business plan trading company

8/6/2019 Business Plan Trading Company

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Business Plan For A Trading Company

Contact Information:

95 Jackson AvenueDallas, TX 63453

(325) [email protected]

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This is a business plan and does not imply an offering of securities.


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Table of Contents

1. Executive Summary 1

Business Opportunity

Product/Service Description2. Company Background 3

Business DescriptionCompany History

3. Business Plan For A Trading Company 5

4. Services 6

5. The Industry, Competition, and Market 7

Market DefinitionPrimary CompetitorsCustomer Profile

6. Marketing Plan 10

7. Financial Plan 12

Investment PlanBreak-even AnalysisLiquidity PlanEarnings Plan

Risk Analysis

8. Conclusion 20


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Business Plan For A Trading Company 1

1. Executive SummaryDue to shrinking profit margins the local wholesale industry is turning toward new andinnovative business concepts. Logistics, just-in-time and business optimization especially aresuch concepts that lately showed significant growth potential. For the selected countrieswhere the company operates the industry expects significant growth rates to persist in the

near future so that investments in that segment are very profitable.

The goal of this start-up is the operation of a trading company that offers a selected range ofproducts. Products will be offered with a focus on regional markets. Additional to this corebusiness the company offers a selection of logistic and transportation services for theircustomers which will help to increase sales revenues and utilize personnel capacity.

1.1 Business Opportunity

The trading industry shows currently a strong growth marked by a higher demand butalso growing costs. The development of new business strategies and solutions seemscritical for new industry players to get market shares and survive in this highly

competitive industry. The choice of services as well as the development of applicationscan be one strategy in this field of business. Additionally a sound cost management is ofcritical importance for a solid stream of revenues. Big industry players have shown thateven in a competitive market growth rates of more than 20% can be sustained.

The operation of a trading company that offers the following products and services is thecore of this start-up

Industry productsRaw materialsStorage

Trading productsWholesale services

A strong focus of this business will be placed on the development of new and innovativetrading strategies for the customers that deliver a significant value. As an add-on a broadrange of customized services will be offered, which will help utilize company andemployee capacity. The range of products is selected to provide solid growth potentials.This can lead to a fast change of goods or whole item groups as well as service elements.

The operation of this business requires a good knowledge of the trading markets as wellas a competitive logistic service concept to increase customer satisfaction. The demand toexplain the handling of special services for other companies is likely to require a highdegree of individual customer advise. However, it is critical that this service is offeredwith a strong focus on cost management.

The required investment for the proposed business is relatively low compared to othercompanies in the industry. A warehouse and labor are expected to be the main costdriver. For the future there are further substantial investments in fixed assets required.


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This will be financed through retained earnings. Depending upon the initial demand theminimum required investment amount ranges between $50,000 and $60,000 in thestart-up phase based on a 20-25% average revenue margin. This amount is well withinthe financial requirements observed for other comparable companies.

1.2 Product/Service DescriptionThe business will operate in the trading industry with a variety of goods that will bebought and sold. An additional source of revenues is the sale of customized logistic andtransportation services. This can range from storage space to a worldwide tradinglogistics and coordination. Cross selling is planned to be one of the prime strategies inthis business since all products are targeted to serve a similar need and can easily becombined. Synergies in selling product across business segments is likely to boostearning further. Net earning are expected to be at least 1% above traditional tradingbusinesses with only one or two sales segments.

Figure 1.1 shows the revenue mix across segments in the start-up phase. This projection

is based on the expected strategic direction, investment amount and businessenvironment. Being the core business the trading segment is expected to generate thelargest share in revenues. The sale of logistic services is expected to be another importantgenerator of revenues which also helps utilize invested capacity. The sale of storagecapacity is expected to be intensified depending upon market conditions.


