Optimizing Company Structure for Profit

Project Overview

In this project, we are developing an optimization model to optimize the company structure under the objective function of maximizing the net present value (NPV) of profits over the next eight quarters. The model considers key decision variables such as market penetration, commission rates, employee headcount, and office space requirements. By balancing these factors against constraints like operating budgets and market conditions, the model helps identify the optimal business structure for maximizing profitability.

GitHub Repository

You can find the source code and project files on GitHub:

Objective Function

The primary objective is to maximize the NPV of profits over eight quarters. Quarterly sales forecasts are based on historical transaction data, while quarterly cash flows are derived from revenue (commission on sales) and operating costs (rent, utilities, and employee salaries). The formula for NPV is:

NPV = Σ (Quarterly Profit / (1 + 0.015)^t)

Where the discount rate is 1.5% per quarter, based on a 6% annual internal rate of return (IRR).

Constraints

• Budget Constraint: The total monthly operating budget is capped at $15,000.
• Market Penetration: The baseline market penetration is 5.5%, with adjustments based on the commission rate. Market penetration can vary between 4% and 5% depending on commission changes.
• Office Rent: The office must occupy at least 250 square feet, plus 125 square feet per employee. Rent is calculated as 1.5% of the average price per square foot, paid monthly.
• Employee Cost: Up to three employees can be hired, with each employee costing $65,000 annually.
• Revenue: Revenue is determined by market penetration, commission rate, and quarterly sales forecasts.

Decision Variables

The optimization model evaluates the following decision variables to determine the best configuration for maximizing NPV:

• Number of Employees: Between 0 and 3 employees.
• Office Size: Base size of 250 square feet, with an additional 125 square feet per employee.
• Commission Rate: Adjustable between 4% and 5%, affecting both revenue and market penetration.

Findings and Insights

The model produced the following optimal configuration:

• Max NPV: $1,783,025
• Number of Extra Employees: 0
• Optimal Commission Rate: 5%
• Optimal Office Size: 250 square feet

By following the model's recommendations, the company can optimize profitability while staying within operational constraints. This strategy enhances resource allocation and promotes data-driven decision-making.

However, it is important to note that these recommendations are based on a simulated business problem and serve as a demonstration of analytical skills. While the model provides valuable insights, applying it to real-world scenarios requires domain-specific knowledge to validate the data and refine the results for practical use. Nevertheless, this approach supports informed decision-making by offering a data-backed rationale for evaluating potential strategies.