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Computer Hardware Reseller Business Plan

AMT, Inc.

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Financial Plan

7.0 Financial Plan

The most important element in the financial plan is the critical need for improving several of the key factors that impact cash flow:

1. We must at any cost stop the slide in inventory turnover and develop better inventory management to bring the turnover back up to 6 turns by the third year. This should also be a function of the shift in focus towards service revenues to add to the hardware revenues.
2. We must also bring the gross margin back up to 30%. This too is related to improving the mix between hardware and service revenues, because the service revenues offer much better margins.
3. We plan to borrow another $100,000 long-term this year. The amount seems in line with the balance sheet capabilities.

7.1 Important Assumptions

The financial plan depends on important assumptions, most of which are shown in Table 7.1. The key underlying assumptions are:

1. We assume a slow-growth economy, without major recession.
2. We assume of course that there are no unforeseen changes in technology to make products immediately obsolete.

General Assumptions

General Assumptions
	1996	1997	1998
Plan Month	1	2	3
Current Interest Rate	8.00%	8.00%	8.00%
Long-term Interest Rate	8.50%	8.50%	8.50%
Tax Rate	20.83%	20.00%	20.83%
Sales on Credit %	85.00%	85.00%	85.00%
Other	0	0	0

7.2 Key Financial Indicators

The Benchmark Comparison chart highlights our ambitious plans to correct declining gross margin and inventory turnover. The chart illustrates why we think the ambitious sales increases we plan are reasonable. We have had similar increases in the recent past.

Benchmarks



7.3 Break-even Analysis

For our break-even analysis, we assume running costs of approximately $96,000 per month, which includes our full payroll, rent, and utilities, and an estimation of other running costs. Payroll alone, at our present run rate, is only about $55,000.

Margins are harder to assume. Our overall average of $471/337 is based on projections for the coming year. We hope to attain a margin that high in the future.

The chart shows that we need to sell about $335,000 per month to break even, according to these assumptions. This is about half of our planned 1996 sales level, and significantly below our last year's sales level, so we believe we can maintain it.

Break-even Analysis



Break-even Analysis

Break-even Analysis:
Monthly Units Break-even	709
Monthly Revenue Break-even	$334,437
Assumptions:
Average Per-Unit Revenue	$471.65
Average Per-Unit Variable Cost	$336.91
Estimated Monthly Fixed Cost	$95,542

7.4 Projected Profit and Loss

The most important assumption in the Projected Profit and Loss statement is the gross margin, which is supposed to increase. This is up from barely 21% in the last year. The increase in gross margin is based on changing our sales mix, and it is critical.

Month-by-month assumptions for profit and loss are included in the appendices.

Profit and Loss

Pro Forma Profit and Loss
	1996	1997	1998
Sales	$6,468,631	$7,478,240	$9,182,745
Direct Costs of Goods	$4,620,673	$5,266,450	$6,078,104
Production Payroll	$139,000	$202,500	$203,500
Other	$0	$0	$0
	------------	------------	------------
Cost of Goods Sold	$4,759,673	$5,468,950	$6,281,604
Gross Margin	$1,708,958	$2,009,290	$2,901,141
Gross Margin %	26.42%	26.87%	31.59%
Operating Expenses:
Sales and Marketing Expenses:
Sales and Marketing Payroll	$344,000	$422,000	$486,000
Ads	$125,000	$140,000	$175,000
Catalog	$25,000	$19,039	$19,991
Mailing	$113,300	$120,000	$150,000
Promo	$16,000	$20,000	$25,000
Shows	$20,200	$25,000	$30,000
Literature	$7,000	$10,000	$12,500
PR	$1,000	$1,250	$1,500
Seminar	$31,000	$45,000	$60,000
Service	$10,250	$12,000	$15,000
Training	$5,400	$7,000	$15,000
	------------	------------	------------
Total Sales and Marketing Expenses	$698,150	$821,289	$989,991
Sales and Marketing %	10.79%	10.98%	10.78%
General and Administrative Expenses:
General and Administrative Payroll	$155,000	$179,000	$234,000
Sales and Marketing and Other Expenses	$0	$0	$0
Depreciation	$12,681	$13,315	$13,981
Leased Equipment	$30,000	$31,500	$33,075
Utilities	$9,000	$9,450	$9,923
Insurance	$6,000	$6,300	$6,615
Rent	$84,000	$88,200	$92,610
Other	$6,331	$6,648	$6,980
Payroll Taxes	$107,840	$139,760	$160,080
Other General and Administrative Expenses	$0	$0	$0
	------------	------------	------------
Total General and Administrative Expenses	$410,852	$474,173	$557,264
General and Administrative %	6.35%	6.34%	6.07%
Other Expenses:
Other Payroll	$36,000	$70,000	$77,000
Contract/Consultants	$1,500	$5,000	$30,000
	------------	------------	------------
Total Other Expenses	$37,500	$75,000	$107,000
Other %	0.58%	1.00%	1.17%
	------------	------------	------------
Total Operating Expenses	$1,146,502	$1,370,462	$1,654,255
Profit Before Interest and Taxes	$562,456	$638,828	$1,246,886
Interest Expense	$38,562	$71,870	$68,277
Taxes Incurred	$104,928	$113,392	$245,543
Net Profit	$418,966	$453,567	$933,065
Net Profit/Sales	6.48%	6.07%	10.16%

