As this week's topic will be on financial plan and we've had the basic assumptions for our financial projection, I think it is the right time to give a heads-up of how our financial posture will look like. The results can become a basis for our discussion on which factors are unrealistic and how we can mitigate the downside risks of some highly influential factors. I did my projection using Risk Solver Platform add-in in Microsoft Excel to incorporate variability in the assumptions. I got the numbers from the assumptions in our feasibility plan, but I added some ranges (minimum and maximum values for these numbers) and included other new assumptions as well.
But first, I want to discuss the result. The model suggests that the expected NPV in three years of operation is around $290,000. Divided by three, our expected annual profit is around $100,000. It looks like a thin profit by American standard. However, in Indonesia, it looks very promising given the range of salary of a person with 0-5 years of experience and tertiary education is between $6,000-$12,000 a year. Furthermore, given the 90% probability of positive values, there is a high upside potential with a low chance of loss. This might sound too optimistic and I realize that there might be an inherent personal bias when I inserted the assumptions.
Thus I will also discuss the assumptions that have the biggest impact to the projection. Two of these assumptions are uncontrollable, i.e. population growth and the percentage of primary motorcylists. This might create some risks to our venture. The other one, market penetration, is the biggest risk that we need to monitor, but its outcome can be influenced by our action.
Below are the assumptions in my financial model with their minimum, likelihood, and maximum values.
| Assumption | Minimum Value | Likelihood value | Maximum value |
| Annual population growth (baseline: 10,187,595) | 1% | 1.4% | 2% |
| Percentage of primary motorcyclists (from the total population) | 40% | 54% | 60% |
| Market penetration: Percentage of penetrated market size | 0% | 1% | 2% |
| Market penetration: Annual percentage change in penetrated market size | -0.1% | 0% | 1% |
| Market penetration: Average annual sales per customer | 1 raincoat | - | 2 raincoats |
Market penetration
Market penetration is the biggest factor that can affect our financial outcome. I assigned 0 and 2 percent as the minimum and maximum values for the penetrated market size, with the likelihood value of 1 percent. Obviously, our ability to penetrate the raincoat market in Jakarta depends largely on customer's perceived value on our product and whether our product is distinct enough in comparison to our competitors'. We have performed a simple conjoint survey, which I believe Dan will have had the result this week. Through this survey, I expect that we will have a better understanding of customer preference. Although we still yet to predict the purchasing decision, we can use the survey results as a consideration for which features should we include in the design. Marketing is also crucial. We've discussed about two different distribution channels and how we will do our marketing efforts (e.g. through our sales force, Google Adwords, and blogs). This is how we try to minimize the downside risk. To evaluate our penetrated market size, we can perform field surveys by observing the number of motorcyclists wearing our raincoats in the streets in Jakarta and compare it to the other brands.
Population growth and the proportion of primary motorcyclists
According to historical data, the average annual growth of population in Jakarta is around 1.4%. Population growth is a factor that we cannot influence. We must adjust our calculation according to the newest data available and see if it erodes our bottom line. Having said that, Jakarta is the center of gravity for rural workers as job opportunities are better than other cities, thus creating high urbanization rate. This may be good or bad. The bad thing is that it is a sign of how unequal economic development in Indonesia is right now and it may create a lot of urban problems; but at the same time, denser Jakarta means a bigger market for our raincoat. We can monitor population growth by collecting data from the Statistics Bureau and adjust our calculation over time.
Primary motorcyclists are part of the population that use motorcycle as their primary mode of transportation. From an article, we found that 54% of the population use only motorcycle to commute. I think that in the future, the trend will continue to increase given the fact that the Indonesian government will continue to reduce the fuel subsidies and the number of primary motorcyclists is largely affected by the fuel price. This is also the factor that we have little influence on, but we can monitor the values over time by collecting data from the Statistics Bureau.
This is how our financial projection will look like in three years:
Note: The horizontal line categories are months in Year 1 (from November to October), and quarters in Year 2 and 3.
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