North Country Organics – Business Plan
1.0 Introduction
54 North Agri-Foods, Tisdale, SK.
54 North Agri-Foods is made up of two Saskatchewan farm families looking at ways to
diversify or create supplemental income for their families. 54 North Agri-Foods is
looking at developing an organic product that can be manufactured in the Tisdale district.
To help answer some of 54 North Agri-Foods questions, we have developed a business
plan for an organic cracker facility.
Over the past several years decreasing grain prices, along with unpredictable weather on
the prairies have left farms wondering what they can do to generate alternative income
for their families. By diversifying the farming operation with another source of income,
54 North Agri-Foods believes that they can surpass these tough times on the farm. By
creating an alternative business along side the farm, they feel they would not have to
worry about unpredictable farming situations on the prairies.
54 North Agri-Foods feels that there is an increasing market for organic foods. In studies
conducted by the Hartman Group, organic food consumption is increasing at a rate of
about 20% per year. From this 20% growth, studies show that 1% of all consumers buy
organically grown products at least once a week. Considering the number of people in
North America, this could be a profitable venture for anybody interesting in taking the
risk of setting themselves up in an organic processing business.
1.1 Current Study Objectives
The goal set out by the 54 North Agri-Food Company is to subsidize their prairie farm by
setting up an organic manufacturing facility. This project will attempt to develop a
business plan for an organic cracker facility. With in-depth research of the exact target
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North Country Organics – Business Plan
market for organic crackers, we hope to prove that it is feasible to start up your own
facility in Saskatchewan and tap the organic marketplace. The idea behind the facility is
to take organic flour and turn it into an end product, which will be marketed towards the
niche organic markets of California.
Goal: To determine the feasibility of, and complete a business plan for an
organic cracker facility situated in Tisdale, Saskatchewan.
Objectives:
1) To establish an operations plan for a organic cracker facility;
2) To establish a human resource plan which covers all employment needed
for the facility to function sufficiently;
3) To establish a marketing plan which deals with product, place, promotion,
and price; and
4) To establish a financial plan to anticipate financing, costs, risk analysis,
and economic returns (IRR and ERR) over the next ten years.
Throughout this plan, the name North Country Organics is used in place of 54 North
Agri-Foods. This name change was suggested for marketing purposes to better position
the company in the organic foods market.
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North Country Organics – Business Plan
2.0 Industry Overview
2.1 Organic Industry in North America
The idea of organic food consumption has been around for many decades. As
populations grow in North America, so does the idea of being a health conscious
consumer. Therefore the organic food industry is increasing in popularity across North
America. “The organic market is growing at an impressive rate. Retail sales in the
United States are expected to top $20 billion by 2005, up from just $1 billion in 1990.
Organic food sales have grown a whopping 20% per year during the past 10 years,
compared to 1% per year for the food industry overall,” (All things Organic 2002).
Consumer demand for organically produced food is on the rise and provides new market
opportunities for farmers and businesses around the world, according to a new report
from the United Nations Food and Agriculture Organization (FAO).
2.2 The Culture
North Country Organics (NCO) has seen that a large number of North Americans are
becoming more interested in their health and wellness. "This yearning expresses itself in
new attitudes, changing behaviors and a deeper appreciation for the importance of
nutrition, exercise, community involvement, nature, spiritual practice, femininity and
ecological health,"(The Hartman Group). This type of cultural change has a large affect
on the baby boomer generation. As this generation has moved into their middle age they
have become more interested in preventing health problems through healthier foods.
Cultural values are changing in society today. Cultural values are evolving to emphasize
health, nature, community, and spirituality. Therefore from a cultural prospective the
demand for natural and organic foods is on the rise.
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2.3 The Market
Based on ten years of consumer and trade research, The Hartman Group has determined
that the "natural" or "green" consumer is now mainstreamed. This shows that buying
organic food is not just a fad but it is an indicator of deep-rooted cultural and lifestyle
changes occurring in North American culture.
16
14
Billions (US$)
12
10
8
6
4
2
0
1990 1991 1992 1993 1994 1995 1996 1997
Years
Natural Product Sales
Figure 1. Growth in the Natural Food Products Industry (Revenues in $ billion)
Source: The Hartman Group
Figure 1 represents the large increase in the demand for natural products across America.
From this figure it is safe to say that the demand for organic products has the same
upward slope and this is simply because society is shopping and eating healthier. It is
evident that natural and organic products are now available is just about every
conventional retail store including pharmacies and supermarkets. This is because there is
a large demand and profitability of organic foods. This large rise in the demand also
comes from the differentiation in the products offered. Now there are more products with
better quality and reduced prices, which indicates that the market and industry is
developing. The bottom line is that the industry is growing at a rapid pace; therefore it is
a good business decision to try and access this market.
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3.0 Operations Plan
3.1 Cracker Production
North Country Organics will be marketing whole-wheat organic crackers produced by a
highly automated biscuit manufacturing line. The operating schedule in year 1 will be a
10-hour per day, 4-day workweek. To produce enough units to meet the estimated sales
level of year one, the plant will operate ten months of the year. The maximum capacity
of the plant is approximately 3 million boxes per year. This is well above the year one
sales estimate of 864,000 units, leaving room for rapid market expansion.
3.2 Product Composition
The crackers are composed of organic soft white wheat flour, baking powder, salt, canola
oil, and water. Each finished unit is a tin box containing two plastic sheaths filled with
350 grams of organic, whole-wheat crackers.
3.3 Ingredient Receiving and Handling
On an average manufacturing day 5230 boxes will be produced. This is based on a ten-
hour working day with the manufacturing line being in operation for 80% of that time,
while the remaining 20% of the time is used for cleaning and maintenance. Operating at
this pace on a 4-day week, monthly output will be approximately 91,000 boxes. To
operate on this monthly schedule, ingredient requirements will be approximately 20
tonnes of flour, 16-25kg bags of baking powder, 13-25kg bags of salt and 4 tonnes of
canola oil. Water is also needed in the process, which will be supplied by wells on site.
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All flour is milled using organic soft white wheat. Flour is sourced in bulk form from
Hayhoe Mills Ltd. in Woodbridge Ontario and will be delivered by Super-B truck every
29 days. The flour will be stored in a 50 tonne epoxy coated steel bin. Salt and baking
powder are purchased from Dawn Foods (Saskatoon) by the pallet, which contains 36-
25kg bags. One pallet of baking powder will be delivered every 67 days and one pallet of
salt every 85 days. Baking powder and salt will be stored in raw ingredients inventory.
Refined canola oil is purchased from ADM Agri-Industries in Lloydminster, Alberta. Oil
will be delivered by bulk truck every 56 days and stored in a 2000-gallon stainless steel
tank.
3.4 Production Process
The cracker production process involves a highly automated manufacturing line
composed of multiple pieces of machinery (summarized in Figure 2 below). There are
four main steps in the production process including fermentation and mixing, forming,
baking, and product handling.
Ingredients Mixer Dough Laminator Gauge
Feeder Rolls
Salt
Finished Sprinkler
Product
Packager
Rotary
Cutter
Stacker Cooling Oil Oven Panner
Conveyer Sprayer Web
Figure 2. Cracker Manufacturing Process
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3.4.1 Mixing and Fermentation
The first step in the mixing process involves the flour, baking powder, salt, a portion of
the canola oil, and water being dumped into the mixer. Flour is put in first, filling the
mixer up to a pre-specified level. Salt and baking powder are each weighed and added
into the mixture. Part of the canola oil is metered out of its storage tank and pumped into
the blend. The latter part of the oil will be sprayed directly on the baked crackers near
the end of the process. Finally, water is metered out of its storage tank and pumped into
the dough mixer. Two members of the production staff will perform ingredient handling.
After the initial mixing step the remainder of the process is automated. The ingredients
are mixed in the single blade high-speed mixer (Figure 3) then fed through the dough
feeder to the beginning of the forming process.
Figure 3. Dough Mixer Figure 4. Dough Laminator
Source: New Era Machines Source: New Era Machines
3.4.2 Forming
The wet dough mixture is received from the dough feeder and sent through the dough
laminator (Figure 4). The dough laminator essentially receives the raw dough and
flattens it into a homogenous sheet. From here the dough is sent through gauge rolls,
which reduce the thickness of the continuous dough sheet to a specified size. Following
this step, the continuous sheet of dough will pass through the salt sprinkler (Figure 5)
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where salt will be sprinkled on the top of the sheet. After being salted, the sheet of dough
proceeds through the rotary cutter (Figure 6) where the sheet is cut into individual
crackers.
