Cost Projections: Start-up Costs and Break-Even Analysis for Risk Insurers

Risk insurers start-up costs include the expenses incurred before the start of operating activities and the cost of assets that will be required to run such activities. The expenses will include legal fees for setting up the partnership (estimated at $750), licenses and membership to association ($2500) and marketing expenses ($3000). The partnership will be operated in a 20 square feet office whose deposit and first month’s rent are estimated at $ 1,040. Other expenses include office supplies ($500), transport costs ($700), and telephone and postage costs ($ 300). The office will also require a secretary whose monthly salary of $2500 is based on median rates reported in the website for the US Department of Labor (Bureau of Labor Statistics, 2011). The assets that will be needed at the office include two computers and a printer (estimated cost of $ 700), furniture and fittings (estimated cost of $2000) and a website ($1000).

The sales for risk insurers will comprise new clients and renewals of existing clients. The insurance premiums for the covers that Risk Insurers will provide will be renewable on an annual basis. It is estimated that each subsequent year, risk insurers will enjoy a 95 percent loyalty. The new sales for each subsequent year are expected to increase by 30 percent. The expenses for the partnership are expected to increase over the three-year period out of various factors. For instance, the salary for the secretary will increase by 5% for each subsequent year in relation to the experience attained. Other expenses are expected to increase according to the inflationary rate that is estimated to remain at 2%. Marketing expenses are however based on a constant annual budget hence will remain unchanged for the three-year period. Depreciation for the fixed assets is evaluated on a straight-line basis with an assumption that the fixed assets will not have a residual value. In this respect, computers and printer are depreciated over a five-year period whereas furniture and fittings are depreciated over a ten-year period. Apart from the secretary, risk insurers will engage sales personnel to sell its policies with such personnel’s salaries being commissions calculated on the new sales generated. It is assumed that all the new sales are generated via such commission-based approach with the commission being 2% of the new sales. The pricing strategy for the business will be based on the industry standards and the individual characteristics of each business evaluated. The entity will offer policies such as general business insurance, and compensation insurance.

Risk insurers will fund its start-up and operational costs by supplementing partner’s contribution with external financing. Each of the three partners is expected to contribute $10,000 at the start of the operations. The partners will not draw salaries for their services to the entity, with their contribution being rewarded by their profit or loss share. All partners are expected to contribute equally to the partnership hence the profit-sharing ratio for any of the three partners will be one thirds. The additional financing required ($30,000) will be obtained via a bank loan repayable in a period of 5 years with an interest rate of 8 % p.a. calculated on a reducing-balance basis. The loan repayments will be made on a monthly basis. The preference for this mode of financing is so as to ensure that the control of the business is not diluted by incorporating other partners other than the existing ones (U.S . Small Business Administration, n.d).

With the projected performance, risk insurers will break even in the third year of operations. During the first two years, the entity will operate at a loss with an estimated loss of $ 66,820 in the first year and $ 23,150.80 in the second year. In the third year, the entity will make a profit of $26,549. At this time, the business will be operating with an asset base of $ 30,270 financed by partner’s contribution, unpaid claims, unearned premiums and unpaid loan balance. In the calculations, it was assumed that at the end of each year, there will be unpaid claims equal to 0.5% of the total sales of that year. The unearned premiums for the three years were $ 7,200, $ 38,040 and $ 35,360. These amounts were drawn up based on the projected monthly sales with the sales from the seventh month being considered.

References

Bureau of Labor Statistics, United States Department of Labor (2011). Occupational outlook handbook, 2010-11 edition: secretaries and administrative assistants. Retrieved from http://www.bls.gov/oco/ocos151.htm

U.S. Small Business Administration (n.d). Financing for the small business. Retrieved from http://archive.sba.gov/idc/groups/public/documents/sba_homepage/pub_fm14.pdf

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