Production Process of Bags PDF

Pre-Feasibility Study
LEATHER GOODS MANUFACTURING UNIT

(Ladies Hand Bags, Brief Cases, Belts, Wallets)
Small and Medium Enterprise Development Authority

Government of Pakistan
www.smeda.org.pk
HEAD OFFICE
Waheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA Lahore
Tel: (042) 111-111-456, Fax: (042) 5896619, 5899756
helpdesk@smeda.org.pk
REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE

PUNJAB SINDH NWFP BALOCHISTAN
Waheed Trade Complex,
1st Floor, 36-Commercial Zone, 5TH Floor, Bahria Ground Floor Bungalow No. 15-A
Phase III, Sector XX, Complex II, M.T. Khan Road, State Life Building Chaman Housing Scheme
Khayaban-e-Iqbal, DHA Lahore. Karachi. The Mall, Peshawar. Airport Road, Quetta.
Tel: (042) 111-111-456 Tel: (021) 111-111-456 Tel: (091) 9213046-47 Tel: (081) 831623, 831702
Fax: (042) 5896619, 5899756 Fax: (021) 5610572 Fax: (091) 286908 Fax: (081) 831922
helpdesk@smeda.org.pk helpdesk-khi@smeda.org.pk helpdesk-pew@smeda.org.pk helpdesk-qta@smeda.org.pk
September, 2002
Pre-Feasibility Study Leather Hand bags, Briefcases, Belts & Wallets
DISCLAIMER
The purpose and scope of this information memorandum is to introduce the subject matter
and provide a general idea and information on the said area. All the material included in
this document is based on data/information gathered from various sources and is based on
certain assumptions. Although, due care and diligence has been taken to compile this
document, the contained information may vary due to any change in any of the concerned
factors, and the actual results may differ substantially from the presented information.
SMEDA does not assume any liability for any financial or other loss resulting from this
memorandum in consequence of undertaking this activity. Therefore, the content of this
memorandum should not be relied upon for making any decision, investment or otherwise.
The prospective user of this memorandum is encouraged to carry out his/her own due
diligence and gather any information he/she considers necessary for making an informed
decision.
The content of the information memorandum does not bind SMEDA in any legal or other
form.
DOCUMENT CONTROL
Document No. PREF-61
Revision 1
Prepared by SMEDA-Punjab
Approved by GM Punjab
Issue Date September, 2002
Issued by Library Officer
PREF-61/September, 2002/1
1 Introduction
1.1 Project Brief
The objective of this pre-feasibility study is to provide information regarding
manufacturing of leather goods. The leather goods include items like ladies purses, ladies
handbags, travel bags, waist belts, wallets, briefcases, etc.
This project has the capability of diversifying the product mix and enlarging the product
length by producing other related products with the same infrastructure facilities. Passport
holder, visiting card holder, mobile cover, optical glasses cover, phone index cover, key
chains, camera cases, bandoleers, and hand gloves are some of the products that can be
manufactured in this unit.
1.2 Opportunity Rationale

Leather goods industry of Pakistan enjoys active demand in the foreign as well as domestic
markets. Besides being a potential source of foreign exchange earnings, it provides an
important means of diversification within leather industry by allowing conversion of
domestically produced leather into higher value added leather goods.
Pakistan has an established manufacturing base for leather garments, leather gloves, leather
goods and leather footwear. This sector is an important foreign exchange earner. The
exports of this sector’s were $ 734.4 million during the year 2000-01.
This industry also provides employment opportunities for skilled and semi skilled labor,
which is easily available in areas, where the clusters of this industry exist. The
development of this industry not only offers attractive return on capital but is also
advantageous to the economy as its exports maximize value addition to raw hide and skins.
The manufacturing bases for leather and leather products are shifting towards developing
countries, primarily due to the high labor costs involved and the polluting nature of the
industry. Pakistan has an edge of having vast resources of the raw material viz. hides and
skins. The livestock raised in Pakistan includes cattle, buffaloes, sheep and goats, which
provide a wide range of hides and skin resources. There were 7.4 million hides and 36.2
million skins available in 1999-00 with an average annual growth of 2.92% and 1.47%
respectively. It is a traditional industry in Pakistan, with wide availability of skilled
manpower, and personalized knowledge of raw materials and prices. The industry tends to
be labor intensive. The low cost labor in Pakistan provides a cost advantage over other
East Asian and developed countries. Government has also offered a variety of incentives to
encourage the leather-related exports, which include:
Duty free imports of hide and skins
Duty drawback on exports of leather goods.
No duty no draw back facility under duty and tax remission system (the DTRE
system allows exporters to make duty free import of accessories or make sale tax
free purchases form the local market on a permit issued by export collectorate)
Technical and marketing assistance for the private sector to promote the exports.
Participation in international fairs and exhibitions at subsidized rates through EPB.
Total duty exemption on import of machinery plant and equipment
Sales tax on exports at zero-rated.
1.3 Proposed Capacity