7.5 Projected Cash Flow

The cash flow depends on assumptions for inventory turnover, payment days, and accounts receivable management. Our projected 60-day collection days is not ideal, but it is realistic in this market, and hard for us to effectively change. We're better off planning for it than ignoring it. We need $100,000 in new financing in March to get through a cash flow dip as we build up for mid-year sales.

Cash



Cash Flow

Pro Forma Cash Flow
	1996	1997	1998
Cash Received
Cash from Operations:
Cash Sales	$970,295	$1,121,736	$1,377,412
Cash from Receivables	$4,496,795	$6,138,518	$7,437,312
Subtotal Cash from Operations	$5,467,089	$7,260,254	$8,814,723
Additional Cash Received
Sales Tax, VAT, HST/GST Received	$0	$0	$0
New Current Borrowing	$860,000	$0	$0
New Other Liabilities (interest-free)	$0	$0	$0
New Long-term Liabilities	$100,000	$0	$0
Sales of Other Current Assets	$0	$0	$0
Sales of Long-term Assets	$0	$0	$0
New Investment Received	$225,000	$0	$0
Subtotal Cash Received	$6,652,089	$7,260,254	$8,814,723
Expenditures	1996	1997	1998
Expenditures from Operations:
Cash Spending	$776,267	$867,371	$1,048,591
Payment of Accounts Payable	$5,340,252	$6,106,919	$7,143,160
Subtotal Spent on Operations	$6,116,519	$6,974,290	$8,191,751
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out	$0	$0	$0
Principal Repayment of Current Borrowing	$400,000	$0	$0
Other Liabilities Principal Repayment	$0	$0	$0
Long-term Liabilities Principal Repayment	$36,708	$40,543	$43,989
Purchase Other Current Assets	$50,057	$0	$0
Purchase Long-term Assets	$90,280	$200,000	$400,000
Dividends	$0	$0	$0
Subtotal Cash Spent	$6,693,564	$7,214,833	$8,635,740
Net Cash Flow	($41,475)	$45,421	$178,983
Cash Balance	$13,957	$59,378	$238,361

7.6 Projected Balance Sheet

The Projected Balance Sheet is quite solid. We do not project any real trouble meeting our debt obligations--as long as we can achieve our specific objectives.

