MBA 992-Business Plan Professor Marvin Painter

Comprehensive Business Plan

Prepared for MBA 992

Professor Painter

David Burlock

Table of Contents

1.0 Executive Summary/Overview 3 MBA 992-Business Plan Professor Marvin Painter

2.0 Operations Plan 8

3.0 Human Resources Plan 17

4.0 Marketing Plan 21

5.0 Financial Plan 29

Executive Summary

2 MBA 992-Business Plan Professor Marvin Painter

1.1 Executive Summary 4

1.2 Introduction 6

1.3 Mission Statement 6

1.4 Goals and Objectives 6

1.5 Industry Overview 7

3 David Burlock MBA 992-Business Plan Professor Marvin Painter

1.1 Executive Summary

PC Logistics Solutions (PCLS) is a corporation that performs application assisted freight brokerage services to firms operating out of Western Canada. The P and C represent personalized and creative (respectively) and that is exactly the type of service the company offers; flexible, affordable, accessible and customizable. It is these attributes that will allow PCLS to grow a niche within the stale freight brokerage industry.

PC Logistics Solutions is a small firm that does not require much space or capital requirements. A staff of 3-7 will manage the operations of the company for the first five years and Tailwind Logistics software will aid these employees in managing accounts. Office expansion is scheduled for year three of operations. Noodle Cake Studios will develop and support the mobile application at a cost of $60,000, plus 15% every year after for maintenance. Between the Tailwind software, the mobile app, the office space and customer contact information, PCLS will have everything required to fully operate as a freight brokerage firm. PCLS features minimal capital costs ($68,000), minimal staff and equipment and has scalable operating expenses.

Between 3-7 employees will manage PCLS’s operations in the first five years of operations. Dispatchers will receive salary about 20% greater than the industry average and the sales team will receive about 55% more than the industry average. Dispatchers will be responsible for ensuring brokerage between the two sides of the transaction is smooth, efficient and accurate in addition to securing payment for processed dispatches. The sales team will be responsible for driving client growth, profile development and ensuring continued client happiness. The manager will be responsible for all business operations in addition to doing anything and everything necessary for PCLS to operate. Employee growth projections are based off of sales growth and continued, ongoing employee training will be engrained in PCLS culture.

PC Logistics Solutions will implement a simple marketing strategy that focuses on 2 main segments. PCLS will positions itself in these segments for the two main value propositions that the company offers, each proposition is directed at a different segment. The value propositions of PCLS are affordable service for the logistic seekers segments and versatile service for the logistics providers segments. Each marketing strategy will employ a marketing mix that determines how best to position the company within each segment. A mixture of website, radio,

4 MBA 992-Business Plan Professor Marvin Painter print and social media advertising will make up the bulk of PCLS’s marketing efforts, with tradeshow appearances occurring occasionally. Marketing efforts initially will be focused within the Province of Saskatchewan and will expand over time. The motivation behind PCLS’s marketing strategy is not just to improve sales, it is to demonstrate an industry innovation that will drive a desire for it. PC Logistics Solutions is more than just another logistics brokerage service, it is industry innovation that will alter the way logistics brokering is done in the future.

PC Logistics Solutions financial projections indicate rough first two years of operations, followed by scalable success beginning in year three. A financing schedule of $200,000 will secure the capital and operational budgets for PCLS until revenues can cover all expenses. Due to the service based nature of its business, PCLS features minimal variable costs and cost of goods sold but has a significant percentage of its costs as fixed. PCLS’s dividend policy is directly related to the amount net positive increases in retained earnings; the first dividend payout will occur in year five of operations and continue every year afterwards. Dividends are payable to ownership of PCLS, which for the first five years consists solely of the founding member. The first two years of operations feature financial ratios and analysis that demonstrate fragility; during this time liquidity is poor, debt to asset ratios are not ideal and the company loses over $140,000. Beginning in the third year, liquidity and debt to asset ratios turn positive and continue to improve into the future. By year three, PCLS is projected to almost earn enough to cover its cumulated losses and by the end of the fifth year the net payback is over $330,000. The financial analysis demonstrates a normal start-up trend of initial losses followed by scalable gains and there is nothing concerning about the sustainability of volume or pricing projections.

In summary, PC Logistics Solutions should be a successful venture. The investment analysis demonstrates a favorable investment rate of return, the projections demonstrate good net income growth at scalable rates, the industry is primed for the type of innovative approach PCLS offers and the firm is small enough to not feature significant risk of operational errors. Marketing and sales efforts will determine PCLS’s most important success factor, transaction volume and the affordable and versatile service offers a sustainable competitive advantage.

1.2 Introduction

PC Logistics solutions (PCLS) is a freight brokerage firm that specializes in application based logistics arrangements. PCLS (Personalized, Creative) uses a mobile application to pair logistics seekers with providers in a way that reduces reliance on freight contracts and allows a more versatile service. In addition to this, the application allows logistics providers who normally would have no way to access shipments (farmers, small owner-operators) an opportunity to use their assets to earn extra money. PCLS will use its unique service opportunity to carve out a niche in the freight brokerage industry that should allow it a first to commercialization advantage. In addition to this, the application subscription revenues will allow PCLS to undercut competitors pricing which should allow for a more sustainable advantage. PCLS will rely on a marketing and sales heavy business model that will allow for service awareness in a manner that should drive customer growth. The following document outlines the business plan for PC Logistics Solutions and its first five years of operations.

1.3 Mission Statement

PC Logistics Solutions is a freight brokerage firm specializing in affordable, versatile service. Our core philosophy is ensuring you get the exact service you need, the moment you need it. Our interactive mobile application allows for out of contract dispatching and it puts scheduling power back into your hands. Never before have logistics arrangements been so accessible, allowing you to focus on what’s important to your firm; transporting goods. PC Logistics Solutions. Personalized. Creative. Empowering you.

1.4 Goals and Objectives

1) Empower non-traditional logistics providers the accessibility to capitalize on their idle assets. This can be achieved by successfully using our mobile application to connect farmers, small trucking owner-operators and other logistics service providers to firms who need goods transported. We would like to achieve this by having at least 20 non-traditional logistics providers as subscribing members by the end of the second year of operations.

2) Establish a market stronghold on the application guided freight brokerage industry within the first two years of operations before competitors can replicate our success. This can be achieved by having 70 subscribing members by the end of 2019.

3) Revolutionize the logistics arrangement industry in Canada within 7 years of operating. This will be achieved by shifting how the industry standard service is achieved and by reaching 600 subscribing members and revenues upwards of one million dollars.

1.5 Industry Overview

The freight brokerage industry in North America in its current form is about 40 years old and very little has changed during that time. There have been technological improvements of course, but the premise remains the same; a logistics seekers contacts a broker who arranges the transportation of that seekers goods. The broker uses a contact network and sales tactics to find carriers who can provide the service for as little money as possible. The broker then facilitates the agreement between the two parties and receives a commission based on the price of the deal that the shipper pays. Typical issues in this industry arise when shipping costs increase due to fuel costs or maintenance in such a manner that brokerage firms need to reduce their commission to uphold the contracts they facilitated (usually based off a set price per delivery for a period of time). An additional industry concern is the trend of suppliers purchasing their own logistics fleet to cut costs associated with brokers and out of house trucking. This is a result of cost pressures. What if brokerage costs could be reduced from their current levels of around 15% per transaction to make it more cost effective for suppliers to continue using brokers? What if the trend suppliers owning their own fleet could be turned into profit for brokers (idle supplier fleet trucks can make with out of house shipments)? A change in the mature and stale logistics brokerage industry would not only revolutionize how suppliers and truckers interact, it would allow those firms able to capitalize on the change to benefit greatly.

2.0 Operations Plan

2.1 Introduction 9

2.2 Site Plan and Development 9

2.2.1 Floor Plan 10

2.3 Structure 10

2.4 Capital Budget 12

2.4.1 Capital Budget Table 12

2.5 Cost of Goods Sold 12

2.5.1 COGS Table 13

2.6 Operational Budget 13

2.6.1 Expense Budget 13

2.7 Appendix 14

2.1 Introduction

PC Logistics Solutions is a logistics brokerage firm that specializes in secondary usage logistic providers. Using a mobile application that interfaces with PCLS databases to match logistics providers with logistic seekers, PCLS offers a unique opportunity for small sized truck owners to access logistics contracts. An example of this would be a farming operation that has a truck or two sitting idle during the winter months; with PCLS, this owner could be earning additional revenue by fulfilling logistic contracts whenever it is convenient for them. This unique value proposition allows PCLS to be innovative while still performing an industry necessary process. Access to the mobile application will be monthly subscription based, with various rates existing for different classes of logistics provider. Due to this subscription revenue, PCLS can charge less than the industry average per brokered transaction to logistics seekers. This should allow PCLS the opportunity to grow at steady rates sustainably, which is important because sales growth is the driving factor in PCLS’s continued success. Being a service provider and not a product driven company, PCLS’s most valuable asset is its client profiles and needs requirements. Being able to correctly match logistics providers with logistic seekers is PCLS’s business model and being able to do that effectively will ensure operational success moving into the future.

