Creating New Foods. The Product Developer's Guide

CREATING NEW FOODS
THE PRODUCT DEVELOPER'S GUIDE

CHAPTER 6
Product Commercialisation

6.11 FINANCIAL ANALYSIS

By this stage costs are more accurate. Predictions can be made of costs at different production levels and of the sensitivity of costs to changes in raw material prices, energy prices and personnel wages. The price range and the different types of discounts necessary will have been confirmed. This means that the profit per unit can be predicted.

Also the sales of units at the launch and in the future will have been predicted from the test market, so the total sales revenues over time can be forecast. From the sales and costs, the profits can be determined and the cash flows for the next few years set out.

Financial analysis is vital before the decision is taken to launch the product. Product development requires adequate resourcing, paid for through financing which has to be planned.

Both the capital investment and the working capital investment are determined for the launch and also to support the future.

It may take some time before the cash flow becomes positive and there needs to be cash available to overcome this. For small companies failure in new product introductions is often the result of insufficient cash reserves or an inability to borrow money to sustain the project through this period of loss.

The return on investment can be predicted and compared with the company's policy. Usually discounted cash flows are used in analysing the return on investment.

The risk is also assessed by setting probabilities on the most pessimistic, most likely and most optimistic cash flows.

Important aspects of financial analysis are:

Finance quantity, in that sufficient capital or credit has to be assured to meet the total costs of the project as they arise and as the project progresses. In a large organisation, this may be met from R&D budgets, by effectively borrowing resources from other operational parts of the company, through short-term credits from suppliers, overdrafts and so on. Smaller organisations may have to formally borrow from outside, even set up a new corporate structure and raise external funds by the sale of shares. In any event, what can be thought of as the project balance sheet has to balance. In the longer term it is expected to generate profits and pay its way in full.

Finance quality, in that the cash is provided when the need occurs. Each time a decision is made to proceed a further step with the project, new resources are committed, and when these are actually bought, appropriate payments must be made at that time. It should be borne in mind that new steps are generally more costly than those taken already, that the launch is probably the most costly, and that income only comes after sales. Negative cash flows will accumulate and accelerate and the debt balance is expected to peak around launch time.

Working capital must be adequate to pay for work in progress, production, marketing, storage, distribution, wages and overheads. It is easy to underestimate and if insufficient can lead to cutting the very corners which are essential to the speedy conclusion and success of the project.