolve salt before adding it to the STPP and CDASLES mixture.



Let drops of fragrance to the mixture. Continue mixing using the electric mixer until it become creamy.



Put it in a container and set aside. From time to time, scoop bubbles forming at the top of the mixture.



When there is no bubble anymore, put the liquid detergent in a clean tank. You can use the liquid detergent after 24 hours.

2. Environmental Impact Assessment The process of production of liquid detergent involves simple mixing and packing and does not have any adverse impact in the environment.

B.

ENGINEERING 1. Machinery and Equipment The total cost of equipment is estimated at Birr 30,500.00, all of which is required in local currency. The list of equipment required for the envisaged plant is given in Table 5.1. Table 5.1: LIST OF EQUIPMENT AND THEIR COST

No.

Equipment

Safety Gear 1 A jacket or apron made of hard material 2 A pair of plastic or rubber gloves 3 A protective mask or scarf 4 A pair of rubber boots or covered shoes 5 A pair of protective goggles Sub Total 1 Equipment 1 Water tank 2 Liquid detergent tank 3 Mixing tank with stirrer 5 Booster tank 7 Electronic scales for measurements Sub Total 2 Grand Total

Unit

Quantity

Unit Price

Total Cost (Birr)

Pcs Pcs Pcs Pcs Pcs

2 2 2 2 2 10

500.00 300.00 250.00 200.00 250.00

1,000.00 600.00 500.00 400.00 500.00 3,000.00

Pcs Pcs Pcs Pcs Pcs

1 1 1 2 1 6 16

3,000.00 5,000.00 10,000.00 500.00 3,000.00

3,000.00 5,000.00 10,000.00 1,000.00 3,000.00 22,000.00 25,000.00

2. Work Space The total area required by the project is 50 m 2. For the purpose of this project renting of work space from individual owner is planned. Accordingly, the total work space rent cost at a rate of Birr 3,000.00 per month is estimated. VI.

HUMAN RESOURCE AND TRAINING REQUIREMENT A.

HUMAN RESOURCE REQUIREMENT

Total human resource required is 6 persons. The total annual cost of human resource is estimated at Birr 129,000. The details of the human resource requirement and the estimated annual labor cost including employees’ benefit are given in Table 6.1. Table 6.1: HUMAN RESOURCE REQUIREMENT AND ESTIMATED LABOR COST (BIRR) No.

Description

1 Manager 2 Accountant and cashier 3 Operator 4 Assistant Operator 5 Guard Sub Total Employees benefit (25% of basic salary) Grand total

B.

Head Count 1 1 1 1 2 6

Monthly Salary 2,500.00 2,000.00 1,500.00 1,000.00 1,600.00 8,600.00 2,150.00 10,750.00

Annual Salary 30,000.00 24,000.00 18,000.00 12,000.00 19,200.00 103,200.00 25,800.00 129,000.00

TRAINING REQUIREMENT

The production of liquid detergent is simple and involves simple mixing and does not need any special training. VII.

FINANCIAL ANALYSIS The financial analysis of the liquid detergent project is based on the data presented in the previous chapters and the following assumptions:Source of finance

100 % equity

Discount cash flow

10%

Accounts receivable

15 days

Raw material local

15 days

Work in progress

1 day

Finished products

10 days

Cash in hand

5 days

Accounts payable A.

0 day

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 50,000. Both fixed investment and initial working capital have equal 50% share each. B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 328,000 (see Table 7.1). The cost of raw material account for 38.61% of the production cost. The other major component of the production cost is administrative costs, which account for 43.81%. The remaining 17.58% is the share of utility, direct labor, labor overhead, depreciation and marketing cost. For detail production cost see Appendix 7.A.2. Table 7.1: ANNUAL PRODUCTION COST AT FULL CAPACITY (YEAR FOUR)

Raw material Utilities Labour Labour overhead costs Administrative costs Depreciation Marketing costs

Cost % share ( in 000 Birr) 126 38.61% 6 1.86% 30 9.16% 8 2.29% 143 43.81% 5 1.53% 9 2.75%

Total Production Cost

328

Items

100.00%

C.