2.2 Site Plan

Due to PCLS being a small firm, the space requirements of the company are minimal. The office space chosen is located in Saskatoon, in the North Industrial area of the city. The office space needs room for four employees, with the ability to expand in either year three or four of operations. The Rockport Officeplex located at 2002 Quebec Avenue allows for such a set up. (Figure 2.1 in Appendix) Suite 244 of the complex would be ideal, as it can be expanded with suite 242 (inner doorway separates the two) when expansion is required. Suite 244 is 430 square feet, which allows for desk space of 36 square feet per employee and enough room for cubicles and equipment. The cost of this suite is 1000$ a month, all-inclusive (utilities, telephone, internet).

2.2.1: A floor plan of the selected office location for PC Logistics Solutions. In the Southeast corner of the building, suite 244 is connected to suite 242 via an inner office door.

2.3 Structure

PC Logistics Solutions is an incorporated firm that specializes in logistics brokerage services and derives its operational value in intellectual processes and networking as opposed to providing physical services. Incorporating allows PCLS to maximize on tax savings by falling under the tax laws of corporations instead of personal rates. PCLS was founded by one person; this, in addition to the tax benefits, means that incorporation is the most efficient business structure for PCLS. Due to this fact that PCLS is a service based firm, it is not dependent on office location or physical attributes. There are only four operational requirements for PCLS; office space, an application, dispatching software and contact information.

The application is the most significant aspect to PCLS’s business success, so ensuring a great product is vital. Saskatoon’s Noodle Cake Studios has agreed to develop the app at a cost of $60,000 (this includes one year of maintenance and support). After the first year, application maintenance costs are estimated to be approximately 15% of the initial cost per year. The application development requires more time and money than most because the app must interface with the Tailwind software used to dispatch orders. The application will be able to sync with a PCLS website that links to the software so no direct product interference of Tailwind’s software will occur. Tailwind Logistics software is subscription based, at a cost of 130$ per user per month. This software will aid in the brokering of transactions, however, PCLS will not be reliant of its services. (Figure 2.2 and 2.3 in Appendix 2.7)

The last component of operations for PCLS is the contact information. This is simply information that can be used to match truckers with shippers and contact info to arrange such transactions.

How these four components fit into the operational process of PCLS is simple; logistics needs are identified, client profiles are created, service agreements are arrange and the service is dispatched and brokered.

1) Logistics Needs: This is a two-pronged approach. For shippers, identifying the types of goods to be shipped and frequency, plus any other relevant information will allow PCLS to be able to match their needs with logistics services. On the logistics side, understanding what type of logistics can be provided by each customer and in what volume/scheduling will allow PCLS to best match logistics services with needs.

2) Using the above information, client profiles can be made that demonstrate match- ability of shippers with logistics services. Detailed profiles will ensure the effectiveness of both the dispatchers and the application.

3) Service agreements is simply matching shippers with truckers and preparing rates for shippers, in addition to negotiating any special considerations. Truckers will have a rate they charge and bringing rates that are acceptable for shippers (in addition to being matched) is how contracts or transaction will be completed.

4) Dispatching the service occurs after both sides agree to terms. PCLS will use Tailwind software to dispatch truckers to shippers and monitor the interactions to ensure both parties are fulfilling their requirements.

2.4 Capital Budget

PC Logistic Solutions requires a modest capital budget of $68,000. $60,000 of that total will go to Noodle Cake Studios for the creation, testing, implementation, maintenance and support of the application. $4,000 of that total will be spent on computers and software for the office staff and the remaining $4,000 will be spent on furniture and electronic equipment. For the first year of operations, the office will need three work stations (desk, chair, cubicle walls, computers, equipment and supplies). The required software is basic everyday office processing (Tailwind software is not included in the capital budget due to its monthly subscription expense).

Schedule 5: Capital Budget 2018 2019 2020 2021 2022

Application 60,000 - - - - Furniture/Electronics 4,000 - - - - Computers/Software 4,000 - - - - Total 68,000 - - - - Figure 2.4.1: A table depicting PCLS’s projected capital budget requirements.

2.5 Cost of Goods Sold

Due to the service nature of PCLS’s operational processes, it features minimal cost of goods sold (COGS). There are only two categories of COGS, application maintenance and website fees. Both of these costs are directed to Noodle Cake studios, who will be responsible for ensuring the application and website are functioning well. Shown below is a table that demonstrates the break-down of the COGS schedule for PCLS; the total cost of goods sold is a projected $10,560 in year one and this total expands to $16,740 by year five.

Schedule 3: Cost of Goods Sold 2018 2019 2020 2021 2022 Application Maintenance 9,000 9,000 9,500 10,000 10,500 Website fees 1,560 3,120 4,680 4,680 6,240

Total 10,560 12,120 14,180 14,680 16,740 2.5.1: A table depicting the 5 year projections of Cost of Goods Sold for PC Logistics Solutions.

2.6 Operational Budget

Figure 2.4 demonstrates the first five operational year operating budgets. In summary, years 1 through 5 are projected to feature operational expenses of $361,112, $399,095, $474,347, $595,162, and $675,998. Operational expenses include Accounting/Legal fees, marketing costs, general supplies, computers/software and furniture/equipment (after year 1), insurance (tenant insurance), all-inclusive rent, miscellaneous décor, salaries and benefits, vehicle expenses, debt interest, CCA depreciation expenses and a variable cost of sales percentage. The significant increases in the operational budget in years 3 and 4 are due to hiring new staff to keep up with projected growth. If growth is slower than expected, those particular years operating budgets will drop by about $65,000 and $85,000 respectfully. Year one features website creation costs which increase the operational expenses by $50,000 comparatively to following years. The areas where operational expenses can most easily be decreased are website costs, salaries and vehicle expenses.

Schedule 4: Operating Expenses 2018 2019 2020 2021 2022

Accounting and Legal 2,000 2,040 2,081 2,123 2,165 Advertizing (Marketing) 68,965 19,992 20,043 20,094 19,584 General Supplies 2,000 2,040 4,000 4,080 4,162 Computers/Software - 4,000 4,080 4,162 4,245 Furniture/Electronics - 2,000 2,040 2,081 2,122 Insurance 300 306 312 318 325 Rent (all inclusive) 12,000 12,240 24,480 24,970 25,469 Misc. Office decor - 2,000 2,040 2,081 2,122 Wages and Salaries 210,000 272,950 339,488 431,627 506,479 Vehicle Expense 25,000 25,500 26,010 51,000 52,020 Employee Benefits (salaries) 7.48% 15,708 20,417 25,394 32,286 37,885 Misc Variable Costs % Sales 0.5% 1,139 2,070 3,038 4,360 5,733 CCA (Furniture, electronics) 400 920 1,140 1,324 1,480 CCA (Computers, Software) 17,600 26,620 14,201 8,657 6,207 Debt Interest 6,000 6,000 6,000 6,000 6,000 Total Operating Expenses 361,112 399,095 474,347 595,162 675,998

Figure 2.6.1: The operating expenses of PC Logistic Solutions for the first 5 years of operations.

2.7 Appendix

Figure 2.1: The location of the selected office space for PC Logistics Solutions, the Rockport Officeplex at 2002 Quebec Avenue in Saskatoon, SK.

Figure 2.2: A screenshot of the contact information page on the Tailwind Dispatching software. Tailwind Logistic software will aid in brokering transactions with PC Logistics Solutions.

Figure 2.3: A screenshot of the dispatching page of Tailwind’s Logistics software.

3.0 Human Resources Plan

3.1 Introduction 18

3.2 Job Descriptions/Training Programs 18

3.3 Salaries and Benefits 19

3.4 Growth 20

3.5 Human Resource Structure 20

3.6 References 20

3.1 Introduction

Being a small firm, the human resources plan for PC Logistics Solutions is straight forward. PCLS believes in hiring the best people and training them in a way that will ensure their success. With a business model that is as dependent on sales growth as PCLS, it is vital that the sales team is the crown jewel of PCLS’s operations. Ensuring the sales team can effectively drive growth and providing every tool they need is a very high priority for the company.