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2. Company Background

The goal of this start-up is the operation of a trading company for a comprehensive range ofproducts and accessories. The focus of this business will be on the trading segment fornational customers which shows the highest profits. It is planned to reach an optimalutilization of personnel and company capacity. An initial investment amount of at least$100,000 to $120,000 is required, which will allow the operation of an industry businesswith 4 to 6 employees, a warehouse and the required equipment for the distribution process.Leasing and rent will be one element to reduce investment costs. Sales revenues are expectedto range between $450,000 and $600,000 in the start-up phase and the operation is expectedto generate profits starting in the second or third business year.

2.1 Business Description

Management is expected to have a solid knowledge of the trading markets and theoffered services to influence the customers. The goal is to create an innovative businessin which the customer experiences competent service. A well chosen and targetedselection of offerings will complement this strategy. Both aspects are a core requirementto build customer loyalty. In the mean run repeat customers are expected to generaterevenues of 40% and more. Although this strategy is likely to require additionalinvestments it is expected that revenues per customer will increase significantly andrange above industry average. Furthermore this strategy will provide a clear entrancebarrier for prospective competitors.

The development and promotion of a corporate identity is another central task formanagement. Given the homogeneity of businesses in this industry the development of acorporate identity will markedly increase sales revenues and build a customer base.Furthermore a corporate identity will support expanding the business to a largerinternational target market.

2.2 Company History

In the start-up phase the business is operated as a one-man-business. This set up carries acertain risk potential because of the high equity stake the manager bears and the personaland statutory liability assumed. However, this set-up preserves a high degree offlexibility in managerial decision taking.

The number of personnel to be employed depends on the structural complexity of theoperations and the desired size. Figure 2.1 shows a break up of costs in the industry. It isexpected that the target employee earns a monthly salary of $4,500 to $6,000 based on 42

hours per week. The sales and service area requires 1 to 2 employees on average workingin 2 shifts. Due to illness and vacation times in the long run an average of 4 permanentemployees will be required after the start-up phase. With increasing sales and betterutilization of employee work time revenue margins will and thus costs per employee willdecrease on average. With revenues ranging around $500,000 capacity utilization isexpected to be around 85%. During the start-up phase a single person will attend to allnecessary management task, coordinate employees and provide strategic direction to thedeveloping business. Accounting, administrative and machine maintenance will be


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outsourced to external partner since those tasks can typically be provided at better ratesexternally. Sourcing and marketing will require one employee.

Finding the optimal location for a business is one of the success factors in the short andlong run. This is also important for virtual businesses because taxes, employees and

additional costs are crucial for all businesses. The following analysis is based on 10businesses in the trading industry. Since a small company is recruiting its customerstypically from the home country and later from a worldwide area a national location isconsidered as the core market.

For the location with a core market in the selected region following factors are relevant:

The taxes and other administration costs are low.Administrative costs are expected comparably small given the expected revenues.The possibility to recruit additional personnel is favorable.Public institutions are expected to provide additional sponsoring.

It is easy to find appropriate employees.

Because of the favorable growth perspectives in the chosen market and growinginvestment activities we expect to realize yearly growth rates in revenues of 15-20%given a 4% economic growth rate.


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3. Business Plan For A Trading Company

One of the key elements of a successful business in the trading industry is the selection ofgoods and good groups that are currently as profitable as possible. One key element of aprofit maximization strategy is to minimize the costs and to increase the sales volume. Thefollowing goods show the highest demand and the best profitability depending onprocurement and distribution costs on the one hand and sales revenues on the other hand.Consumer goodsTechnical equipment for consumerTechnical equipment for firmsRaw materialsUsed goods

The specific selection of services and applications offered will be monitored constantly andvary according to business needs. The selection will include low and high pricedcombinations as well as new and innovative products. This strategy provides a competitiveedge against other companies in the environment and is expected to generate an additionaldemand and the possibility for a price mark-up.

The development of warehouse and a storage system are two key elements of a successfultrading business in a national environment. To utilize the capacity external customer can alsouse storage space for their goods. Especially the following industries will show a highdemand for this service due to the fact that just-in-time delivery becomes more important.

Component suppliersIndustry companiesTrading companiesRetail companiesWholesale companies

The estimated revenue is highly correlated with the development of the whole tradingindustry.