FINANCIAL EVALUATION 1. Profitability Based on the projected profit and loss statement, the project will generate a profit throughout its operation life. Annual net profit after tax ranges from Birr 73 thousand to Birr 89 thousand during the life of the project. Moreover, at the end of the project life the accumulated net cash flow amounts to Birr 869 thousand. For profit and loss statement and cash flow projection see Appendix 7.A.3 and 7.A.5, respectively. 2. Ratios In financial analysis financial ratios and efficiency ratios are used as an index or yardstick for evaluating the financial position of a firm. It is also an indicator for the strength and weakness of the firm or a project. Using the year-end balance sheet figures and other relevant data, the most important ratios such as return on sales which is computed by dividing net income by revenue, return on assets (operating income divided by assets), return on equity (net profit divided by equity) and return on total investment (net profit plus interest divided by total investment) has been carried out over the period of the project life and all the results are found to be satisfactory. 3. Break-even Analysis The break-even analysis establishes a relationship between operation costs and revenues. It indicates the level at which costs and revenue are in equilibrium. To this end, the break-even point for capacity utilization and sales value estimated by using income statement projection are computed as followed. Break -Even Sales Value = .

Fixed Cost

= Birr 261,570

Variable Margin ratio (%) Break -Even Capacity utilization = Break -even Sales Value X 100 = 58.13% Sales revenue 4. Pay-back Period The pay -back period, also called pay – off period is defined as the period required for recovering the original investment outlay through the accumulated net cash

flows earned by the project. Accordingly, based on the projected cash flow it is estimated that the project’s initial investment will be fully recovered within a year. 5. Internal Rate of Return The internal rate of return (IRR) is the annualized effective compounded return rate that can be earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate of return for an investment is the discount rate that makes the net present value of the investment's income stream total to zero. It is an indicator of the efficiency or quality of an investment. A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments or putting the money in a bank account. Accordingly, the IRR of this project is computed to be 252% indicating the viability of the project. 6. Net Present Value Net present value (NPV) is defined as the total present (discounted) value of a time series of cash flows. NPV aggregates cash flows that occur during different periods of time during the life of a project in to a common measuring unit i.e. present value. It is a standard method for using the time value of money to appraise long-term projects. NPV is an indicator of how much value an investment or project adds to the capital invested. In principle, a project is accepted if the NPV is non-negative. Accordingly, the net present value of the project at 10% discount rate is found to be Birr 438 thousand which is acceptable. For detail discounted cash flow see Appendix 7.A.5. D.

FINANCIAL EVALUATION

The project can create employment for 6 persons. The project will generate Birr 296 thousand in terms of tax revenue. The project will also create forward linkage with the service sector such as hotels, restaurants and hospitals and back ward linkage with the chemical manufacturing sub sector and also generates income for the city administration in terms of tax revenue and payroll tax.

VIII.

Appendix 7.A: FINANCIAL ANALYSES SUPPORTING TABLESAppendix 7.A.1 NET WORKING CAPITAL (in 000 Birr) Description 1. Current assets 1.1 Accounts receivable (debtors) 1.2 Inventory a) Materials - Local materials - Imported materials c) Work-in-Progress d) Finished Products 1.3 Cash-in-hand 2. Current liabilities 2.1 Accounts payable (creditors) 3. Working capital 3.1 Net working capital (1) - (2) 3.2 Increase in working capital

Days of Coverage

1

15

15 90 1 10 5 -

2

3

4

Production Years 5 6 35 35 35 18 18 18 14 14 14

25 13 10

28 15 12

31 17 13

4 0 6 1 -

4 0 7 1 -

5 0 8 2 -

5 0 9 2 -

5 0 9 2 -

25 25

28 3

31 3

35 3

35 -

7

8

9

10

35 18 14

35 18 14

35 18 14

35 18 14

5 0 9 2 -

5 0 9 2 -

5 0 9 2 -

5 0 9 2 -

5 0 9 2 -

35 -

35 -

35 -

35 -

35 -

Appendix 7.A.2 PRODUCTION COST (in 000 Birr) Cost item Capacity utilization I. Costs of Goods Manufactured 1. Direct & auxiliary materials 2. Utilities 3. Labour, direct 4. Factory Overheads -Depreciation & amortization II. Selling & Marketing Costs -Marketing costs (% sales) III. General & Adm. Expenses Salaries & wages (+ benefits) Rent payment Transport Miscellaneous Total Operating Costs