3.2 Job Descriptions/Training Programs

There are only three positions at PC Logistics Solutions; Manager, Dispatcher and Salesperson.

Dispatcher:

 Manage client accounts and make alterations to matching information when necessary

 Organize and facilitate the logistic matching process (for non-app transaction)

 Liaison rate and service conditions between parties

 Create and present finalized service agreements for all parties

 Dispatch and monitor logistics services using Tailwind software

 Facilitate logistics seeker payment processing

Salesperson:

 Gain new logistic provider and seeker clients (rate of 1-2 seekers a month)

 Create detailed new client information profiles to ensure accurate matching

 Negotiate and secure favorable logistics provider rates

 Ensure customer satisfaction by continually monitoring client accounts and assist clients in any way possible

 Assist dispatchers in updating client profiles to ensure effective matching services

Manager:

 Manage all business operations

 Lead employee training programs

 Assist in client profile generation and updating

 Assists the sales team in new client growth

 Lead brand development efforts

Most dispatchers will have significant experience with dispatching software, but a one-day Tailwind software training session will be mandatory for all (even salespeople) employees. The manager, who would have previously undergone Tailwind software training from Tailwind itself, will perform the training. A second day of training will revolve around customer interactions, conflict resolution and brand ambassador training; this will also be administered by the manager. For dispatchers, the following three days will involve a series of random difficult situations for the dispatchers to work through with the aid of the manager. After one week of training, dispatchers will be considered trained fully for customer interaction. Salespeople will also get a three day training session with the manager, but their focus will be on sales strategies and customer interactions. Both salespeople and dispatchers will be required to remain up to date with recent industry trends and new sales strategies on their own time (this is not a time consuming task). The manager will spend a significant amount of time training and assisting employees because PCLS believes that great companies are built upon great employees.

3.3 Salaries and Benefits

Each position features different pay rates. Year one rates will grow by 3% every year to keep up with inflation and allow for a small raise. Additional raises will be evaluated on a situational basis. PCLS will pay its employees more than the industry average to ensure the best people fill positions. Dispatchers will receive a salary of $55,000 a year, plus benefits. This is 20% higher than the industry average of $46,000. (Payscale, 2017) Salespeople will receive a salary of $75,000 a year, plus benefits. This is 55% higher than the industry average of $49,000 a year. (Payscale, 2017) This significant increase is for two reasons; 1) PCLS does not offer commission based incentives to the sales team (at least not within the first five years) 2) Sales growth is vital

19 David Burlock MBA 992-Business Plan Professor Marvin Painter to the long-term success of PCLS, ensuring a star sales team is essential. The manager will earn a salary of $80,000 a year. The manager will take dividends once retained earnings allows (year 5, dividends of $210,136). At that point, the manager will receive dividends in perpetuity at a rate similar to that of year five. If sales growth is not enough to warrant the hiring of additional staff, the manager may increase his salary to a level consistent with an altered dividend strategy.

3.4 Growth

Employment growth will be dependent on sales growth values. At inception, PCLS has 22 clients (truckers and shippers combined) due to the manager’s industry experience and networking efforts. At a growth rate of approximately 2 new clients per month per salesperson and 1 new client per month per manager, the projected growth schedule has employment increasing by 1 team member every year. Initially, PCLS will start with 1 dispatcher and 1 salesperson and expand to 2 dispatchers in the second year. In the third year, PCLS will add one more dispatcher. By the fourth year, PCLS will need to add a second salesperson and by the fifth year PCLS will add a 4th dispatcher. That would have PCLS at 7 employees by the end of the 5th year of operations, as long as sales can provide the projected growth rates.

3.5 Human Resource Structure

Being a small firm, the HR structure will be simple at PCLS. All employees will answer directly to the manager. There will be no department heads, however, the most senior dispatcher will retain a leadership position in situations when the manager is unable to handle. The sales team will be allowed to work autonomously, with vehicle expenses offered at $0.5 per kilometer traveled for work purposes. When additional sales people are hired, the sales team must work together to develop a strategy that maximizes the team’s efficiency, not individual efficiency. The board of directors of PCLS will consist of three members, the manager/owner, his wife (who will be involved in the business unofficially) and the owner’s brother who provided an operational loan. Board members will vote on proposals, but the day-to-day operating decisions of the business will be managed by the owner.

3.6 References

PayScale: Human. Capital. 2017. “Fleet Dispatcher (Trucking and Transportation)”. Canada. Accessed May 22, 2017. http://www.payscale.com/research/CA/Job=Fleet_Dispatcher_(Trucking_ %26_Transportation)/Salary

PayScale: Human. Capital. 2017. “Outside Sales Representative” Canada. Accessed May 22, 2017. http://www.payscale.com/research/CA/Job=Outside_Sales_Representative/Salary

4.0 Marketing Plan

4.1 Introduction 22

4.2 Environmental Analysis 22

4.3 Marketing Objectives 23

4.4 Marketing Mix 23

4.4.1 Transaction Costs 24

4.4.2 Subscription Costs 25

4.5 STP 26

4.6 Marketing Budget 27

4.6.1 Marketing Budget Table 28

4.1 Introduction

PC Logistics Solutions will implement a simple marketing strategy that focuses in an innovative approach to an aging industry. PCLS will position itself as affordable and versatile; a company that can serve the needs of any logistics provider or seeker. Two value propositions will be directed at two different targeted segments, each of which requires a different strategy to ensure market penetration. PCLS’s marketing strategy revolves around marketing industry basics of a marketing mix and STP approach to engaging each mix factor. PCLS will feature a small marketing budget, as most growth will occur organically. However, a small marketing budget does not represent the importance of marketing to PCLS; marketing is an essential component to the business model of PC Logistics Solutions and the successful roll out of its marketing plan will determine the level of success the company has.

4.2 Environmental Analysis

The logistics brokerage industry in Canada is a mature market that has experienced very little innovation in the past few decades. Most brokerage firms use the same few dispatching software systems and ultimately provide the same service. How brokerage firms experience success over others is their ability to negotiate contracts and the ability of their sales team to constantly deliver. The trucking industry in Canada in general is mature and non-innovative (other than technological advancements in the trucks themselves). Many companies employ new technology that monitors trucks and uses GPS to make routes more efficient, but very little has changed in how the business model works (Shipper requests deliveries, broker finds truckers able to deliver, contracts are signed, trucks are dispatched, goods are delivered). Some of the large shipping firms own their own trucks and therefore do their own brokerage (Walmart), but the large majority still rely on freight brokers because brokers can do the job in less time and cheaper than

22 MBA 992-Business Plan Professor Marvin Painter the shippers could themselves. In the logistics industry, success is almost directly related to the size of the firms involved. Larger firms have more power over smaller firms and it can be very difficult for small firms to find work. In addition to this, the trucking industry is dominated by logistics contracts. Company A agrees to ship product B to location C, X times a week and will do it with these requirements and for this price. That system works fine for the most part, but what about unexpected situations such as a trucking company simply no showing up for deliveries or broken trucks or unexpected inventory delivery? Currently, shippers are on the hook for wasted inventory or missed deliveries. This contract system makes its very difficult for smaller trucking firms to get work; large shippers are reluctant to hand their product over to firms that cannot fulfill the requirements of the contracts (which are notoriously hard to fulfill with many emergency clauses that are borderline unreasonable- due to the shipper liability problem). This factor ensures that small owner operators usually need to pair up with established logistics companies to secure work. This is not a desirable situation for owner/operates as they are still on the hook for all operating expenses and do not receive an hourly wage like a company driver would. In summary, the logistics brokerage industry in North America has a few major concerns; pricing based competition, lack of service innovation, reliance on firm power, contract based work, and difficulty for small firms to be successful.

4.3 Marketing Objectives

PC Logistics Solutions has several key marketing objectives.

1) Increase company profile and awareness

2) Demonstrate an advantageous position for customers

3) Grow outside of the Province of Saskatchewan

4) Develop a new sub-industry consisting of casual logistics providers and out of contract agreements

4.4 Marketing Mix

Product

Due to the fact that PC Logistics Solutions offers services and not products, marketing efforts must be experience focused. Being able to provide high quality, quick and affordable services is what PC Logistics Solutions needs to emphasis with its customers. In addition to this, PCLS should emphasize its competitive advantage (affordable and versatile service) in its marketing strategy. There are two components to the product marketing strategy that will allow this to happen: a focus on the pricing on the shipper side and a focus on the versatility of services provided by the application on both sides. The app should be the crown jewel of PCLS’s marketing strategy; without the app, PCLS does not provide a versatile service and cannot be more affordable than competitors. Ensuring the application looks sleek and is easy to use will greatly enhance the ability of a marketing strategy to fully represent its message.