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4. Services

Additional service offerings related to the core business are another field of business. Theavailable competence will be used for further business activities that will generate additionalrevenues. While this is not a core business segment this concept has growth potential becausethe demand for logistics and transportation services is rising. Initially the investment ininventory, technical equipment and personnel capacity of this segment is limited. Especiallythe supply of complex logistics planning with a higher priced range will require extensiveservice. This strategy will help utilize the capacity in personnel since it allows for an optimalcoordination of employees. All employees will be trained to cover all aspects of individualservices for the customer. Therefore it is necessary to have a high knowledge about theoffered services. This concept is adaptive to changes in customer demand.


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5. The Industry, Competition, and Market

A careful analysis of the market and competitive forces in this industry is a key element inassessing the business potential of our project. This analysis will provide marketing and salesdata that are indispensable to develop the business potential optimally. The main competitorsare medium and large trading companies in the national environment with a similar selectionof products and services and comparable size. Since the planned project is of national scopewith a single headquarter the competitive analysis will have to focus on the national andlocal market. The market and competition analysis will be based on the entire market.

5.1 Market Definition

Figure 5.1 shows average growth figures in revenues of typical trading companies duringthe past 10 years. Despite slowing global economic growth in general and in the mostlocal industries in particular, a lot of companies have experienced constant growth ratesof more than 15% to 20% since 1999. For 2005 a growth of 17% is expected with astrong development in the third and last quarter.

Despite decreasing customer demand the national trading industry underwent a relativelyfavorable development. New and innovative business concepts in the sector still showhigh growth potentials while growth rates of traditional businesses in that industry werebelow average. The significant growth of new business concepts is primarily due to sharpcost control and more efficient business strategies that accounted for higher revenue andearning figures. According to industry estimates 30% of such innovative businessesgained from cross-selling activities between their business segments. Sinking prices ofinput products and service costs have allowed the industry to partially compensate forslowing demand. Savings in input costs were also due to decreased labor costs. However,starting in 2006 this trend is expected to reverse and growth rates will pick up markedlydespite the uncertainty in the development of input prices and worldwide economicdevelopments.

5.2 Primary Competitors

The competitive environment is primarily determined by the choice of item groups butalso the regional location. But regardless of the selection of items high mark-ups are not


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feasible in the long run since this will attract competitors who compete away any rents.With a high density of businesses in one location businesses with the highest marginalcost will be driven out of the market. Such locations will yield a return of 12-14% onaverage. This is the expected equilibrium return in a saturated market. To further analyzethe competitive environment it is necessary to define the players in that environment. A

firm that generates $300,000 to $1,000,000 in revenues and employs 5 to 10 peopleshould regard a firm with revenues and personnel 3 times this figures as a viablecompetitor. On the product and service side, businesses with a comparable selection ofoffers are regarded competing in the same market segment. Figure 5.4 shows the size ofbusinesses in this market segment which also includes different products and servicesthat will be sold worldwide. The numbers are based on average revenues of companiesthat run their business more than five years.

5.3 Customer Profile

The specialized way of distribution and offerings are primarily targeting large nationalcompanies. A possible segmentation to identify different customer groups is bysegmentation of different lines of business. Figure 5.2 shows the demand for tradingservices from different lines of business. Numbers are based on averages per company ofa particular group multiplied by the number of companies in the respective group. Thisgives total demand share per group. As can be seen companies in the industry segmentlike car manufacturer have a high demand for goods and trading services. Also otherindustries like telecommunication and information technology have a growing demandespecially in the field of procurement. Figure 5.3 shows revenues by yearly revenues ofpotential customers. The figure shows revenues generated per profit group. Numbers arebased on the average profit per customer and the number of customers per profit group.As can be seen customers in the middle income cohort generate the highest revenuestreams. High frequented low income groups such as small and medium companiesgenerate relatively low revenue streams.


