Dutch Fabric Innovations

Disclaimer: This example is meant to illustrate how to set assumptions for a business forecasting on CASFLO APP. It is not a real company.

Dutch Fabric Innovations (DFI) is a company established in the Netherlands. It is focused on transforming wool, cotton, silk and synthetic fibers into fabrics that are sold to clothes manufacturers. The firm invests in R&D for developing new fabrics and is known within the industry for its stain-resistant fabrics. DFI has been researching a new type of fabric: the DFI-Xpander, which is entering in the later stages of development. The distinguishable characteristic about the DFI-Xpander is its capacity to adjust to the body, which would allow for a unique size piece of cloth to fit people of all sizes. The firm believes that the DFI-Xpander will be mostly used in t-shirts, polos and similar clothes.

The firm works on a Business to Business (B2B) basis, meaning that it sells its final product to other firms, more specifically, to clothes manufacturers that work with clothing brands.

DFI is analyzing the feasibility of creating a new company within its group that would be dedicated to operate the DFI-Xpander business. The new company and factory will be established in the Netherlands as is the rest of the group.

Business case

DFI-Xpander’s revenues comes from six products: wool, cotton and silk fabrics, distributed between solid colors or patterned type of fabric.

The fibers are to be acquired from non-EU suppliers and are transformed to get the adjustable characteristic that makes DFI-Xpander unique. DFI imports the fibers required for its production from India, when it comes to cotton and wool, and from Thailand, from where it gets silk.

Investment Chronogram

DFI plans to sell the new fabric to cloth manufacturers all over the world: in a first stage it will supply only a few manufacturers in the Netherlands to learn about the welcoming of the product. In a second stage the company plans to expand and sell worldwide.

Revenues

The main source of revenue of DFI-Xpander is the sale of six types of fabric to clothes manufacturers. The fabrics will be used to make shirts and tops.

Expected Quantities

It is expected that each piece of clothing requires an average of 1 m2 of fabric. DFI expects that manufacturers adhere progressively to DFI-Xpander and that the size of the orders grows every year. The company will go through an experimental period, selling only to national manufacturers in 2021 and 2022, to collect information on how well the product is received. In 2023, it plans to open to the worldwide market; therefore it expects to supply more manufacturers.

DFI-Xpander 2020 2021 2022 2023 2024
Number of supplied manufacturers 0 2 4 7 10
Cotton (solid color)
Average supply per manufacturer 15.000,00 15.000,00 20.000,00 23.000,00
Total pieces of clothing 30.000,00 68.000,00 122.000,00 200.000,00
Total m2 30.000,00 68.000,00 122.000,00 200.000,00
Cotton (pattern)
Average supply per manufacturer 12.500,00 13.950,00 16.000,00 19.000,00
Total pieces of clothing 25.000,00 55.800,00 112.000,00 190.000,00
Total m2 25.000,00 55.800,00 112.000,00 190.000,00
Wool (solid color)
Average supply per manufacturer 17.000,00 16.125,00 18.000,00 18.700,00
Total pieces of clothing 34.000,00 64.500,00 126.000,00 187.000,00
Total m2 34.000,00 64.500,00 126.000,00 187.000,00
Wool (pattern)
Average supply per manufacturer 14.250,00 14.250,00 17.000,00 18.000,00
Total pieces of clothing 28.500,00 57.000,00 119.000,00 180.000,00
Total m2 28.500,00 57.000,00 119.000,00 180.000,00
Silk (solid color)
Average supply per manufacturer 11.000,00 14.500,00 19.000,00 19.800,00
Total pieces of clothing 22.000,00 58.000,00 133.000,00 198.000,00
Total m2 22.000,00 58.000,00 133.000,00 198.000,00
Silk (pattern)
Average supply per manufacturer 11.000,00 12.825,00 14.000,00 16.500,00
Total pieces of clothing 22.000,00 51.300,00 98.000,00 165.000,00
Total m2 22.000,00 51.300,00 98.000,00 165.000,00

Expected Prices

The prices were based on the costs of production, as well as on the R&D costs. In 2023, as production grows, it is expected that the cost of production becomes cheaper, allowing the company to reduce the price of the fabric.

Price per m² 2020 2021 2022 2023 2024
Cotton (solid color) 13 13 12 12
Cotton (patterned) 15 15 14 14
Wool (solid color) 16,5 16,5 15,5 15,5
Wool (patterned) 17,75 17,75 16,75 16,75
Silk (solid color) 14 14 13 13
Silk (patterned) 15,5 15,5 14,5 14,5
Inserting inputs

Raw Materials and Consumables

The raw materials and consumables include

  • Natural fibers for each type of fabric: an average of 0.30€ / m² in case of cotton fibers, 4.50€ / m² in case of wool fibers (solid color), 4.00€ / m² in 2021 and 2022 and 4.50€ / m² from 2023 on,  in case of wool fibers (pattern) and 1.30€ / m2 in case of silk fibers.
  • Dye to attribute color to the fabrics: an average of 1.30€ / m² in case of solid color and 2.60€ / m² in case of pattern
  • Compound that attributes the expanding characteristic: an average of 5€ / m² in the first two years of production.