On the shipping side of PC Logistic Solutions services, price is the largest factor in customers decisions. The freight brokerage industry uses a commission on services provided pricing model; for every deal brokered, the brokerage receives a commission that is paid for by the shipper. In North America, from 2012 until 2014, the average brokerage commission rate hovered around 15%. Because PCLS receives revenue from its application services, it can undercut this industry average rate by about a third. For large scale shipping operations, a savings of 5% on every brokered deal can add up to a significant amount of money in a year. This is precisely why PCLS needs to use its pricing point about 10% per transaction to attract large scale shipping customers; this is where the majority of marketing efforts will be focused because this segment will feature the largest growth for PCLS. The pricing strategy is flat rate and not commission based and is consistent with an estimated percentage of 10% per transaction. The pricing for shippers is based on per dispatched shipment and the cost fluctuates from $25-$35 dollars a shipment (depending on the amount of shipments a week).

1 deal per week 3 deals per week 5 deals per week

Per Transaction $35 $30 $25

Weekly $35 $90 $125

Yearly $1,785 $4,590 $6,375 Figure 4.4.1: A table depicting the cost per transaction for logistics seekers based on the amount of dispatched orders per week. An average of $30 was used to generate sales projections.

The application subscription fees ranged from 15$ to $45 monthly, depending on the amount of versatility a logistics provider offers.

Less than 5 units Between 6 and 20 Over 20 units units Less than 2 logistics $25 monthly $35 monthly $45 monthly options Between 2 and 5 $20 monthly $30 monthly $40 monthly logistics options More than 5 logistics $15 monthly $25 monthly $35 monthly options Figure 4.4.2: A table demonstrating the monthly application subscription fees for various category of user. An average of $30 monthly was used to generate sales projections.

Promotion

PC Logistics Solutions will implement many different venues for marketing distribution. Because the logistics industry is very mature and features many traditional customers, a more traditional marketing approach is required. The most significant source of advertising, at least for the first five years, will come from radio media. Radio advertising is going to be the media that provides PCLS with the majority of its small-scale trucking customers; within this segment, radio is still very popular. More specifically than just focusing on radio, the type of stations that should be targeted include country and rock music stations. Printed media such as newspapers and magazines will be implemented as well. While the effectiveness of this form of media has declined in recent years, due to the traditional nature of this industry, it is important not to neglect traditional advertising. Both newspapers and magazines can be deployed in service stations, which are integral infrastructure in the logistics industry. Having a trade show presence is another traditional form of advertising that would be beneficial to PCLS. Tradeshows, while uncommon, allow the unique opportunity to interact with potential customers. At tradeshows, the app can be physically demonstrated to potential customers. The importance of this interaction

25 David Burlock MBA 992-Business Plan Professor Marvin Painter should not be overlooked; getting to as many trucking tradeshows as possible is an integral part of PCLS’s marketing strategy. The last major form of advertising for PCLS is the use of social media, and more specifically, Facebook. This advertising media is effective because Facebook reaches a substantial amount of readers. Even in a traditional industry, Facebook will gather the attention of potential customers. The Facebook advertising should be brief, and include a link to PCLS’s website to increase website traffic. The website itself will be considered a marketing tool as well, it will be maintained regularly and contain many features of a high-end website.

While PC Logistics Solutions will have an office in Saskatoon, Saskatchewan, it will do business all across North America. However, for the first five years, marketing efforts will focus within Western Canada. Radio and tradeshow advertising will take place across regions located close to major highways, so particular focus will be placed on the Trans Canada highway. Saskatoon newspapers will receive the majority of print advertising with nationwide trucking magazines receiving attention as well. Facebook advertising will initially focus on Saskatchewan and will grow organically using the advertising engine Facebook implements. Special attention will be required on tracking where customers are based; increasing advertising measures in regions that are productively attracting new customers is essential to a successful marketing strategy.

4.5 STP

PC Logistics Solutions sees four market segments in the logistics brokerage industry. Two of these four will be primary targets for PCLS’s marketing efforts, but none of the segments will be ignored. The segments are:

1) Small scale logistics seekers

2) Large scale logistics seekers

3) Small scale logistics providers

4) Large scale logistics providers

The logistic seeker segments will be separated by the amount of brokered deals required per week. Companies seeking more than 3 deals per week will be classified as large scale shippers

26 MBA 992-Business Plan Professor Marvin Painter whereas companies requiring 3 or less deals per week will be classified as small scale shippers. On the trucking side, companies offering more than 20 units will be classified as large scale truckers and companies featuring 20 or less units will be considered small scale operators.

The two segments that PCLS will target are the large scale logistics seekers and the small scale logistics providers. These two segments allows PCLS to take advantage of its value propositions of 1) Lower costs per brokered deal that shippers have to pay and 2) Easier access to shipping contracts for smaller truckers historically unable to meet contract demands.

PCLS has a simple strategy for positioning these segments for marketing efforts. The two main value propositions PCLS offers fit with the needs of each segment perfectly. Larger shipping firms are looking for ways to decrease operating expenses and PCLS provides an opportunity to do so. PCLS’s revenue model allows for an average brokerage transaction fee of around 10%, compared to the industry average of about 15%. This is an appealing factor for large companies who could benefit the most from decreased operational expenses. Focusing on this pricing point will be the main marketing positioning strategy for the larger scale logistics seekers.

The small scale trucking operators is where PCLS has its most significant market niche. PCLS’s app allows for last minute, unscheduled services that would be very beneficial to the casual truck owner. An example of the type of customers who would benefit the most from PCLS are farmers. Farmers often have a fleet of trucks with varying hauling capabilities; these trucks for usually sitting in storage during the winter months. What if farmers would earn extra income in the winter by registering with PCLS and running routes when it is convenient for them? PCLS does not limit services to delivering product, the application can be used for anything logistics based such as organizing snow removal, landfill runs, scrap metal runs and anything users input into their profile. In addition to the farming industry, many single owner/operator drivers have to pair with established companies to find work. This is a tedious job because owner/operators take on all the expenses of operating and receive little benefit from the partnership outside of scheduled work. PCLS can eliminate the need for those types of partnerships and allow small owner/operators access to find their own work through either PCLS dispatchers or the application. That is the message PCLS marketing efforts will hit when focusing on the small scale trucking segment.

4.6 Marketing Budget

PC Logistics Solutions will implement a low cost marketing plan over the course of the first five years of operations. Year one will cost $68, 965, followed by yearly totals of $19,600, $19,650, $19,700 and $19,200. Year one will feature the costs of creating and registering a website. The largest marketing expense results from radio advertising, followed by printed media, tradeshows and social media. See Figure 4.6.1 for a break-down of the marketing costs.

Expense 2018 2019 2020 2021 2022

Website $50,000 $1,200 $1,300 $1,400 $1,500

Radio $16,800 $16,200 $15,600 $15,000 $14,400

Printed Media $1,000 $1,000 $1,000 $1,000 $1,000

Social Media $365 $400 $450 $500 $500

Trade shows $800 $800 $800 $800 $800

Magazines 0 0 $500 $1,000 $1,000

Total $68,965 $19,600 $19,650 $19,700 $19,200

Figure 4.6.1: The 5 year marketing expenses for PC Logistics Solutions.

5.0 Financial Plan

5.1 Introduction 31

5.2 Marketing/Ops/HR Considerations 31

5.2.1 Operational Expenses 32

5.2.2 Employees and Salaries 32

5.3 Capital Budget and Depreciation 32

5.3.1 Capital Budget Table 33

5.3.2 CCA Deductions 33

5.4 Financing Budget/Taxes and Dividend Policy 33

5.4.1 Financing Schedule 34

5.4.2 Tax schedule 34

5.4.3 Retained Earnings Schedule 35

5.5 Economic Forecast 35

5.5.1 Economic Variables 35

5.5.2 Revenues 36

5.6 Ratio Analysis 36

5.6.1 Solvency Ratios 37

5.6.2 Profitability Ratios 37

5.7 Financial Information Systems 38

5.8 Financial Analysis 38

5.8.1 Net Cash Flow 38

5.8.2 Earnings Graph 39

5.9 Risk Analysis 39

5.9.1 Risk Scenarios 40

5.9.2 Sensitivity Analysis 41

5.9.3 Break-even Analysis 42

5.9.4 Break-even Graph 42

5.10 Financial Statements 43

5.10.1 Income Statement 43

5.10.2 Balance Sheet 44

5.10.3 Cashflow Statement 44

5.11 Appendix 46

5.12 References 51

5.1 Introduction

PC Logistics Solutions will use financial information to determine the ongoing and projected health of the firm. Key performance metrics of income statements, balance sheets, current ratio and debt to equity ratio will be monitored in addition to risk analysis information such as break even rates and sensitivity evaluations. This information will be used weekly, monthly, quarterly and annually to not only monitor PCLS but to adapt and alter strategies to ensure long term success. The most important performance variables for PCLS include the income statement, transaction volume values, monthly subscription values, the debt-to-equity ratio and the net margin percentage. These metrics will make up the core of the financial recording efforts for PCLS, but many more metrics will be monitored.