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6. Marketing Plan

In the start-up phase it is a central task of the marketing concept to establish a namerecognition and own trade mark. Later on the strategy will primarily be targeted to gain newcustomers and create customer loyalty of repeat customers. Several marketing and salespromotion strategies are available in the trading industry. Figure 6.1 shows differentmarketing elements and their use in marketing strategies as well as their estimated potentialsuccess factor. The figure can serve as a direction for the planning of a marketing and salespromotion strategy. The numbers are based on typical businesses in the trading andwholesale industry. As can be seen printed advertisements targets a large potential customergroup but at a relatively high cost. Printed advertisements in national newspapers andmagazines is regarded as very beneficial in the start-up phase to attract a large group ofpotential customers and draw attention to the range of articles offered. 49% of businesses inthe trade industry use printed advertisements and about 60% of this group regard this as themost beneficial form of marketing. Sales promotion strategies have temporary effects only.They are used at business openings primarily and offer special discounts. 49% of businessesuse sales promotion strategies frequently and 81% of the users responded that this instrumentis successful. Marketing alliances with other trading businesses to generate cost savings andincrease efficiency are used rarely. Such strategies include mutual use of marketing and webpromotion events and joint promotion arrangements. Only 45% of businesses have used theseelements and 55% of these regard this instrument as beneficial. Web and e-mail marketing isused frequently in the trading industry although this would be a relatively inexpensiveadditional effort. Direct mailings are a very efficient strategy that sends mailing to selectedcustomers or businessmen groups. Since spreading costs of such mailing are very low thismarketing element provides a useful tool for special offer promotions.

The use of marketing and sales promotions proceeds as follows: to a broad base attract newcustomers the strategy will include a combination of printed advertisements and specialoffers with opening discounts. Furthermore a group of customers will be selected for directmailings. This strategy is expected to continue for 3-4 months after which the effort will turntowards creating a customer loyalty for regular customers. This strategy is supplemented by aregular marketing strategy and direct mailings to regular customers. A marketing allianceand online advertisements will also come to use.


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7. Financial Plan

A sound financial plan is the key factor for the success of a business start-up. Investors andbanks will base their funding decision on the information given in this plan. Besides a plan ofthe financial needs this plan must insure that the business is always liquid and ultimatelyprofitable. Since the sales and earnings projections in the business plan are based onexpectations, the financial plan has to be revised and refined on a constant basis so thatdiscrepancies can be uncovered and solved instantly. The inputs for this financial plan arebased on 22 businesses of different size and market segments in the national trading industrywhich serve as a group of comparable firms as well as own estimates based on the plannedbusiness environment. Revenue estimates are conservative and expense projections include acushion for unforeseen contingencies.

The initial capital requirement is estimated to be $50,000 to $60,000. The sales margin isexpected to be 7-10% whereby each business segment contributes differently to sales andearnings. The classical wholesale segment will of all segments have an average contributionto sales in relative terms (6.5%) but given the high sales volume the largest in absolute terms.Revenues from transportation and logistic services can be differentiated into those from lowpriced single services to comprehensive and long-term transportation. The sale of services isexpected to generate a 12% to 15% sales margin while the margin from sales of storageplaces is expected to be closer to about 10%. Figure 7.1 shows the source of revenues bysegment during the start-up phase.

Depending on the initial investment sum cost and revenue estimates vary. Figure 7.2 showsthe expected relationship of cost and revenues. As can be seen the relationship is not lineareverywhere but costs decrease relative to sales at an initial investment of $50,000. Thiseffects is due to the better utilization of capacities in personnel at rising revenues at constantcost. Ifcapacity is fully utilized additional personnel must be recruited. At an investment sum of$100,000 administrative costs are expected to return to a linear relationship of sales. At saleslevels between $1,000,000 to $2,000,000 costs increase by the factor 1,85. The cost revenuerelationship is important not only during the start-up phase but also for planned furtherexpansion. Often such expansion strategies are based on this relationship. Other industriesare able to generate cost savings of 30-50% during expansion periods while for the tradingindustry this factor is close to 15%. At a specific size this relationship reverses becauseadministrative costs rise sharply. This affects small businesses between 10 and 20 employeesmost severely.