The economic size of this pre-feasibility report is based on a unit with 12 stitching
machines. The 12 stitching machines have a capacity to produce a product mix of 3,000
ladies handbags, 9,000 Wallets, 15,000 belts, and 3,000 briefcases per annum.
1.4 Total Project Cost

The total initial cost of the project is approximately Rs 1.8 million.
2 Current industry structure

2.1 Industry Cluster and Size
According to the Leather directory 1994, there were 134 leather goods manufacturing units
in the organized sector with an installed capacity of 7.5 million pieces per annum. Exact
data of the size of the industry is not available due to the fact that most of the production
comes from cottage industry and it is difficult to get precise statistics of the size of the
industry and their installed capacity. The leather goods industry generally operates on
small and unorganized scale and these units normally lacks modern technology and has
underdeveloped accessories. The clusters of these industries are mostly concentrated in
Karachi, Sialkot and Lahore. Largest cluster is in Karachi that comprised of 86 units and
accounted for 64% of the total units and 66% of total labor employed.
Table 2-1 Leather Goods Industrial Structure in Pakistan
Cities Units Installed Capacity (Million Pcs.) Employment
Karachi 86 2.63 1,707
Sialkot 42 4.15 773
Islamabad 4 0.26 50
Gujrat 1 0.06 8
Lahore 1 0.40 35
Total 134 7.50 2,573
3 Production process flow

Figure 3-1 Process Flow Diagram
Pattern/Frames of the
Product & Cutting of
leather
Skiving
Folding of edges
Sticking of different
parts
Stitching
Fixing of locks &

Accessories
Finishing quality check

& Packing
3.1.1 Pattern/frames of the product & cutting of leather

In this process, dyes/pattern are made according to the shape and design requirements of
the product and leather is cut into pieces of different sizes and shapes with the help of these
dyes/patterns and hydraulic cutting press. For briefcases, wooden and hardboard frames are
readily available in the market in different standard sizes like:
16”x3”x11”
17”x4”x12”
18”x3”x12.5”
18”x5”x12”
3.1.2 Skiving
Skiving is a process of scuffing the edges of the leather pieces, so that the leather can stick
more effectively.
3.1.3 Folding of edges
Skived edges are folded and different parts are glued before stitching.
3.1.4 Stitching
Glued parts of the product are stitched and unnecessary parts of leather and threads are
removed/picked in this process.
3.1.5 Fixing of locks and accessories

The locks and accessories are fixed, which are easily available in local market
3.1.6 Finishing quality check and packing

Finished product is checked for the assured standards and products are packed.
4 Raw material
Table 4-1 List of Raw Material
Description
Buffalo Calf Leather
Silk Lining
Metal Corners
Zip
Adhesive Material
Buttons
Wooden frame (for briefcases)
Lock set and other allied accessories (for briefcases)
Inner lining (for briefcases )
Industry mainly uses locally produced leather; however imported leather is also used, when
specifically required by the buyers/importers for high quality leather goods. Imported as
well as local accessories like zips, locks, buttons, hooks, etc. are available in the market.
4.1 Packing
From commercial point of view, there are leather goods (such as most of the travel goods
and handbags), which are sold over the counter without special packaging and those (e.g.
wallets, engagements pads or diaries) which are mostly presented and sold in their own
(gift) boxes or bags.
Normally, an exporter in Pakistan uses cardboard boxes/cartons of different sizes
depending on the buyer’s specifications and size of the products as packaging material.
5 Production
5.1 Product Mix
The proposed unit can produce a variety of leather products with the same infrastructure
but it has been proposed in this study that the unit will produce the following products
initially in the percentages mentioned below:
Table 5-1 Product Mix Details
Description Production Percentage
Ladies Handbags 10%
Wallets 30%
Belts 50%
Briefcases 10%
Total Production 100%
5.2 Production Capacity

