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BUSINESS PLAN

FOR
VALUE DRUGS
by: JAMES SMITH
111 EXISTING ROAD
WESTSIDE, 90000 NEW YORK
(212) 999-0808

Presented to:
JANE DOE C/O MANUFACTURING NATIONAL BANK
00/00/19xx

Copy ____ of ____ copies distributed

This business plan contains information that is not to be shared, copied, disclosed or
otherwise compromised without the consent of VALUE DRUGS.

Value Drugs

Business Plan

Table of Contents

Executive Summary
Introduction
Mission Statement
Unique Features
Marketing Objectives
Expected Accomplishments
Required Capital

4
4
5
5
6
6

The Business
Purpose Statement
Description of the Business
History of the Business
Founder of the Business
Management and Operations
Regulations and Licensing
Objectives

7
8
8
9
9
10
10

Market Analysis
Market Research
Target Market
Competition
Customer Profile

12
14
16
17

The Product
Production
Product Decisions
Inventory

Table of Contents

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20
20

Value Drugs

Business Plan

Marketing
Objectives and Strategies
Unique Selling Advantage
Selling Tactics
Channels of Distribution
Pricing

22
22
23
25
25

Promotions
Advertising
Sales Promotions
Publicity and Public Relations

27
29
29

Risks
Description of Risks
Contingency Plans

31
32

Finances
Sources and Uses of Capital
Balance Sheet
Cash Flow Statement
Income Statement
Break Even Analysis
Ratio Analysis
Cost Containment
Assumptions

33
34
35
37
39
40
42
43

Conclusion
Justification for Loan/Investment
Milestones/Timetable

Table of Contents

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Value Drugs

Business Plan

Executive Summary
Introduction
The purpose of this business plan is to provide the reader with a comprehensive synopsis of Value Drugs
(the company) and its plans of expansion. Value Drugs was established in 19xx in response the consumer
demand for discount pharmaceutical products. The company manufactures and distributes a stomach-relief
medication which is marketed as a high-quality, but discount, alternative to the existing range of stomachrelief pharmaceutical products on the market. Since its founding, the business has proven to have met the
market need and has generated an impressive supplementary income for the owner, Joe Formulary, a fulltime college chemistry professor. Given the companys record of success the owner now intends to devote
all of his attention to Value Drugs by managing the business full-time and expanding its reach by enhancing
existing production capacity, adding an additional product line for cough syrup, and expanding the
companys sales efforts.

Mission Statement
The mission of Value Drugs is to provide consumers with, and to be the preferred brand for, high-quality
pharmaceutical products at a reasonable price.
Because of its small scale of operation and narrow focus, Value Drugs has been, and will continue to be,
able to provide pharmaceutical products of equal or better quality than the major brands. Value Drugs will
continue to market a discount stomach-relief medication and plans to add a discount cough syrup product to
its product mix. These products will contain the same ingredients as the major pharmaceutical products and
will have the same medicinal effects, yet will retail for about half the price of existing brands.
Value Drugs intends to increase its production capacity and expand its sales effort to include local discount
retail chains, supermarkets, drug stores, and gift shops in the Massive City area. Eventually, the company
will broaden its scope to include regional, then national distribution.
Its typical customers are those quality conscious, yet frugal, consumers, many of whom are from lowerincome families that seek to stretch their budgets wherever possible. Value Drugs intends to meet the needs
of this broad segment of consumers through the provision of low-cost, quality medications. The products
will be marketed as such, with an emphasis on their quality to distinguish Value Drugs products from the
more generic brands which emphasize price. In carrying out the above measures, Value Drugs expects to
establish itself as a the preferred brand in the market for which a wide-range of consumers will come to
recognize and trust.

Executive Summary

Value Drugs

Business Plan

Unique Features
In addition to Value Drugs, there are three companies nationwide which provide discount pharmaceutical
products. Value Drugs, however, has several unique features which distinguish it from competitors in the
industry.
First, while the competitive advantage of any discount products manufacturer is its ability to compete on
price, the Value Drugs brand has a unique image among discount pharmaceutical products: that of a quality.
Where competing discount pharmaceutical products manufacturers attempt to capitalize solely on their on
their low price in relation to the major brands, they limit their appeal to value-conscious consumers. Value
Drugs, on the other hand, has attempted to create a brand identity associated with quality, as well as value.
Value Drugs believes that consumers are attracted to discount pharmaceutical products which emphasize
their quality in addition to affordability.
Therefore, while the perception exists among consumers that discount products are not as effective, Value
Drugs believes that a company such as it can further dispel this notion through clever advertising and
promotion which will substantially broaden its appeal among brand-conscious consumers. This strategy will
effectively allow Value Drugs to become the brand of choice for the value-conscious consumer and
potentially an even broader market segment.
Second, Value Drugs has and will continue to stress its proximity to local markets and its just-in-time
inventory system as a method for enhancing delivery of orders and providing quality customer service. By
continuing to focus on the local market, Value Drugs can fine tune its operations for both products and
establish limited brand awareness before expanding its scope regionally and nationally.
Third, Value Drugs will stress the reliability of its products. Consumers will be made aware of the fact that
the cough syrup and stomach-relief medications from Value Drugs are equally, if not more, effective than
the higher-priced, name brand products on the market. It will also offer tours of its facility in order to
emphasize the similarity of its operation with the multinational pharmaceutical producers, though on a much
smaller scale. In this manner, consumers will be more inclined to think of the Value Drugs products as the
same in quality, reliability, and effectiveness as the major brands, with the only difference being the lower
price of the Value Drugs products.

Marketing Objectives
Value Drugs has set as its marketing objectives expanding its local market share for stomach-relief
medication to 7% and capturing a 5% local market share for cough suppressants in the first twelve months
following expansion. The company will achieve its short-term objectives through an aggressive pull
strategy, involving heavy advertising and promotions based on its themes of product salability: quality,
reliability, effectiveness, affordability. The companys long-term goal is to capture a 1% share of the
national market for each of its products within the next five years. This longer-term objective will be met by
gradually relying more on brand identity and name recognition in the local market and shifting its
advertising focus and marketing efforts to other regions of the country.

Executive Summary

Value Drugs

Business Plan

Expected Accomplishments
Based on its experience in entering the pharmaceutical industry by introducing its cough syrup a short time
ago, Value Drugs expects to be equally successful broadening its product mix to include a stomach-relief
medication and expanding the production capacity for its cough syrup product to achieve greater market
share.
According to market conditions and company forecasts, Value Drugs projects the growth of its stomachrelief medication to continue at a steady pace to the point where it expects gross sales to exceed $2.8 million
by the end of next year. Similarly, the introduction of its new cough syrup product is expected to bring in
initial sales of $2.3 million in its first year. Even given the costs associated with its expansion and the
companys day-to-day operations, Value Drugs anticipates turning a modest profit in the coming year.

Required Capital
In order for Value Drugs to successfully complete its plans for expansion, an investment of $1,125,000 will
be required. The owner will contribute $125,000 of his own funds and is seeking a lender to provide the
remaining $1,000,000. The business anticipates the terms of the loan to be 6 years with an 8% rate of
interest that will be repaid in monthly installments.