Figure 5. Salt Sprinkler Figure 6. Rotary Cutter
Source: New Era Machines Source: New Era Machines
3.4.3 Baking and Oiling
Following the rotary cutter, the panner web transfers the cut dough pieces onto the oven
belt. The raw crackers then pass through a gas fired tunnel oven (Figure 7) where they
are baked, losing approximately 27%1 of their original raw weight. The stripper unit
immediately receives the baked crackers from the oven and sends them into the oil
sprayer (Figure 8) where each cracker is sprayed with a fine mist of canola oil. At this
point the crackers are still very hot and require about two and half minutes of natural
cooling. To do this, the hot crackers exit the oil sprayer and enter the cooling conveyer
system. This system is simply a long belt that transports the cooling crackers to the
stacker.
1
In conversation with Connie Perron, Department of Applied Microbiology and Food Science University
of Saskatchewan
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Figure 7. Gas Fired Tunnel Oven Figure 8. Oil Spray Machine
Source: A.R. Enterprises Source: New Era Machines
3.4.4 Product Handling
The stacking machine (Figure 9) collects crackers from the cooling conveyer, forms them
into rows and places them into stacks. The stacks then move into the cracker-packaging
machine (Figure 10), which seals the desired length of crackers in a plastic wrapper.
Two plastic sleeves of crackers will then be put in each tin box, put in cases, and stacked
on pallets. From here the pallets will be transported by forklift to finished goods
inventory storage. Three members of the production staff will oversee packaging and
storage.
Figure 9. Stacking Machine Figure 10. Packaging Machine
Source: New Era Machines Source: New Era Machines
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3.5 Shipping
Operating on the 10-hour day, 4-day workweek, the plant will produce approximately one
semi load of product every two weeks. If the cracker market experienced continuous
demand, a load would be shipped every two weeks. Since market demand will probably
not occur in this continuous fashion, the plant production schedule will have to operate
accordingly. If a slump in demand is experienced, plant shutdown will be mandatory
until demand picks back up. If there is a sudden increase in demand, production can also
be increased. This would be done by increasing the number of production hours in a day
from 8, to as many as 22. Operating days in the week can be picked up from 4 to 7.
Input suppliers are re-assuring that there will be ample supplies available, so ingredient
requirements will not be a problem. The high output nature of cracker production gives
the firm the opportunity to maintain a relatively low amount of finished goods inventory.
North Country Organics major market is California, with the San Francisco Bay area
being the main target. The distance from Tisdale to San Francisco is 2,067 kilometers.
Although this is a rather long distance, freight costs per box are calculated to be
approximately $0.092. This low freight cost is due to the competitive nature of the
trucking industry and back-haul availability to California. Much of Saskatchewan’s fresh
produce consumption is delivered by truck from California. This enables the firm to
access economical back-haul rates and be able to depend on truck availability.
2
Based on $1.57 per loaded kilometer
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3.6 Land and Utilities
3.6.1 Land Purchase
The plant will be situated 2.5 miles north of Tisdale Saskatchewan on Highway #35. 12
acres will be purchased for $10,250. The site was chosen because of 54 North Agri-
Foods current location; as well it is situated directly adjacent to a well-maintained
highway.
3.6.2 Electricity Installation and Consumption
Electricity is a major factor in the cracker production process. All electrical installation
costs are included in the cost of the building. The cracker manufacturing equipment
accounts for approximately 95% of the annual electricity bill, which totals $105,1153 in
year one of operation.
3.6.3 Natural Gas Installation and Consumption
Natural gas installation accounts for $12,5004 of the total building cost. Natural gas is
used to heat the buildings and bake the crackers in the gas-fired oven. The oven
consumes approximately 65% of the gas usage in year 1.
3.6.4 Water System
The plant’s water consumption in year 1 is approximately 35,000 gallons, which includes
both office use and ingredient requirement. The water will be supplied by an on-site
well, or in the event of a dry well, water can be trucked in. Water is purified through a
reverse osmosis machine and stored in a 454-gallon water tank.
3
Sask Power, based on machinery specifications provided by APV Baker
4
Sask Power, based on specifications provided by APV Baker
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3.7 Project Development
3.7.1 Building Site Plan
Loading Docks
H
I Office
G Production
H Plant
W
A
Y
35
Parking
Flour Storage
Figure 11. Proposed Site Plan
3.7.2 Building Costs
The production building is 120 feet long, 40 feet wide, and 20 feet tall (4800 square feet).
The long and narrow shape of the building is due to the nature of the cracker
manufacturing equipment housed inside. It is an insulated steel structure building fully
finished with electricity installation and natural gas heating. An office building is
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North Country Organics – Business Plan
attached to the side of the main production building. The fully finished office building is
60 feet long, 30 feet wide, and 10 feet tall (1800 square feet). Total cost of the buildings
is $372,9655. Approximately 60% of this cost is for the production building, with the
remaining 40% for the office.
3.7.3 Building Floor Plan
10
1
8
Main 2 9
Entrance
0
3
5 4
0) Reception/clerical assistant
1) Washroom
2) President 7
3) Account Manager
4) Marketing Manager
5) Lounge
6) Flour storage bin 14
7) Production line
8) Packaging line
9) Cracker storage
10) Loading docks
13
11) Water tank 12
12) Ingredient storage (with oil
tank)
13) Shop/misc
14) Plant Manager 15 11
15) Water distiller
6
Figure 12. Proposed Floor Plan
5
Graham Construction, Saskatoon SK
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3.8 Equipment
3.8.1 Cracker Manufacturing Equipment
The cracker industry is rather concentrated with a few large players providing most of the
output. This has caused cracker-manufacturing equipment to become bigger to suit the
needs of its customers. The capacity of new equipment can be quite over whelming to a
new entrant. North Country Organics firm selected smaller scale, commercial classed
equipment, which still exceeds the initial required capacity. Commercial classed
equipment is generally regarded as automated, minimal labour input machinery6. Having
room for extra capacity allows the firm room for rapid market growth and to practice
minimum inventory management. The cost of new cracker manufacturing equipment can
be very costly; therefore a used line of equipment was sourced for a value of $893,5507.
3.8.2 Additional Equipment
Equipment requirements for the rest of operations are relatively small after the purchase
of the cracker manufacturing equipment. The packaging machine described in section
3.4.4 will have an approximate cost of $50,000. Bulk ingredient storage equipment
includes the flour storage bin with a cost of $88508, and a canola oil storage tank with a
cost of $72009. The water supply system, which is composed of a well, reverse osmosis
water purifier, and a 424-gallon tank, will have a total cost of approximately $8,80010. A
used tractor to perform yard maintenance is valued at a cost of $14,00011. This tractor
includes a mower and blade, which will mow grass in the summer and clear snow off the
roads in the winter. A forklift is also required to move pallets of finished product from
the end of the packaging line to finished goods storage. It would also be used in
6
In conversion with Mike Whaley, Biscuit Equipment Inc.
7
Biscuit Equipment Inc., Ellerslie, Georgia
8
Flaman Sales Ltd., Saskatoon SK
9
Nelson Machinery and Equipment Ltd., Vancouver BC
10
Waterworld, Wadena SK; Flaman Sales Ltd., Saskatoon SK
11
Jay-Dee Equipment, Swift Current SK
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unloading shipments of baking powder and salt, and to load trucks with finished product.
An electric forklift, with a cost of $9,50012, was selected in order to keep low emissions
in the production plant.
Office equipment including computers, computer hardware and software, fax machine-
photocopier-printer, filing cabinets, desks, and chairs were estimated at a total cost of
$28,00013. The entire equipment requirements for operations are summarized in Table 1
below.
Table 1. Estimated Cost of Equipment
Type of Equipment Estimated Cost
Mixer
Dough Feeder
Laminator
Gauge Rolls
Salt Sprinkler
Rotary Cutter 893,550
Panner Web
Oven
Oil Sprayer
Cooling Conveyer
Stacker
Packaging Machine 45,000
Reverse Osmosis 8,000
Water Tank (424 gal) 800
Oil Tank (2000 gallons) 7,200
Flour Bin (50 tonne) 8,850
Forklift 9,500
Yard Tractor 14,000
Office Equipment 28,000
Total Equipment Cost 1,014,900
12
Liftway Material Handling Solutions, Brantford ON
13
Office Depot, Saskatoon SK; Staples, Saskatoon SK
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3.9 Cost of Goods Manufactured
The cost of goods manufactured is the total cost for all direct inputs used in the cracker
production process. These costs include direct materials used (flour, canola oil, salt,
baking powder, and packaging), direct labour used (production staff), and manufacturing
overhead (utilities). These costs for the first six years of operations are illustrated in
Table 2.
Table 2. Cost of Goods Manufactured
2003 2004 2005 2006 2007 2008
Direct Materials Used 625,492 672,404 722,834 777,047 835,325 897,975
Direct Labour Used 173,937 178,286 182,743 187,312 191,994 196,794
Manufacturing Overhead 268,565 373,923 347,258 328,802 317,189 311,340
Cost of Goods Manufactured 1,067,994 1,224,612 1,252,835 1,293,160 1,344,509 1,406,109
3.10 Operating Expenses
Operating expenses for the business include all other costs not included in the cost of
goods manufactured. All operating expenses for the first six years of operations are
summarized in table 3.
