Rug Bug Corporation
What improvements can be made to the body of the business plan to improve its overall presentation?
The business plan does a good job of describing the business concept and the product. A critical missing piece is video of the prototype in use by a child. Testimonials from parents that have used the prototype can be invaluable in assuring the investors that there is a demand for the Rug Bug. This plan needs visual support.
The plan needs a more thorough description of the manufacturing process. The reader has no idea how much initial set-up will be capable of producing. What is Rug Bug’s tie to Inter-Ocean Oil Company? Free rent should be explained. There should be a break-down of how much it costs to manufacture one Rug Bug. The plan must demonstrate that cost of goods sold estimates are accurate. How will the production operation adapt to growing from 20 units per month to 50 units per month? What new equipment will be needed? How will the company respond to a large order of greater than 100 units?
As a manufacturing concern, the investors will be interested in knowing how much labor costs. How many hours of labor input are required to assemble a Rug Bug? Is this a skilled task? Where will labor inputs come from?
Each management team member should include a resume. This is fundamental in providing the investors with an idea of the experience available to tap into. Passion is wonderful, but it is not a substitute for hard earned experience.
This plan does not address how most customers pay for their child’s electric wheelchairs: insurance and state Medicaid programs. Is Rug Bug approved for reimbursement? What legal liabilities will Rug Bug be exposed to? Selling medical devices to children can be rife with legal land mines. Is there a shock risk if exposed to rain or puddles? Will the chair fit in the trunk of someone’s car?
Investors will expect a detailed projection of how the initial $150,000 in seed capital will be spent. Young’s personal contributions are not revealed. Will the investors be providing all of the money? Young may have a better chance of maintaining a larger equity share by showing his contributions and adding some of his own money. Investor are often leery of a deal where the entrepreneur has no skin in the game. Young has nothing to lose if the Rug Bug fails. He must change the business model to participate in some of the risk that the investors face if he expects to receive funding.
Finally, the business plan did not explain why the Rug Bug can’t be copied by one of their competitors. Another company can create a shell similar to the Rug Bug for their own electric wheelchairs with little adjustment to their current product. If the competitor is already authorized for reimbursement through insurance companies and Medicaid, they will quickly take Rug Bug’s price advantage away.
What are the strengths and weaknesses of the marketing mix developed by Mr. Young?
The marketing plan has good source figures for the market. The business plan should include market share estimates to tie in with the Pro Forma Statements. The 6-14 age group has 70,000 wheelchair users. It would be interesting to know how many of these are electric wheelchairs. Also, the name Rug Bug is cute, but it may cause some apprehension because it also means crabs (http://www.urbandictionary.com/define.php?term=rug+bug).
One of the key selling features of the Rug Bug may be that it is similar to a battery operated riding toy. Kids want to be like other kids, and parents are quick to do anything possible to help their kids fit in. It is easy to see how the Rug Bug might be used as a way for a handicapped child to play with the other kids in the neighborhood.
Rug Bug will be distributed through direct sales methods in its launch phase. The 15% commission rate seems reasonable. Wayne Dunn and Dwaine Farrill have been associated with the company and are in a good position to develop the initial sales.
Distributing the Rug Bug to retailers may take more effort than has been suggested. Retailers will want to know what kind of warranties come with the Rug Bug. The business plan should provide financial estimates of the mark-ups used by retailers for selling competing products.
The business plan needs to address how the idea will be protected form competitors copying the Rug Bug. This is a great idea, but it needs to answer this concern. Otherwise, Rug Bug may only have a year of time being the only market offering.
The marketing plan did not address how the Rug Bug is going to be purchased? Most electric wheelchairs are paid for by insurance companies or Medicaid. Blue Cross’s Smartsense $1,500 individual health plan will pay 60% of the cost of an electric wheelchair. The customer is responsible for $ 1,500 out of pocket per year. A few doctor visits and prescriptions will meet the deductible essentially making the Rug Bug free. Medicaid pays 100% of the cost of electric wheelchairs. A phone call to Blue Cross revealed that their requirement is for a doctor’s prescription describing why an electric wheelchair is medically necessary. The Rug Bug’s price of $1,850 is much less than the competing prices of $3,000 to $20,000 for substitute products. The upper-end products usually have special controls and customization for the child. Yet, the bargain price of $1,850 is extraordinary when the competition puts their electric wheelchairs in the hands of customers for little money.