Executive Summary

Value Drugs

Business Plan

The Business
Purpose Statement
The market for off-the-shelf pharmaceutical products, including stomach-relief products and cough syrups,
continues to expand. Individuals, when ill, have a tendency to look for a quick fix that will remedy their
problems with little downtime and minimal effort on their behalf. The pharmaceutical industry has
capitalized on this trend with advertising campaigns emphasizing stress-induced symptoms and aimed at
associating their products with fast relief. Consumers have responded, purchasing these products in greater
volume.
In addition to purchasing more each year, consumers continue to seek more choices in their form of
medication. Different forms (such as tablets, capsules, pills, and liquid), different flavors (i.e.-- regular, cool
mint, honey lemon, cherry, etc.) and different sizes (travel size, family size, etc.) are just three examples of
innovations in product availability which have contributed to increased consumer choice and enhanced
demand.
Prices for these off-the-shelf pharmaceutical products are being sustained at unreasonably high levels.
Three large multinational corporations, with enormous advertising and promotional campaigns and
distribution networks, have been able to set excessive price levels many times that of their production costs .
The size of these companies allows their production costs to be kept low, since they are able to take
advantage of opportunities such as vertical integration (in some cases they produce their own chemicals) and
economies of scale (much of their work is automated and they receive substantial trade discounts).
However, their size also makes overhead costs high. Their expenses for sales and promotional campaigns,
advertising, capital expenditures, research and development, and labor eat up much of their gross profit,
requiring them to sustain extraordinarily high markups in order to maintain their profitability.
Value Drugs seeks to take advantage of a relatively new phenomena in the industry -- the growing trends
toward value production. A group of companies has been emerging which are designed to compete with the
three major pharmaceutical corporations.
These companies have smaller research and development departments, much smaller advertising budgets,
and are usually less than 50 employees -- keeping operating costs to a minimum. These companies typically
have smaller gross profit margins, since they charge up to 50% less than the brand names. However, their
low overhead has resulted in a consistently profitable record of growth.
Most importantly, these companies fill the consumer need for inexpensive products. Value priced products
contain the same ingredients as those from top selling, name brand products, but sell at lower costs to
consumers due to smaller markups and an ability by smaller companies to keep costs to a minimum. These
products are valuable for all levels of consumers, but provide a special service to low-income and working

The Business

Value Drugs

Business Plan

class families whose budgets can be severely impacted by repeat purchases of overpriced brand name
products.

Description of the Business


Value Drugs currently manufactures small quantities of its stomach-relief medication for a few local
discount stores. The company intends to expand its manufacturing capacity for stomach-relief drugs, and
will begin producing a line of cough syrups.
The company acquired its existing base of retail customers through industry contacts. The founder of Value
Drugs met the vice president for acquisitions of a local discount chain store at a social gathering, and he
urged Joe Formulary to go into business. This individual also provided Joe Formulary with the names of
several purchasing agents for independent area supermarkets and drug stores. Many of these individuals
expressed a desire to do business with a regional discount manufacturer which gave Joe Formulary the
impetus to start a pharmaceutical manufacturing operation.
The results from the introduction of the companys lone product has been overwhelming, with Value Drugs
unable to meet the local consumer demand for discount stomach-relief medication. Orders for stomachrelief medication exceeded capacity within the first month of operations.
The companys sales have increased fairly consistently over the last two calendar years, with some seasonal
fluctuation. Peak sales for the stomach-relief product are realized during the summer months. However,
Value Drugs anticipates greater fluctuation in its cough syrup sales. Winter months typically produce the
largest sales volume for this product, and summer the lowest. Nonetheless, the product mix has been
chosen, in part, to maintain revenues throughout each respective seasonal variation.
Based on the demand for the current stomach-relief product and strong interest in a similar cough syrup
medicine (which Value Drugs does not currently produce), the time is ripe for expansion. Given the
companys ability to expand its production capacity and add a second product (cough syrup), Joe Formulary
expects gross sales to exceed $5 million in the first year of expansion.

History of the Business


Joe Formulary founded Value Drugs in response a suggestion from a vice president of a local discount retail
chain store. This person had mentioned to Joe Formulary the potential for independent pharmaceutical
companies to substantially undercut the prices of major pharmaceutical companies in manufacturing and
selling products such as cough syrup and stomach-relief medications. Joe Formulary realized the potential
market for such products and decided to put his scientific and business backgrounds together to produce
products catering to the discount end of the price spectrum.
It was at this point that Value Drugs was set up as an S-Corporation owned and operated on a part-time
basis, solely by Joe Formulary in a laboratory facility in a converted garage outside of his home in Massive
City.
Joe Formulary recognized that cough syrup sales were vulnerable to heavy fluctuations in sales volume due
to variations in seasonal demand. He thus choose to begin his manufacturing operation with the production

The Business

Value Drugs

Business Plan

of stomach-relief medication on a limited basis for trial purposes. Within two months, demand for the
product from retail discount stores, local independent supermarkets and drug stores, and other neighborhood
retail stores doubled to the point where his small operation was running at near capacity. Within six months,
demand had exceeded the limited production capability of both the company and Joe Formulary, himself,
based on the time and resources available to him. Based on this success, the time is now ripe for Joe
Formulary to concentrate all of his time and effort on the expansion full-time operation of Value Drugs.

Founder of the Business


Joe Formulary has recently resigned his position as chairperson of the Chemistry Department at Massive
State University. He held this position for twelve years, and served as a consultant for at least two dozen
medical and pharmaceutical companies during that time. He has also testified as an expert witness at many
trials involving questions of chemical composition and interaction.
Joe Formulary received his B.A. and M.S. degrees in applied chemistry at Prestigious University. He
worked for Pharmico, Inc. for seven years in their research and development department, perfecting trial
recipes for various pharmaceutical products. In 19XX he joined the staff of the Chemistry Department at
Massive State University.
In his last four years of teaching at Massive State, Joe Formulary attended classes on a part-time basis in the
M.B.A. program, completing his Master of Business Administration in May, 19XX.

Management and Operations


Pharmaceutical manufacturers require the following functions to operate successfully. First, adequate
chemists are required to actually mix each product. This job may only be performed by certified chemists.
Joe Formulary qualifies, and he plans to mix each batch of product himself, with the help of an assistant
chemist. He will be responsible for supervising the mixing of raw materials and overseeing the measuring of
the raw materials input. His assistant will perform the actual measuring and mixing responsibilities. In
addition, the assistant chemist will be responsible for keeping a log of all activities relating to the mixing
process. Joe Formulary also plans to give the assistant chemist responsibility for placing orders for
necessary raw materials.
Joe Formulary plans to hire one of his former students for a job as assistant chemist. There are several
potential candidates he has in mind, and all have adequate qualifications. Each has been notified of his or
her candidacy, and all have agreed to interview for the position. Joe Formulary has a close relationship with
all of these former students, as many were his teaching assistants at various times. He plans to compensate
this person in the $35,000 - $50,000 range.
Joe Formulary also plans to hire one salesperson. He has contacted one of his former students for
information about the responsibilities and compensation levels for such a person. Although that student is
not interested in the position, he was able to refer several persons to Joe Formulary. Joe Formulary has
determined that the sales person will be compensated at $35,000 per year, plus commission. Based on the
sales estimates, the total budgeted amount for this persons wage is $60,000.

The Business

Value Drugs

Business Plan

Joe Formulary plans to hire one administrative assistant to maintain computer records regarding inventory,
accounting, and correspondence. This person will also be responsible for answering phones, reception
work, and clerical duties. This administrative assistant will receive an annual salary of $40,000.
Finally, Joe Formulary needs five people to handle the bottling, packaging, and shipping responsibilities for
the product. This position can be filed by unskilled manual labor. Joe Formulary plans to pay these
individuals $7.80 per hour or $15,000 per year. For this, he has budgeted a total of $75,000.
Joe Formulary has budgeted a total of $305,000 for gross wages, leaving $85,000 as his salary for his first
year.
Joe Formulary has a management background from his work at Pharmico, where he supervised a staff of 15,
and from the university where he maintains a staff of three student assistants. Since most of the people he
plans to hire have industry experience, each will be helpful from a management perspective, especially as
the Value Drugs business grows and expands its scope.

Regulations and Licensing


The following permits and licenses were obtained in order for Value Drugs to commence business:
- Manufacturers permit, October 15, 19xx
- Permit to conduct business in Massive City, October 8, 19xx
- Sales license, October 31, 19xx
- Various FDA (Food and Drug Administration) licenses and permits.
All necessary licenses and permits to conduct medical research and produce pharmaceutical products for
over-the-counter sale have been applied for and granted to Value Drugs and its owner, Joe Formulary.