Table 3. Operating Expenses
Expenses 2003 2004 2005 2006 2007 2008
Communications 14,500 15,588 16,757 18,013 19,364 20,817
Salaries (SG &A) 353,700 362,543 371,606 380,896 390,419 400,179
Benefits (SG &A) 34,592 35,457 36,343 37,252 38,183 39,138
Start up Expense 40,000 - - - - -
Marketing Expenses 1,592,607 1,672,237 1,755,849 1,843,641 1,935,823 2,195,224
Broker/Importer 199,076 209,030 219,481 230,455 241,978 274,403
Shelf Space charge 96,000 98,400 100,860 103,382 105,966 108,615
Office Expenses 2,500 2,688 2,889 3,106 3,339 3,589
Transportation Costs 73,440 79,040 82,992 87,141 91,498 96,073
Interest - LT Debt 56,000 52,134 47,959 43,451 38,581 33,322
Total Expenses 2,462,414 2,527,115 2,634,736 2,747,337 2,865,151 3,171,359
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3.11 Summary of Capital Budget
The total capital cost of the operation including land, buildings, and equipment is
$1,448,115. The capital budget is summarized in table 4.
Table 4. Capital Budget
Land $ 10,250
Buildings $ 372,965
Equipment and installation $ 1,064,900
Total Capital Cost $ 1,448,115
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North Country Organics – Business Plan
4.0 Marketing Plan
4.1 Mission Statement
The mission of North Country Organics is to produce an organic alternative for the snack
food marketplace. North Country Organics will enter the market with a lot of marketing
and slowly evolve as the premium organic cracker on the shelf. North Country Organics
product will be known for it’s taste, it’s healthiness, and it’s prestige and will fit the
brand developed from the marketing activities.
4.2 Marketing Objectives
Three key marketing objectives are:
To develop markets for an organic cracker in California
To build a prestigious brand that will be recognized by a loyal customer base
To expand production and marketing as the organic market grows
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4.3 Situation Analysis
Table 5. SWOT Analysis
Strengths Weaknesses
Premium Canadian organic product High start up costs
Low input costs Finding investment funding
Differentiated packaging Location (distant from market)
Few employees Customs paperwork
Location (cheap land & labour) High non-organic competition
Educated employees
Competitive price
Opportunities Threats
Low transportation cost Amount of organic flour available
Low competition Other companies may enter
Relatively new market Truckers go on strike
Opportunity for product expansion to fit Vulnerable to recession
clients needs Strong substitute brands
Opportunities to enter new markets Other companies may expand
4.3.1 Strengths
A good strength of the firm is low input costs. Since the crackers are made on an
automated manufacturing line, the plant can operate with few employees. With fewer
employees labour cost will be low, which is very beneficial to the firm in the long run.
Given the plant location, labour and land costs are cheaper than setting up operations in
California. The last strength of the firm is the potential to increase production. The
cracker production facility is not running at full capacity and therefore there is potential
to increase production with larger demand. The facility is set to hold enough raw
materials for a two-month period of production. The final product is priced lower than
the direct competition. This is a good strength, helping to establish the product in a new
market.
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4.3.2 Weaknesses
The major weakness of the firm is the amount of start up cost required. Equipment and
land will cost $1,075,150 to purchase. The building and facilities will cost $372,965,
which includes utilities and hook-ups. The total capital required to get the business
started is $1,448,115. This is a high start up cost and it may be difficult to raise sufficient
financing. This brings up another weakness of finding investors. It may be difficult to
find investors in Saskatchewan for a product selling in California. Since this is a newer
market, potential shareholders may perceive substantial risk and therefore be hesitant to
invest. Although the firm’s distance from market is somewhat of a weakness the low
freight cost per unit helps offset it.
4.3.3 Opportunities
Although there is already some direct competition, the organic cracker market is
relatively new. The organic food market is growing at a rate of 20-24% annually, which
means the business has a great opportunity to expand with the market growth. This
rapidly growing market, along with the fact that the target market population is growing,
justifies North Country Organics operation size. The operation size also gives North
Country Organics the opportunity to meet retail demand. There is also an opportunity to
expand the product line into markets that already exist. Examples of these products are
different flavours of organic crackers, and organic baby crackers. These markets are also
relatively new, giving North Country Organics the opportunity for successful market
penetration.
4.3.4 Threats
There is a small threat of an organic flour shortage. Flour made from organic soft white
wheat is imported from Ontario, and in the event of a major shortage, the firm would
have to find an alternative source. This is a small threat because the amount of flour
needed is very small at 240 tonnes per year. There is also a threat is of substitution.
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There are some very well established non-organic crackers companies in the market.
Even though they do not currently produce an organic cracker they could produce them
much cheaper than North Country Organics if they opted to enter the market. This is due
to the large economies of scale they would realize, and the fact that they already have a
recognized national brand. Another threat is that NCO’s product is vulnerable to
recession. This means that if the economy is in a downward spiral NCO’s product, a
premium priced organic cracker, could be substituted for a cheaper non-organic cracker.
4.4 Competition
Competition in the organic cracker market is minimal because the market is relatively
new. The main competition in California is Devonsheer Organic Crackers. They are
based out of Ventura California, which is a huge marketing advantage for them. A box of
Devonsheer Organic Crackers is $6.99 a box in U.S. dollars. This is considerably higher
then what North Country Organics will sell a box for. Another organic cracker company
is Basca Organic Crackers. Basca makes a cracker similar to a Ritz cracker. It sells for
$5.00 a box in U.S. funds. Other companies, which are not organic but create huge
competition are, Nabisco (Triscuit’s, Ritz) and Breton Wheat Crackers. These companies
have very well established brands and hold a large portion of the market share. Although
these companies are not organic, they can be easily substituted for NCO’s product.
4.5 Target Customer
Active and health-conscience individuals represent the organic consumer base. The
customer whom NCO will target for our marketing strategy is a health conscience
consumer. Since NCO’s product is a premium product it is priced higher then ordinary,
non-organic, crackers. With that, the target base is the customer who is in the high-
income bracket. These customers are willing to pay a premium price for a product that
does not give up taste, but increases in health. The market segment will include the post
secondary education students up to the adults in a professional occupation. The range in
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age will vary from 22 years old and up. Included in the young adult segment are young
adults with families. Parents tend to be more health conscience then single adults.
Another segment is the older citizens who are very health conscience and shop
organically regularly.
4.6 Product
North Country Organics physical product is an organic whole-wheat cracker. This
product is made up of the following ingredients:
organic flour
salt
baking powder
canola oil
water
The product NCO is selling is not just a cracker, as it includes many intangible
characteristics. The crackers are packaged in an elegant tin box that represents prestige
and wealth. To catch the eye there will be a colorful design that covers the box. A
farmyard with a wheat field will make up the design. The tin box is a marketing
technique NCO believes can influence the decision of a customer between NCO’s
product and the competition. Although the packaging is far more expensive then the
cardboard box, NCO believes that as a new company they needed something to give them
the edge over other premium crackers. The idea behind the tin box is that it will be kept
at home and used for decoration or to store other things after the crackers are gone. This
is in house advertising, without an expense to NCO.
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4.7 Sales and Profit Objectives
4.7.1 Sales Objectives
North Country Organics sales objective is to sell the product into California. The
transportation costs are not high because of the back hauls that other grocery store trucks
are making to California. The organic crackers will be sold through the Whole Foods
organic food market chain. The first year of production NCO has a sales target of
864,000 boxes of crackers. NCO plans on increasing the sales output by 5% each year.
NCO believes that this is possible due to the organic market growth in United States,
which is expected to be steady at 20-24% annually for the next five years14.
4.7.2 Profit Objectives
The objective of North Country Organics is to generate a profit. The return on
investment should be high because it is a high risk business. Thus NCO’s profits should
be greater then the opportunity cost of using NCO’s money in other investments. North
Country Organics net earnings in the first year are $332,915 and increase’s steadily each
of the following years.
4.8 Channels of Distribution
In the food business it would be most desirable for the product to go from the producer to
the retailer without a broker. In NCO’s situation it would be very difficult not to use a
broker because of the location of the factory and the market. The broker will handle all
importer/exporter-related issues and paperwork. They will also provide warehouse
storage in California, which will secure the cracker supply chain in the event of
transportation problems. The crackers will be produced in Tisdale, SK and shipped to
California by truck. The consumer will then purchase the product from the super market.
