Pyramid Engineering

Start your own business plan »

Architectural Engineering Business Plan

Financial Plan

We want to finance growth mainly through cash flow and equity, but will need a second short-term loan, in the amount of $26,391, in the next year to cover our cash flow.

The most important factor in our case is collection days. We can't push our clients hard on collection days, because they are larger companies and will normally have marketing authority, not financial authority. Therefore we need to develop a permanent systems of receivables financing, using one of the established accounting systems. In turn, we must intend to ensure that our investment is compatible with our growth plan, management style, and vision.

Compatibility in this regard means:

  1. A fundamental respect for giving our customers value, and for maintaining a healthy and congenial workplace.
  2. Respect for realistic forecasts, conservative cash flow, and financial management.
  3. Cash flow as first priority, growth second, profits third.
  4. Willingness to follow the plans objectives and contribute valuable input to strategy and implementation decisions.

The financial plan which follows summarizes information regarding the following items:

  • Important Assumptions
  • Key Financial Indicators
  • Break-Even Analysis
  • Projected Profit and Loss
  • Projected Cash flow
  • Projected Balance Sheet
  • Business Ratios

8.1 Important Assumptions

The financial plan depends on important assumptions. From the beginning, we recognize that collection days are critical, but not a factor we can influence easily. Interest rates, tax rates, and personnel burden are based on conservative assumptions.

Some of the more important underlying assumptions are:

  • We assume strong economy, without major recession.
  • We assume that there are no unforeseen changes in economic policy to make our services immediately obsolete.

Others include 60-day average collection days, sales entirely on invoice basis, including a favorable deposit policy, expenses on a net 39-day basis, 30 days on the average for payment of invoices, and present-day interest rates.

General Assumptions
2004 2005 2006
Plan Month 1 2 3
Current Interest Rate 6.00% 6.00% 6.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 30.00% 30.00% 30.00%
Other 0 0 0

8.2 Projected Profit and Loss

The gross margin for a service-based business is a reflection of the efficiency at which those services are offered.  labor is our primary expense, and the only cost directly associated with sales. Given our sales rate over the last 6  months, we expect both to remain fairly constant. Gross margin, because we use no inventory, looks to be 100% for all year. After taking labor into account, a more realistic gross margin for Year 1 is 26%. We expect that our increased efficiency in Years 2 and 3 will produce a higher annual gross margin of 34% and 38%, respectively.

Net Profit /Sales will increase steadily through 2005.

Pro Forma Profit and Loss
2004 2005 2006
Sales $349,752 $400,756 $433,718
Direct Cost of Sales $0 $0 $0
Hidden Row $0 $0 $0
Total Cost of Sales $0 $0 $0
Gross Margin $349,752 $400,756 $433,718
Gross Margin % 100.00% 100.00% 100.00%
Expenses
Payroll $248,328 $259,290 $267,604
Sales and Marketing and Other Expenses $7,200 $7,200 $7,200
Depreciation $612 $612 $612
Rent $7,200 $7,200 $7,200
Utilities $13,560 $8,400 $8,400
Insurance $12,000 $12,000 $12,000
Payroll Taxes $9,600 $9,600 $9,600
125 - Flexible Spending Account $9,600 $9,600 $9,600
Automobile Expense $5,400 $3,600 $3,600
Bank Service Charges $600 $600 $600
Charity / Contributions $600 $600 $600
Interest Expense $1,800 $360 $360
Licenses and Permits $1,800 $720 $720
Office Supplies $6,000 $6,000 $6,000
Payroll taxes & Expenses $9,600 $9,600 $9,600
Postage and Delivery $840 $850 $860
Printing and Reproduction $2,400 $2,400 $2,400
Professional Fees $1,200 $1,200 $1,200
Professional Improvement (CEUs) $600 $600 $600
Travel & Ent $1,200 $1,200 $1,200
Other $0 $0 $0
Total Operating Expenses $340,140 $341,632 $349,956
Profit Before Interest and Taxes $9,612 $59,124 $83,762
EBITDA $10,224 $59,736 $84,374
Interest Expense $2,243 $2,137 $1,338
Taxes Incurred $2,211 $17,096 $24,727
Net Profit $5,158 $39,891 $57,697
Net Profit/Sales 1.47% 9.95% 13.30%

8.3 Break-even Analysis

The following chart and table summarize our break-even analysis. We are currently averaging sales above our break-even point. Any decrease in sales lasting longer than 3 months will generate decreases in payroll across the board to maintain net profits and capital.

Break-even Analysis
Monthly Revenue Break-even $28,345
Assumptions:
Average Percent Variable Cost 0%
Estimated Monthly Fixed Cost $28,345

8.4 Projected Cash Flow

Cash flow projections are critical to our success. The monthly cash flow is shown in the illustration, with one  bar representing the cash flow per month, and the other the monthly balance. The first few months are critical. It may be necessary to inject additional capital in this time frame if the need arises. The annual cash flow figures are included here and more important detailed monthly numbers are included in the appendices.