Objectives
Value Drugs has defined two primary business objectives for its planned expansion. The companys shortterm goal for the year following expansion is to capture a 5% share of the local market for its new cough
syrup product and to grow its share in the local market for stomach-relief medication to 7%. From there the
company will seek to achieve a 10% local market share which, when realized, will trigger an expansion and
new direction toward penetrating the national market. Its long-term goal, as such, is a 1% share of the
nationwide market for stomach-relief medication and cough syrup as the company grows and its focus
evolves from local to national over the course of a five year plan. Value Drugs hopes to use this five year
performance as a platform to eventually expand into other pharmaceutical products.
Value Drugs intends to establish itself in the local market and meet its short term goals through an
aggressive push strategy involving intensive marketing, advertising and promotional campaigns aimed at
consumers in the local market. The intent of this effort will be to stir consumer demand for the companys

The Business

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Value Drugs

Business Plan

products. This will, in turn, increase the presence of the Value Drugs products among local chain stores and
franchises by generating interest at the retail level.
In the long-term, Value Drugs intends to reach its goal of a 1% national market share by broadening its
scope and expanding outward from a strong local base. It is believed that the publicity achieved in the local
Massive City market will spread well in advance of distribution efforts, thus spurring the planned growth on
a regional, then national, level. Nonetheless, this eventual expansion will be complemented through focused
advertising and promotions efforts aimed directly at potential end-users of the companys products. At the
same time, the companys manufacturers representatives will be directed to shift their sales focus to the
national market by establishing contracts with the larger regional or national chain stores.
With the above steps in place, Value Drugs is poised to become the preferred brand for value pharmaceutical
products.

The Business

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Value Drugs

Business Plan

Market Analysis
Market Research
Joe Formulary identified the need for discount pharmaceutical products when a local discount store asked
him to produce such products based on the demand from the consumers at his store. Contacting several
additional independent store owners in the local area (grocery stores, pharmacies, and other retail shops),
Joe Formulary found others interested in offering these items as well.

The national market for discount pharmaceuticals is well documented. The National Journal of
Business has reported that booming consumer interest in reliable value consumer products (such as
those that supermarkets produce) has broadened to include pharmaceutical products as well.
Finally, a recent edition of the Southwestern Daily Business Gazette named the Massive City area as a
specific example of an area where demand for discount pharmaceuticals was currently far exceeding supply.
The research Joe Formulary has performed has led to the conclusion that these trends will continue in a
positive direction.
Further research has identified distinct groups of consumers in the broad market for pharmaceutical products
by which the market can be segmented. The market can be broken into three distinct segments. First, those
price sensitive, lower income consumers who primarily purchase products based on the lowest available
prices make up a growing percentage of the market for pharmaceuticals. Next, an also growing segment of
middle income consumers tend to make purchasing decision based on value (the best quality at the best
price). Finally, higher income consumers, which make up a declining majority of the market, tend to be
brand conscious in their buying behavior, meaning that they purchase products based on the perceived
higher quality of major brands.
Based on this market research and company forecasts, Joe Formulary has developed a winning strategy for
capitalizing on the consumer demand for discount pharmaceutical products by effectively targeting certain
segments of this market. The following table (Market Segments) illustrates the results of the companys
market research:

Market Analysis

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Value Drugs

Business Plan

Market Segments
SEGMENT

Supermarkets (Tummysooth)

Last Year
Sep 1998

This Year
Sep 1999

Projection
Sep 2000

Projection
Sep 2001

Projection
Sep 2002

Projection
Sep 2003

Projection
Sep 2004

$1,150,000

38%

$1,050,000

32%

$990,000

22%

$945,000

17%

$915,000

13%

$895,000

11%

$854,000

8%

Drug Stores (Nitesleep)

$975,000

33%

$1,000,000

30%

$950,000

21%

$900,000

16%

$845,000

12%

$810,000

10%

$775,000

8%

Discount Stores (Both)

$490,000

16%

$650,000

20%

$800,000

18%

$995,000

18%

$1,225,000

18%

$1,489,500

18%

$1,890,000

19%

Other (Both)

$385,000

13%

$600,000

18%

$1,760,000

39%

$2,840,000

50%

$3,889,000

57%

$5,150,000

62%

$6,549,000

65%

Total Market
Market Growth Rate

Market Analysis

$3,000,000 100%
---

$3,300,000 100%
10%

$4,500,000 100%
36%

$5,680,000 100%
26%

$6,874,000 100%
21%

$8,344,500 100%
21%

$10,068,000 100%
21%

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Value Drugs

Business Plan

Market Segments

Target Market
Consumers of stomach-relief and cough syrup medications are similar enough to be considered as
one target market. Thus, a dual product mix makes sense from a marketing perspective, apart from
economic reasons. According to Industry Week magazine, the two largest customer segments for each
product are parents (who make purchases both for themselves and for their children) and single individuals.
For stomach-relief products, there are also substantial sales to people with high stress occupations and those
who are accustomed to eating quickly. Busy executives, cab drivers, and air traffic controllers were cited as
examples of individuals who make up this part of the market.
More importantly, the companys market research has determined that the fastest growing market segment is
the niche market composed of those individuals who prefer, and who give priority in their purchasing
decisions to, discount products. This segment of the market for pharmaceuticals has been identified as those
consumers whose primary consideration in purchasing decisions is the lowest available price. Further, the
market segment consisting of those individuals whose primary purchasing decision revolves around value
(i.e. the best quality for the best price) is also showing an upward growth trend as a percentage of the total
market.
These two growing market segments have been reflected in the trend in consumers preferences with regard
to point-of-purchase decisions. While supermarkets and drug store chains continue to be the major sellers of
Market Analysis

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Value Drugs

Business Plan

pharmaceutical products, their market share has shown a declining trend. This decline is accelerating and is
predicted to more substantially undercut their position in the market over the coming years. Discount stores,
in the meantime, have shown a rapid increase in gross sales and a corresponding upward trend in their
market share in contrast with the larger supermarket and drug store retailers.
Value Drugs expects to capitalize on this regional and nationwide trend toward the discount end of the
product spectrum by expanding its capability to provide low cost products which meet the needs of low
income and value conscious consumers, the two market segments the company intends to target. The
following table (Target Markets) illustrates these market segments in the context of the total market for
pharmaceutical products.

Target Markets
% of Sales

% of
SEGMENT

Targeted

Last Year

Projection

Projection

Projection

Projection

Projection

Population*

Sep 1998

Sep 2000

Sep 2001

Sep 2002

Sep 2003

Sep 2004

Supermarket (Tummysooth)

22%

39%

37%

36%

35%

34%

33%

Drug Stores (Nitesleep)

35%

32%

29%

28%

27%

27%

25%

Discount Stores (Both)

10%

13%

17%

19%

20%

21%

22%

Other (Both)

15%

16%

17%

17%

18%

18%

20%

100%

100%

100%

100%

100%

100%

TOTAL
* Source: i.e. U.S. Census Bureau (1996)

Market Analysis

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Value Drugs

Business Plan

Target Markets

Competition
Pharmaceutical manufacturers for stomach-relief and cough syrup products are neatly divided into two
distinct categories within the industry: multinational pharmaceutical research and development companies
who outsource their production requirements or who have in-house manufacturing facilities, and the small,
independent pharmaceutical producers.
The multinational pharmaceutical R&D companies capitalize on their substantial research and development
capabilities. Their capital backing, brand recognition, advertising capabilities, sales budgets, and effective
distribution channels keep their products on the shelves and in consumers minds.
The much smaller, independent pharmaceutical manufacturers typically have a minimal research and
development function consisting primarily of labs used to analyze products other companies introduce.
They are usually very small (less than 50 employees), and have limited manufacturing facilities. They
usually distribute locally or regionally, occasionally maintaining a regional account in another part of the
country. These companies often compete on price due to the limited scope of the their operations. Value
Drugs fits into this industry cluster of independent manufacturers.