14
U.S. Organic Information Standards, U.S. Embassy
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North Country Organics – Business Plan
4.9 Pricing
North Country Organics product is a classic example of a differentiated product
commanding a premium price. NCO’s product will come in a 350-gram box and will sell
the product to the super market for $2.99 US dollars. The super market would mark up
the price 50%15. The consumer would then pay $4.49 USD for a box of crackers. The
amount NCO would receive is $2.99 USD, which converts to $4.61 CDN (FOB
California). Approximately $0.08 CDN will be subtracted for freight, giving a wholesale
price of $4.53 FOB Tisdale. In the year 2008 NCO will increase the price by 8%.
NCO’s policy is not to increase price until they have a well-established brand. They
believe by the year 2008 their brand will be well established and they can increase their
price to $4.98 Canadian dollars from $4.61. The primary reason for the price increase is
to compensate for their expenses that have been increasing due to inflation.
4.10 Place
NCO’s geographical target markets are mainly the Southwestern United States coastal
areas. The area from San Diego up to San Francisco accounts for the majority of
California’s population. The California population represents one of the world’s largest,
most diverse populations. With over 34 million people living in the state, the opportunity
to market a high volume of product is very evident. With the nature of NCO’s high
output equipment, this is an ideal market for them. Without the California market it
would be very difficult for NCO to market their entire production and realize the
economies of scale that are possible in the operation. Within the California market NCO
will focus its resources on the San Francisco Bay area. This area, which houses over 12
million people, is the geographical area that best represents the targeted consumers.
Initially, one might think that it is not economical to produce something in northwestern
Saskatchewan and ship it to southern California, but after conducting logistical research it
has been found otherwise. A useful part of today’s food industry is the fact that countless
15
Whole Foods Market Inc, Austin TX
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 24
North Country Organics – Business Plan
freightliners bring fresh produce up to Saskatchewan and return back to their origin
empty. This current situation allows NCO to take advantage of the competitive nature of
the trucking industry and get lower cost “back haul” rates to California. With the size of
today’s’ freight liners, NCO will be able to fit tens of thousands of units on a single truck,
resulting in a very low freight cost per unit.
After assessing NCO’s estimated production, it became evident they will need a major
grocery retailing chain to sell their products. NCO’s targeted grocer is Whole Foods
Market who is the largest retailer of natural and organic foods in California. Whole
Foods is exactly the type of retailer NCO needs to make their venture feasible. Whole
Foods is a supermarket of natural and organic specialty foods that sell at premium prices.
Whole Foods operates over 120 stores in the United States, with a very large proportion
of those being located in our target market area. Having Whole Foods as the main grocer
would make many aspects of the business much more efficient. By simply having NCO
product placed on the shelf, NCO is marketing their crackers as a premium product.
4.11 Promotion
Table 6. Marketing Costs
Marketing Activities Year 1 cost
Website $37,500
Brochures $10,477
Free products and coupon discounts $404,227
Telephone $1,057
Magazine Advertising $172,760
Convention and trade shows
$60,907
(includes materials and travel)
Marketing Agency Budget $906,286
Total $1,592,607
The promotion of NCO’s products will be an important part of the marketing strategy.
Entering a new market, brand establishment will be an essential component of the
marketing strategy. To begin this, three major food trade shows will be attended. The
first show is called NASFT Winter International Fancy Food and Confection Show. This
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 25
North Country Organics – Business Plan
show is held in the Moscone Centre in San Francisco California, running from January
20-22, 2003. This is the 20th annual show that displays a wide arrange of specialty foods.
The second fair is called the Natural Products Expo West. This is an annual event that
runs from March 7-10, 2003 and is located in the Anaheim Convention Centre in
Anaheim California. This show provides great opportunity for NCO to gain exposure
because it is for natural and organic foods only. The third trade show is called Nutrocon
2003 and is held in Anaheim, California. This is a newer show but is along the same type
of products as the Natural Product Expo. Combining these three shows it is estimated
that over one million people will pass by our exhibit.
The second step is to advertise in magazines that appeal to our target markets. These
magazines will include Natural Life and Organic Style. By advertising in these
magazines we are also creating a healthy brand. These ads will run all year round in
many food and health magazines.
Another marketing strategy is to design a web site. North Country Organics is willing to
spend money to get a firm to design a website. Other resources will be used to advertise
on other health food websites and to put a link from their site to NCO’s. This site will
include information about the product and where it can be purchased. Information will
include nutritional information and statistics about the organic industry. There will be a
place where consumers can place feedback about NCO’s product and contact
information. NCO will also try to make joint agreements with health magazines to have a
link to each other’s websites. With this, people may access NCO’s web site from health
magazine websites and vise-versa.
NCO will also promote our product within the stores that the product is being retailed in.
Beside the shelves that their products are placed on will be brochures and coupons
(periodically). These brochures will contain nutritional information about the organic
crackers and the organic industry. Each brochure will have suggested recipe ideas that go
with the delicious crackers. A marketing agency located in California will also handle
promotion for NCO. Although NCO would optimally like to do all promotions from
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North Country Organics – Business Plan
their headquarters, it makes sense to have another marketing agency from California
assisting them. They will be paid to design all advertisements and run them in the local
media. They are successful marketers in NCO’s targeted area, and will be aware of any
changing market conditions. By doing this NCO is not giving up a marketing advantage
to their competitors who are located in the United States. The fact that NCO’s product is
unknown justifies ample resources to be spent on marketing.
4.12 Start-Up Expense
Substantial investment is required for North Country Organics to start cracker production
operations. The fact that the product has not yet been established in the market creates
risk for potential investors. For this reason it is suggested that North Country Organics
employ the Food Center (located in Saskatoon, SK) to produce a small quantity of
product on a pilot scale. By doing this the recipe can be refined and a small quantity of
finished units can be produced. These units would be then taken to California to try and
get contracts with major organic food retailers such as Whole Foods. The crackers will
be sampled by the retailers themselves, and placed on their shelves for a preliminary
amount of time. The retailer will then have a measure of market demand (before any
advertising takes place) and will make a decision on whether to make a contract with
North Country Organics. Once these contracts are attained, North Country Organics can
start raising capital to build the manufacturing facilities. Taking this route before starting
production is recommended, as it will substantially reduce investor risk. $40,000 has
been budged for start-up expense. This includes all direct materials and labour needed to
produce approximately 2000 units, resources to rent the Food Center, and all travel costs
to go to California and live there for 6 weeks.
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North Country Organics – Business Plan
5.0 Human Resource Plan
It is crucial that North Country Organics have highly knowledgeable and dedicated staff
members. This corporation will be known for a high quality product, therefore all
employees will have to poses that same characteristic. NCO will employ a variety of
different people with different backgrounds in order to capture diversity within the
working environment. All jobs within this small business are very important and are all
an integrated part of the business. This cracker business requires a simple organizational
structure that incorporates a Board of Directors, President, Marketing Manager, Account
Manager, Plant Manager, Production Staff, and lastly a Receptionist. Each of their job
responsibilities will now be explained.
5.1 Job Descriptions
Board of Directors
The Board of Directors is responsible for the strategic planning and overall vision for
North Country Organics. There will be four individuals on the board of directors and
these people are the founders of this small business. This group of four is made up of
two husband and wife couples that are from the Tisdale area in Saskatchewan that wish to
establish this proposed cracker operation. The board of directors will have a variety of
responsibilities, which can affect the operations of the business. The board will have to
make the decisions about the overall management of the business, also the direction it
will head in the future. All the external shareholders will be updated on the operations
and performance of the business by the board of directors.
President
The president of North Country Organics will have to be a dedicated individual. This
person will have to possess leadership skills and will have to be an integrated part of
NCO’s team. He/she will require a degree in business or agribusiness and a minimum of
ten years of experience in the food marketing industry. With this experience he/she
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North Country Organics – Business Plan
should posses strong problem solving, decision-making, and marketing skills. The
president has a number of responsibilities which most of all surrounds the
implementation of the mission statement for the business. The president has to report all
aspects of the day too day operations to the board of directors. As a part of the president
job he/she will be responsible for all the internal operations of the business including the
processing plant, human resource management, and public relation work. There will be a
receptionist on hand to take phone calls and assist the president with paper work and
arranging meetings. This job requires a highly dedicated and talented individual;
therefore this person will be compensated with a large annual salary.
Marketing Manager
This position will require a person with excellent numerical and analytical skills, as well
as advanced oral and written communication skills. He/she will have to be a dedicated
individual that shows outstanding initiative because this is a very demanding position.
This person will develop and implement new marketing strategies for the product, and
therefore as the marketing manager he/she will be responsible for the marketing and
selling of the crackers. He/she will also be responsible for finding other markets where
the product may be feasible to enter. This person will need an understanding of the
transportation industry because he/she will be in charge of the product logistics. The
marketing manager will be required to meet sales and marketing goals that the boards of
directors have set. Given the location of the target market and the extent of marketing
that this type of product needs, the marketing manager position is challenging.