5.2 Marketing/Ops/HR Considerations

Marketing, operations and human resources are the majority of PC Logistics Solutions expense budgets. Of these three, the marketing budget is the most vital to the success of PCLS so ensuring adequate budget is allocated for marketing efforts is essential. Review the marketing section (4.7) for a detailed projection of marketing expenses for the first five years of operations. In summary, the marketing budget totals $19,650 in year one (plus $50,000 for the website) and decreases to $19,200 in year five.

The operations budget includes everything that is not a cost of goods expense (website fees and Tailwind subscription costs). This includes expenses such as rent and utilities, marketing expenses, salaries and office supplies. The operational expenses in year one are projected to be $361,112 and increase to $675,998 by year five.

Schedule 4: Operating Expenses 2018 2019 2020 2021 2022

Accounting and Legal 2,000 2,040 2,081 2,123 2,165 Advertizing (Marketing) 68,965 19,992 20,043 20,094 19,584 General Supplies 2,000 2,040 4,000 4,080 4,162 Computers/Software - 4,000 4,080 4,162 4,245 Furniture/Electronics - 2,000 2,040 2,081 2,122 Insurance 300 306 312 318 325 Rent (all inclusive) 12,000 12,240 24,480 24,970 25,469 Misc. Office decor - 2,000 2,040 2,081 2,122 Wages and Salaries 210,000 272,950 339,488 431,627 506,479 Vehicle Expense 25,000 25,500 26,010 51,000 52,020 Employee Benefits (salaries) 7.48% 15,708 20,417 25,394 32,286 37,885 Misc Variable Costs % Sales 0.5% 1,139 2,070 3,038 4,360 5,733 CCA (Furniture, electronics) 400 920 1,140 1,324 1,480 CCA (Computers, Software) 17,600 26,620 14,201 8,657 6,207 Debt Interest 6,000 6,000 6,000 6,000 6,000 Total Operating Expenses 361,112 399,095 474,347 595,162 675,998

Figure 5.2.1: A table depicting the operational expenses of PC Logistics Solutions for the first five years of operations.

Human resources expenses include the salaries of the staff. PCLS’s staff is compensated more than the industry average to ensure employees are motivated to perform at their best. Every employee will receive a pay increase of 3% yearly to ensure for inflation matching and a very minor raise. Additional raises will be considered per basis.

Salary and Wage Expense Number of Employees: Manager 1 1 1 1 1 Sales People 1 1 1 2 2 Dispatchers 1 2 3 3 4

Salaries/Wages Manager Salary 80,000 82,400 84,872 87,418 90,041 Sales Person Salary 75,000 77,250 79,568 81,955 84,413 Dispatcher Salary 55,000 56,650 58,350 60,100 61,903 Total Yearly Salary 210,000 272,950 339,488 431,627 506,479

Figure 5.2.2: A table depicting the number of employees per year of operation and their pay rate for PC Logistics Solutions during its first five years of operation.

5.3 Capital Budget and Depreciation

As mentioned in the Operations section, PCLS requires a capital investment of $68,000 total. This would cover the cost of the application development ($50,000), computers and software ($4,000) and equipment ($4,000). At no other point in the first five years of operations will PCLS require capital spending.

Schedule 5: Capital Budget 2018 2019 2020 2021 2022

Application 60,000 - - - - Furniture/Electronics 4,000 - - - - Computers/Software 4,000 - - - - Total 68,000 - - - -

Figure 5.3.1: A table depicting the capital budget for PC Logistics Solutions during its first five years of operations.

PCLS features two classes of depreciable assets. The first is class 50, which is identified as computer and software equipment. This class depreciates at a yearly rate of 55%. Included in this class is the $60,000 application expense and $4,000 for computers and software (both capital costs) and the $4,000 yearly additions to computers and software. This class of CCA expense balance decreases from $46,400 in year one to $7,201 in year five. The second class of CCA is class 8, which is designated for furniture and equipment. This class depreciates at a rate of 20% annually. Included in this class is $4,000 in capital equipment/furniture costs and an additional $2,000 in yearly equipment/furniture costs. The CCA expense balance for this class in year one is $3,600 and increases to $6,980 by year five. The total CCA expense for each year is as follows (respectively); $18,000, $27,540, $15,341, $9,981, and $7,201. See Appendix 5.11 for more CCA class information.

Schedule 8: CCA Class: Furniture/Equipment (Class 8) 2018 2019 2020 2021 2022 Beg Balance 20% - 3,600 4,680 5,580 6,337 Addition 4,000 2,000 2,040 2,081 2,122 CCA Expense 400 920 1,140 1,324 1,480 End Balance 3,600 4,680 5,580 6,337 6,980

Class: Computers/Software (Class 50) 2018 2019 2020 2021 2022 Beg Balance 55% - 46,400 23,780 13,659 9,164 Addition 64,000 4,000 4,080 4,162 4,245 CCA Expense 17,600 26,620 14,201 8,657 6,207 End Balance 46,400 23,780 13,659 9,164 7,201

Total CCA Expense 18,000 27,540 15,341 9,981 7,687

Figure 5.3.2: A table depicting the CCA class depreciation expenses for PCLS during its first five years of operations.

5.4 Financing Budget/Taxes and Dividend Policy

Financing for PC Logistics Solutions will require $200,000 in total. $100,000 of this will be personal equity and the other $100,000 will be provided in the form of a convertible loan from the brother of the owner. The terms of the convertible loan are simple, but variable. $100,000 will be loaned at an simple interest rate of 6% of $100,000 per year for 5 years. This equals payments of $26,000 yearly with $6,000 of that being interest. At the end of the loan term, the option to purchase 25% of the company at 50% of its total asset value is allowable for the brother lender. This should result in a projected payment of $62,143 for 25% of PC Logistics Solutions.

Schedule 6: Financing Budget Brother debt 50.00% 100,000 - - - - Equity 100,000 - - - - Total 200,000 - - - -

Schedule 7: Debt Ammortization 2018 2019 2020 2021 2022 Beg Balance 5 - 80,000 60,000 40,000 20,000 Addition 100,000 - - - - Payment 26,000 26,000 26,000 26,000 26,000 Interest 6,000 6,000 6,000 6,000 6,000 Principal Reduction 20,000 20,000 20,000 20,000 20,000 End Balance 80,000 60,000 40,000 20,000 -

Figure 5.4.1: The financing budget and payment schedule for PC Logistics Solutions

Due to accumulated loss carry forward rules regarding taxation, PCLS can use its initially net losses to minimize tax payments in later years. With a net loss of $143,972 in year one of operations, PCLS can carry forward that amount in tax savings that will shield its tax payments until the 5 year of operations. In year four, the tax shield is diminished and PCLS will pay a projected $30,019 in corporate taxes at 12.5% (see appendix 5.1 for tax rate information). In year five of operations, PCLS will pay a projected $56,735 in taxes on $453,882 on taxable income.

2018 2019 2020 2021 2022 Income Before Taxes (143,972) 2,803 119,171 262,153 453,882 Accumulated Loss Carry Forward 143,972 141,168 21,998 - - Loss Carryforward Used - 2,803 119,171 21,998 - Taxable Income - - - 240,155 453,882

Federal Tax - - - 67,243 127,087 Small Bus Tax Credit - - - (42,027) (79,429) Provincial Tax - - - 4,803 9,078 Total Taxes - - - 30,019 56,735

Figure 5.4.2: The tax payment projection schedule for PC Logistics Solutions during its first five years of operations.

PCLS’s dividend policy is directly related to the amount of retained earnings available. In years where the retained earnings balance is negative, no dividends will be paid. Dividends will only be paid once the retained earnings balance is neutral. This schedule projects for the first dividend payment to occur in year five of operations at a total of $210,136. This amount is the balance of ending retained earnings of the previous year. The dividends are payable to all company shareholders, which includes the owner solely for the first five years of operations.