Market Analysis

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Business Plan

The following table (Competitive Analysis) provides an overview of some of the key advantages and
disadvantages associated with the three large multinational corporations, as well as for the competing
independent manufacturers:

Competitive Analysis
Description

VALUE DRUGS

Pharmco

Medico
research &
manufacturing
very large
29140

medium-small

research &
manfuacturing
very large

Number of Employees (payroll)

1-200

32549

Years in Business

34719

39

43

16%

21%

29%

$480,000

$630,000

$870,000

24%

-2%

0%

Advertising Budget

$19,200

$44,140

$26,100

Greatest Strength

low overhead

economies of scale

economies of scale

ad budget

overhead

overhead

low

high

high

medium

high

high

high

low

medium

Advertising Effectiveness

low

medium

medium

Strength of Sales Force

high

low

medium

Standing in Industry

low

high

high

Future Potential

high

low

medium

Seriousness of Competition

high

low

medium

Business Type

manufacturing

Size of Business

Market Share
19xx Sales
Growth Rate

Key Weakness
Price
Quality of Service
Profitability

Customer Profile
Value Drugs has compiled and continues to maintain a customer profile in order to continue to successfully
position and market the companys products in the market place. All information has been derived

from the 19xx U.S. Census and an electronic database of local demographic information. The
following table (Customer Profile) represents a breakdown of the local market in the Massive City
area for pharmaceutical products:

Market Analysis

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Business Plan

Customer Profile
Description

Last Year
Sep 1998

Projection
Sep 2000

Projection
Sep 2001

Projection
Sep 2002

Projection
Sep 2003

Projection
Sep 2004

25000

27000

30000

32000

35000

39900

$1,500

$2,200

$3,000

$3,500

$3,850

$4,210

15000

17000

19000

21000

22500

24500

$1,000

$1,500

$1,890

$2,200

$2,500

$3,000

Families
number of customers
average amount spent on medicines
Discount Shoppers
number of customers
average amount spent on medicines

Market Analysis

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Business Plan

The Product
Production
Value Drugs purchases its chemical inputs from reputable brokers in the Massive City area. These
chemicals are delivered to Value Drugs directly, and are kept in special sealed vats and drums in a
temperature controlled environment with specially secured locks. Only Joe Formulary has access to these
chemicals, as some of them are highly flammable. Because the planned expansion requires increased
complexity in the production process, this section describes the companys planned production processes,
not its existing ones.
When Value Drugs is ready to mix a batch of either one of its products, Joe Formulary will supervise the
mixing efforts. The mixing will be an all-day task involving varying the temperature conditions in several
pressurized vats. The pressurized vats will be six-foot high pieces of equipment which hold several
thousand gallons of mixture. This vat will compress chemicals to remove tiny air bubbles and vapors. Next,
the chemicals will be automatically loaded onto an attached mixer in a highly compressed state, where they
will be mixed into a base.
Finally, the base will be poured by special lifting arms into a large vat for dilution. The dilution vat contains
special jets which inject the diluting agent (primarily water in the case of stomach-relief, and a water/alcohol
mixture in the case of cough syrup) into the mixed chemical compound. The vat has a special cover
designed to re-pressurize the mixture during the process and also contains large mixing blades in four levels.
The mixture process will typically take two hours for cough syrup and two and one half hours for the
stomach-relief medication.
The vat full of final product will be attached to a tube designed to deliver the product into a compressor,
which will compress and inject the substance into bottles placed under jets. There will be twelve jets
attached to the compressing device, and each one will have its own button. Depressing the button will cause
that jet to release the substance from the nozzle in the preset desired amount.
There will be very few hazardous activities associated with the manufacturing process. The machinery will
all have double-locking mechanical arms which will not permit operation while they are open, and will have
few moving parts on the outside.
The only hazardous elements of machinery operated in Value Drugs design scheme will be the rocking arms
which pivot the machinery, the forklift which will be used to move boxes of product from the floor of the
manufacturing facility to the loading dock, and the exterior of the two mixing devices, which will reach
extremely high temperatures.
Joe Formulary has, working with an insurance team, determined solutions for most of these problems.
Special insulation will be applied to the exterior of the machinery which will prevent burns and other
injuries. The pivoting machinery arms will be completely obstructed by a metal casing device which Joe
The Product

19

Value Drugs

Business Plan

Formulary plans to weld and attach himself. Finally, employees will be instructed on the proper distances
and safety precautions necessary when working around a forklift, and will be educated on the lanes and
speeds used by the forklift during those few times it will be in operation.
Finally, given the companys willingness to take these precautionary measures, his insurance company has
agreed to extremely reasonable workers compensation rates which will cover all work-related injuries in the
Value Drugs facilities.

Product Decisions
Value Drugs considered several options for adding another discount pharmaceutical product to its product
mix. However, the company chose to introduce a product that will have the greatest similarities to its
existing stomach-relief medication in terms of production requirements, marketability, and consumer
demand. Value Drugs has decided to add a cough syrup medication, thus, limiting its product mix to two:
liquid stomach-relief medicine and cough syrup.
These two products are believed to be the ones with the highest profit margin within the pharmaceuticals
industry, based on the market research Joe Formulary has performed. As well, the liquid forms of these two
products make them suited to the same production equipment and similar processes. Both products can also
be produced economically on a small scale. Finally, the consumer demand appears to be increasing for both
of these products even faster than the market average for over-the-counter pharmaceutical products in
general.
While each of these two products fill an important medical need, they do not compete against each other
since they are designed to remedy ailments associated with different parts of the body, the stomach and
throat. These areas also have different seasonal patterns of illness. Market research shows that cough syrup
sales are skewed toward the winter months when throat symptoms due to cold and flu are much more
prevalent. By contrast, sales of stomach-relief medications, while more consistent, are skewed slightly
toward the summer months when indigestion tends to be more common (possibly from the greater number of
picnics and barbecues).
Since most pharmaceutical products can be easily reproduced, Value Drugs has the potential to expand its
business by moving into other related product lines. Similarly, Value Drugs has the capability to use its
manufacturing equipment and laboratories in a flexible manner, adapting its production processes and
manufacturing focus accordingly.

Inventory
In its plans for expansion, Value Drugs has decided to use the just-in-time method of production and
inventory distribution, thereby, limiting the amount of inventory it keeps to a bare minimum. Typical in the
pharmaceutical business is a receipt of orders approximately two weeks in advance from retail distribution
outlets. This amount of lead time is ideal for just-in-time inventory planning, since production, bottling, and
shipping of the orders requires about one week. As well, retail distributors are typically happy to take
receipt of items two or three days early. Value Drugs, as such, will gear its production schedule around
guaranteed orders, thus producing in quantities according to specific demand.

The Product

20

Value Drugs

Business Plan

The just-in-time method of inventory planning and delivery is a natural inventory management method,
because the existing and proposed products have an expiration date; retailers typically wish for quick
product delivery; and production capabilities are expected to be enough to match orders up to a high end of
estimated sales.
The use of the just-in-time inventory method obviates the need for complex calculations concerning the
optimal use of space to store products. Regardless, ample space exists for temporary, short-term storage of
products. This space is climate-controlled for proper storage and adequately secured by steel doors for
appropriate security.
Joe Formulary has purchased and customized a specific type of inventory software designed for
pharmaceutical manufacturers. This system tracks partial orders, invoices, shipments, and orders. Its tie-in
to accounting software allows Value Drugs to automate its own invoicing and collection process. This justin-time logistics planning will provide Value Drugs with a very efficient inventory system defined by rapid
turnover and minimal surplus stocks of product.

The Product

21

Value Drugs

Business Plan

Marketing
Objectives and Strategies
In introducing its new cough syrup product to the local market, Value Drugs has set its objective at capturing
a 5% local market share in the twelve months following the products roll-out. Further, it seeks to expand
its local market share for stomach-relief medication from 5% to 7% as a result of the increased production
capacity and aggressive marketing strategy associated with its expansion. In the longer term, the company
will seek to capture 1% of the national market for each of its products by within the next five years.
These objectives will be pursued through an aggressive pull strategy of advertising and promotions aimed at
end-users of the Value Drugs products. This approach is designed to stimulate demand at the retail level by
promoting the products to consumers who will then seek to find the medications on the shelves of the local
retail stores. This strategy will be supplemented with a direct sales push aimed specifically at purchasing
agents of chain discount stores, with a secondary target of purchasing agents for local and regional
supermarkets and drug stores. This push strategy is intended to communicate a specific message about the
Value Drugs products -- that the products will appeal to consumers more readily than products perceived as
generic. A secondary message aimed at retailers will emphasize that their product will be delivered more
quickly and more reliably than those of major corporations
The products will be marketed as low-cost alternatives to the expensive off-the-shelf pharmaceuticals sold
by the big three multinational pharmaceutical companies. Since many of the potential retailers being
targeted are already familiar with these products, Value Drugs will emphasize the unique selling features of
its products (for more information on this key point, please refer to section unique selling advantage).
Finally, Value Drugs plans to use its growing customer base in the first two years to slowly expand its
market concentration into other regions of the country. As the company grows and the marketing budget
increases, Value Drugs will slowly capitalize on its brand recognition in it regional base in order to increase
marketing and promotions activities in other regions.