Production Manager
The production manager will be required to be an authority figure for the production
staff. This will be a full-time position in the plant. This means that he/she will have to
play the role of a foreman in the production process. It is also important that this person
has a well-rounded knowledge of the food processing and baking industry. Therefore a
requirement for this position is a past management role in the food processing industry.
The production manager will have to be an approachable individual that has effective
communication skills. This is because all questions on the production floor will be
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 29
North Country Organics – Business Plan
directed to the production manager. The production manager will have to make sure that
all operation in the plant runs smooth, because a consistent, high quality cracker is the
end product. Shipping and receiving of products is also another responsibility of the
plant manager. This job is again very important for the business to be successful;
therefore this person will be compensated accordingly.
Account Manager
This position will require an individual that possesses a university degree or community
college diploma in business administration or accounting. Past experience in accounting
is a large asset because this will be the primary job for this individual. More
requirements would be excellent communication skills and proven problem solving, and
time management skills. This person will be required to submit financial statements to
the president and board of directors and be responsible to prepare tax information for
Revenue Canada. Keeping track of all account’s receivables and account’s payables is a
very important aspect for North Country Organics; therefore they are willing to pay the a
sufficient wage for the right person.
Production Staff
The production staff will be responsible for the day-to-day operations, maintenance, and
upkeep of the production equipment. The plant manager will be the boss for these five
individuals. They will need the basic understanding of the production process and the
equipment involved in manufacturing the crackers. An understanding of heavy
machinery is an asset for this position because the production staff will have to operate
some machinery. A high school diploma will be a requirement for this position. This is
at least the requirement because this job involves a lot of responsibility and some degree
of problem-solving skills. These individuals will be wage earners not salary employees.
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 30
North Country Organics – Business Plan
Receptionist/Clerical Assistant
This person will be asked to do secretarial type duties for the Account Manager and
President/ Marketing Manager. This person will require excellent computer skills and
exceptional typing skills. Advanced interpersonal and communication skills are also
required for this position because he/she will be interacting with customers daily. Also
he/she will have to work with the account manager and run the payroll activities
throughout the year. This person will also receive an hourly wage and not an annual
salary. This position is a key component to the business running smooth; therefore it is
important to fill it with a quality employee.
5.2 Training Programs
The training of each of the employees is essential for North Country Organics to operate
effectively. Each employee from the president to the clerk and production staff will need
to know how the product is made and the manufacturing processes the product goes
through. Each of the production staff employees will have to complete a cracker
production technology seminar and receive a certification for cracker production.
This certification is to ensure that North Country Organics production staff has an
excellent understanding of the production process of crackers; this is also done to ensure
that the high value product is maintained. These seminars will have to be completed
before the staff member can start work at North Country Organics.
North Country Organics will also provide guided tours of the processing facility. These
tours will be accompanied by an information package. This is done to ensure that all
customers and any other persons with an interest in this company can see the operation in
action.
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North Country Organics – Business Plan
5.3 Human Resource Strategy
Cracker production is an assembly type production process. Therefore it is essential for
all the employees to work as a team in the production process. For a group of employees
to work as a team there must be good communication skills, interpersonal skills, and trust
among the employees.
At North Country Organics it is essential that all employees get along with each other and
respect each other, on the assumption that work is first priority and a light atmosphere is
promoted in the work place. A goal of this small business is to have a hard working staff,
and to accomplish this the staff must be a motivated group, happy in their work
environment. The employees will be allowed two fifteen-minute coffee breaks and a
single, one hour lunch break during the course of a full working day.
5.4 Lines of Authority
Board of
Directors
President
Production Marketing Account
Manager Manager Manager
Production Staff Receptionist/Clerical
Assistant
Figure 13. Lines of Authority
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North Country Organics – Business Plan
5.5 Present and Future Costs of Employees
Benefit Breakdowns16
At North Country Organics the employees will have a benefit package, which contains:
Employment Insurance (EI) – 3.08 % (government regulated)
Canadian Pension Plan (CPP) – 4.7 % (government regulated)
Holiday Pay – 5.8 % of annual earnings (only for non-salary employees)
Workers Compensation (Office) – 2 %
Workers Compensation (Cracker Plant) – 3 %
Salary Staff
For all salary employees their wages will expand at the expected rate of inflation, which
is 2.5 %
Table 7. Five year Projection of Salaries
Marketing Account Production
2003 President Total Cost
Manager Manager Manager
Annual Salaries $ 120,000 $ 100,000 $ 48,700 $ 85,000 $353,700
EI (3.08%) $ 3,696 $ 3,080 $ 1,500 $ 2,618 $ 10,894
CPP (4.7%) $ 5,640 $ 4,700 $ 2,289 $ 3,995 $ 16,624
Workers Comp. (2%) $ 2,400 $ 2,000 $ 974 $ 1,700 $ 7,074
Total Cost $ 131,736 $ 109,780 $ 53,463 $ 93,313 $ 388,292
Marketing Account Production
2004 President Total Cost
Manager Manager Manager
Annual Salaries $ 123,000 $ 102,500 $ 49,918 87,125 $362,543
EI (3.08%) $ 3,788 $ 3,157 $ 1,537 $ 2,683 $ 11,166
CPP (4.7%) $ 5,781 $ 4,818 $ 2,346 $ 4,095 $ 17,040
Workers Comp. (2%) $ 2,460 $ 2,050 $ 998 $ 1,743 $ 7,251
Total Cost $ 135,029 $ 112,525 $ 54,800 $ 95,646 $ 398,000
16
Bill Brown, University of Saskatchewan
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 33
North Country Organics – Business Plan
Table 7. (Continued)
Marketing Account Production
2005 President Total Cost
Manager Manager Manager
Annual Salaries $ 126,075 $ 105,063 $ 51,165 89,303 $371,606
EI (3.08%) $ 3,883 $ 3,236 $ 1,576 $ 2,751 $ 11,445
CPP (4.7%) $ 5,926 $ 4,938 $ 2,405 $ 4,197 $ 17,465
Workers Comp. (2%) $ 2,522 $ 2,101 $ 1,023 $ 1,786 $ 7,432
Total Cost $ 138,405 $ 115,338 $ 56,169 $ 98,037 $ 407,949
Marketing Account Production
2006 President Total Cost
Manager Manager Manager
Annual Salaries $ 129,227 $ 107,689 $ 52,445 91,536 $380,897
EI (3.08%) $ 3,980 $ 3,317 $ 1,615 $ 2,819 $ 11,732
CPP (4.7%) $ 6,074 $ 5,061 $ 2,465 $ 4,302 $ 17,902
Workers Comp. (2%) $ 2,585 $ 2,154 $ 1,049 $ 1,831 $ 7,618
Total Cost $ 141,865 $ 118,221 $ 57,574 $ 100,488 $ 418,149
Marketing Account Production
2007 President Total Cost
Manager Manager Manager
Annual Salaries $ 132,458 $ 110,381 $ 53,756 93,824 $390,419
EI (3.08%) $ 4,080 $ 3,400 $ 1,656 $ 2,890 $ 12,025
CPP (4.7%) $ 6,226 $ 5,188 $ 2,527 $ 4,410 $ 18,350
Workers Comp. (2%) $ 2,649 $ 2,208 $ 1,075 $ 1,876 $ 7,808
Total Cost $ 145,412 $ 121,176 $ 59,013 $ 103,000 $ 428,602
Wage Earning Staff
These employees work on an hourly wage. Their wages will increase each year with
inflation, which is projected at 2.5 %. These employees will work 8 hours/day, 5 days a
week. They should work roughly 260 days a year for an average of 2080 hours a year.