Retained Earnings Account Beg RE - (143,972) (141,168) (21,998) 210,136 Net Income (143,972) 2,803 119,171 232,134 397,147 Dividends - - - - (210,136) End RE (143,972) (141,168) (21,998) 210,136 397,147

Figure 5.4.3: A table depicting the projected retained earnings balance for PCLS during its first five years of operation. The determined dividend payments are the previous years ending retained earnings balance once a positive retained earnings balance is gained. See Appendix 5.11 for more supplementary tax information.

5.5 Economic Forecast

The economic forecast includes debt interest rates and projected allowed inflation growth rates. The terms of the $100,000 loan include 6% simple interest of the initial principal, paid evenly over each year of the 5 year term. The projected inflation growth rate used is 2%. The inflation factor of 1.02 is applied to almost every category of costs throughout the financial projections.

Schedule 1: Economic Variables 2018 2019 2020 2021 2022 Debt Interest Rate 6.0% 6.0% 6.0% 6.0% 6.0% Inflation 2.0% 2.0% 2.0% 2.0% 2.0% Inflation Factor 1.020 1.020 1.020 1.020 1.020

Figure 5.5.1: The economic factors of inflation and debt interest rates that will apply to PCLS’s financial projections.

The projected sales growth for PCLS is approximately 503% (from $227,000 in 2018 to $1,146,620 in 2022). This is in relation to a 465% growth in sales volume (per dispatched transaction) and a 187% increase in operational expenses. These figures are adjusted for 2% inflation. What this demonstrates is that PCLS is scalable and should be able to generate more

35 David Burlock MBA 992-Business Plan Professor Marvin Painter profit per input as it grows. This is reflected with gross margin percentage increases every year of operations (95% to 99%).

Schedule 2: Revenues 2018 2019 2020 2021 2022

Number of Transactions/week 138 246 354 498 642 Number of weeks/year 51 51 51 51 51 Average fee/transaction 30.00 30.60 31.21 31.84 32.47 Total Brokerage Sales 211,140 383,908 563,501 808,577 1,063,230

Subscriptions/month 46 82 118 166 214 Number of Months/year 12 12 12 12 12 Average Subscription fee/customer 30.00 30.60 31.21 31.84 32.47 Total Subscription Sales $16,560 $30,110 $44,196 $63,418 $83,391

Total Sales 227,700 414,018 607,698 871,995 1,146,620

Figure 5.5.2: The projected dispatched transaction and subscription revenues for PCLS during its first five years of operations.

5.6 Ratio Analysis

There are three categories of financial ratios that will be monitored for PCLS. They include, liquidity ratios, solvency ratios and profitability ratios.

Liquidity ratios determine how vulnerable a firm is to not meeting its short term financial obligations. A higher liquidity ratio suggests it is easier to convert assets to cash to meet potential financial demands. The two liquidity ratios monitored for PCLS are current and quick ratios. PCLS has current ratios of 0.45, 0.31, 2.95, 16.51 in years one through 4 and has essentially an infinite current ratio in year five due to all liabilities being paid off. The quick ratios are -0.39, -0.8, 1.31, 13.3 in years one through four and once again an essential infinite quick ratio in year five due to no liabilities existing anymore. What these ratios determine is that PCLS is at high risk of not meeting its financial obligations during its first two years of operations. This is troubling because the first two years of operations will be the most challenging.

Solvency ratios measure similar metrics as liquidity ratios, but are directed at long term financial requirements as opposed to short term. The solvency ratios monitored for PCLS include the debt ratio (DR), debt-to-equity ratio (DTE), cashflow-to-debt ratio (CTD) and interest coverage (IC). The following table identifies all four of these ratios for the first five years of operations.

2018 2019 2020 2021 2022 DR 2.22 3.19 0.34 0.06 0.00 DTE -1.82 -1.46 0.51 0.06 0.00 CTD -2.10 -0.51 2.45 12.31 Infinite IC -28.00 -5.12 16.30 41.03 73.37 Figure 5.6.1: A table depicting the debt ratio, debt to equity ratio, cashflow to equity ratio and the interest coverage ratio for PCLS.

What these ratios demonstrate is that years one and two for PCLS are at high risk for financial distress. These ratios are not as concerning as the liquidity ratios because most business rely on some form of debt to be able to cover capital costs. As time goes on and firms earn revenue, these long-term obligation ratios balance out.

The profitability ratios are less about company survival and more about the attractiveness of the projections. These ratios will be benchmarks to look for operational efficiencies moving forward. The profitability ratios that will be monitored are the gross profit margin (GM), net profit margin (NM), return on assets (RA) and return on equity (RE). The following table identifies these ratios between 2018 and 2022.

2018 2019 2020 2021 2022 GM 95% 97% 98% 98% 99% NM -63% 1% 20% 27% 35% RA -400% 15% 101% 70% 80% RE -327% -7% 153% 75% 80% Figure 5.6.2: A table depicting the profitability ratios of gross margin, net margin, return on assets and return on equity in percentage form of PCLS’s first five years of operations.

What these ratios determine is that initially, PCLS has high overhead costs compared to earnings. This is fine however due to the nature of the revenue structure for PCLS. With the significant majority of costs being fixed, the gross margin appears staggeringly high while the net margin is a much more accurate reflection of overall company financial conversion rates. The poor initial return of assets and equity ratios are a reflection of the debt used to fund capital and early costs.

5.7 Financial Information Systems

PC Logistics Solutions will record financial information on a weekly, monthly, quarterly, and yearly basis. Weekly tracking will consist of transactions dispatched volume (the amount of dispatched shipments per week). This metric is the dominant sales value and it is recorded on a weekly basis. Monthly tracking will consist of an income statement, subscription sales reports and gross margin/cost of goods sold reports. These values are important to monitor costs and get a true value for the profit earned in a monthly period. The quarterly metrics will include an income statement, balance sheet and a cash flow statement. These are the statements that will be used to determine the overall financial health of PCLS. The yearly metrics that will be monitored include the income statement, balance sheet, cash flow statement, retained earnings statement, capital budget statement (in year 1), a financing statement and updated break even and risk analysis projections. In addition to these statements and projections, PCLS will include updated five year projections of average net income and cash flow.

5.8 Financial Analysis

The financial analysis takes into consideration how likely PCLS is to succeed. The benchmarks measured in this analysis include cash flow (CF), net income (NI), net present value (NPV), internal rate of return (IRR) and economic rate of return (ERR).

The net cashflow in years one and two are negative, but it rebounds drastically by the third year. This trend follows what is expected from the ratio analysis and capital budget structure. The first year features capital expenses, which significantly effects the amount of available cash. The operating cash flows for years one through five are as follows; -$143,572, $3,723, $120,311, $233,458 and $398,627.

Net Cash Flow (31,572) (16,277) 100,311 213,458 168,491 Cash Bal Beg of Year - (31,572) (47,848) 52,462 265,920 Cash Bal End of Year (31,572) (47,848) 52,462 265,920 434,411

Figure 5.8.1: The net cash flow for the years 2018 to 2022 (left to right) for PCLS

The net income follows a similar trend as the cash flow. Year one is projected to feature a net loss of $143,972, followed by a slight positive net income of $2,803 in year two. Year three features a jump of net income to $119,171 with $232,134 and $397,147 following in years four

38 MBA 992-Business Plan Professor Marvin Painter and five. Both the projected cash flows and net incomes suggest that PCLS will be successful after two years of losses (or close to).

Figure 5.8.2: A graph depicting the five year revenue, operating cash flow, net income, cash balance and retained earnings of PC Logistics Solutions. The graph demonstrates how the low variable cost model influences the sales to net income gap and how the first two years of operations are not the projected financial trend.

The NPV, IRR and ERR all suggest that PCLS is a solid investment. With a rate of return of 20%, the NPV is a projected $91,090 over the course of five years. The IRR is 38% and the ERR is 16%. This suggests that while there is initial risk during the first two years of operations, PCLS is a relatively safe investment with a moderate rate of return on equity.

5.9 Risk Analysis

PC Logistics Solutions has two variables that will determine the success of the company, volume of dispatched transactions and price of those transactions. PCLS does not rely on market pricing of goods and is only minimal vulnerable to the Tailwind software pricing (even doubling its subscription costs would add about $1,500 in additional cost of goods sold). Therefore, a detailed risk analysis must be performed on the key factors of volume of sales and the pricing of sales.

