Create an Economic and Management Accounting Plan with Reporting
Soft Drink Market in the United States
Soft drink industry in the USA market is one of the most profitable industries in the country. The country provides a major market and profitability of a company wishing to enter and tap in this market. This expansion analysis plan analyses the market trends under the micro-economic analysis and macro-economic analysis. The parts under cash flows projections and capital budgeting deals with management accounting concepts of identifying cash flows surplus and determining funds requirements. The conclusion part outlines the management recommendation of the best capital budgeting plan to see this plan to profitability.
Microeconomic Analysis of the United States Market
The non- alcoholic beverage market in the USA is highly competitive and highly turbulent. These changes have an impact on both existing beverage companies and aspiring new entrant organizations. An aspiring company has to understand competitive threats and plan a good corporate strategy and craft viable growth projections. This will prove in future to be profitable as well as informed business decisions. This to be done effectively involves a micro-economic analysis of the industry focusing on current trends. The micro-economic trends that are worth mentioning in this paper are the; consumers demand for healthier products, smaller companies gaining share, new products, other products etc.
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Consumers have continuously made it clear they like purchasing and consuming products that contribute to a healthy lifestyle, (euromonitor.com). The soda industry in the beverages industry has been declining in the last one decade. The reported reasons from consumers’ edge show they have been turning to juices, flavored water and other healthier options. These options pack fewer calories, has low sugar, (fortune.com). The saver products saw a rise in consumer growth showing the new entrants should have these goods to target the new consumers
The second major microeconomic factor in the beverage sector is gain of additional market share of smaller companies. In the US market, the market is no longer predominantly by the cola companies, Coca Cola and Pepsi companies. Other notable rival competitors in the soft drinks are the Dr Pepper Snapple the third company, the Monster Beverage that was the best performing organization and Red Bull Company. These companies as been clearly targeting on healthy goods such as bottled water, juice and RTD teas. These are the goods have been on the increase.
New product focus on health. Due to the rising focus of the consumer to purchase healthy related products, new product development has been focusing on healthy aspects of soft drinks. The producers has been shifting their ingredient from normal stimulant in soft drinks the sugar and caffeine. These have been severely criticized for the ill health effects of high sugar content. This shows a new company will grow their existing and new product lines in healthy goods.
Macroeconomic Analysis of the United States Market
Consumer interest in premium products across all the food and beverage industries. Higher end consumer products; promising higher quality ingredients, highly priced and linked to health claims have been gaining momentum. This means companies need to position goods as premium goods to gain more consumers and therefore high sales volume and revenue. This means organizations will achieve their profit maximization, liquidity and profitability goals.
The other major positive trend in the industry is the growing population. With the population, growth being more than one percent per annum from local births and high level of immigrants means a stable and continuously growing market. This macro-economic trend is one of the most important factors. Companies exist to make and market their goods to target consumers. Where the market is growing is a guarantee for market development.
The negative trends include lower than expected consumer spending growth and rising competition. In the USA soft drinks, market there has been a development of consumers moving from soft drinks to healthy products. This has seen a continuous decline of soft drink revenue for a continuous period of ten years in a line. This however is a positive development for healthy drinks, carbonated and flavored water and teas.
The other major trend in the market has been the consumers request and adoption of new products. This includes expanded and new product lines. This has seen the trend in which the old and giant companies such as Coca Cola and Pepsi are losing in sales revenue. New entrant companies have experienced additional and growing revenues. Red Bull is reported to have had a 5.6% revenue increase in 2014. Monster beverage on the other hand experienced a 7% increase. At the same time Coca Cola, Pepsi and Pepper Snapple, Monster Beverage experienced a sales decline of -0.91%, -1.96%, - 1.17% and – 0.91% respectively (fortune et.al)
Key Accounting Practices
The expansion plan of the company will involve the organization investment in a syrup producer, bottling plant, expanding a distribution mechanism, identifying company merchants in the wholesale and retail areas. It is from this the product will proceed to the consumers. The company apart from having a sound producing budget for producing and distribution, the organization will need to have a contingency marketing budget for creating market awareness in the USA industry. The other major planning item will include planning for relevant technology and human capital for proper and efficient execution of the expansion.
The first stage of this planning will involve cash flow projection. The cash flow forecast is a cashbook that projects the business income and outflows for a given period such as week, month, or a financial year. This will involve listing down all the payments or expenditure one expect to give over the period. The receipts received in the business operation will be balanced against expenditure to determine the cash surplus or cash deficit from operation. Where the company experiences a deficit, it is advisable to ignore the project. Where the projections portray a cash surplus it is a strong indication for good business and the business will need to invest in the project.
The cash projections has promised the income receipts and expenditure
Projected Income Statement
Orange flavor $ 225000
Pineapple flavor $ 185000
Apple flavor $ 400000
Grape flavor $ 200000
Total sales revenue $ 1,010,000
Less Operating expenses
Sales and Marketing $ 400000
Administration and marketing $ 200000
Salaries and wages $ 250000
Total expenditure ($ 850,000)
Cash surplus $ 160,000
The projection shows the organization will earn surplus cash balance. This means the organization should consider investing and implementing on the program.
Cash budgeting is the process of determining the cash requirements for setting the expansion project. The company will need cash for expanding the syrup plant, purchase several bottling plant, setting distribution channel and setting, marketing and human resource budgets.
The projected cash budget for the above items is as follows
Syrup plant $ 1000000
Bottling plants $ 2000000
Warehouses $ 900000
Motor vehicles $ 350000
Human resource $ 600000
Marketing $ 400000
Total cash budget $ 5250000
The second part of the cash budget identifies the sources of funds that will be used in the process of financing the budget a process known as capital budgeting. Capital sources of funds can either be from two common sources, owners’ equity and on the other hand issuance of debt. Owners’ equity is raised through stock re-issue or an initial public offer. Management can get debt proceeds from financial sources or offer corporate bonds in the securities market.
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The two methods have different advantages and drawbacks. The Initial public offer issues more company ownership items, stock in the market. The major advantage of this plan is that it is cheaper since there is no need for the company to pay regular interest expenditure and a later maturity value. The major drawback of the debt borrowing is the interest proceeds to the debt holders. The organization currently has fund availability of $ 3 million out of the currently needed proceeds of $ 5.25
The project to expand the organization’s business nationally proves to be a profitable venture for consideration. This is supported by positive factors in micro-economic market level analysis and macro-economic industrial level analysis as discussed above. The analysis of the cash flows shows the organization will provide positive cash flows that are also expected to rise with time. The analysis of cash budget shows that the organization will need an approximate of $ 525000 to implement the plan. This shows the company will need an additional cash requirement of funds approximate $325000 to add to available capital of $ 200000. This additional capital will need to be raised from initial public offer (IPO) that will shift the organization from private ownership to public ownership. This method is relatively cheaper and affordable compared to the expensive debt issuance.
The recommendation of this paper is for the company to issue the public stock.
- Bailey S. (2014), A Guide to the Non-Alcoholic Beverage Industry, Market Realist, Retrieved From http://marketrealist.com/2014/11/guide-non-alcoholic-beverage-industry/
- Country Report; Soft Drinks in the US, EuroMonitor, industries, Soft Drinks, Retrieved from http://www.euromonitor.com/soft-drinks-in-the-us/report
- Kelly J. (2015), US soda sales dropped for the 10th straight year in 2014. Fortune news retrieved from http://fortune.com/2015/03/26/soda-sales-drop-2014/
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