The cost of production of the compound will be reduced from 5€ to 4.5€ per m² in 2023, reducing the overall cost of production of each type of fabric by 0.5€.

Inserting inputs

Operating Expenses

The operating expenses were divided into the following categories:

  • Cost of Goods Sold
  • General and Administration
  • Sales and Marketing
  • Research and Development.
Cost of Goods Sold
  • Subcontracting: while still producing to sell on a national basis, the company will use the factory that Dutch Fabric Innovations already owns (where it produces the stain repelling fabric). This will cost DFI-Xpander 27.000€ in 2021 and 55.000€ in 2022.
  • Rent of the new factory: from 2023 on, DFI-Xpander will have its own factory and the rent will be of 35.000€ per year.

Other COGS include insurance for the new factory, the rent of the new offices, machinery maintenance, utilities, packing material, distribution and cleaning services.

COGS (in €)

2020

2021

2022

2023

2024

Subcontracting

0,00

27.000,00

55.000,00

0,00

0,00

Rent new factory

0,00

0,00

0,00

35.000,00

35.000,00

Maintenance of machinery

0,00

0,00

0,00

3.500,00

3.500,00

Utilities (factory)

0,00

0,00

0,00

14.000,00

16.000,00

Packing material

0,00

0,00

25.000,00

42.000,00

51.000,00

Cleaning services (factory)

0,00

0,00

0,00

5.000,00

5.000,00

Distribution Costs

0,00

20.000,00

40.000,00

90.000,00

150.000,00

Insurance (factory)

0,00

0,00

0,00

10.000,00

10.000,00

Cleaning services (factory)

0,00

0,00

0,00

5.000,00

5.000,00

General and Administration
  • Communications: internet, telephone, and other communications’ services.
  • Insurance for all workers.
  • IT programmes: programmes, such as Microsoft Office.
  • Accounting Services,
  • Legal, Financial and Technological Advisory.
  • Office materials and amenities, and Security.
General and Administration (in €)

2020

2021

2022

2023

2024

Rent new offices

10.000,00

10.000,00

10.000,00

10.000,00

10.000,00

Communications

1.500,00

2.500,00

2.750,00

3.100,00

3.650,00

Insurance (workers)

5.000,00

7.000,00

12.000,00

14.000,00

15.500,00

Legal Advisory

10.000,00

5.000,00

12.000,00

4.000,00

4.000,00

Accounting Services

10.000,00

6.000,00

6.000,00

6.000,00

6.000,00

Financial Advisory

12.000,00

7.000,00

7.000,00

3.000,00

3.000,00

Technological Advisory

20.000,00

15.000,00

10.000,00

10.000,00

10.000,00

Office materials and amenities

10.000,00

7.000,00

7.000,00

7.000,00

7.000,00

IT programmes

4.000,00

8.000,00

10.000,00

9.000,00

10.100,00

Security

0,00

0,00

30.000,00

30.000,00

30.000,00

Utilities (offices)

2.500,00

5.000,00

6.000,00

6.500,00

6.850,00

Cleaning services (offices)

1.500,00

2.500,00

3.000,00

3.000,00

3.250,00

Sales and Marketing
  • Marketing and Design Services: marketing and design specialists hired to help the company stand out and grow; the value spent on these services is bigger in 2020, when the company is still trying to form its own Marketing team, decreasing afterwards.
  • Communication Services: costs related with advertising; the value spent is bigger in 2020 and 2022, when the company is preparing to start selling abroad.
Sales and Marketing (in €)

2020

2021

2022

2023

2024

Marketing and Design Services

18.000,00

12.500,00

13.000,00

5.000,00

5.000,00

Communication Services

20.000,00

15.000,00

24.000,00

16.000,00

16.000,00

Research and Development
  • Purchase of laboratory supplies needed for investigation. The needs are expected to decrease over the years.
Research and Development (in €)

2020

2021

2022

2023

2024

Laboratory Supplies

10 200.00

8 500.00

3 000.00

3 000.00

3 000.00

Inserting inputs

Employees

DFI-Xpander company will have to hire the following employees categories:

Employees Gross Salary  Prize and Bonus  Non-social security costs
Treatment of Raw Materials 20 200,00€ 1 000,00€ 1 000,00€
Transformation 20 150,00€ 1 000,00€ 1 000,00€
Final Processes 20 100,00€ 1 000,00€ 1 000,00€
Packing 20 100,00€ 1 000,00€ 1 000,00€
Researchers 20 600,00€ 1 000,00€ 1 000,00€
Sales Manager 20 350,00€ 1 000,00€ 1 000,00€
Marketing and Design 20 300,00€ 1 000,00€ 1 000,00€
Accounting and Financial Services 20 250,00€ 1 000,00€ 1 000,00€
Receptionist (factory) 20 250,00€ 1 000,00€ 1 000,00€
Receptionist (offices) 20 250,00€ 1 000,00€ 1 000,00€
International Relations Manager 20 350,00€ 1 000,00€ 1 000,00€
Executive Director 30 000,00€ 1 000,00€ 1 000,00€

The salary for each category is an average. The exceptions are the Executive Director, the Receptionist, the International Relations Manager and the Sales Manager (only in 2020) since there is only one employee for each of these functions.