Pro Forma Cash Flow
2004 2005 2006
Cash Received
Cash from Operations
Cash Sales $0 $0 $0
Cash from Receivables $359,562 $392,397 $428,316
Subtotal Cash from Operations $359,562 $392,397 $428,316
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $26,000 $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 $0 $0 $0
Subtotal Cash Received $385,562 $392,397 $428,316
Expenditures 2004 2005 2006
Expenditures from Operations
Cash Spending $248,328 $259,290 $267,604
Bill Payments $95,598 $100,387 $107,243
Subtotal Spent on Operations $343,926 $359,677 $374,847
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $13,326 $13,325 $13,325
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $357,252 $373,002 $388,172
Net Cash Flow $28,310 $19,395 $40,144
Cash Balance $30,909 $50,304 $90,448

8.5 Projected Balance Sheet

With the payment of our liabilities, relatively low payroll and operating expenses, and a conservative sales forecast, our Balance Sheet shows an increasing net worth in every month and year of our plan. As a consulting and design business, the majority of our "capital" is intangible - the skills, experience, and reputation of our team. However, the nature of our work also keeps our costs low, so careful debt management and billing will soon produce a good profit, and a valuable company.

Pro Forma Balance Sheet
2004 2005 2006
Assets
Current Assets
Cash $30,909 $50,304 $90,448
Accounts Receivable $57,320 $65,679 $71,082
Other Current Assets $0 $0 $0
Total Current Assets $88,229 $115,983 $161,529
Long-term Assets
Long-term Assets $9,628 $9,628 $9,628
Accumulated Depreciation $5,957 $6,569 $7,181
Total Long-term Assets $3,671 $3,059 $2,447
Total Assets $91,900 $119,042 $163,976
Liabilities and Capital 2004 2005 2006
Current Liabilities
Accounts Payable $7,722 $8,298 $8,861
Current Borrowing $42,283 $28,958 $15,633
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $50,005 $37,256 $24,494
Long-term Liabilities $0 $0 $0
Total Liabilities $50,005 $37,256 $24,494
Paid-in Capital $0 $0 $0
Retained Earnings $36,737 $41,895 $81,786
Earnings $5,158 $39,891 $57,697
Total Capital $41,895 $81,786 $139,483
Total Liabilities and Capital $91,900 $119,042 $163,976
Net Worth $41,895 $81,786 $139,483

8.6 Business Ratios

Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 8712.01, Architectural Engineering, are shown for comparison.

Our business ratios look different from the industry standards in part because we are counting our only direct cost of sales, our engineering labor, as an operating expense. The company is structured so that employees receive a monthly salary regardless of hours billed, so our expenses are all, essentially, operating expenses.

Ratio Analysis
2004 2005 2006 Industry Profile
Sales Growth 54.82% 14.58% 8.22% 6.40%
Percent of Total Assets
Accounts Receivable 62.37% 55.17% 43.35% 33.49%
Other Current Assets 0.00% 0.00% 0.00% 37.48%
Total Current Assets 96.01% 97.43% 98.51% 75.03%
Long-term Assets 3.99% 2.57% 1.49% 24.97%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 54.41% 31.30% 14.94% 34.27%
Long-term Liabilities 0.00% 0.00% 0.00% 13.64%
Total Liabilities 54.41% 31.30% 14.94% 47.91%
Net Worth 45.59% 68.70% 85.06% 52.09%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 100.00% 100.00% 100.00% 100.00%
Selling, General & Administrative Expenses 34.29% 21.45% 19.18% 83.39%
Advertising Expenses 0.00% 0.00% 0.00% 0.24%
Profit Before Interest and Taxes 2.75% 14.75% 19.31% 2.49%
Main Ratios
Current 1.76 3.11 6.59 1.84
Quick 1.76 3.11 6.59 1.49
Total Debt to Total Assets 54.41% 31.30% 14.94% 56.44%
Pre-tax Return on Net Worth 17.59% 69.68% 59.09% 6.92%
Pre-tax Return on Assets 8.02% 47.87% 50.27% 15.90%
Additional Ratios 2004 2005 2006
Net Profit Margin 1.47% 9.95% 13.30% n.a
Return on Equity 12.31% 48.77% 41.36% n.a
Activity Ratios
Accounts Receivable Turnover 6.10 6.10 6.10 n.a
Collection Days 60 56 58 n.a
Accounts Payable Turnover 12.39 12.17 12.17 n.a
Payment Days 29 29 29 n.a
Total Asset Turnover 3.81 3.37 2.65 n.a
Debt Ratios
Debt to Net Worth 1.19 0.46 0.18 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $38,224 $78,727 $137,036 n.a
Interest Coverage 4.28 27.66 62.61 n.a
Additional Ratios
Assets to Sales 0.26 0.30 0.38 n.a
Current Debt/Total Assets 54% 31% 15% n.a
Acid Test 0.62 1.35 3.69 n.a
Sales/Net Worth 8.35 4.90 3.11 n.a
Dividend Payout 0.00 0.00 0.00 n.a