The production capacity of the project is based on 12 stitching machines, which have a
capacity to produce a product mix of 3,000 ladies handbags, 9,000 Wallets, 15,000 belts,
and 3,000 briefcases per annum at 100% capacity. Capacity utilization for the first year is
60%, with 5% annual growth in production capacity and the maximum capacity utilization
for the project of 90%.
Table 5-2 Capacity Details
Description
Maximum Production per Year 100% Utilization 1st Year (60%)
Ladies Handbags 3,000 pieces 1,800 pieces
Wallets 9,000 pieces 5,400 pieces
Belts 15,000 pieces 9,000 pieces
Briefcases 3,000 pieces 1,800 pieces
Total 30,000 pieces 18,000 pieces
6 Marketing
The size of local market in Pakistan for leather goods is very small. In order to cater to this
market segment, marketing expenses will considerably rise so, the primary target of this
unit will be the export market. The leather goods for consumer’s amount to almost 90 % of
total goods market, while 10% is for industrial leather goods.
America and Europe are the major markets for leather goods, and account for 85% of total
imports of leather goods in the world.
6.1 Global Trade of Leather Goods

Total global trade for leather goods was almost US$ 5.7 Billion in 1999. Historical Detail
of leather goods export is given in the below table:
Table 6-1 Global Trade of Leather Goods1 (US$ Millions)
Description 1995 1996 1997 1998 1999
World 5,911 6,006 5,905 5,732 5,653
Growth %age 2% -2% -3% -1%
6.2 Major World Exporters

Italy is the largest exporter of leather goods as a whole and exported 16.54% of the leather
goods trade in 1999. Other exporters of leather include China and Korea, which accounted
for about 43% of the total international market of leather.
Major world exporters of leather goods are Italy, China, France, Germany and Korea. The
export details are given in the following table:
Table 6-2 Details of Major Exporter Countries in US Dollars (Millions)2
Country % Share in 1999
Italy 16.54%
France 16.16%
China 13.36%
Korea 5.08%
6.3 Major World Importers

USA is the biggest importer of leather goods and, in 1999, accounted for 26% of the total
imports, an average amount of US$ 3,000 million. Hong Kong is second with nearly 17%
of total imports. The details of the major importers are given in the below table:
1
Trade Analysis System, year 1999, UNSD
2
Trade Analysis System, year 1999, UNSD
7
Table 6-3 Details of Major Importer Countries in US $ (Million)

Country % of Share in 99
USA 25.84%
Hong Kong 17.12%
Japan 15.93%
Germany 6.39%
6.4 European Market

The European Union ranks amongst the leading markets for leather goods in the world. In
1997, EU demand for leather products was estimated to be US$ 7,000 million. Four
countries dominate the EU leather goods market and their detail is given below:
Table 6-4 Details of Major Importer Countries in EU Market
Country % of Total EU Market

Germany 20%
France 16%
Italy 16%
United Kingdom 10%
Others 38%
Total 100%
Demand for travelers requisites (suit cases, brief cases, document cases, travel bags,
rucksacks and computer cases, and other office related cases) has increased vigorously as
more people travel on holiday or business. The EU ranks among the leading importers of
leather goods in the world. In 1997, the EU imported more than 25% of the world’s leather
goods or 529 thousand tons with a value of US$ 5,094 million.
6.5 Pakistan’s Exports of Leather Goods

In 1999, Leather goods accounted for $9 million in foreign exchange earnings, which is
nearly 2% of total leather exports of Pakistan. The leather goods market as a whole has
shown a negative trend, in Pakistan, the leather goods market has decreased by an annual
average of 3% in last five years. In the year 2000-2001, the exports of Pakistan have
increased from $9 million to nearly $15 million, which is an increase by more then 66%.
Table 6-5 Pakistan Leather Export Trends in US Dollars (Million)
Years 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
Value 11.16 12.06 13.46 8.81 9.02 15
Growth % 8% 11.6% -34.5% 2.8% 66%
6.6 Pakistan’s Trading Partners

Some of the leading importers from Pakistan include USA, Germany and United Arab
Emirates. The details of the major importers of Pakistani leather goods are given in the
below table:
Table 6-6 Pakistan Trading Partners of Leather Goods
Country 1998 % Share 1999 % Share
USA 1.335 15.15% 1.656 18.37%
Germany 1.079 12.24% 0.944 10.47%
United Arab Emirates 1.673 18.99% 0.748 8.30%
United Kingdom 0.408 4.63% 0.515 5.71%
Within the leather goods category, Pakistan produces both industrial and consumer leather
goods. Leather industrial goods comprise of the bulk of Pakistan’s exports of leather
goods.
Table 6-7 Pakistan Exports Details of Leather Goods in US Dollars (Million)
Description (Category Wise) 1995 1996 1997 1998 1999
Industrial Goods 6.36 8.61 9.80 4.75 6.25
Consumer Goods 4.81 3.45 3.66 4.06 2.77
7 Machinery & EQUIPMENT