Unique Selling Advantage


The unique selling advantage of Value Drugs is its ability to induce both price-sensitive and value-oriented
consumers to purchase its products through clever promotions and packaging. Value Drugs hopes to use its
expansion as a mechanism to amplify these advantages substantially.
While other companies are involved in the value pharmaceutical business, Value Drugs believes those
companies have taken an improper approach to packaging and promotion of their product. Most
independents have packaged their products in generic-type product labels with words such as best value in
large, boldface type on the label.

Marketing

22

Value Drugs

Business Plan

The companys market research, as well as some recent articles in economics journals suggests that
pharmaceuticals are one product type in which many consumers believe that the expensive products are
substantially different (i.e. better) than their low-priced competitors.
This line of thought has been well promoted by the three large multinational companies which has fostered
the impression from consumers that major brand products are significantly better than their smaller
competitors in their ability to cure product-specific ailments. However, little has been done by the
independent producers to attempt to counter that image.
Value Drugs believes that independent pharmaceutical companies are doing themselves a disservice by
appealing to the value-conscious customers sensitivity to low cost alone. The company believes it can
attract a much more broad-based appeal if its packaging, labels and in-store promotions are as attractive and
quality-oriented as its large counterparts.
Value Drugs intends to sells its uniqueness in packaging and promotions not only to consumers, but also to
distributors as a reason its value products will actually sell more than one of the other independents. Value
Drugs believes that consumers notice the lower price, and also are educated by the companys labeling and
promotions about the complete lack of a difference in quality between a Value Drugs product and that of a
name brand.

Selling Tactics
In its plans for expansion, Value Drugs will use manufacturers representatives, rather than its own sales
force, to sell its products to retailers in the local market. The manufacturers representatives will use a
direct sales strategy to penetrate the retail market. While Value Drugs will lose some control over the
selling function, the company will still coordinate the selling process so that it is consistent with the
companys marketing objectives. Joe Formulary will also work closely with the representatives on such
policies as pricing, area, distribution and order-handling procedures.
The companys primary sales goal is to win shelf space at discount retail chains, as well as supermarkets,
drug stores and gift shops. Joe Formulary believes that using this selling tactic will have two main benefits
in helping to achieve this objective. First, the company will not incur the costs of directly employing a full
sales force. Second, the manufacturers representatives have a sales network in place at the retail level.
This will allow Value Drugs to move its products into the retail outlets faster than if it sold the products
itself. It will also give Value Drugs access to retailers it might not otherwise have.
The following table (Sales Targets) illustrates the expected results of the planned sales effort:

Marketing

23

Value Drugs

Business Plan

Sales Targets
Products/Services

Last Year
Sep 1998

This Year
Sep 1999

Projection
Sep 2000

Projection
Sep 2001

Projection
Sep 2002

Projection
Sep 2003

Projection
Sep 2004

Tummysooth
Cash Sales

$289,140

$328,480

$797,300

$1,374,120

$1,622,540

$2,129,800

$2,796,550

Sales on Account

$156,104

$293,182

$316,610

$295,865

$296,275

$288,525

$296,920

Nite sleep
Cash Sales

$35,360

$96,960

$574,340

$1,022,960

$2,002,070

$2,424,350

$3,220,590

Sales on Account

$152,404

$376,682

$462,490

$463,135

$443,725

$427,475

$460,980

$6,017,140

Total Cash Sales

$324,500

$425,440

$1,371,640

$2,397,080

$3,624,610

$4,554,150

Total Sales on Account

$308,508

$669,864

$779,100

$759,000

$740,000

$716,000

$757,900

TOTAL SALES

$633,008

$1,095,304

$2,150,740

$3,156,080

$4,364,610

$5,270,150

$6,775,040

Growth Rate
TOTAL MARKET
Total Market Share

Marketing

--$3,000,000
21%

73%
$3,300,000
33%

96%
$4,500,000
48%

47%
$5,680,000
56%

38%
$6,874,000
63%

21%
$8,344,500
63%

29%
$10,068,000
67%

24

Value Drugs

Business Plan

Channels of Distribution
The Value Drugs distribution chain will involve the following steps:
First, the company will source the chemical and raw material inputs from various suppliers on short-term
contractual grounds as needed. These transactions will be brokered by a middleman who will shop the
chemical and raw materials markets as demand conditions dictate to find the best prices for his client, Value
Drugs. As Value Drugs begins to form more industry relationships and as the company establishes a fairly
steady production schedule the supply channels are expected to become more concrete and longer-term.
Second, Value Drugs will source its packaging and labeling products in the same manner, where short-term
needs will be met as demand conditions dictates until a routine operating schedule is in place. Bottles to
contain the cough syrup and stomach-relief products will be ordered directly from the manufacturers as will
the cardboard boxes that will house cases of the end products.
Third, Value Drugs will use local and regional wholesalers to distribute to retail chains. In order to keep
inventory to a bare minimum, the production schedule for the Value Drugs products will be driven by new
orders. Value Drugs will solicit orders through the manufacturers representatives and will guarantee that
the company can fill and deliver those orders anywhere in the USA in 3 weeks or less. These
manufacturers representatives typically add a 2-3% markup on the Value Drugs wholesale product price.
Because of this fact, the financial statements do not reflect any commission for these individuals.

Pricing
Although the range of markups in the pharmaceutical industry for the products described in this business
plan is quite large, it is not very flexible at the upper and lower ends, and it does not change often. In fact,
both upper and lower limits have remained within a few percentage points of each other for the big three
multinational manufacturers since competition has existed. The entrance of independents into the market
introduced a lower pricing tier that, surprisingly, has affected the major companies very little.
Almost all of the independents tend to stay in the same price ranges for their products, since variable costs
such as chemicals and raw materials tend to be consistent the world over. Those competitors that
substantially exceed the lower tier price range or try to undercut it are not able to maintain a competitive
position for long. For those who undercut the lower price range set by the market simply cannot sustain
such a small profit margin. Likewise, those who exceed the upper end of the range price themselves in the
tier where they compete with the high-end, name brand products. As a result, sales plummet because they
cannot compete with the market leaders advertising and promotions efforts to establish brand loyalty.
Thus, the Value Drugs pricing policy is very much in line with the industry standard for the independents.
The following table (Price Comparison) illustrates this markup policy, as well as the markup policies of
competitors:

Marketing

25

Value Drugs

Business Plan

Price Comparison
Products/Services
Tummysooth

Nite sleep

Marketing

Company

Markup

Chemico

45-87%

Pharmico

41-92%

Medico

43-88%

Independents

25-44%

Value Drugs

33-42%

Chemico

43-89%

Pharmico

45-110%

Medico

52-109%

Independents

27-59%

Value Drugs

37-52%

26

Value Drugs

Business Plan

Promotions
Advertising
Value Drugs intends to run advertisements aimed at attracting the attention of purchasing decision-makers
for those retail stores which offer stomach-relief and cough syrup products to facilitate potential sales by
manufacturers representatives who will attempt to sell on behalf of Value Drugs. Ultimately, however, the
advertising will be directed at consumers in order to create a demand for the products which will further
spark demand on the part of retailers to carry the Value Drugs products on their shelves.
Value Drugs believes that the key factors motivating purchase by these people are, in order of importance:
1) price competitiveness of the items they purchase; 2) value of the products (highest quality for the best
price); 3) reliability and effectiveness of the products they purchase; and 4) ability of the items retailers
purchase to sell themselves.
Value Drugs knows that its products will be recognized as among the low priced leaders on the market.
Slightly more challenging in terms of an advertising theme will be the issue of quality. Most consumers are
of the mind set that because discount pharmaceuticals are less expensive than their name brand competitors,
the quality of the ingredients going into the discount products make for a less effective end-product. In
reality, the quality of the inputs is on par with the established multinational manufacturers. However, in
attempting to dispel this myth, Value Drugs will stress the quality of its products in its advertising message
to gain an association with the name brand products and to differentiate its products from its primary
competitors in the discount pharmaceuticals niche who tend to emphasize their value as opposed to quality.
Value Drugs expects to make a difference in the independent pharmaceuticals market with its unique
packaging design and in-store promotional displays. It will stress these characteristics in its ad campaign.