Rug Bug needs to get approval from Medicaid and large health insurance companies as a vendor. Selling chairs with minimal cost to customers will be much easier. The price could even be increased to match competing products in the $3,000 range. A 20% co-payment requirement by a customer will still cost the family only $600.
Approval by Medicaid and large health insurance companies will open up new opportunities. In fact, it might make the business idea much more valuable. Young could potentially sell the business to a competitor for a tidy profit. Approval will also make obtaining seed financing with good terms much easier.
If Rug Bug does not receive approval from Medicaid or health insurance companies, it may want to consider increasing the price and adopting a model similar to that of Tom’s Shoes. Tom’e Shoes gives away a pair of shoes to a needy child for every pair they sell. It might be possible to implement a similar business model for Rug Bug. The free publicity generated would help drive sales higher very quickly. People are often willing to spend more on something when they know they are helping a cause.
Is the production aspect of the business plan adequately discussed?
No, this is a manufacturing business that is selling its products directly to the customer and through retailers carrying the Rug Bug. Cost of goods sold is estimated at 23.56% if sales. There must be a detailed accounting of how each Rug Bug cost $435.86 (23.56% of $1,850) to manufacture. The cost sounds much too low. This includes direct labor costs as well?
The production section should also detail who will be supervising production for Rug Bug. Does this person have any manufacturing experience? The labor portion of the Rug Bug must be estimated very carefully and separately stated in the business plan. What happens if it takes twice as long to manufacture one Rug Bug?
How will quality be measured? Is there a warranty offered? Who are the suppliers? What is the process for producing a Rug Bug? Where are the weak areas in this process? Are agreements in place with suppliers?
The business plan should detail the costs to manufacture a Rug Bug. Each component must be listed along with its cost and supplier. Another table should break down the labor cost component of manufacturing one Rug Bug. It is important for the company to know the manufacturing costs definitively. Retail pricing may have to be adjusted if the cost of goods sold calculations are incorrect. A sure way to lose money in a manufacturing business is to sell products for less than it costs to make them.
What is the nature of the competitive environment?
The Rug Bug is a very good idea. There does not appear to be much competition for a fun electric wheelchair made especially for children. Families are traditionally steered in a particular direction from their healthcare providers and health equipment dealer. Rug Bug’s competitors are established with deep reseller networks and brand awareness.
Rug Bug must find a way to maintain its competitive advantage of being different. With little effort the idea could be extended with different shells: bumble bee, frog, etc. That also poses the problem of competing wheelchair manufacturers making a more toy-like electric wheelchair. Most of these companies are already doing business with Medicaid and health insurance companies. If just one of them copied the idea, they could put Rug Bug out of business very quickly.
Competing electric wheelchair companies offer a depth of customization that Rug Bug can’t. Specialized controls and adjustments are common to meet the needs of the family. Many of the electric wheelchairs are sold in a package that includes equipment to make automobile transportation possible. This might put Rug Bug in the category of an expensive toy.
What are the strengths and weaknesses of the managerial team?
Al Young has generated a great idea. Rug Bug has strong potential as an alternative to the traditional electric wheelchairs made for children. His creativity and design knowledge are very valuable. More time should be spent learning the business side of Rug Bug: cost of goods sold and insurance approval. Those two key issue should be investigated by Young. He is a good choice to run the company initially, because his passion may be what makes it a success.
Wayne Dunn and Dwaine Farrill will operate the marketing department. The commission rate of 15% is fair. The reader of the business plan does not have any idea how they are associated with the company or what their sales skills are. Investors will expect professional salesmanship and experience to market Rug Bug.
Linda Bryant: who is she? Bryant is the single signatory for the company and receives no compensation. There must be better internal control over the cash function. Two signatures should be required for transactions over a certain size. There is no explanation as to why she is working for free. Investors will want to know of her experience and knowledge, because she will have significant control over their capital.
A resume for each management team member should be included in the business plan. It would also be helpful for each team member to write a paragraph or two about Rug Bug. Additional views can be very helpful for prospective investors. These people will all have a role in the success in the company.