Table 7-1 Machinery Details
Description Machines Cost/Machine Total Cost (Rs)
Required (Rs)
Hydraulic Cutting Press 1 430,000 430,000
(Ngaushing SL 999-5, Japan)
Cutting Machine 1 96,000 96,000
Strap Cutting 1 20,000 20,000
Skiving Machine 2 25,000 50,000
Needle Lock stitch Machine 12 31,000 372,000
Single Needle Block 1 41,000 41,000
Single Needle Post-Bed Needle Feed 1 110,000 110,000
Dyes for Hydraulic Cutting 60 200 12,000
Total (Rs) 1,131,000
All the required stitching machinery is easily available in the market. The stitching
machinery is available in quite a diversified range of suppliers & origins, i.e. Japanese,
Italian, Chinese, Korean and Taiwanese origin. Other brands of stitching and other
machines are also available i.e. Brothers, Singer, etc. Juki machines have been suggested
due to their durability and easy availability of spare parts in the market.
Table 7-2 Other Equipment Details
Description Number Rate (Rs) Cost (Rs)
Furniture & Fixtures 75,000 75,000
Office Equipment
Fax Machine 1 10,000 10,000
Computer 1 30,000 30,000
Printer 1 20,000 20,000
Air conditioner 1 40,000 40,000
Total Cost 175,000
10
8 Human resource requirement

This sector normally follows piecework system. Normally, there are 10-15 different
process involved in leather goods manufacturing. The leather goods industry of Pakistan,
especially export based, is dependent on job orders and thus, there is an aversion to employ
workers on long term basis. So, the exporters prefer to employ labor under contract system.
However, the units that have regular export orders prefer to employ permanent labor on
piece rate system.
The detail of the human resource requirement for the proposed unit is given in the below
table:
Table 8-1 Human Resource Requirement Detail
Description Number Salary/month (Rs.) Annual salary (Rs)
(1st Year)
Production Staff
Production Supervisor/Manager 1 10,000 120,000
Cutting Master 1 7,000 84,000
Cutter 1 3,000 36,000
Labor (Stitching & Skiving)3 927,000
Quality Supervisor /Controller 1 6,000 72,000
Helper 4 3,000 144,000
Administrative Staff
Owner 1 30,000 360,000
Accounts officers 1 6,000 72,000
Peon 1 2,000 24,000
Security Guards 1 2,500 30,000
Total 1,869,000
3
Paid on per piece basis. The staff is paid Rs. 150 per ladies bag, Rs 30 per wallet, Rs 15 per belt and Rs
200 for each briefcase manufactured.
11
9 Land & Building

9.1 Total Land Requirement
The detail about the area requirement for the proposed leather goods manufacturing unit of
12 stitching machines is given below:
Table 9-1 Covered Area Requirement
Description Required Area (sq. ft).
Stitching & Finishing Hall 1,400
Inspection & Cutting Area 400
Store 250
Accounts & Admin. Office 300
Owner's Office 150
Total: 2,500
9.2 Rent Details

It is recommended that this project should be started in a rented building, as this will
reduce the initial capital cost of the project. An appropriate premises is generally available
in many commercial/industrial areas of the main clusters of leather industry. One year rent
will be paid in advance.
Table 9-2 Rent Cost
Rent Cost Monthly Rent (Rs) Annual Rent (Rs)
Building rent cost 15,000 180,000
9.3 Suitable Locations

The clusters of leather goods manufacturing industry exist predominantly in Karachi,
Sialkot and Lahore. Most of the manufacturers are based in these major cities, so it is
recommended that such unit should be started in these areas. The basic criteria for the
selection of location within these clusters should be the accessibility of skilled manpower
and easy accessibility of raw material. Also, basic utilities like electricity, water and public
transport are a must for the establishment of such sort of unit.
9.4 Utilities Requirements

• Electricity
• Telephone
• Water
12
10 Project Economics
Table 10-1 Project Cost/Capital Requirements
Project Costs
Plant & Machinery 1,131,000
Furniture & Fixtures 75,000
Office Equipment 100,000
Pre-Operating Costs4 30,000
Total Fixed Cost 1,336,000
Minimum Cash on hand 50,000

Raw Material Inventory 197,680
Advance Building rent 180,000
Pre paid Insurance 33,930
Working Capital 461,610
Total Investment in Project 1,797,610

Table 10-2 Financing Plan
Equity 50 % 898,805
Debt 50 % 898,805
Total Financing 1,797,610
Table 10-3 Project Returns
Internal Rate of Return 62%
Net Present Value (NPV) (Rs) 3,872,486
Payback Period (Years) 2.41
4
These expenses are incurred before the unit is operational, e.g. salaries of key personal for 1 month,
stationery, company formation expenses, legal and registration charge, etc.
13
11 Key success factors