The major industry publications for retailers carrying pharmaceutical goods are Industry Week and
Discount Trade Source. Both of these publications have been targeted for advertising campaigns by Value
Drugs as prime places to emphasize the unique selling advantage its products will have.
It is believed not only that consumers will be more inclined to purchase a quality discount product, but also
that more retail stores will carry the Value Drugs products if they understand that the companys packaging
and in-store displays carry themes of quality and reliability rather than themes of low price. Since
purchasing agents at these chain stores are very interested in the ability of these products to sell themselves,
Value Drugs aims to advertise this characteristic in their products.
Finally, this advertising theme will be reinforced with the mailings to purchasing executives and follow-up
calls to these people by the sales force (see the Selling Tactics section of this plan for more information).

Promotions

27

Value Drugs

Business Plan

A complete budget and description of the planned advertising channels are laid out in the table (Advertising)
below:

Advertising
AMOUNT SPENT
MEDIUM

Industry Week (weekly trade


magazine)

Last Year

This Year

Projection

Projection

Projection

Projection

Projection

Sep 1998

Sep 1999

Sep 2000

Sep 2001

Sep 2002

Sep 2003

Sep 2004

$5,000

$10,220

$32,540

$78,400

$84,200

$96,400

$84,200

$10,000

$19,875

$28,000

$48,200

$36,200

$40,250

$47,210

$5,100

$11,450

$30,000

$52,000

$56,500

$60,000

$67,000

$12,000

$23,100

$32,600

$68,480

$74,580

$87,500

$97,500

TOTAL SPENDING

$32,100

$64,645

$123,140

$247,080

$251,480

$284,150

$295,910

GROSS SALES

$633,008

$1,095,304

$2,150,740

$3,156,080

$4,364,610

$5,270,150

$6,775,040

Discount Trade Source (monthly


trade magazine)
Mass Mailings
Direct Sales through Executive
Sales Force

Percentage of Gross Sales

Promotions

5%

6%

6%

8%

6%

5%

4%

28

Value Drugs

Business Plan

Sales Promotions
Value Drugs has planned several promotional efforts for establishing its presence in the cough syrup market
and enhancing its position in the market for stomach-relief medications. The company strongly believes that
promotional selling is extremely important as a means to distinguish the product from among the field of
competitors, reinforce its image of reliability, and lend credibility to the marketing efforts of its direct sales
force.
First, Value Drugs has budgeted for the use of in-store promotional displays which stress the reliability and
effectiveness of both its stomach-relief and its cough syrup products. The company plans to produce
cardboard cutouts picturing male and female models standing back-to-back, one touching his stomach and
smiling, and the other touching her throat and smiling. The cutout will have the words Value Drugs
emblazoned stylishly across it, along with the name of the Value Drugs products.
Second, Value Drugs is offering a promotional sales incentive to manufacturers representatives which is
designed to five the companys products priority over others in their efforts to sell to retailers. Over the last
ten years Joe Formulary has acquired enough frequent flyer miles on a major airline, whose miles do not
expire, for two free round trip first class tickets to the Caribbean. These tickets are fully transferable, and he
plans to offer them ,along with one week lodging accommodations, to the representative with the best sales
performance within one year of the companys expansion.
Finally, Value Drugs plans to make substantial use of the availability of free samples to its prospective retail
customers. Those prospects showing interest in the Value Drugs product line will receive free samples for
their evaluation as a means of persuading the retailer to carry the Value Drugs line of products on its
shelves.

Publicity and Public Relations


Value Drugs plans to generate strong publicity through a strategic public relations effort.
Joe Formulary is a strong believer in maintaining solid business relationships, and has invested a
considerable amount of time and effort developing effective public relations skills. Joe Formulary is a
particularly effective speaker, and has often lectured at chemistry and pharmaceutical conferences. Now, he
plans to volunteer his time as a speaker at seminars for entrepreneurs arranged by service organizations. Joe
Formulary is also a member of the Lions Club in Massive City, and is a member of the Chamber of
Commerce in his district of the city. Each of these organizations has already expressed an interest in having
him as a motivational speaker on entrepreneurial issues.
Joe Formulary often volunteers his time at events sponsored by these organizations, and will make it a high
priority to encourage employees to volunteer for these types of organizations. To facilitate this effort, Joe
Formulary plans to begin a voluntary employee community service team. This team will have T-SHIRTS
emblazoned with the name of the company and the words helping others in our community as caption.
Ultimately, Value Drugs hopes to turn this public relations effort into positive publicity for the company by
encouraging employee participation and service to the community. Value Drugs will initiate friendly
rivalries with other area businesses issuing their challenges through press releases and local free

Promotions

29

Value Drugs

Business Plan

advertising as a means of further establishing corporate and brand awareness as well as ingraining its
position in the local community. The result will be a positive net impact on the community, and on the
image of Value Drugs.

Promotions

30

Value Drugs

Business Plan

Risks
Description of Risks
Every business faces threats from various risk factors it may encounter. Value Drugs is no exception. A list
of considerations the company has addressed include:
> Competitive Response. There is little chance that major pharmaceutical companies will decide to slash
prices based on the Value Drugs expansion.For Value Drugs poses no real threat to the market share held by
each of the primary manufacturers in the industry. As such no competitive response is expected from these
major players that would negatively impact the position of Value Drugs in the industry. Similarly, the
smaller, independent manufacturers are unlikely to respond significantly in price, because they are already
operating toward the lower end of their potential profit margin.
However, it is likely that independent competitors will at least take a look at some of the innovative
techniques Value Drugs will implement. For example, there is a likelihood that the Value Drugs emphasis
on quality as a non-brand name may catch the attention of some competitors. If successful, these
competitors may seek to capitalize on the companys emphasis on quality and change their labels and their
promotional techniques to take advantage of this successful marketing strategy.
> Cycles. Since the cough syrup business is especially seasonal (with winter being the period of greatest
sales), there is the risk that Value Drugs will not be able to meet its obligation to its creditors and employees
in the slower periods of summer due to revenue difficulties. There is a similar risk, though less serious, as a
result of the seasonal variation in usage of stomach-relief medication which tends to peak in the summer
months.
> Growing pains. While Value Drugs has had experience in managing personnel in the pharmaceutical
industry, there is a substantial likelihood that the company will grow extremely quickly, and will require the
employment of additional personnel. This growth will bring with it a series of operational and managerial
issues ranging from accounting and legal choices to marketing options, organizational structure and
personnel questions.

Risks

31

Value Drugs

Business Plan

Contingency Plans
In its plans for expansion, Value Drugs has made plans to deal with the risks outlined above:
> Competitive Response. Value Drugs plans to make a quick and effective market entrance as the quality
leader among discount pharmaceuticals. Traditionally, the first company to introduce and land an in-store
display has priority on its space -- stores typically do not want too many displays (especially of competing
products) cluttering their aisles. Thus, a quick strike on the retail chain market will be especially effective at
locking out competitors who have yet to use this promotional tool. As well, a quick entrance is designed to
ingrain the notion that Value Drugs is the quality product among the variety of similar pharmaceutical
products on the shelf. Finally, if other brands switch their labels and otherwise follow the companys
promotional strategy, the company plans to respond with an advertising theme that emphasized its position
as the quality leader in the market.
> Cycles. Value Drugs has chosen its product mix to offset the cyclical effect of cough syrup sales. The
companys market research has shown that sales of stomach-relief medicine peak in the summer (especially
where active recreation, summer barbecues and picnics are common) . It is anticipated that this will, to
some extent, counteract the effect of diminished sales during slow periods in the sales cycle for cough syrup.
As well, the company plans to position itself from a capital perspective to be able to ride out the slower
months. The inventory planning system will reduce the amount of variable costs (chemicals) ordered during
that period of time to help keep costs down.
> Growing pains. Joe Formulary understands the difficulties that managing a quickly growing enterprise
can pose. He received his M.B.A. in what is widely regarded as one of the best entrepreneurship programs
in the country at Massive State University. There, he was exposed to many situations where successful
entrepreneurial enterprises had decisions to make that would determine their viability in a period of high
growth. Joe Formulary knows that rapid growth will require him to increasingly delegate responsibility -- a
characteristic he mastered in his successful management career at Pharmico. He also is committed to a
semi-annual personal assessment and evaluation of his management skills and the companys direction. For
this, he has budgeted $15000 in outside services for next year to hire a consultant who is a regionally
recognized expert in entrepreneurial management decision making.