Variable Worst Case Poor Case Base Case Great Case

Volume 15/5 60/20 138/46 153/51

Price 15 20 30 35

Fixed Costs +20% +10% +0% -10%

Figure 5.9.1: A table depicting the risk scenarios for PCLS during its first five years of operations. The volume category represents the volume of transactions/subscriptions. Subscriptions multiplied by 3 (the average transaction number a week for shippers) is the metric used. Price represents the pricing per transaction and subscription (they are priced at matching rates).

In the volume worst case, PCLS will go bankrupt before the end of the fifth year of operations. In this scenario, the net payback and IRR are still positive, but the average five year net income is -$62,447 and the year 5 owners compensation is negative almost half a million dollars. However, this situation would be hard to achieve because it would imply a loss of 17 customers from the initial 22 customers required to commercialize. Things get even worse in the worst case pricing scenario as all four measured risk categories feature negative values. This scenario could play out if competition forces pricing wars that affect how much PCLS can charge. PCLS management would need to implement other strategies besides lowering prices to this point because it would result in failure. The worst case scenario of 20% higher fixed costs is not disastrous for PCLS. In this scenario, the average 5 year profit is only $33,757, net payback is $216,111, and IRR is 16%. In this situation, PCLS would be able to continue operating into the future, with the scalability of the business allowing for increased strength into the future. Obviously, if more than one of these worst case scenarios plays out together, PCLS will not be able to survive.

In the poor case volume scenario, PCLS will require an operating line of credit to continue into the future. In this situation, the five year profit is marginally positive ($4,835), net payback is $213,125, IRR is 12% and the fifth year owners compensation is -$161,647. This situation is not ideal, but with an influx of cash to hold PCLS over until after the fifth year, it would survive. With the poor case pricing scenario, things are a bit tougher for PCLS than the volume scenario, but it would be survivable with a line of credit. In this situation, both average 5 year net income and the fifth year owners compensation are negative, the IRR is 0% and a very slightly positive net payback. This scenario is not ideal; it is survivable but the long term viability of the company would be in jeopardy if the low pricing continues.

The base case scenario is developed using conservative projections based on pricing averaging les than the industry average and the sales team being able to gain a modest three customers a month. In this case, the numbers are healthy across the board and demonstrate a plan that leans towards safety instead of high upside. The base case features an average five year profit of $121,457, net payback of $334,411, and IRR of 38% and a fifth year owners compensation of $300,177.

Sensitivity Analysis Average 5 Year Year 5 Profit Net Payback IRR Owner Comp Transactions/Subscriptions 15, 5 (62,447) 143,152 6% (428,084) Bankrupt 60, 20 4,835 213,125 12% (161,647) Line of Credit 96, 32 58,660 269,103 20% 51,502 123, 41 99,029 311,086 30% 211,364 138, 46 121,457 334,411 38% 300,177 Base Case 153, 51 143,884 357,735 48% 388,989 165, 55 161,826 376,394 58% 460,039 180, 60 184,253 399,718 73% 548,851 240, 80 273,962 493,015 152% 904,100

Prices 15 (163,066) (164,728) -8% (623,300) Bankrupt 20 (68,225) 1,652 0% (315,474) Line of Credit 25 26,616 168,031 14% (7,649) 30 121,457 334,411 38% 300,177 Base 35 216,298 500,790 71% 608,002

Subscriptions/Price 23, 20 (137,002) (69,876) -3% (587,832) Bankrupt 34, 25 (18,239) 121,383 8% (185,273) Line of Credit 46, 30 121,457 334,411 38% 300,177 Base 57, 35 273,861 560,656 113% 835,954 69, 40 448,693 810,225 230% 1,460,543

Figure 5.9.2: A table depicting the sensitivity analysis of PCLS under various pricing and volume based situations.

Using the information the sensitivity analysis provides, it is apparent that pricing has more importance determining the success of PCLS. However, due to the ability to easier control pricing compared to volume, volume will be the key performance indictor (KPI) in quarterly evaluations.

With the main KPI identified, it is possible to perform a break even analysis to determine what level of sales volume will allow PCLS to cover its expenses.

Breakeven Analysis 1 2 3 4 5

Base Case Transactions/Week 138 246 354 498 642 BreakEven Transactions/Week 226 244 284 346 387 Cushion -38.94% 0.82% 24.65% 43.93% 65.89%

Figure 5.9.3: The break even analysis for volume of sales for PCLS during its first five years of operations.

Figure 5.9.4: A graph depicting the break even analysis of PCLS during its first five years of operations. The left axis features the amount of transactions per week and the right axis features the cushion between the break even and base scenarios.

The break even analysis demonstrates a similar trend to the projected earnings and risk analysis sections. Year one will feature performance under the break even value but the performance will grow at a faster rate than the required break even values over time. By the fifth year, a break even cushion of 65% is projected to exist, providing PCLS with a safe amount of variance in case of potential down turns.

The risk analysis of PCLS identifies that the company will struggle through two years of operations before experiencing a comfortable level of success. This is not alarming, it just means that management will have to be diligent with budgeting and remain flexible on operating process costs until year three. See Appendix 5.11 for more supplementary information regarding the risk analysis for PCLS.

5.10 Financial Statements

Included in this section are the PC Logistics Solutions income statements, balance sheet and cash flow statement for its first five years of operations. These three components will be updated every quarter and used as a guideline for the financial health of the company.

Income Statement For the year ended 2018 2019 2020 2021 2022 GM% 95% 97% 98% 98% 99% Sales 227,700 414,018 607,698 871,995 1,146,620 COGS 10,560 12,120 14,180 14,680 16,740 Gross Profit 217,140 401,898 593,518 857,315 1,129,880

Operating Expenses Accounting and Legal 2,000 2,040 2,081 2,123 2,165 Advertizing (Marketing) 68,965 19,992 20,043 20,094 19,584 General Supplies 2,000 2,040 4,000 4,080 4,162 Computers/Software - 4,000 4,080 4,162 4,245 Furniture/Electronics - 2,000 2,040 2,081 2,122 Insurance 300 306 312 318 325 Rent (all inclusive) 12,000 12,240 24,480 24,970 25,469 Misc. Office decor - 2,000 2,040 2,081 2,122 Wages and Salaries 210,000 272,950 339,488 431,627 506,479 Vehicle Expense 25,000 25,500 26,010 51,000 52,020 Employee Benefits (salaries) 15,708 20,417 25,394 32,286 37,885 Misc Variable Costs % Sales 1,139 2,070 3,038 4,360 5,733 CCA (Furniture, electronics) 400 920 1,140 1,324 1,480 CCA (Computers, Software) 17,600 26,620 14,201 8,657 6,207 Debt Interest 6,000 6,000 6,000 6,000 6,000 Total Operating Expenses 361,112 399,095 474,347 595,162 675,998

EBT (143,972) 2,803 119,171 262,153 453,882 Income Taxes - - - 30,019 56,735 Net Income (143,972) 2,803 119,171 232,134 397,147

Figure 5.10.1: The income statement for the first five years of operations for PC Logistics Solutions. This statement is a projection, accurate statements will be created every quarter that identify the true values.

There is nothing unexpected in the income statement; it projects steady growth with scalable operations.

Balance Sheet Year 2018 2019 2020 2021 2022 Current Assets Cash (31,572) (47,848) 52,462 265,920 434,411 Total Current Assets (31,572) (47,848) 52,462 265,920 434,411

Non-Current Assets Application 60,000 60,000 60,000 60,000 60,000 Computers/Software 4,000 4,000 4,000 4,000 4,000 Furniture and Fixtures 4,000 4,000 4,000 4,000 4,000 Accumulated CCA (400) (1,320) (2,460) (3,784) (5,264) Total Non-Current Assets 67,600 66,680 65,540 64,216 62,736

Total Assets 36,029 18,832 118,002 330,136 497,147

Liabilities Long Term Debt 80,000 60,000 40,000 20,000 - Total Liabilities 80,000 60,000 40,000 20,000 -

Common Shares 100,000 100,000 100,000 100,000 100,000 Retained Earnings (143,972) (141,168) (21,998) 210,136 397,147 Total Equity (43,972) (41,168) 78,002 310,136 497,147

Total Liab & Equity 36,029 18,832 118,002 330,136 497,147

Figure 5.10.2: The balance sheet for PCLS for its first five years of operations.