The commercial viability of the leather goods manufacturing unit depends on the regular
export orders, which means a very effective marketing of the product in the international
market.
Following are some of the important factors for success of such a business:
• Producers should not restrict themselves to copying. They should be more
innovative and develop their own designs, which can be adapted to the buyers’
specifications.
• When setting up export line for the first time, producers should not start with the
most fashion-sensitive items like women’s handbags, which change style every six
months or so. Producer could start, for example, with travel goods, small leather
goods, lines that stay longer in fashion and therefore offer producers a greater
chance of setting up a stable export business.
• Leather goods producer should concentrate on producing goods that can be made
from leather that is easily available in the local market.
Real commercial power lies only in cooperation between an exporter and an importer.
Becoming a team and working closely together is the best way and perhaps the only way to
success. To achieve this, trading partners must listen to each other’s ideas and understand
each other’s problems.
Some other factors which are important and have be ensured to make this business a
success are as following:
♦ Assurance of high consistent quality.
♦ Surety of products delivery on time.
♦ Competitive Rates.
♦ Cost efficiency through better managerial techniques.
♦ Better services to customers, i.e. claim settlement, etc.
12 Threats for the business

12.1 Threats
The level of technology being used is very low. This not only reduces the production
capacity of the smaller manufacturers, but also affects the quality of their product, thereby
affecting their competitive edge in the international markets. Some of the threats of the
business are as following:
Underdeveloped accessories.
Inefficient marketing.
Lack of modern technology in SMEs and difficult access of credit for SMEs are the
major problem hindering growth of this industry.
Economies of scale is a important factor, as most of units in Pakistan have small
capacity, which means higher cost, and this results in decreasing competitiveness in
the international markets.
14
13 financial analysis
13.1 Projected Income Statement
PROJECTED INCOME STATEMENT
SMEDA
Const Year Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Year-7 Year-8 Year-9 Year-10
Sales 8,208,806 9,481,171 10,950,752 12,648,119 14,608,577 16,872,907 19,488,207 22,508,880 25,997,756 29,033,903
COST OF GOODS SOLD

Raw Material 4,023,792 4,647,480 5,367,839 6,199,854 7,160,832 8,270,760 9,552,728 11,033,401 12,743,578 14,231,837
Packaging Cost 88,200 101,871 117,661 135,898 156,963 181,292 209,392 241,848 279,334 311,956
Payroll (Production Staff) 1,383,000 1,572,285 1,788,401 2,035,257 2,370,047 2,697,786 3,136,139 3,570,794 4,067,677 4,523,723
Machine Maintenance 30,173 23,338 18,141 14,180 11,152 8,829 7,040 5,657 4,582 3,741
Direct Electricity 203,040 223,344 245,678 270,246 297,271 326,998 359,698 395,668 435,234 478,758
Stationary 82,088 94,812 109,508 126,481 146,086 168,729 194,882 225,089 259,978 290,339
Freight Charges 164,176 189,623 219,015 252,962 292,172 337,458 389,764 450,178 519,955 580,678
Total 5,974,469 6,852,753 7,866,244 9,034,879 10,434,522 11,991,853 13,849,644 15,922,634 18,310,338 20,421,032
Gross Profit 2,234,337 2,628,418 3,084,509 3,613,240 4,174,056 4,881,054 5,638,564 6,586,245 7,687,418 8,612,871
OPERATING EXPENSE
Payroll (Admin) 486,000 534,600 588,060 646,866 711,553 782,708 860,979 947,077 1,041,784 1,145,963
Fixed electricity 41,040 45,144 49,658 54,624 60,087 66,095 72,705 79,975 87,973 96,770
Insurance Expense 25,448 19,086 14,314 10,736 8,052 6,039 4,529 3,397 2,548 1,911
Administrative & Factory Overheads 123,132 142,218 164,261 189,722 219,129 253,094 292,323 337,633 389,966 435,509
Amortization (Pre-operational Expenses) 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Depreciation 300,250 227,813 173,222 132,043 100,946 77,431 59,624 46,113 35,840 28,010
Total 978,870 971,860 992,516 1,036,990 1,102,765 1,188,367 1,293,159 1,417,195 1,561,111 1,711,162
Operating Profit 1,255,468 1,656,558 2,091,993 2,576,249 3,071,290 3,692,687 4,345,405 5,169,051 6,126,307 6,901,709
NON-OPERATING EXPENSE
Financial Charges on Long-term Loan 153,696 121,339 88,982 56,625 24,268 - - - - -
Building Rental 180,000 198,000 217,800 239,580 263,538 289,892 318,881 350,769 385,846 424,431
L C Charges 24,626 28,444 32,852 37,944 43,826 50,619 58,465 67,527 77,993 87,102
Total 358,322 347,782 339,634 334,149 331,631 340,511 377,346 418,296 463,839 511,532
PROFIT BEFORE TAX 897,146 1,308,776 1,752,359 2,242,100 2,739,659 3,352,177 3,968,059 4,750,755 5,662,468 6,390,176
Tax 61,560 71,102 82,123 94,852 109,554 126,534 146,147 168,800 194,964 217,733
PROFIT AFTER TAX 835,586 1,237,674 1,670,236 2,147,249 2,630,105 3,225,642 3,821,912 4,581,955 5,467,504 6,172,444
Retained Earnings beginning of year 835,586 835,586 2,073,260 3,743,496 5,890,745 8,520,850 11,746,493 15,568,404 20,150,359 25,617,863
Retained Earnings end of year 835,586 2,073,260 3,743,496 5,890,745 8,520,850 11,746,493 15,568,404 20,150,359 25,617,863 31,790,306
15
13.2 Projected Balance Sheet

