How to do a Financial Feasibility for your Next Beverage Manufacturing Company?

Financial Feasibility aids in assessing whether to pursue a project or not

Establishing a beverage manufacturing company will need proper planning and preparation starting from research, environmental scanning, equipment to purchase, initial investment, funding sources, etc. Good financial feasibility will assess every aspect and help you decide if to continue the project or not.

We will look at these factors below when evaluating a beverage manufacturing company.

1. Initial investment

You need to identify what costs are necessary to start your beverage manufacturing company. Initial investments include the initial CAPEX (building, machinery & equipment, vehicles), permits & licenses, insurance, direct materials, labor costs, overhead, and general & administrative costs. The computation of the initial investment is from pre-operation until you have enough cash to finance the operation internally.

2. Sources of Funds

You will likely source out funds when starting a beverage manufacturing company since a significant investment is needed for the operation. Funding sources can be either from banks, other lenders, or investors.

It is critical to consider the loan interest and payback years since it will affect business profitability.

3. Computing the Revenue

Revenue computations include identifying the production volume per production multiplied by the number of cycles in a year. Then depending on the number of product lines, multiplied the production volume to the selling prices. Prices will vary if they are sold to distributors, retailers, or end customers.

Production volume would also depend on capacity utilization. In the first year, capacity utilization may be lower than 100% then increase as the market expands. Also, allowance for production loss is deducted.

4. Costs of Goods Sold (COGS)

The production costs include raw materials, direct labor, and production overhead.

a. Direct Materials

A proper inventory of raw materials and finished products is needed for continuous operation. So, when computing for the Costs of Goods Sold, you have to add the beginning inventory for raw materials, work in progress, and finished products, then deduct all the ending inventories.

b. Direct Labor

Direct labor is all workers directly involved in the production process. These include the machine operators and manual laborers. Their salaries and benefits are included in COGS.

c. Production Overhead

Production overhead includes utilities, salaries and benefits (supervisors/managers), rent, fuel, supplies, primary packaging, and maintenance costs.

5. Gross Profit

You get the Gross Profit by deducting the direct materials, direct labor, and production overhead from the Revenue. Gross Profit is a rough measure of business viability after deducting the Costs of Good Sold.

6. General and Administrative Expenses

General and administrative expenses are non-production costs. These include the salaries and benefits of management and office staff, office supplies, office rent, light & power, training and seminars, transportation allowance, contingencies, etc.

7. EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization)

EBITDA is the difference of Gross Profit less General and Administrative Expenses. The EBITDA margin is a good metric when comparing peer companies and to the industry average. For a manufacturing company, the average EBITDA margin is 15%.

8. Net Income

Net income is found in the lower portion of the income statement. Net income is computed by deducting from EBITDA the non-operating expenses (tax and interest) and non-cash expenses (depreciation and amortization).

9. Financial Ratios

Financial ratios are an indispensable financial planning tool for in-depth financial analysis of your financial statements. Financial ratios categories include liquidity ratios, profitability ratios, leverage ratios, efficiency ratios, and growth ratios, which provide various angles of analysis of your business.

10. Financial Metrics

To further assess project feasibility, financial metrics are utilized. These metrics help in deciding whether to pursue the project or not. Financial metrics include return on investment (ROI), Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR).

11. Sensitivity Analysis

Sensitivity analysis is used when trying different scenarios and how these affect business economics. For example, how does a 15% decrease in production volume affect your manufacturing company’s profit margin and financial metrics? Would it still be worth it to pursue? You can also test changes in prices and costs and see their effect on the project’s viability.

12. Break-even Analysis

Break-even analysis is utilized to identify at what level of output and prices the revenue will equal to total costs, or the profits are zero. It identifies the quantity to produce for break-even and earn after reaching that threshold.

In Conclusion:

After preparing the financial feasibility of your beverage manufacturing company, you will now be confident in making informed business decisions since you have a solid analysis and metrics as the foundation.

Utilizing a financial model template will make your financial feasibility preparation easier. You have to select the fitted templates for your manufacturing business. eFinancialModels offer a comprehensive, easy-to-use, and fully editable Excel Spreadsheet, which you can find on their website.