Marrowstone Advertising

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Advertising Consulting Business Plan

Financial Plan

Our financial plan anticipates one year of negative profits as we gain sales volume. We have budgeted enough investment to cover these losses and have an additional credit line of $60,000 available if sales do not match predictions.

7.1 Important Assumptions

We are assuming approximately 75% sales on credit and average interest rates of 10%. These are considered to be conservative in case our predictions are erroneous.

General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 30.00% 30.00% 30.00%
Other 0 0 0

7.2 Break-even Analysis

Our Break-even Analysis is based on the assumptions that our gross margin is 100%. In other words, we will have insignificant direct cost of sales. Since each project will be of different scope, length, and complexity, it is difficult to assign an average per unit revenue figure. However, it is conservatively believed that during the first three years, about three projects per month will guarantee a break-even point. This is because we will be dealing with smaller companies at first that have smaller projects.

Break-even Analysis
Monthly Revenue Break-even $22,583
Assumptions:
Average Percent Variable Cost 0%
Estimated Monthly Fixed Cost $22,583

7.3 Projected Cash Flow

The following is our Cash Flow table and chart. We do not expect to have any short-term cash flow problems even though we will be operating at a loss for the first year. Our short-term loan of $16,000 will be repaid in two equal payments in 2004-2005. Our $45,000 long-term loan will be paid off in ten years.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $57,750 $89,000 $115,000
Cash from Receivables $121,425 $238,956 $321,668
Subtotal Cash from Operations $179,175 $327,956 $436,668
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $5,000 $0 $0
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $3,000 $0 $0
Subtotal Cash Received $187,175 $327,956 $436,668
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $180,000 $216,000 $294,000
Bill Payments $95,653 $116,295 $131,741
Subtotal Spent on Operations $275,653 $332,295 $425,741
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $7,992 $3,000 $3,000
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $0 $4,000 $4,000
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $283,645 $339,295 $432,741
Net Cash Flow ($96,470) ($11,339) $3,926
Cash Balance $20,830 $9,491 $13,418

7.4 Projected Profit and Loss

The following table itemizes our revenues and associated costs. We expect to be paying higher costs in marketing and advertising than other companies as we attempt to build sales volume. As the reader can see, we expect monthly profits to begin in August 2003 and yearly profits to occur in 2004. The charts following the table give a visual representation.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $231,000 $356,000 $460,000
Direct Cost of Sales $0 $0 $0
Other Costs of Sales $7,000 $7,000 $7,000
Total Cost of Sales $7,000 $7,000 $7,000
Gross Margin $224,000 $349,000 $453,000
Gross Margin % 96.97% 98.03% 98.48%
Expenses
Payroll $180,000 $216,000 $294,000
Sales and Marketing and Other Expenses $12,000 $24,000 $24,000
Depreciation $2,000 $2,000 $2,000
Rent $12,000 $12,000 $13,000
Utilities $3,600 $3,600 $4,000
Insurance $3,000 $3,000 $3,000
Payroll Taxes $27,000 $32,400 $44,100
Travel $24,200 $12,000 $10,000
Other $7,200 $8,000 $10,000
Total Operating Expenses $271,000 $313,000 $404,100
Profit Before Interest and Taxes ($47,000) $36,000 $48,900
EBITDA ($45,000) $38,000 $50,900
Interest Expense $5,917 $5,451 $4,751
Taxes Incurred $0 $9,165 $13,245
Net Profit ($52,917) $21,384 $30,904
Net Profit/Sales -22.91% 6.01% 6.72%

7.5 Projected Balance Sheet

The following table shows the Project Balance Sheet for Marrowstone Advertising.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $20,830 $9,491 $13,418
Accounts Receivable $51,825 $79,869 $103,201
Other Current Assets $5,000 $5,000 $5,000
Total Current Assets $77,655 $94,360 $121,619
Long-term Assets
Long-term Assets $10,000 $10,000 $10,000
Accumulated Depreciation $2,000 $4,000 $6,000
Total Long-term Assets $8,000 $6,000 $4,000
Total Assets $85,655 $100,360 $125,619
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $9,264 $9,585 $10,939
Current Borrowing $13,008 $10,008 $7,008
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $22,272 $19,593 $17,947
Long-term Liabilities $45,000 $41,000 $37,000
Total Liabilities $67,272 $60,593 $54,947
Paid-in Capital $103,000 $103,000 $103,000
Retained Earnings ($31,700) ($84,617) ($63,233)
Earnings ($52,917) $21,384 $30,904
Total Capital $18,383 $39,767 $70,672
Total Liabilities and Capital $85,655 $100,360 $125,619
Net Worth $18,383 $39,767 $70,672

7.6 Business Ratios

We have included industry standard ratios from the advertising consultant industry to compare with ours. As this is a new sub-market of the overall industry, we expect some significant differences especially in sales growth, financing ratios, long-term asset investments and net worth. However, our projections indicate a healthy company that will be able to obtain and retain long-term profitability.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 54.11% 29.21% 7.51%
Percent of Total Assets
Accounts Receivable 60.50% 79.58% 82.15% 39.92%
Other Current Assets 5.84% 4.98% 3.98% 39.01%
Total Current Assets 90.66% 94.02% 96.82% 82.32%
Long-term Assets 9.34% 5.98% 3.18% 17.68%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 26.00% 19.52% 14.29% 39.13%
Long-term Liabilities 52.54% 40.85% 29.45% 10.54%
Total Liabilities 78.54% 60.38% 43.74% 49.67%
Net Worth 21.46% 39.62% 56.26% 50.33%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 96.97% 98.03% 98.48% 100.00%
Selling, General & Administrative Expenses 119.88% 92.03% 91.76% 84.13%
Advertising Expenses 0.00% 0.00% 0.00% 3.06%
Profit Before Interest and Taxes -20.35% 10.11% 10.63% 2.36%
Main Ratios
Current 3.49 4.82 6.78 1.76
Quick 3.49 4.82 6.78 1.49
Total Debt to Total Assets 78.54% 60.38% 43.74% 5.71%
Pre-tax Return on Net Worth -287.86% 76.82% 62.47% 55.31%
Pre-tax Return on Assets -61.78% 30.44% 35.15% 12.78%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -22.91% 6.01% 6.72% n.a
Return on Equity -287.86% 53.77% 43.73% n.a
Activity Ratios
Accounts Receivable Turnover 3.34 3.34 3.34 n.a
Collection Days 54 90 97 n.a
Accounts Payable Turnover 11.00 12.17 12.17 n.a
Payment Days 28 29 28 n.a
Total Asset Turnover 2.70 3.55 3.66 n.a
Debt Ratios
Debt to Net Worth 3.66 1.52 0.78 n.a
Current Liab. to Liab. 0.33 0.32 0.33 n.a
Liquidity Ratios
Net Working Capital $55,383 $74,767 $103,672 n.a
Interest Coverage -7.94 6.60 10.29 n.a
Additional Ratios
Assets to Sales 0.37 0.28 0.27 n.a
Current Debt/Total Assets 26% 20% 14% n.a
Acid Test 1.16 0.74 1.03 n.a
Sales/Net Worth 12.57 8.95 6.51 n.a
Dividend Payout 0.00 0.00 0.00 n.a