PROJECTED BALANCE SHEET
SMEDA
Current Assets
Cash 50,000 133,076 1,243,419 2,702,596 4,564,706 6,841,180 9,826,737 13,341,856 17,547,390 22,587,637 29,139,314
Up-Front Insurance payment 33,930 25,448 19,086 14,314 10,736 8,052 6,039 4,529 3,397 2,548 1,911
Stocks and Inventory 197,680 228,320 263,710 304,585 351,795 406,323 469,303 542,045 626,063 699,177 -
Receivable 1,231,200 1,422,036 1,642,452 1,897,032 2,191,071 2,530,688 2,922,944 3,376,000 3,899,281 4,354,658
Pre-paid building rent 180,000 198,000 217,800 239,580 263,538 289,892 318,881 350,769 385,846 424,431 466,874
Total 461,610 1,816,043 3,166,050 4,903,526 7,087,807 9,736,518 13,151,648 17,162,144 21,938,696 27,613,073 33,962,756
Gross Fixed Assets 1,306,000 1,306,000 1,005,750 777,938 604,716 472,673 371,727 294,296 234,672 188,559 152,719
Less: Accumulated depreciation 300,250 227,813 173,222 132,043 100,946 77,431 59,624 46,113 35,840 28,010
Net Fixed Assets 1,306,000 1,005,750 777,938 604,716 472,673 371,727 294,296 234,672 188,559 152,719 124,709
Intangible Assets
Pre-operational Expenses 30,000 27,000 24,000 21,000 18,000 15,000 12,000 9,000 6,000 3,000 -
Total 30,000 27,000 24,000 21,000 18,000 15,000 12,000 9,000 6,000 3,000 -
Total Assets 1,797,610 2,848,793 3,967,987 5,529,242 7,578,480 10,123,245 13,457,944 17,405,816 22,133,255 27,768,793 34,087,466
Current Liabilities
Accounts payable 395,359 456,640 527,419 609,169 703,590 812,647 938,607 1,084,091 1,252,125 1,398,354
Total 395,359 456,640 527,419 609,169 703,590 812,647 938,607 1,084,091 1,252,125 1,398,354
Long-term liabilities
Long-term Loan 898,805 719,044 539,283 359,522 179,761 - - - - - -
Total 898,805 719,044 539,283 359,522 179,761 - - - - - -
Equity
Paid-up Capital 898,805 898,805 898,805 898,805 898,805 898,805 898,805 898,805 898,805 898,805 898,805
Retained Earnings - 835,586 2,073,260 3,743,496 5,890,745 8,520,850 11,746,493 15,568,404 20,150,359 25,617,863 31,790,306
Total 898,805 1,734,390 2,972,065 4,642,301 6,789,550 9,419,655 12,645,297 16,467,209 21,049,164 26,516,668 32,689,111
Total Liabilities And Equity 1,797,610 2,848,793 3,967,987 5,529,242 7,578,480 10,123,245 13,457,944 17,405,816 22,133,255 27,768,793 34,087,466
16
13.3 Projected Cash flow Statement