Table 8. Five Year Projection of Wages
Production
2003 Receptionist Total Cost
Staff (5)
Individual Wage (per hour) $ 11.30 $ 15.24
Total Annual Wage $ 117,500 $ 31,700 $149,200
EI (3.08%) $ 3,619 $ 976 $ 4,595
CPP (4.7%) $ 5,523 $ 1,490 $ 7,012
Workers Comp. (3%) $ 3,525 $ 951 $ 4,476
Holiday Pay (5.8%) $ 6,815 $ 1,839 $ 8,654
Total Cost $ 136,982 $ 36,955 $173,937
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 34
North Country Organics – Business Plan
Table 8. (Continued)
Production
2004 Receptionist Total Cost
Staff (5)
Individual Wage (per hour) $ 11.30 $ 15.62
Total Annual Wage $ 120,438 $ 32,493 $152,931
EI (3.08%) $ 3,709 $ 1,000 $ 4,709
CPP (4.7%) $ 5,661 $ 1,527 $ 7,188
Workers Comp. (3%) $ 3,613 $ 975 $ 4,588
Holiday Pay (5.8%) $ 6,985 $ 1,885 $ 8,870
Total Cost $ 140,406 $ 37,880 $178,286
Production
2005 Receptionist Total Cost
Staff (5)
Individual Wage (per hour) $ 11.30 $ 16.01
Total Annual Wage $ 123,448 $ 33,305 $156,753
EI (3.08%) $ 3,803 $ 1,026 $ 4,829
CPP (4.7%) $ 5,802 $ 1,565 $ 7,367
Workers Comp. (3%) $ 3,703 $ 999 $ 4,703
Holiday Pay (5.8%) $ 7,160 $ 1,932 $ 9,092
Total Cost $ 143,916 $ 38,827 $182,743
Production
2006 Receptionist Total Cost
Staff (5)
Individual Wage (per hour) $ 11.30 $ 16.41
Total Annual Wage $ 126,535 $ 34,137 $160,672
EI (3.08%) $ 3,897 $ 1,052 $ 4,949
CPP (4.7%) $ 5,947 $ 1,604 $ 7,552
Workers Comp. (3%) $ 3,796 $ 1,024 $ 4,820
Holiday Pay (5.8%) $ 7,339 $ 1,980 $ 9,319
Total Cost $ 147,514 $ 39,797 $187,311
Production
2007 Receptionist Total Cost
Staff (5)
Individual Wage (per hour) $ 11.30 $ 16.82
Total Annual Wage $ 129,698 $ 34,991 $164,689
EI (3.08%) $ 3,995 $ 1,077 $ 5,072
CPP (4.7%) $ 6,096 $ 1,645 $ 7,740
Workers Comp. (3%) $ 3,891 $ 1,050 $ 4,941
Holiday Pay (5.8%) $ 7,522 $ 2,029 $ 9,552
Total Cost $ 151,202 $ 40,792 $191,994
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 35
North Country Organics – Business Plan
6.0 Financial Plan
6.1 Financing Budget
In order for North Country Organics to meet their financial obligations, they are going to
need approximately $1,450,000 in financing. Roughly about half of North Country
Organics financing will be from long-term debt and the rest will be from the sale of
common shares. Table 9 shows the financing mix that North Country Organics will
pursue.
Table 9. Financing Mix
Financing Budget
Long Term Debt $ 700,000
Shareholder's Equity $ 750,000
Total Financing $ 1,450,000
The long-term debt will be acquired through a bank loan. The terms of the bank loan are
as follows:
Amortized over a period of ten years
Interest rate of 8%
Annual payments of $104,321
Table 10. Debt Amortization Schedule
2003 2004 2005 2006 2007
Beginning Balance $ - $ 651,679 $ 599,493 $ 543,131 $ 482,261
Addition $ 700,000 $ - $ - $ - $ -
Interest $ 56,000 $ 52,134 $ 47,959 $ 43,450 $ 38,580
Debt Payment $ 104,320 $ 104,320 $ 104,320 $ 104,320 $ 104,320
Ending Balance $ 651,679 $ 599,493 $ 543,131 $ 482,261 $ 416,522
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 36
North Country Organics – Business Plan
Table 10. (Continued)
2008 2009 2010 2011 2012
Beginning Balance $ 416,522 $ 345,523 $ 268,844 $ 186,031 $ 96,593
Addition $ - $ - $ - $ - $ -
Interest $ 33,321 $ 27,641 $ 21,507 $ 14,882 $ 7,727
Debt Payment $ 104,320 $ 104,320 $ 104,320 $ 104,320 $ 104,320
Ending Balance $ 345,523 $ 268,844 $ 186,031 $ 96,593 $ 0
6.2 Dividend Policy
By analyzing our base financial projections (Appendix A), it is feasible for North
Country Organics to start paying dividends out in the second year of operation. The
dividend policy for the company states that dividends will be paid out to shareholders at a
rate of 30% of the previous years ending cash balance. Dividends will only be paid out
on positive cash balances.
Table 11. Dividends Paid and End of Year Cash
2003 2004 2005 2006 2007
Dividends Paid $ 0 $ 27,374 $ 158,861 $ 252,528 $ 320,519
End of Year Cash $ 91,246 $ 529,537 $ 841,759 $ 1,068,397 $ 1,237,223
2008 2009 2010 2011 2012
Dividends Paid $ 371,167 $ 445,428 $ 513,510 $ 567,691 $ 612,413
End of Year Cash $ 1,484,758 $ 1,711,701 $ 1,892,302 $ 2,041,376 $ 2,169,015
6.3 Economic Forecast
To derive the base case projections, an inflation rate of 2.5% has been used. All expenses
and wages have been inflated at 2.5% per year for the ten-year financial plan of North
Country Organics. The plant that has been purchased has a maximum capacity of
approximately 3 million boxes a year, assuming that the plant operates 24 hours a day, 7
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 37
North Country Organics – Business Plan
days a week. The financial plan is set up to show an increase in cracker production of
5% per year. The sales revenue of North Country Organics is set constant for the first 5
years. In the sixth year the selling price is increased by 8%. After 5 years in the
marketplace, North Country Organics should have a well-established brand that can
demand a higher price. The 8% pricing increase also balances out the inflation costs
occurred, over the past five years, on costs of production and wages.
6.4 Working Capital
The following working capital assumptions have been used in the financial projections.
Table 12. Summary of year 2003 net working capital
Working Capital Average Days Year 2003 Level
Cash N/A $100,000
Accounts Receivable 30 days $327,248
Cracker Inventory 3.5 days $38,802
Accounts Payable 15 days $25,705
Net Working Capital $440,345
6.5 Cash Conversion Cycle
The Cash Conversion Cycle (CCC) is based on the following formula:
CCC = Average Days Inventory + Average Collection Period - Average Days Payables
In the case of North Country Organics, the cash conversion cycle is 18.5 days. The
average days inventory is 3.5 days. With a constant output of production there will be a
truckload of crackers leaving every 7 working days. So therefore, the average days
inventory will be the mean between 0-7 days (3.5 days). The average accounts receivable
is set at an industry standard of 30 days and the accounts payables usually are limited to
about 15 days. This brings the cash conversion cycle to be 18.5 days; therefore North
Country Organics turns over its working capital cash every 18.5 days.
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 38
North Country Organics – Business Plan
6.6 Other Expense Assumptions
Within the financial plan there are also a few assumptions that were made. One of the
major costs that will be incurred by North Country Organics is the cost for marketing. In
the financial plan North Country Organics made the assumption that they would allocate
40% of the businesses total revenue towards marketing of the product. The
administration expenses were also estimated at $2,500, which includes various office
supplies. Installation costs for the initial set up of the equipment was also estimated to be
approximately $50,000. This price will include hiring an electrician to wire all the
cracker equipment. Start-up costs have also been estimated in the financial plan. The
start up cost includes hiring the Food Center of Saskatoon to produce 3000 boxes of our
crackers and then sending the marketing manager down to California to establish
connections and distribute samples of our product. This start-up cost is estimated at
approximately $40,000.
6.7 Ratio Analysis
Table 13. Ratio Analysis for Base Case
Financial Ratios 2003 2004 2005 2006 2007
Leveraged Ratios
Debt Ratio 38.0% 31.2% 26.5% 22.8% 19.4%
Debt to Equity 61.4% 45.3% 36.1% 29.5% 24.1%
Profitability Ratios
Gross Profit Margin 73.9% 70.4% 71.2% 71.8% 72.1%
Net Profit Margin 8.9% 7.4% 8.2% 8.8% 9.3%
Return on Total Assets 19.8% 15.3% 16.7% 18.1% 19.4%
Return on Equity 32.0% 22.3% 22.7% 23.4% 24.1%
Net Profit Margin * 12.1% 9.9% 11.2% 12.2% 12.9%
Return on Total Assets * 30.1% 23.2% 25.0% 26.8% 28.6%
Return on Equity * 43.6% 30.0% 31.0% 32.2% 33.4%
Comm 492.3 College of Agriculture/Commerce, University of Saskatchewan 39
North Country Organics – Business Plan
Financial Ratios 2008 2009 2010 2011 2012
Leveraged Ratios
Debt Ratio 15.1% 11.4% 8.1% 4.8% 1.6%
Debt to Equity 17.8% 12.9% 8.8% 5.1% 1.6%
Profitability Ratios
Gross Profit Margin 74.4% 74.3% 74.3% 74.1% 73.8%
Net Profit Margin 11.8% 12.0% 12.1% 12.2% 12.3%
Return on Total Assets 25.6% 25.5% 25.8% 26.2% 26.6%
Return on Equity 30.1% 28.8% 28.1% 27.5% 27.0%
Net Profit Margin * 16.6% 16.9% 17.2% 17.3% 17.4%
Return on Total Assets * 37.4% 37.1% 37.3% 37.7% 38.1%
Return on Equity * 42.5% 40.7% 39.8% 39.1% 38.4%
* Using net income before tax
6.8 Financial Analysis
The following table illustrates the critical success variables for North Country Organics.