Balance Sheet

Pro Forma Balance Sheet
Assets
Current Assets	1996	1997	1998
Cash	$13,957	$59,378	$238,361
Accounts Receivable	$1,396,649	$1,614,634	$1,982,656
Inventory	$954,531	$951,943	$976,582
Other Current Assets	$75,057	$75,057	$75,057
Total Current Assets	$2,440,194	$2,701,013	$3,272,656
Long-term Assets
Long-term Assets	$440,280	$640,280	$1,040,280
Accumulated Depreciation	$62,681	$75,996	$89,977
Total Long-term Assets	$377,599	$564,284	$950,303
Total Assets	$2,817,793	$3,265,297	$4,222,959
Liabilities and Capital
Current Liabilities	1996	1997	1998
Accounts Payable	$293,795	$328,275	$396,862
Current Borrowing	$550,000	$550,000	$550,000
Other Current Liabilities	$15,000	$15,000	$15,000
Subtotal Current Liabilities	$858,795	$893,275	$961,862
Long-term Liabilities	$348,154	$307,611	$263,621
Total Liabilities	$1,206,949	$1,200,886	$1,225,483
Paid-in Capital	$725,000	$725,000	$725,000
Retained Earnings	$466,878	$885,844	$1,339,411
Earnings	$418,966	$453,567	$933,065
Total Capital	$1,610,844	$2,064,411	$2,997,476
Total Liabilities and Capital	$2,817,793	$3,265,297	$4,222,959
Net Worth	$1,610,844	$2,064,411	$2,997,476

7.7 Business Ratios

The table follows with our main business ratios. We do intend to improve gross margin, collection days, and inventory turnover. The industry standards are taken for industry classification 5734 in the SIC code. We assume that the difference between our results and the standards is that the standards include

Ratios

Ratio Analysis
	1996	1997	1998	Industry Profile
Sales Growth	22.03%	15.61%	22.79%	10.50%
Percent of Total Assets
Accounts Receivable	49.57%	49.45%	46.95%	19.20%
Inventory	33.88%	29.15%	23.13%	38.00%
Other Current Assets	2.66%	2.30%	1.78%	20.80%
Total Current Assets	86.60%	82.72%	77.50%	78.00%
Long-term Assets	13.40%	17.28%	22.50%	22.00%
Total Assets	100.00%	100.00%	100.00%	100.00%
Current Liabilities	30.48%	27.36%	22.78%	44.60%
Long-term Liabilities	12.36%	9.42%	6.24%	14.10%
Total Liabilities	42.83%	36.78%	29.02%	58.70%
Net Worth	57.17%	63.22%	70.98%	41.30%
Percent of Sales
Sales	100.00%	100.00%	100.00%	100.00%
Gross Margin	26.42%	26.87%	31.59%	37.20%
Selling, General & Administrative Expenses	19.94%	20.80%	21.33%	22.30%
Advertising Expenses	1.93%	1.87%	1.91%	4.10%
Profit Before Interest and Taxes	8.70%	8.54%	13.58%	1.50%
Main Ratios
Current	2.84	3.02	3.40	1.78
Quick	1.73	1.96	2.39	0.75
Total Debt to Total Assets	42.83%	36.78%	29.02%	58.70%
Pre-tax Return on Net Worth	32.52%	27.46%	39.32%	3.80%
Pre-tax Return on Assets	18.59%	17.36%	27.91%	9.30%
Additional Ratios	1996	1997	1998
Net Profit Margin	6.48%	6.07%	10.16%	n.a
Return on Equity	26.01%	21.97%	31.13%	n.a
Activity Ratios
Accounts Receivable Turnover	3.94	3.94	3.94	n.a
Collection Days	58	86	84	n.a
Inventory Turnover	6.74	5.52	6.30	n.a
Accounts Payable Turnover	18.41	18.71	18.17	n.a
Payment Days	25	18	18	n.a
Total Asset Turnover	2.30	2.29	2.17	n.a
Debt Ratios
Debt to Net Worth	0.75	0.58	0.41	n.a
Current Liab. to Liab.	0.71	0.74	0.78	n.a
Liquidity Ratios
Net Working Capital	$1,581,399	$1,807,738	$2,310,794	n.a
Interest Coverage	14.59	8.89	18.26	n.a
Additional Ratios
Assets to Sales	0.44	0.44	0.46	n.a
Current Debt/Total Assets	30%	27%	23%	n.a
Acid Test	0.10	0.15	0.33	n.a
Sales/Net Worth	4.02	3.62	3.06	n.a
Dividend Payout	0.00	0.00	0.00	n.a