Industry & Marketplace Analysis
Financial Summary
Assumptions
The financial statements presented in the Appendix reflect only Abaka's forecasted sales of pre-financing contracts in Karagwe. Revenues generated from community center services are not included in these forecasts, nor are potential revenues generated from projects in locations other than Karagwe. In addition, the financial statements assume that Abaka makes no capital expenditures during the explicit period of 2001-2006. Due to the nature of the pre-financing plans, the bulk of customer payments will be collected before kit components will be ordered. This will have a positive effect on net income and cash flow. The following table presents Abaka's expected operational calendar and shows why reported net income and cash flow will be increased by the nature of the pre-financing plans.
Operational Calendar
| Sign-Up New Customers | Year 0 - Nov. to Dec. |
| Collect Monthly Payments | Year 1 - Jan. to Dec. |
| Order Kit Components | Year 1 - Sep. to Oct. |
| Assemble Kits | Year 1 - Oct. to Dec. |
| Distribute Kits | Year 2 - Jan. to Feb. |
| Charge off Cost of Kits Sold | Year 2 - Jan. to Feb. |
Capital Requirements
Abaka requires $800,000 in start-up capital for the construction of the power station and community center. An additional infusion of $200,000 in cash at the end of 2000 will be needed to jump-start operations; this includes a significant safety cushion in case of financial emergency.
Ratio Analysis
The following table shows Abaka's comparative financial ratios for operational years 2001-2006. The increasing return on equity figures demonstrate that Abaka does not plan to seek further external capital to expand the operation in Karagwe. The return on assets figures do not increase as substantially, because this analysis assumes that Abaka does not expend any cash during the first six years of operation.
| Financial Ratios Profitability | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 |
| Cost of Kits Sold | 0.00% | 19.04% | 22.84% | 28.55% | 38.07% | 38.07% |
| Operating Expenses | 74.79% | 30.69% | 15.67% | 10.50% | 9.98% | 10.16% |
| Gross Margin | -74.75% | 14.57% | 44.97% | 51.04% | 44.63% | 45.86% |
| Profit Margin | -74.75% | 8.74% | 26.98% | 30.63% | 26.78% | 27.52% |
| Return on Equity | -6.30% | 2.21% | 17.05% | 38.70% | 50.76% | 78.23% |
| Return on Assets | -6.36% | 1.99% | 11.18% | 16.77% | 15.87% | 17.11% |
| Activity | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 |
| Total Asset Turnover | 0.09 | 0.23 | 0.41 | 0.55 | 0.59 | 0.62 |
| Fixed Asset Turnover | 0.12 | 0.39 | 1.13 | 2.63 | 4.74 | 8.88 |
| Liquidity | ||||||
| Quick Ratio | 4.19 | 2.14 | 1.53 | 1.4 | 1.46 | 1.49 |
Ratio Comparisons. There are no comparable businesses that release their financial ratios to the public. Most of the activity in the rural development industry is driven and subsidized by industrialized governments and World Bank contracts. There are several private enterprises that have been largely successful in this realm, but their financial statements are not available for comparison.
Financial Risks
Currency Translation. All of Abaka's revenues will be collected in Tanzanian shillings, and almost every shilling collected will have to be converted into U.S. dollars in order to meet the company's major expense accounts. Although the Tanzanian shilling has deflated considerably against the dollar over the past eighteen months, this trend may not continue. As far as the founders know, there are no market-based instruments available for hedging this currency risk. As such, all financial forecasts assume that Abaka will lose 5 percent of its revenue to currency exchange fluctuations and expenses. In order to minimize exposure, almost all collected Tanzanian money will be immediately converted into U.S. dollars by establishing a corporate forex account at the Tanzania National Bank. This account will allow for currency exchange at a competitive market rate, and will also enable Abaka to automatically wire transfer all funds directly into a corporate account at either Citibank or the Chase Manhattan Bank in Eugene. This will be Abaka's short-term answer to contending with currency risk. For the long-term, Abaka will neutralize currency risk by diversifying its operations and holdings into other areas of the world.
Political and Economic Stability. The countries surrounding Tanzania's western border have experienced a great deal of strife over the past ten years, characterized by anarchy, exodus, bloody violence, and massive inflation. In Tanzania, these regional pressures have contributed to high unemployment and double-digit inflation. Nevertheless, Tanzania has demonstrated 38 years of political stability, during which time the government has transferred power peacefully on three different occasions, most recently in 1994. There is a substantial World Bank presence in Tanzania, as well as in Kenya and Uganda. The Tanzanian government has set up an Investment Center to aid foreigners in identifying lucrative opportunities in Tanzania. Consistent with this measure, the government has also adopted extremely liberal tax and import laws in an effort to attract foreign investment. Abaka is confident that the political and economic climate in Tanzania is becoming more and more favorable for business every day, and that real progress is being made to protect Tanzania's economy and infrastructure from the instability occurring in neighboring regions.
Coffee. Karagwe residents depend heavily on coffee for their revenue. Economically, coffee harvests can be affected by climate or market prices, and this cannot be ignored as a potential threat to Abaka's success in Karagwe. However, Abaka's presence in Karagwe will drastically improve the region's prosperity, and the community center will help to spark an entrepreneurial spirit by providing new opportunities for small businesses in Karagwe. In short, Abaka's commitment for a long-term, value-enhancing presence in Karagwe will itself significantly neutralize this risk by helping the community to diversify and expand its economy. Furthermore, Abaka will explore the possibility of accepting coffee as payment for solar kits, which might prove to be another effective strategy for neutralizing currency translation risk.
Cross-Cultural. There is an operational risk inherent whenever a company in one country attempts to do business in another. This "distance" risk will be mitigated in Karagwe through the partnership with SSEW, which will handle all day-to-day operations of the business. Additionally, Abaka will maintain a full-time Oregon-based staff, as well as an expanding travel budget, so that Karagwe, and future sites in other countries, will be visited on a regular basis.
Exit Strategy
This proposed project in Karagwe will require a long-term commitment. In Karagwe, Abaka will generate cash flows that will be used to finance project expansions into other areas of the world, such as West Africa, Asia, and Latin America. Once Abaka's concept has been proven, and the potential for further growth demonstrated, Abaka will most likely exit via a management buyout. Another real possibility will be to take the company public. Demonstration of substantial and sustainable growth, combined with the establishment of a global brand name recognition, should make this a viable exit option. In the past decade, several mutual funds have been established that explicitly invest with environmental companies, and this demonstrates that there is a public capital market willing to purchase equity in a company like Abaka. In any case, Abaka does not foresee an exit occurring until at least 2006.
For a comprehensive background on the challenges of conducting business in Tanzania, please see the author's paper entitled "Tanzania: Developing Strategies for Effective Business Practices," available in Adobe Acrobat format from the Abaka website, www.Abaka.com.