PROJECTED CASH FLOW
SMEDA
Net profit 835,586 1,237,674 1,670,236 2,147,249 2,630,105 3,225,642 3,821,912 4,581,955 5,467,504 6,172,444
Amortization (Pre operational expense) 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Depreciation 300,250 227,813 173,222 132,043 100,946 77,431 59,624 46,113 35,840 28,010
Account Recievables (1,231,200) (190,836) (220,416) (254,580) (294,040) (339,616) (392,257) (453,056) (523,280) (455,377)
Up front Insurance Payment (33,930) 8,483 6,362 4,771 3,579 2,684 2,013 1,510 1,132 849 637
Raw Material Inventory (197,680) (30,640) (35,390) (40,875) (47,211) (54,528) (62,980) (72,742) (84,017) (73,115) 699,177
Account Recievables 395,359 61,281 70,779 81,750 94,421 109,056 125,960 145,484 168,034 146,229
Cash Provided by Operations (231,610) 280,837 1,309,904 1,660,718 2,065,829 2,482,588 3,014,547 3,547,007 4,240,611 5,078,832 6,594,120
Financing activities
Long term debt principal repayment (179,761) (179,761) (179,761) (179,761) (179,761) - - - - -
Addition of Long Term Loan 898,805
Add: building rent expense 180,000 198,000 217,800 239,580 263,538 289,892 318,881 350,769 385,846 424,431
Building rent payment (180,000) (198,000) (217,800) (239,580) (263,538) (289,892) (318,881) (350,769) (385,846) (424,431) (466,874)
Issuance of share 898,805
Cash provided by/ (used for) financing activities 1,617,610 (197,761) (199,561) (201,541) (203,719) (206,115) (28,989) (31,888) (35,077) (38,585) (42,443)
Total 1,386,000 83,076 1,110,343 1,459,177 1,862,110 2,276,473 2,985,558 3,515,119 4,205,534 5,040,248 6,551,677
Investing activities
Capital expenditure (1,336,000)
Cash (used for)/ provided by investing activities (1,336,000) - - - - - - - - - -
Net Cash 50,000 83,076 1,110,343 1,459,177 1,862,110 2,276,473 2,985,558 3,515,119 4,205,534 5,040,248 6,551,677
Cash balance brought forward 50,000 50,000 133,076 1,243,419 2,702,596 4,564,706 6,841,180 9,826,737 13,341,856 17,547,390 22,587,637
Cash carried forward 50,000 133,076 1,243,419 2,702,596 4,564,706 6,841,180 9,826,737 13,341,856 17,547,390 22,587,637 29,139,314
17
13.4 Ratio Analysis

Ratio Analysis SMEDA
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Profitability ratios
Gross profit margin on sales 27.2% 27.7% 28.2% 28.6% 28.6% 28.9% 28.9% 29.3% 29.6% 29.7%
Operating Profit on Sales 15.29% 17.47% 19.10% 20.37% 21.02% 21.89% 22.30% 22.96% 23.56% 23.77%
Net profit margin on sales 10.18% 13.05% 15.25% 16.98% 18.00% 19.12% 19.61% 20.36% 21.03% 21.26%
ROA 29.33% 31.19% 30.21% 28.33% 25.98% 23.97% 21.96% 20.70% 19.69% 18.11%
ROE 68.14% 55.62% 46.03% 39.23% 33.80% 30.38% 27.26% 25.33% 23.81% 21.59%
Liquidity ratios
Current ratio 4.66 6.99 9.34 11.66 13.86 16.20 18.29 20.24 22.06 24.29
Quick ratio (Acid Test) 4.08 6.41 8.76 11.09 13.28 15.62 17.72 19.66 21.50 24.29
Asset management ratios
Days sales outstanding 22 42 42 42 42 42 42 42 42 43

Fixed assets turnover ratio 8.16 12.19 18.11 26.76 39.30 57.33 83.04 119.37 170.23 232.81
Total assets turnover ratio 2.88 2.39 1.98 1.67 1.44 1.25 1.12 1.02 0.94 0.85
Debt management ratios

Debt ratio 25% 14% 7% 2% - - - - - -
Times interest earned 8.17 13.65 23.51 45.50 126.56 - - - - -
18
Pre-Feasibility Study Leather Hand bags, Briefcases, Wallets & Belts
14 Key Assumptions
Table 14-1 Operating Assumptions
Hours operational per day 8
Days operational per month 25
Days operational per year 300
Table 14-2 Production Assumptions
Annual production capacity 30,000 pieces
Capacity utilization (1st Year) 60%
Capacity growth rate (yearly) 5%
Maximum Capacity utilization 90%
First Year production utilization 18,000 pieces
Table 14-3 Economy Assumptions
Electricity growth rate 10%
Wages growth rate 10%
Office equipment growth 5%
Table 14-4 Cash Flow Assumptions
Accounts Receivable cycle (in days) 45
Accounts Payable cycle (in days) 30
Raw material inventory (in days) 15
Cash at the start of Operations (Rs) 50,000
Table 14-5 Depreciation Assumptions
Machinery & Equipment depreciation rate 25% Reducing Balance Method
Furniture & Fixtures 10% Reducing Balance Method
Table 14-6 Revenue Assumptions
Weighted average sale prices
Ladies Bags (Rs) 1,000 Per piece
Wallets (Rs) 270 Per piece
Belts (Rs) 150 Per piece
Briefcases (Rs) 2,000 Per piece
Wastage Leather sale Rate 1% of Leather Sale price
Sale price growth rate 10%
Wastage Price Growth Rate 1%
Dollar conversation rate $1= Rs 60
19
PREF-61/Sepetember, 2002/1
Table 14-7 Raw Material Assumptions