Production years 1

2

3

4

5

6

7

8

9

10

70%

80%

90%

100%

100%

100%

100%

100%

100%

100%

124

141

158

175

175

170

170

170

170

170

89

101

114

126

126

126

126

126

126

126

4

5

5

6

6

6

6

6

6

6

26

30

34

38

38

38

38

38

38

38

5

5

5

5

5

-

-

-

-

-

5

5

5

5

5

-

-

-

-

-

6

7

8

9

9

9

9

9

9

9

6

7

8

9

9

9

9

9

9

9

112

122

133

143

143

143

143

143

143

143

64

73

82

92

92

92

92

92

92

92

36

36

36

36

36

36

36

36

36

36

6

7

8

9

9

9

9

9

9

9

5

6

6

7

7

7

7

7

7

7

242

271

299

328

328

323

323

323

323

323

Appendix 7.A.3 INCOME STATEMENT (in 000 Birr) Description Total Sales Revenue Less Cost of Goods Sold Gross Profit Gross Profit Margin Less Administrative Expenses Profit (loss) before Interest, Sales Cost & Tax Less Selling & Distribution Costs Profit (loss) before Tax Less Income Tax (30%) Net Profit (Loss) Cumulative Net Profit (Loss) * Tax holiday period

Production Years 1 315

2 360

3 405

4 450

5 450

6 450

7 450

8 450

9 450

10 450

124

141

158

175

175

170

170

170

170

170

191

219

247

275

275

280

280

280

280

280

61%

61%

61%

61%

61%

62%

62%

62%

62%

62%

112

122

133

143

143

143

143

143

143

143

79

97

114

131

131

136

136

136

136

136

6

7

8

9

9

9

9

9

9

9

73

89

106

122

122

127

127

127

127

127

*

*

32

37

37

38

38

38

38

38

73

89

74

86

86

89

89

89

89

89

73

162

236

322

408

497

586

676

765

854

Appendix 7.A.4 BALANCE SHEET (in 000 Birr) Description Fixed assets Fixed investment Total Fixed Assets Less acc. Depreciation Net fixed assets Current assets Cash on hand & at bank Debtors (receivables) Stocks Total current assets less Current liabilities Creditors (payables) Overdraft Total current liabilities Total working capital Total net assets Financed by Paid-up capital Retained profits (Losses) Total

Year 0

Production Years 5 6

1

2

3

4

7

8

9

10

25 25 25

25 25 5 20

25 25 10 15

25 25 15 10

25 25 20 5

25 25 25 -

25 25 25 -

25 25 25 -

25 25 25 -

25 25 25 -

25 25 25 -

-

79 13 10 103

170 15 12 197

246 17 13 276

334 18 14 367

425 18 14 458

514 18 14 547

603 18 14 636

692 18 14 725

782 18 14 815

871 18 14 904

25

103 123

197 212

276 286

367 372

458 458

547 547

636 636

725 725

815 815

904 904

25 25

50 73 123

50 162 212

50 236 286

50 322 372

50 408 458

50 497 547

50 586 636

50 676 725

50 765 815

50 854 904

Appendix 7.A.5 DISCOUNTED CASH FLOW (in 000 Birr) Description

Year 0

Total Cash Inflow 1. Inflow of funds Borrowing (long & med-term) Borrowing (short term) 2. Inflow from operation Profit after tax Depreciation 3. Other income Salvage value of assets Recoverable asset Total Cash Outflow 4. Investment Fixed investment Incremental working capital 5. Loan repayment Long & med-term loan (Principal) Short-term loan (Principal) Net cash flow Cumulative Net cash flow Net present value (@ 10%) Internal rate of return (IRR) Note:

Book Value 11

Production Years 1

2

3

4

5

6

7

8

9

10

25

78 78 73 5 25

94 94 89 5 3

79 79 74 5 3

91 91 86 5 3

91 91 86 5 -

89 89 89 -

89 89 89 -

89 89 89 -

89 89 89 -

89 89 89 -

35 35 35 -

25 -

25

3

3

3

-

-

-

-

-

-

-

(25) (25) 438 252%

53 28

91 119

76 195

87 282

91 373

89 462

89 552

89 641

89 730

89 819

35 854

a. Salvage value of assets is taken to be the book value of fixed assets. b. Recoverable asset is taken to be the net working capital.