The details of the financial plan are laid out in more detail as follows:

Section 7.1 gives an investments schedule. This includes all investments necessary during thestart-up phase.

Section 7.2 gives a break-even analysis that shows revenues at the break-even point. Everyadditional sales revenue adds to profit and vice versa.


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7.2 Break-even Analysis

The break-even analysis shows how earnings rise as a function of sales. The break-evenpoint is the point at which revenues from sales cover total costs (fix costs and costs risingwith sales). This analysis is important for the development of the liquidity plan. If thebreak-even point is not achieved in the long run the business loses liquidity and maybecome insolvent. This requires that a critical amount of revenues must be generated.

At a sale revenue of $600,000 and given fixed costs the business will generate a profit.Fixed costs are estimated at $120,000 to $130,000 and variable costs at $480.000.

At a realizable revenue of $1,000,000 after 2-3 years profits will rise to $70,000 pre-tax.This represents an earnings margin of 10% pre-tax and 7% after-tax. These estimates arerealistic in this market segment. Increasing sales volume will increase pre-tax earningsmargins but this development reverses when administrative costs begin to rise sharply.Up to a sales volume of $3,000,000 earnings margins rise to 12.5% after which the


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margin decreases to constant 11.5%.

Figure 7.3 shows at which critical sales volume the business generates a profit. Thisserves as a base for a pricing strategy. Additionally the graph shows the amount of salesat which a marketing campaign can be run profitably.

7.3 Liquidity Plan

The liquidity plan shows the amount of finances necessary to assure permanent liquidityof the business. The plan is based on 4 representative months of a typical business with 3to 5 employees, annual sales of $1,300.000 and net profits of about $300,000. Revenue

estimates are drawn from a standard normal distribution.


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7.4 Earnings Plan

The earnings plan shows the results from ordinary operations. The plan is based on thefirst 4 years of business. Revenue estimates are drawn from a normal distribution with anestimated growth rate of 20 to 30%. Figure 7.4 shows profit over time.


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7.5 Risk Analysis

The risk analysis considers critical factors that may lead to a failure of the businessconcept. Such factors can involve failures during the implementation phase as well asduring operations. Such potential factors are ordered according to the probability atwhich they can arise. Shown is the key factor that led to the failure only. Data are drawnfrom questionnaires of 10 trading businesses with comparable product offerings andrevenue- and cost structures that went bankrupt during the last 3 years as well as analysesof different research institutes.

1. Insufficient demand: This is the most frequent reason that leads to businessfailure. This includes permanently low demand as well as a temporary collapse indemand. Often demand estimates were too optimistic at the outset. Such failures mightalso come from external shocks instead of operating deficiencies. 19% of businesses withinsufficient demand go bankrupt. 50% of these businesses report that once demandslacked they did not react accordingly because they believed that this phenomenon wasonly temporary. Since the expected frequency of customers during the start-up phase are


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still low a critical success factor is to focus promotional effort so as to generate customerloyalty early on which will help minimize the effects of demand fluctuations. This is alsoimportant for the future development of the business.

2. Behavior of Competition: Due to low entry barriers additional businesses can

enter the market at low cost. Approximately 16% of insolvent businesses were driven outof the market by that competition. A better service concept, innovative ideas andconcentration on core businesses are an easy means for an entrant to gain a competitiveedge.

3. Personnel and capacity utilization: Often personnel capacity cannot be adjustedflexibly easily when demand slows down. Currently wholesale businesses have acapacity utilization rate of personnel of 70%, i.e. 70% of employee working hours can bedirectly credited to sales. At small businesses this value is often lower which means that30% of working hours arise without generating any further revenue. 13% of suchbusinesses go bankrupt for this reason.