The table shows the percentage in change that it takes to reach our critical IRR, which is
set at 25%.
Table 14. Allowable % change in effect with critical variables
Allowable %
Critical Variables Base Case IRR = 25%
Change
Price per Box $4.61 $3.95 - 14%
Sales Output 864,000 658,610 - 24%
Packaging Costs per Box $0.53 $0.86 + 61%
Marketing Expense $1,592,607 $2,975,965 + 87%
Direct Materials Cost $625,492 $1,997,593 + 219%
Table 14 shows that the most critical variable for North Country Organics is the price
received per box. It can only decrease 14% from the base price in order for the 25% IRR
to be met. Another significant variable is the quantity of crackers sold. From the base
case, the number of boxes sold can only decrease by 24% in order for the critical IRR to
be satisfied.
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North Country Organics – Business Plan
6.8.1 Base Case
Table 14.1. Summary financial analysis of base case scenario
Key Variables
Price per Box $4.61
Sales Output 864,000
Packaging Costs per Box $0.53
Marketing Expense $1,592,607
Direct Materials Cost $625,492
Net Present Value $ 906,003
Internal Rate of Return 49.2%
External Rate of Return 24.3%
2003 2004 2005 2006 2007
Gross Margin $ 2,942,824 $ 2,941,790 $ 3,126,236 $ 3,308,362 $ 3,489,909
Net Income $ 352,887 $ 308,083 $ 360,446 $ 407,835 $ 451,275
Net Cash from Operations $137,681 $ 517,852 $ 527,444 $ 540,036 $ 555,084
End of Year Cash $ 91,246 $ 529,537 $ 841,759 $ 1,068,397 $ 1,237,223
Dividends Paid $0 $ 27,374 $ 158,861 $ 252,528 $ 320,519
2008 2009 2010 2011 2012
Gross Margin $ 4,083,289 $ 4,283,927 $ 4,492,745 $ 4,706,466 $ 4,925,832
Net Income $ 647,011 $ 689,614 $ 733,403 $ 775,938 $ 817,509
Net Cash from Operations $ 689,701 $ 749,049 $ 776,925 $ 806,203 $ 836,645
End of Year Cash $ 1,484,758 $ 1,711,701 $ 1,892,302 $ 2,041,376 $ 2,169,015
Dividends Paid $ 371,167 $ 445,428 $ 513,510 $ 567,691 $ 612,413
From the examination of the base case results, it looks like North Country Organics
would be an excellent investment. Some of its strengths include the high IRR. The
required IRR was set at 25% and in the base case scenario the IRR is 47.8%. The
external rate of return is also extremely attractive for investors at 26.3%.
In addition, cash flow from operations shows a steady increase over the ten-year period.
End of year cash also shows steady increases over the ten-year period. The most
attractive part of the base case model is the dividends, which begin to get paid out in the
second year.
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North Country Organics – Business Plan
6.8.2 Worst Case Scenario (selling price decrease)
By affecting the key decision variable of selling price per box of crackers, the sensitivity
of its bottom line can be observed. In the worst case scenario the selling price is lowered
by $1.03. In this case the IRR is set at 10%. With an IRR of 10% or less an investor
would be better of putting their money in an investment plan which has a lot less risk.
Table 14.2. Worst case scenario by changing selling price
Key Variables
Price per Box $3.58
Sales Output 864,000
Packaging Costs per Box $0.53
Marketing Expense $1,592,607
Direct Materials Cost $625,492
Net Present Value $-547,759
Internal Rate of Return 10.0%
External Rate of Return 5.7%
2003 2004 2005 2006 2007
Gross Margin $2,029,142 $2,027,380 $2,161,757 $2,292,161 $2,420,079
Net Income $-35,301 $-81,865 $-34,215 $5,526 $38,665
Net Cash from Operations $-178,700 $115,085 $123,614 $131,538 $138,729
End of Year Cash $-225,136 $-162,237 $-94,984 $-24,317 $48,672
Dividends Paid 0 0 0 0 0
2008 2009 2010 2011 2012
Gross Margin $2,862,934 $3,005,051 $3,148,411 $3,293,674 $3,441,374
Net Income $214,714 $210,524 $229,327 $245,811 $260,176
Net Cash from Operations $264,092 $270,367 $274,703 $279,171 $283,487
End of Year Cash $227,164 $352,703 $438,782 $496,880 $534,710
Dividends Paid $14,602 $68,149 $105,811 $131,635 $149,064
In the worst case scenario the required IRR is not met. Over the ten-year period the
business has a negative end of year cash for the first 4 years. It isn’t until the fifth year
that the business shows a positive end of year cash balance. The external rate of return
also is not very attractive for investors. At this rate of return investors could invest their
money in a less risky investment. There are also no dividends being paid out until the
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North Country Organics – Business Plan
fifth year. North Country Organics is not feasible if the worst case scenario occurred.
The raising of share capital would be almost impossible.
6.8.3 Best Case Scenario (selling price increase)
By affecting the key decision variable of selling price per box of crackers, the sensitivity
of its bottom line can be observed. In the best case scenario the selling price would be
higher than the base case price. In the best case the price would be raised by $1.03.
Table 14.3 Best case financial analysis by changing selling price
Key Variables
Price per Box $5.64
Sales Output 864,000
Packaging Costs per Box $0.53
Marketing Expense $1,592,607
Direct Materials Cost $625,492
Net Present Value $2,218,616
Internal Rate of Return 81.4%
External Rate of Return 39.5%
2003 2004 2005 2006 2007
Gross Margin $3,804,966 $3,891,996 $4,119,604 $4,347,900 $4,578,605
Net Income $667,100 $668,648 $736,076 $799,862 $860,982
Net Cash from Operations $360,437 $857,002 $884,847 $916,328 $950,985
End of Year Cash $314,001 $1,024,616 $1,545,717 $1,937,460 $2,241,467
Dividends Paid 0 $94,200 $307,385 $463,715 $581,238
2008 2009 2010 2011 2012
Gross Margin $5,310,702 $5,575,208 $5,847,075 $6,127,271 $6,416,651
Net Income $1,106,733 $1,174,024 $1,241,002 $1,308,070 $1,375,548
Net Cash from Operations $1,128,617 $1,221,795 $1,273,653 $1,328,014 $1,384,714
End of Year Cash $2,626,646 $2,983,769 $3,279,478 $3,534,210 $3,762,068
Dividends Paid $672,440 $787,994 $895,131 $983,843 $1,060,263
In the best case scenario, North Country Organics becomes an extremely attractive
company for investors. With a $1.03 raise in price the IRR increases by 33.6% and the
ERR increases by 13.2%. By a simple $1.03 raise in selling price the company has
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North Country Organics – Business Plan
almost twice as much end of year cash, after the ten-year period. Raising share capital
would not be very hard if this scenario would be successful.
6.8.4 Worst Case Scenario (sales output decreases)
In the second worse case scenario we looked at decreasing the sales output of crackers.
By setting the IRR at 10% the following financial analysis occurs.
Table 14.4 Worst case financial analysis by changing sales output
Key Variables
Price per Box $4.61
Sales Output 547,061
Packaging Costs per Box $0.53
Marketing Expense $1,592,607
Direct Materials Cost $625,492
Net Present Value $-539,159
Internal Rate of Return 10.0%
External Rate of Return 5.3%
2003 2004 2005 2006 2007
Gross Margin $1,721,983 $1,711,588 $1,837,405 $1,959,363 $2,078,994
Net Income $-56,254 $-96,433) $-42,283 $4,827 $46,284
Net Cash from Operations $-156,112 $102,598 $117,725 $133,118 $148,734
End of Year Cash $-202,548 $-152,136 $-90,773 $-18,525 $64,469
Dividends Paid 0 0 0 0 0
2008 2009 2010 2011 2012
Gross Margin $2,454,950 $2,586,322 $2,719,124 $2,854,078 $2,991,792
Net Income $209,291 $206,102 $231,757 $255,968 $279,015
Net Cash from Operations $266,645 $268,846 $280,171 $292,507 $305,654
End of Year Cash $240,774 $360,709 $449,854 $517,967 $571,637
Dividends Paid $19,341 $72,232 $108,213 $134,956 $155,390
With an IRR of 10%, the company does not start to make money until the fifth year. This
scenario also is not very attractive to investors due to the fact that dividends are not paid
out until the sixth year and the ERR is only 5.3%. An investor would be better off to
invest in a business venture of less risk.
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North Country Organics – Business Plan
6.8.5 Best Case Scenario (sales output increases)
In the best case scenario the sales output is increased by 316,939 boxes of crackers. This
number is taken from the worse case scenario above. It is the difference between the
sales output of the base case scenario and the worse case scenario is 316,939 boxes.