Some categories have zero employees in 2020: since in this year there will be no production, it does not make sense to have workers for the categories related with the production of the fabrics. The same happens with the international relations manager (DFI-Xpander only goes international in 2022).

Apart from the salary, each worker receives prizes, as well as other subsidies that are not subject to Social Security, such as Food Subsidies. These prizes and subsidies, and even the salaries, are expected to stay constant in the first 4 years of activity.

The number of workers is not constant since the company will hire new employees through time.

Number of Employes

2020

2021

2022

2023

2024

Treatment of Raw Materials

0

6

9

14

16

Transformation

0

5

8

12

17

Final Processes

0

6

8

13

16

Packing

0

5

7

11

15

Researchers

5

3

2

2

2

Sales Managers

1

2

2

3

3

Marketing and Design

2

2

3

3

4

Accounting and Financial Services

2

2

3

3

4

Receptionist (offices)

1

1

1

1

1

International Relations Manager

0

0

1

1

2

Executive Director

1

1

1

1

1

Receptionist (factory)

0

0

0

1

1

Inserting inputs

Others

Investment and Operational Grants

Being the Netherlands a member of the European Union, DFI-Xpander expects to receive an EU-funded operational grant to for the investigation and developmnet of the new product and to encourage the entry in the market. The company expects to receive a grant of 400.000€ in 2020 and of 150.000€ in 2021.

Inserting inputs

Investment

DFI-Xpander will have a total investment of 469.800€. The first investment (178.720€) corresponds to 2020, period in which the company will not be operating yet. The other part of the investment will be made in 2022 and 2023, when the company intends to go international and will need more production capacity.

As previously said, DFI-Xpander will only build its own factory from 2023 onwards. Therefore, all the machinery necessary is only going to be bought in 2022.

2020

2022

2023

Research machinery
Quantity 3,00
Price 5 000,00€
Total Investment 15 000,00€
Other Materials for Research
Quantity 15,00 15,00
Price 1 000,00€ 1 000,00€
Total Investment 3.000,00€ 15 000,00€
Treatment of Raw Materials machinery
Quantity 3,00 1,00
Price 20 000,00€ 20 000,00€
Total Investment 60 000,00€ 20 000,00€
Transformation machinery
Quantity 4,00 1,00
Price 22 000,00€ 22 000,00€
Total Investment 88 000,00€ 22 000,00€
Final Processes machinery
Quantity 3,00 1,00
Price 15 000,00€ 15 000,00€
Total Investment 45 000,00€ 15 000,00€
Packing machinery
Quantity 3,00 1,00
Price 5 000,00€ 5 000,00€
Total Investment 15 000,00€ 5 000,00€
Computers and similar equipment
Quantity 8,00 15,00 5,00
Price 1 000,00€ 1 000,00€ 1 000,00€
Total Investment 8 000,00€ 15 000,00€ 5 000,00€
Office equipment
Quantity 12,00 8,00 10,00
Price 60,00€ 60,00€ 60,00€
Total Investment 720,00€ 480,00€ 600,00€
Software
Quantity 1,00
Price 150 000,00€
Total Investment 150 000,00€
Patent
Quantity 1,00
Price 2 000,00€
Total Investment 2 000,00€
Inserting inputs

Financing

Issued Capital

In 2020, DFI-Xpander will raise 100.000€ in exchange for shares as a way of financing the beginning of its activity. In the following two years, it repeated the process, raising 100.000€ in both years.

In 2024, however, it expects to buy back some of its shares, reducing the issued capital by 200.000€ with the goal of increasing distributable reserves to enable future dividends to be paid to the shareholders of the company.

Other Equity Instruments

In 2020, the shareholders decide to attribute more financing to the company through other equity instruments, with the value of 100.000€. Nevertheless, they reduced this exact financing by 50.000€ both in 2021 and 2022.

Inserting inputs

Feasibility Analysis

The 10-year Dutch Government Bonds were considered as the risk-free asset for this project. They have been presenting a decreasing behavior for some time, being around -0.2% at the moment. After such a decrease, it is expected that they start increasing and a rate of 1% was then considered as risk free rate. Following the same rationale for the Market Portfolio and for the Market Risk Premium, these were estimated to have the values of 8% and 7%, respectively.

As for the Beta, it was obtained from the estimation of the Beta of the respective industry, considering a group of 50 companies and reaching a value of 0.95. From this procedure, we also got a debt-to-equity ratio of around 36%, allowing us to establish an equity weight of 74%.

Finally, and after a careful research, we found that the Dutch interest rates were recorded at 3%.

Taking all of the above into consideration, we were able to get

  • Cost of Equity = 7.65%
  • Cost of Debt = 2.25%
  • WACC = 6.25%
  • Perpetuity growth = 3,53%
Inserting inputs

Forecasting results

The results of this example are used in different pages of the Learning Center manuals. Check them out.