Cash Flow Statement For the year ended 2018 2019 2020 2021 2022

Net Income (143,972) 2,803 119,171 232,134 397,147 CCA 400 920 1,140 1,324 1,480 Operating Cash Flow (143,572) 3,723 120,311 233,458 398,627

Changes in Working Capital

Investment Activities Application (60,000) - - - - Computers/Software (4,000) - - - - Furniture and Fixtures (4,000) - - - - Total (68,000) - - - -

Financing Activities Long Term debt 80,000 (20,000) (20,000) (20,000) (20,000) Common Shares 100,000 - - - - Dividends - - - - (210,136) Total 180,000 (20,000) (20,000) (20,000) (230,136)

Net Cash Flow (31,572) (16,277) 100,311 213,458 168,491 Cash Bal Beg of Year - (31,572) (47,848) 52,462 265,920 Cash Bal End of Year (31,572) (47,848) 52,462 265,920 434,411

Figure 5.10.3: The cash flow statement for PCLS for its first five years of operations.

These three statements provide the projected financial picture that is PC Logistics Solutions first five years of operations. They demonstrate that even with two difficult years, PCLS is a viable business option. The financial information demonstrates PCLS’s ability to perform under less than ideal situations and identifies the key areas required for success. After five years of operations, the financial picture continues to improve with the scalability of the business plan allowing for even more cushion between success and failure.

5.11 Appendix

CCA classes (From Revenue Canada, 2017)

Rate in Class Description % Most buildings bought after 1987 and the cost of certain additions or alterations made after 1987. The rate for eligible non residential buildings acquired after March 18, 2007, and used in Canada to manufacture and process goods for sale or 1 4 lease includes an additional allowance of 6% (total 10%). For all other eligible non residential buildings in this class, the rate includes an additional allowance of 2% (total 6%). To be eligible for the additional allowances, elections have to be filed. For more information, see Class 1 (4%). Most buildings acquired before 1988 (or 1990, under certain conditions). Also 3 5 include the cost of additions or alterations made after 1987. For more information, see Class 3 (5%). Frame, log, stucco on frame, galvanized iron, or corrugated metal buildings that 6 10 meet certain conditions. Class 6 also includes certain fences and greenhouses. For more information, see Class 6 (10%). Property that you use in your business that is not included in another class. Also included is data network infrastructure equipment and systems software for that 8 20 equipment acquired before March 23, 2004. For more information, see Class 8 (20%) and Class 46 (30%). General-purpose electronic data-processing equipment (commonly called computer hardware) and systems software for that equipment acquired before March 23, 10 30 2004, or after March 22, 2004, and before 2005 if you made an election. Motor vehicles and some passenger vehicles. For more information, see Class 10 (30%) and Class 10.1 (30%) . A passenger vehicle not included in Class 10. For more information, see 10.1 30 Class 10.1 (30%) . The cost limit for access to Class 12 (100 %) treatment is $500 for tools acquired 12 100 on or after May 2, 2006, and medical and dental instruments and kitchen utensils acquired on or after May 2, 2006. For more information, see Class 12 (100%). Leasehold interest - You can claim CCA on a leasehold interest, but the maximum 13 Varies rate depends on the type of leasehold interest and the terms of the lease. Patents, franchises, concessions, or licences for a limited period. Your CCA is the lesser of the total of the capital cost of each property spread out over the life of the 14 Varies property, or the undepreciated capital cost to the taxpayer as of the end of the tax year of property of that class. Taxis, vehicles you use in a daily car-rental business, coin-operated video games or 16 40 pinball machines acquired after February 15, 1984, and freight trucks acquired after December 6, 1991, that are rated higher than 11,788 kilograms.

Roads, parking lots, sidewalks, airplane runways, storage areas, or similar surface 17 8 construction. Eligible machinery and equipment used in Canada to manufacture and process 29 Varies goods for sale or lease, acquired after March 18, 2007 and before 2016, that would otherwise be included in Class 43. Most power-operated, movable equipment you bought after 1987 that was use for 38 30 excavating, moving, placing, or compacting earth, rock, concrete, or asphalt. 1 Eligible machinery and equipment, used in Canada to manufacture and process 43 30 goods for sale or lease that are not included in Class 29. For more information, see Class 43 (30%). Electrical vehicle charging stations (EVCSs) set up to supply more than 10 kilowatts but less than 90 kilowatts of continuous power. For property acquired for 43.1 30 use after March 21, 2016 that has not been used or acquired for use before March 22, 2016. Electrical vehicle charging stations (EVCSs) set up to supply 90 kilowatts and 43.2 50 more of continuous power. For property acquired for use after March 21, 2016 that has not been used or acquired for use before March 22, 2016. Data network infrastructure equipment and systems software for that equipment 46 30 acquired after March 22, 2004, (if acquired before March 23, 2004, include them in Class 8 (20%). For more information, see Class 46 (30%). General-purpose electronic data-processing equipment (commonly called computer hardware) and systems software for that equipment, including ancillary data- 50 55 processing equipment acquired after March 18, 2007, and not included in Class 29. For more information, see Class 50 (55%). Machinery and equipment acquired after 2015 and before 2026 that is used in 53 50 Canada mainly to manufacture and process goods for sale or lease. Figure 5.11.1: The CCA rates identified by the Government of Canada for recording depreciation on assets. This table is directly from the Canada Revenue agency website and was last updated in 2017.

Business Income Taxes

Schedule 9: Income Taxes 2018 2019 2020 2021 2022

Federal Small Business 28.00% Saskatchewan Small Business Rate 2.0% Small Business Tax Credit 17.5% Saskatchewan M & P Rate 10.0% Federal Small Business Limit 500,000 Saskatchewan Corporate Rate 11.5% Federal Corporate Rate 15.00% Saskatchewan Small Business Limit 500,000

Figure 5.11.2: Corporate tax information including rates and limits.

Federal tax rates for 2017  15% on the first $45,916 of taxable income,

 20.5% on the next $45,915 of taxable income (on the portion of taxable income over $45,916 up to $91,831),

 26% on the next $50,522 of taxable income (on the portion of taxable income over $91,831 up to $142,353),

 29% on the next $60,447 of taxable income (on the portion of taxable income over $142,353 up to $202,800),

 33% of taxable income over $202,800.

Figure 5.11.3: The Federal personal income tax rates for Canadian citizens for the year 2017. This information is directly from the Canada Revenue Agency website.

Provincial/territorial tax rates Province/territory Rate 8.7% on the first $35,851 of taxable income, 14.5% on the next $35,850, 15.8% on the next $56,309, Newfoundland and Labrador 17.3% on the next $51,204, 18.3% on the amount over $179,214

9.8% on the first $31,984 of taxable income, 13.8% on the next $31,985, Prince Edward Island 16.7% on the amount over $63,969

Nova Scotia 8.79% on the first $29,590 of taxable income,

14.95% on the next $29,590, 16.67% on the next $33,820, 17.5% on the next $57,000,

21% on the amount over $150,000 9.68% on the first $41,059 of taxable income,

14.82% on the next $41,060, New Brunswick 16.52% on the next $51,388, 17.84% on the next $18,593, 20.3% on the amount over $152,100

5.05% on the first $42,201 of taxable income,

9.15% on the next $42,203, Ontario 11.16% on the next $65,596, 12.16% on the next $70,000, 13.16 % on the amount over $220,000

10.8% on the first $31,465 of taxable income,

Manitoba 12.75% on the next $36,540, 17.4% on the amount over $68,005

11% on the first $45,225 of taxable income, 13% on the next $83,989, Saskatchewan 15% on the amount over $129,214

10% on the first $126,625 of taxable income, 12% on the next $25,325, 13% on the next $50,650, Alberta 14% on the next $101,300, 15% on the amount over $303,900

British Columbia 5.06% on the first $38,898 of taxable income,

7.7% on the next $38,899, 10.5% on the next $11,523, 12.29% on the next $19,140, 14.7% on the amount over $108,460

6.4% on the first $45,916 of taxable income, 9% on the next $45,915, 10.9% on the next $50,522, Yukon 12.8% on the next $357,647, 15% on the amount over $500,000

5.9% on the first $41,585 of taxable income, 8.6% on the next $41,587, Northwest Territories 12.2% on the next $52,047, 14.05% on the amount over $135,219

4% on the first $43,780 of taxable income, 7% on the next $43,780, Nunavut 9% on the next $54,793, 11.5% on the amount over $142,353 Figure 5.11.4: The provincial and territorial income tax rates for individuals residing in Canada for the year 2017. This information is directly from the Canada Revenue Agency website.

5.12 References

Canada Revenue Agency. 2017. “CCA Classes.” Canada.ca. Accessed June 4, 2017. http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/rprtng/cptl/clsss-eng.html

Canada Revenue Agency. 2017. “Canadian income tax rates for individuals - current and previous years.” Canada.ca. Accessed June 4, 2017. http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts- eng.html#federal