Are the Pro Forma Statements satisfactory?
Rug Bug’s pro forma financial statements are missing some important elements. Where are the payroll tax expense items? That will run 15% of payroll. Workers compensation insurance has not been displayed. The $42 monthly employee insurance is very low for any insurance. It needs to be explained.
Research and development appears to be a financial black hole. Investors need a better description of how these funds will be used. Within 12 months of operations, the cost is $4,625 for the month. Young will draw a salary of $2,000 per month. R & D is 2.5 times his pay. The business plan should give guidance as to what exactly the R & D costs are. New business offerings or product ideas can be described.
The Cash Flow Statement should show the monthly cash position. Taxes in Year 1 do not reflect a reduction in tax liability for lower tax rates and early month losses. The federal corporate tax rate on the first $50,000 of taxable income is only 15%. The calculations for tax expense should be reworked to provide better accuracy.
Bad debt expense at 3% of sales may be high. The business model might be able to adjust the way it bills so that there is no accounts receivable or bad debt expense. Credit card charges for accepting payments should be included at 1.5% of sales.
Warranty costs must be estimated and accounted for. This will be based on the warranty policy that was not included in the business plan. Poor workmanship will create high warranty costs. Rug Bug’s accountants can help estimate an allowance for warranty expense.
A statement explaining how start-up capital will be used is necessary. Rug Bug should also provide a statement detailing additional capital expenditures for the first 3 years of operations.
How sound are the forecasts?
The forecasts are optimistic. It would be useful for Rug Bug to be selling units now. With a reported cost of $435.86, this is not unreasonable. Demonstrated sales will make convincing investors that this is a sound business idea easier. It can also be used to make a better projection of monthly unit sales.
Dunn and Farrill are expected to sell 25 units each in month 12 to make the forecasted numbers. Projected sales are the big variable in this business plan. By month 24, direct sales are projected at 600 units per month. This is 1,100% growth within one year. It might be possible, but the business plan should include alternative projections based on more reasonable forecasts.
The reader of Rug Bug’s business plan should be able to have the same confidence in sales projections as the author. When this doesn’t happen, a better justification should be provided. A good method for substantiating the estimates would be to provide sales figures in units and dollars for competitors in the same marketplace.
Every number of a business plan should be sourced. Readers will want to be able to trace the roots of the estimates and calculations. A business plan that lacks this support will appear hastily prepared and unprofessional. For example, payroll tax expense can be sourced to current tax law and insurance cost estimates can be sourced to a quote from an insurance broker.
Is $150,000 the “right” amount of capital to ask for and how much equity should Young give up in exchange for the capital?
Every start-up business desires more capital. In fact, many businesses fail because of insufficient start-up capital. This is one of the reasons that a sound business plan can prove worthwhile to do well. Yet, this business plan does not give the reader a good explanation of what the money will be used for.
Assuming that the inventory expense items and flows given were accurate, $150,000 will be adequate. Investors will want better detail and explanations of how the $150,000 will be spent before a deal is struck.
The reader of the business plan is not given a reason as to why 200 units must be produced initially. It might be better to build 20 or 50 units and sell those. The production process description should define how long it takes to produce a Rug Bug. Could the company produce demo models and manufacture units as orders are received? This would reduce inventory and shrink the capital needs.
More information must be provided before a judgment of whether $150,000 is the correct amount of seed capital money. The amount flows through the existing document well, but the questions raised must be answered before an amount is decided on.
Young may have to give up a larger portion of the company than he hopes. $150,000 is a lot of money. If it wasn’t, Young could fund the business himself. He should maintain greater than 50% control. The business plan does not show what Young is contributing to Rug Bug. His compensation package may also be part of the deal being put together. Young could receive a larger pay in exchange for less ownership. Bonus terms should be negotiated at this time as well. Any family employment by Young needs to be revealed to the investors.
The business plan does not include an exit strategy. Investors will have to know how they are going to earn a profit from the deal. Young should also describe what role investors will be expected to play in Rug Bug. Ownership and control are important aspects that must be laid out clearly. Young must maintain his ownership interest above 50% if he expects to operate Rug Bug with little interference from the investors. A buy-out provision can be included in the initial funding agreement that provides Young a way to gain back some of the ownership equity when the business grows.