Risks

32

Value Drugs

Business Plan

Finances
Sources and Uses of Capital
In order for Value Drugs to successfully complete its plans for expansion, an investment of $1,125,000 will
be required. The owner will contribute $125,000 of his own money and is seeking financing for the
remaining $1,000,000 from an outside source. The anticipated terms of the loan will be 6 years with an
interest rate of 8% that will be repaid in monthly installments. The table below (Sources and Uses of
Capital) represents the ways in which the funds will be utilized over a one-year period.

Sources and Uses of Capital


Description

Amount

SOURCES
Business Loan

$1,000,000

Owner Investment

$125,000

TOTAL SOURCES

$1,125,000
USES

Chemicals

$363,750

Machinery

$187,500

Salaries

$93,750

Working Capital

$93,750

Office Costs

$115,125

Professional Fees

$78,750

Miscellaneous and Reserve Fund

$192,375

TOTAL USES

$1,125,000

Uses of Capital

Finances

33

Value Drugs

Business Plan

Balance Sheet
The following table (Balance Sheet) provides an overall picture of the company's assets and
liabilities.

Finances

34

Value Drugs

Business Plan

Balance Sheet
Description

Sep 1998

Sep 1999

Sep 2000

Sep 2001

Sep 2002

Sep 2003

Sep 2004

ASSETS
Current Assets
Cash - Checking
Accounts Receivable
Inventory
Total Current Assets

$56,717

$303,210

$1,766,500

$2,292,390

$3,095,800

$4,610,410

$7,241,262

$154,254
$112,566
$323,537

$344,254
$124,659
$772,123

$389,550
$189,776
$2,345,826

$379,500
$177,500
$2,849,390

$370,000
$225,000
$3,690,800

$365,000
$220,000
$5,195,410

$378,950
$238,950
$7,859,162

$34,150

$41,220

$189,200

$110,840

$105,510

$120,570

$123,640

$1,650

$1,780

$9,200

$5,340

$5,010

$5,570

$5,890

$32,500

$39,440

$180,000

$105,500

$100,500

$115,000

$117,750

$356,037

$811,563

$2,525,826

$2,954,890

$3,791,300

$5,310,410

$7,976,912

Fixed Assets
Leasehold Improvements
LESS: Accum. Deprec.- Improvements
Total Fixed Assets
TOTAL ASSETS

LIABILITIES AND EQUITY


Current Liabilities
Accounts Payable

$21,327

$58,242

$65,750

$76,500

$85,000

$120,500

$187,950

Notes Payable

$51,633

$41,975

$16,400

$24,000

$26,000

$105,500

$132,600

Investment Loan Payable

$0

$0

$1,168,540

$913,940

$672,140

$437,940

$211,540

Total Current Liabilities

$72,960

$100,217

$1,250,690

$1,014,440

$783,140

$663,940

$532,090

$217,295

$534,595

$1,027,254

$1,542,892

$2,221,529

$3,935,248

$6,471,955

$65,782

$176,751

$247,882

$397,558

$786,631

$711,222

$972,867

Total Equity

$283,077

$711,346

$1,275,136

$1,940,450

$3,008,160

$4,646,470

$7,444,822

TOTAL LIABILITIES AND EQUITY

$356,037

$811,563

$2,525,826

$2,954,890

$3,791,300

$5,310,410

$7,976,912

Equity
Paid-in Capital
Retained Earnings

CURRENT RATIO

4.43

7.70

1.88

2.81

4.71

7.83

14.77

Cash Flow Statement


The following table (Cash Flow Statement) covers the Value Drugs cash disbursements for historical,
present and projected years.

Finances

35

Value Drugs

Business Plan

Cash Flow Statement


Description

Last Year
Sep 1998

This Year
Sep 1999

Projection
Sep 2000

Projection
Sep 2001

Projection
Sep 2002

Projection
Sep 2003

Projection
Sep 2004

RECEIPTS
Beginning Cash Balance

$27,000

$1,394

$5,450

$544,680

$235,686

$298,712

$317,948

Cash Sales

$324,500

$425,440

$1,371,640

$2,397,080

$3,624,610

$4,554,150

$6,017,140

Accounts Receivable

$154,254

$325,610

$389,550

$379,500

$370,000

$351,000

$378,950

Owner Investment

$150,000

$200,000

$125,000

$0

$0

$0

$0

$0

$0

$1,000,000

$0

$0

$0

$0

$655,754

$952,444

$2,891,640

$3,321,260

$4,230,296

$5,203,862

$6,714,038

$185,530

$366,115

$989,500

$1,289,600

$1,515,000

$1,895,650

$2,549,850

$32,100

$64,645

$123,140

$247,080

$251,480

$284,150

$295,910

$0

$0

$56,040

$43,040

$72,080

$85,910

$57,206

$29,028

$35,037

$160,820

$94,214

$89,684

$102,485

$105,094

Entertainment

$2,500

$3,640

$12,000

$9,500

$14,800

$17,800

$19,630

Insurance

$6,200

$7,800

$12,850

$15,400

$18,500

$22,458

$21,250

$10,220

$14,530

$16,400

$32,100

$42,500

$45,800

$53,545

Rent

$8,600

$9,800

$18,720

$22,650

$38,500

$42,100

$32,658

Office Supplies

$4,280

$8,706

$10,400

$12,820

$27,500

$32,680

$42,500

Outside Services

$8,400

$10,200

$15,000

$17,500

$18,500

$23,654

$21,369

$73,200

$88,630

$96,400

$148,700

$257,800

$367,420

$487,400

Loan Proceeds
Total Cash Available
DISBURSEMENT
Purchases (collateral material)
Advertising
Capital Equipment
Leasehold Improvements

Legal Expenses

Taxes (Fed. Sales, State)


Telephone
Selling Expense
Wages

$5,420

$6,420

$24,000

$18,500

$27,850

$29,654

$21,000

$25,000

$28,500

$85,400

$125,000

$227,540

$326,900

$432,100

$215,650

$238,080

$375,600

$598,700

$924,500

$1,148,200

$1,463,820

Shipping

$36,975

$52,706

$56,800

$58,540

$61,500

$125,874

$160,150

Miscellaneous

$11,258

$12,185

$21,700

$26,430

$35,110

$38,540

$43,200

Loan Payment

$0

$0

$202,790

$254,600

$241,800

$234,200

$226,400

$654,361

$946,994

$2,277,560

$3,014,374

$3,864,644

$4,823,475

$6,033,082

$1,394

$5,450

$614,080

$306,886

$365,652

$380,388

$680,956

$0

$0

$69,400

$71,200

$66,940

$62,440

$58,750

$1,394

$5,450

$544,680

$235,686

$298,712

$317,948

$622,206

Total Disbursement
OPERATING CASH
Interest Paid
ENDING CASH BALANCE

Finances

36

Value Drugs

Business Plan

Cash Flow Projections

Income Statement
The following table (Income Statement) provides an overview of the company's income for historical,
present and projected years.