Table 14.5. Best case scenario by changing sales output
Key Variables
Price per Box $4.61
Sales Output 1,180,939
Packaging Costs per Box $0.53
Marketing Expense $1,592,607
Direct Materials Cost $625,492
Net Present Value $2,191,774
Internal Rate of Return 80.0%
External Rate of Return 39.3%
2003 2004 2005 2006 2007
Gross Margin $4,105,063 $4,200,373 $4,436,171 $4,672,524 $4,911,106
Net Income $678,734 $675,798 $738,657 $797,274 $852,571
Net Cash from Operations $329,180 $862,105 $885,285 $911,498 $940,229
End of Year Cash $282,744 $1,007,839 $1,534,411 $1,924,716 $2,221,790
Dividends Paid $0 $84,823 $302,352 $460,323 $577,415
2008 2009 2010 2011 2012
Gross Margin $5,708,953 $5,983,717 $6,265,632 $6,555,599 $6,854,402
Net Income $1,113,563 $1,174,615 $1,234,548 $1,293,690 $1,352,274
Net Cash from Operations $1,127,580 $1,219,533 $1,264,212 $1,310,507 $1,358,168
End of Year Cash $2,611,835 $2,971,138 $3,261,196 $3,503,906 $3,714,309
Dividends Paid $666,537 $783,550 $891,342 $978,359 $1,051,172
In this best case scenario North Country Organics becomes very attractive for investors.
Shareholders get paid out dividends in the second year at a rate of 11.3% and the ERR for
the 10 year period is 39.3%. In the market place it would be tough to get this type of
return on an investment. End of year cash of the company is also shows a very
significant increase. At the end of the 10 years North Country Organics has almost 4
million in cash.
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North Country Organics – Business Plan
6.9 Break-even Analysis
Following are the break-even analysis for net income, after-tax cash, and the break-even
of NPV = 0. The following two tables take into account the two most constraining
variables, selling price and sales output of crackers.
6.9.1 Net Income Break-even Analysis
Table 15. Net income break-even analysis by changing selling price
Net After-tax Selling Base Case
Year
Income Cash Price Selling Price
2003 $ - $(195,735) $ 3.66 $ 4.61
2004 $ - $ (58,790) $ 3.75 $ 4.61
2005 $ - $ 50,648 $ 3.65 $ 4.61
2006 $ - $ 107,275 $ 3.57 $ 4.61
2007 $ - $ 115,017 $ 3.52 $ 4.61
2008 $ - $ 93,032 $ 3.48 $ 4.98
2009 $ - $ 53,735 $ 3.45 $ 4.98
2010 $ - $ 5,009 $ 3.42 $ 4.98
2011 $ - $ (48,292) $ 3.41 $ 4.98
2012 $ - $(117,799) $ 3.40 $ 4.98
The above table shows that the selling price change drop quite substantially before net
income becomes negative. North Country Organics can also see that the selling price
decreases over the 10 year period in the break-even analysis. Since NCO is an exporter,
the exchange rate can also have some effects towards the company cash flows. If the
Canadian dollar strengthens, the North Country Organics profit margin is decreased. On
the other hand, if the Canadian dollar weakens North Country Organics has an increased
profit margin.
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North Country Organics – Business Plan
Table 16. Net Income Break-even Analysis Varying the Sales Output
Year Net After-tax Sales Base Case
Income Cash Output Sales Output
2003 $ - $ (160,137) 582,202 864,000
2004 $ - $ (19,907) 626,917 907,200
2005 $ - $ 91,704 634,494 952,560
2006 $ - $ 138,458 646,458 1,000,188
2007 $ - $ 139,567 662,319 1,050,197
2008 $ - $ 110,902 629,551 1,102,707
2009 $ - $ 69,350 650,468 1,157,843
2010 $ - $ 19,347 674,223 1,215,735
2011 $ - $ (34,529) 700,709 1,276,522
2012 $ - $ (99,968) 729,868 1,340,348
The above results show that the sales output can drop quite substantially before a
negative net income occurs. However, cash flow deficits can occur under this
circumstance.
6.9.2 After-tax Year-end Cash Break-even Analysis
Table 17. After-tax year-end break-even Analysis Varying Selling Price
Year Net After-tax Selling Base Case
Income Cash Price Selling Price
2003 $ 251,070 $ - $ 4.36 $ 4.61
2004 $(230,989) $ - $ 3.29 $ 4.61
2005 $ (85,012) $ - $ 3.49 $ 4.61
2006 $ (69,194) $ - $ 3.45 $ 4.61
2007 $ (34,013) $ - $ 3.46 $ 4.61
2008 $ (8,157) $ - $ 3.46 $ 4.98
2009 $ 15,381 $ - $ 3.47 $ 4.98
2010 $ 36,151 $ - $ 3.48 $ 4.98
2011 $ 55,044 $ - $ 3.49 $ 4.98
2012 $ 72,531 $ - $ 3.50 $ 4.98
From the following analysis you can see that North Country Organics has quit a bit of
room to drop there selling price in order to break-even on the after-tax cash. Compared
to the base case, North Country Organics can have a reduced selling price and still
maintain a positive after-tax cash value.
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North Country Organics – Business Plan
Table 18. After-tax year-end break-even Analysis Varying Sales Output
Year Net After-tax Sales Base Case
Income Cash Output Sales Output
2003 $ 236,240 $ - 775398 864,000
2004 $(219,944) $ - 609069 907,200
2005 $ (89,076) $ - 675521 952,560
2006 $ (68,651) $ - 701637 1,000,188
2007 $ (34,765) $ - 737586 1,050,197
2008 $ (4,836) $ - 716550 1,102,707
2009 $ 14,359 $ - 751371 1,157,843
2010 $ 35,867 $ - 790403 1,215,735
2011 $ 54,556 $ - 831640 1,276,522
2012 $ 72,002 $ - 875658 1,340,348
Table 18 shows the sales output in which North Country Organics must maintain in order
to have positive after-tax cash. The biggest drop occurs after the first year and then
slowly works its way back towards the figures of the base case scenario.
6.9.3 Economic Break-even Analysis
Table 19. Selling price and sales output required to meet required IRR
Varying Selling Price Varying Sales Output
Base Case Base Case
NPV $0 $ 906,003 NPV $0 $ 906,003
IRR 25.0% 49.2% IRR 25.0% 49.2%
ERR 15.0% 24.3% ERR 15% 24.3%
Selling Selling Sales Sales
Year Year
Price Price Output Output
2003 $ 3.95 $ 4.61 2003 658,610 864,000
2004 $ 3.95 $ 4.61 2004 691,540 907,200
2005 $ 3.95 $ 4.61 2005 726,117 952,560
2006 $ 3.95 $ 4.61 2006 762,423 1,000,188
2007 $ 3.95 $ 4.61 2007 800,544 1,050,197
2008 $ 4.27 $ 4.98 2008 840,571 1,102,707
2009 $ 4.27 $ 4.98 2009 882,600 1,157,843
2010 $ 4.27 $ 4.98 2010 926,730 1,215,735
2011 $ 4.27 $ 4.98 2011 973,066 1,276,522
2012 $ 4.27 $ 4.98 2012 1,021,720 1,340,348
From the economic break-even analysis of the North Country Organics, table 18 shows
what the selling price and sales output must be in order for the required IRR to be met.
This table also shows the lowest selling price and lowest sales output that the company
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could withstand before it could no longer deliver returns above all direct costs and
opportunity costs. This is known as economic profit. The existence of this economic
profit is often a signal to investors of the opportunity a business presents.
7.0 Future Considerations
With the growing organic marketplace many future considerations can be looked at. If
North Country Organics establishes a well-known branded product into its target
marketplace, expansion of its sales output may want to be increased at a rate greater than
5% per year. The plant and equipment that has been purchased has huge capacity
potential. With a well-known brand, North Country Organics can also consider
producing brand extensions of its cracker product. Organic products that North Country
Organics may look into can include such things as breads, cookies, baby crackers or
saltines. With the ever-changing mind of the consumer, North Country Organics has
huge potential to expand its business as long as a strong company brand is developed.
8.0 Conclusion
From the data present, one can conclude that North Country Organics would be a
profitable and feasible business for 54 North Agri-Foods. From the base case scenario
one can also conclude that the business would also be a good investment for the equity
investors. Under the base case scenario the IRR is 49.2%, which is well above the
required rate of 25%. The ERR is also very attractive to investors at 31.0%, with a
salvage value at the end of the ten year period. The ERR, just including the dividends
paid, is also striking towards investors at 24.3%. By creating a new business, such as
North Country Organics, many new jobs will be created in the Tisdale area. By the
business plan presented, both 54 North Agri foods and the surrounding community
should benefit if North Country Organics begins its operations.
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