4. Liquidity constraints: Another frequent reasons for bankruptcy is in sufficientliquidity. In that case it is possible that all liquid funds are used to cover losses or thatliquidity needs were planned too tight. To be able to flexibly react to changing liquidityneeds it is important that sufficient funds be planned even during the start-up phase thus5-10% of the investment sum should be held as liquidity reserve permanently. 13% ofinsolvent businesses reported liquidity as the reason for bankruptcy.

5. Over-indebtedness: Many business are run on a small equity base. The majority ofinvestments are funded by debt. If the business becomes unprofitable, debt obligationscannot be covered. Little more over 10% of insolvent firms reported over-indebtedness as

the reason for going bankrupt. It is therefore important that a share of earnings is retainedfor debt service.

6. Macroeconomic Conditions: In a cyclical downturn revenue expectations my notcome in according to expectation. Although this factor does not affect the business initself it does have an impact on profitability, liquidity and leverage. Cost remain constantduring such period but revenues typically decrease which affects overall profitability.10% of all insolvent businesses report that they went bankrupt due to macroeconomicconditions although the relevant indicators of the business looked healthy.

7. Location and market: The market of the business and the selection of the right

potential customers is an important success factor and one of the fundamental decisionsthat have an impact on the future prosperity of the firm. Therefore a careful analysis isnecessary. More than 10% of insolvent businesses reported that they went bankruptbecause of the wrong market selection. Often start-ups did not consider that even whenthe choice of market may not be wrong at the outset it may later become so wheneconomic conditions worsen. This may be due to structural changes or different interestof customers.


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8. Wrong Business Decisions: Often wrong business decisions and difficultsituations go unnoticed for some period which can lead to a failure of the business. Acritical and independent reflection of a decision are critical factors to determine the valueof a management decision and evaluate the business' profitability. Studies have shownthat many businesses fail in their start-up phase because of managements inability to

make sound business decisions while one a business is settled such mistakes are veryrare. A critical management instrument is the ability to detect potential failures andproblems. Certain key figures can help measure this ability and allow to objectivelydetermine a decision's chance for success. Small businesses should use such indicatorratios to assess their business outlooks.

Figure 7.5 shows the relative importance of each factor for businesses that went bankrupt.The numbers are based on the most relevant reason that triggered bankruptcy but not thereason responsible for bankruptcy. As can be external factors that changed thecompetitive environment and changing macroeconomic conditions were the mostimportant reasons relative to internal factors.


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8. Conclusion

Trading and logistics services are a growing business that shows a positive dynamic between4% to 5% per year for the next few years depending on the national demand. Thecompetition in this field of business shows a low development with high entry barriers. Onlyfew companies operate in this field of business.

The relatively modest investment requirements and running costs (compared to industrybusinesses) are a favorable argument since external funds from banks becomes more difficultsince the risk aversion to finance such ventures has risen. A company with specificknowledge and innovative ideas has good chances to move into profitable market niches andrun a successful business. Market conditions change constantly as do customer demands.This is the chance for businesses with innovative ideas and new offerings to secure adependable customer basis. Service is a critical factor that can earn a competitive edge. Thisis also true for new trends in the industry to better control costs and increase efficiency.

For a successful operation of a trading 5 factors are critical and central for the businessstrategy:

- In the national trading industry it is important that the customer experiences acomprehensive and competent logistics service. This will secure customer loyalty in amarket that is very fast and competitive.

- The utilization of personnel capacity is critical for the long-term profitability because ofchanging margins and the constraints to flexibly reduce personnel. Therefore the additionalselling of transportation and logistic services is a further segment of the business that isintegrated in the sale of the whole business process.

- A carefully selected assortment of goods as well as the selected choice of new technologiesis a potential to gain a competitive edge against competitors. Furthermore a service thataims to give the customer an added value through new services can justify price mark-ups.

- A critical factor in the trading industry is quality management. Better quality at lower costincreases customer satisfaction. Deficiencies in service quality can lower demand whilegood service quality can help create customer loyalty.

- Cost management is a critical success factor for businesses in industries where margins arelow. Computer aided planning is an integral part of cost management.

business plan trading company

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