Finances

37

Value Drugs

Business Plan

Income Statement
Description

Last Year
Sep 1998

This Year
Sep 1999

Projection
Sep 2000

Projection
Sep 2001

Projection
Sep 2002

Projection
Sep 2003

Projection
Sep 2004

EARNINGS
Gross Sales

$633,008

$1,095,304

$2,150,740

$3,156,080

$4,364,610

$5,270,150

$6,775,040

COST OF GOODS SOLD


Beginning Inventory

$47,500

$112,566

$124,659

$189,776

$177,500

$225,000

$220,000

$185,530

$366,115

$989,500

$1,289,600

$1,515,000

$1,895,650

$2,549,850

$112,566

$124,659

$189,776

$177,500

$225,000

$220,000

$238,950

$120,464

$354,022

$924,383

$1,301,876

$1,467,500

$1,900,650

$2,530,900

$512,544

$741,282

$1,226,357

$1,854,204

$2,897,110

$3,369,500

$4,244,140

$32,100

$64,645

$123,140

$247,080

$251,480

$284,150

$295,910

$0

$0

$3,923

$3,013

$5,046

$6,014

$4,004

Leasehold Depreciation

$1,650

$1,780

$9,200

$5,340

$5,010

$5,570

$5,890

Entertainment

$2,500

$3,640

$12,000

$9,500

$14,800

$17,800

$19,630

Purchases
Less end of period inventory
Cost of Goods Sold
Gross Profit on Sales
GENERAL / ADMINISTRATIVE EXPENSES
Advertising
Capital Equipment Depreciation

Insurance

$6,200

$7,800

$12,850

$15,400

$18,500

$22,458

$21,250

$10,220

$14,530

$16,400

$32,100

$42,500

$45,800

$53,545

Rent

$8,600

$9,800

$18,720

$22,650

$38,500

$42,100

$32,658

Office Supplies

$4,280

$8,706

$10,400

$12,820

$27,500

$32,680

$42,500

Outside Services

$8,400

$10,200

$15,000

$17,500

$18,500

$23,654

$21,369

$71,200

$85,900

$96,400

$148,700

$257,800

$367,420

$487,400

Legal Expenses

Taxes (Income)
Telephone
Selling Expense
Wages

$5,420

$6,420

$24,000

$18,500

$27,850

$29,654

$21,000

$25,000

$28,500

$85,400

$125,000

$227,540

$326,900

$432,100

$215,650

$238,080

$375,600

$598,700

$924,500

$1,148,200

$1,463,820

Shipping

$36,975

$52,706

$56,800

$58,540

$61,500

$125,874

$160,150

Miscellaneous

$11,258

$12,185

$21,700

$26,430

$35,110

$38,540

$43,200

$0

$0

$69,400

$71,200

$66,940

$62,440

$58,750

Total Gen. & Admin. Expenses

$439,453

$544,892

$950,933

$1,412,473

$2,023,076

$2,579,254

$3,163,176

NET INCOME

$73,091

$196,390

$275,424

$441,731

$874,034

$790,246

$1,080,964

Interest Paid

% of Gross Profit

Finances

11.5%

17.9%

12.8%

14.0%

20.0%

15.0%

16.0%

38

Value Drugs

Business Plan

Income Projections

Break Even Analysis


Value Drugs has calculated its break-even point -- the point at which its sales will cover its costs. The
Average Variable Cost ratio calculation expresses the ratio of product cost to gross sales. The table below
(Break Even Analysis) displays the data used in these calculations, as well as the calculations themselves:

Finances

39

Value Drugs

Business Plan

Break Even Analysis


Description
Average Sales/Month
Average Variable Cost
Ratio/Month

Sep 1998
$52,751
0.33

Sep 1999
$91,275
0.36

Sep 2000
$179,228
0.50

Sep 2001
$263,007
0.45

Sep 2002
$363,718
0.40

Sep 2003
$439,179
0.42

Sep 2004
$564,587
0.44

Average Fixed Cost/Month

$36,986

$46,032

$100,222

$133,315

$176,842

$216,744

$254,261

Average Monthly Sales Break


Even point

$55,417

$71,956

$200,356

$241,606

$294,365

$374,810

$454,149

Ratio Analysis
The following table (Ratios) illustrates some of the critical ratios for Value Drugs based on the projected
financial statements in the previous sections:

Finances

40

Value Drugs

Business Plan

Ratios
Ratio

Sep 1998

Sep 1999

Sep 2000

Sep 2001

Sep 2002

Sep 2003

Sep 2004

Current Ratio

4.43

7.70

1.88

2.81

4.71

7.83

14.77

Quick Ratio

2.89

6.46

1.72

2.63

4.43

7.49

14.32

A/R Turnover

4.55

5.95

6.46

10.45

12.88

15.32

17.76

Inventory Turnover

1.07

2.84

4.87

7.33

6.52

8.64

10.59

Profit Margin on Sales

0.14

0.26

0.22

0.24

0.30

0.23

0.25

Rate of Return on Assets

0.21

0.24

0.11

0.15

0.23

0.15

0.14

Rate of Return on Equity

0.26

0.28

0.22

0.23

0.29

0.17

0.15

Finances

41

Value Drugs

Business Plan

Cost Containment
Value Drugs is initiating an aggressive cost-control system as a means of limiting spending excesses as the
companys expansion get under way. Given its relatively young position in the industry it is wise to control
spending while the business gains market share and gradually increases its competitive position.
Based on his business background, Joe Formulary has been able to map out a cost containment program and
a timetable for implementation. The table (Cost Containment) is a basic version of that timetable.
The self-directed cost audit containment will be comprised of several programs which will be used for
internal cost control purposes. The Cost Reduction Reward Program is designed to enable employees to earn
bonuses based on the projected cost savings of the suggestions they provide for improving business
operations. Joe Formulary believes that there is always room to improve and he would like to encourage his
employees to think about efficiency gains and potential reductions in the cost of such things as the
production processes, packaging, and advertising.
Further, an internal cost audit will be performed annually to evaluate the management structure and financial
operations of the company. However, at this point, given the designs for a relatively flat organization
structure and small-scale of operations, Joe Formulary feels the company will be organized for maximum
efficiency.
Additionally, a materials cost tracking program will be implemented in order to periodically evaluate the
sourcing of raw materials, equipment, packaging supplies, and the like to see if there is room for economic
improvement or efficiency gains in terms of channels or processes.
Finally, Joe Formulary has planned a fairly rigid employee wage and training budget for the first year.
Nonetheless, employees will be rewarded for their hard-work in helping the business become successful
through incentives programs, bonuses and other compensation. Further, considerable investment in training
has been budgeted for in order to educate employees from the start, as well as to upgrade their skills over
time.

Cost Containment
Item
1

Program Name\Task Name

Action Taken?

Renewed?

1/1/19XX

1/31/19XX

yes

yes

3/1/19XX

4/1/19XX

no

no

Cost Tracking
Raw Material Cost Tracking

Finances

Review Date

Audits
Internal Cost Audits

Impl. Date

42

Value Drugs

Business Plan

Assumptions
Value Drugs has used the following assumptions in the preparation of its financial statements. All
calculation methods adhere to Generally Accepted Accounting Principles:
> The method of inventory valuation was used on a last-in, first-out basis.
> The cash method of accounting was used.
> A straight line depreciation formula was used.
> A 12% annual rate of interest was assumed for accounts payable and accounts receivable unless otherwise
noted.

Finances

43

Value Drugs

Business Plan

Conclusion
Justification for Loan/Investment
Joe Formulary is providing $125,000 in funding to expand the business of Value Drugs. The company also
seeks $1,000,000 from an outside source to meet the financial requirements of this promising endeavor.
This capital will be used to satisfy the company's expansion requirements as set forth in the Sources and
Uses of Capital section of the business plan.
The projected cash flow statement clearly shows the ability to pay even in a worst-case scenario situation.

Milestones/Timetable
Value Drugs has identified a few key benchmarks it seeks to achieve and has laid these goals out on a
timeline for company success. These objectives, when met, will give an indication of the success of the
expansion effort and will provide the foundation for the future direction of the company . The following
table (Milestones) depicts the name of the objective, the date the goal was set, the date action was initiated,
the target date for achieving the goal, and the current status:

Milestones
Milestone

Date Adopted

Date Enacted

Target Date

Current Status

Capture 1% of the market

8/15/19XX

8/15/19XX

7/15/19XX

on schedule

Reduce raw materials costs 10%

9/12/19XX

10/1/19XX

6/1/19XX

ahead of schedule

Form strong business relationships with local


drugstore owners

10/1/19XX

10/18/19XX

12/31/19XX

ahead of schedule

Conclusion

44