Description Rate Usage per piece
Leather Price (Rs) 60 per sq. ft
Zip for Purses (per zip) (Rs) 10 3 zips per Purse
Buttons for Purses (Rs) 5 Per product
Buckle for belts (Rs) 15 Per Product
Wooden Box (Rs) 150 Per Briefcase
Lock Set. (Rs) 400 Per Briefcase
Inner Linings (Rs) 32 Per Briefcase
Adhesive material & Other 0.8% of leather Cost
Leather Wastage Rate 3% Total Leather input
Raw material price growth rate 10%
Table 14-8 Expense Assumptions
Administrative overhead (% of sales) 1.5% of Revenue
Office Expenses (stationery, entertainment, etc.) 1% of Revenue
Freight charges 2% of Revenue
Machine Maintenance cost 3% of Fixed Assets
Insurance rate (Annual) 3%
Rent growth rate 10%
Pre-paid building rent (months) 12
LC Charges 0.3% of Revenue
Tax Rate 0.75% of Revenue
Table 14-9 Financial Assumptions
Project life (Years) 10
Equity 50%
Debt 50%
Interest rate on Long term Debt 18%
Debt repayments (Installment per year) 2
Debt Tenure (Year) 5
Discount rate for calculation of NPV 25%
20
Table 14-10 Material Cost of Ladies Bag

Description Quantity Per Unit Total Cost in (Rs)
Leather consumption 4.5 sq. ft Rs 60 per sq. ft 270
Zip 3 Rs 10 per Zip 30
Parachute Lining Rs 15 per piece 15
Button 1 Rs 5 per Button 5
Adhesive material 0.8% of leather consumption 2.16
Total material cost 322.16
Table 14-11 Material Cost of Wallet
Leather consumption 1.75 sq. ft Rs 60 per sq. ft 105
Parachute Lining Rs 8 per piece 8
Packaging cost 1 Rs 3 3
Table 14-12 Material Cost of Belt
Leather consumption 0.625 sq. ft Rs 60 per sq. ft 37.5
Buckle 1 Rs 15 15
Packaging cost Rs 3 3
Table 14-13 Material Cost of Briefcase
Leather consumption 12 sq. ft Rs 60 per sq. ft 720
Wooden box 150 150
Lock set 400 400
Inner lining 32 32
Packaging cost Rs 20 20
Total material cost 1,327.76
Table 14-14 Direct Labor Costs
Ladies Bag 150 per piece
Briefcase 200 per piece
Belt 15 per piece
Wallet 30 per piece
21

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Pre-Feasibility Study

LEATHER GOODS MANUFACTURING UNIT

Small and Medium Enterprise Development Authority

REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE REGIONAL OFFICE

1.2 Opportunity Rationale

1.3 Proposed Capacity

1.4 Total Project Cost

2 Current industry structure

3 Production process flow

Fixing of locks &

Finishing quality check

3.1.1 Pattern/frames of the product & cutting of leather

3.1.5 Fixing of locks and accessories

3.1.6 Finishing quality check and packing

5.2 Production Capacity

6.1 Global Trade of Leather Goods

6.2 Major World Exporters

6.3 Major World Importers

Table 6-3 Details of Major Importer Countries in US $ (Million)

6.4 European Market

Country % of Total EU Market

6.5 Pakistan’s Exports of Leather Goods

6.6 Pakistan’s Trading Partners

7 Machinery & EQUIPMENT

Total Cost 175,000

8 Human resource requirement

9 Land & Building

9.2 Rent Details

9.3 Suitable Locations

9.4 Utilities Requirements

Minimum Cash on hand 50,000

Total Investment in Project 1,797,610

11 Key success factors

12 Threats for the business

COST OF GOODS SOLD

13.2 Projected Balance Sheet

13.3 Projected Cash flow Statement

13.4 Ratio Analysis

Asset management ratios

Days sales outstanding 22 42 42 42 42 42 42 42 42 43

Debt management ratios

Table 14-7 Raw Material Assumptions

Table 14-10 Material Cost of Ladies Bag

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