The Magnolia Inn expects business to grow steadily until we are at an average of over 90% capacity for the year 2004 with a conservative capacity rate of 50% expected at times. We will be growing slowly with profits growing at a rate of about 10%. Expenses will be well managed, allowing Magnolia to make a profit even if the capacity rate drops as low as 50%.
8.1 Important Assumptions
The following critical assumptions will determine the potential for future success.
A healthy economy that supports a moderate level of growth in our market.
Keeping operating costs as low as possible, particularly in the areas of personnel and our ongoing monthly expenses.
General Assumptions
Year 1
Year 2
Year 3
Plan Month
1
2
3
Current Interest Rate
9.50%
9.50%
9.50%
Long-term Interest Rate
8.50%
8.50%
8.50%
Tax Rate
28.17%
28.00%
28.17%
Other
0
0
0
8.2 Break-even Analysis
The following chart and table summarize our break-even analysis. Our fixed costs will be $17,000 per month at the onset and we expect to reach the break-even point within the first few months of operation.
Break-even Analysis
Monthly Revenue Break-even
$18,487
Assumptions:
Average Percent Variable Cost
5%
Estimated Monthly Fixed Cost
$17,563
8.3 Projected Profit and Loss
The following represents the Projected Profit and Loss for the Magnolia Inn based on sales and expense projections for 2004 and beyond.
Pro Forma Profit and Loss
Year 1
Year 2
Year 3
Sales
$341,830
$376,013
$413,614
Direct Cost of Sales
$17,092
$21,000
$24,000
Other Costs of Sales
$12,000
$14,000
$16,000
Total Cost of Sales
$29,092
$35,000
$40,000
Gross Margin
$312,739
$341,013
$373,614
Gross Margin %
91.49%
90.69%
90.33%
Expenses
Payroll
$105,000
$117,000
$119,000
Sales and Marketing and Other Expenses
$12,000
$14,000
$16,000
Depreciation
$0
$0
$0
Rent
$48,000
$48,000
$48,000
Utilities
$12,000
$14,000
$16,000
Insurance
$6,000
$7,000
$8,000
Payroll Taxes
$15,750
$17,550
$17,850
Other
$12,000
$3,000
$0
Total Operating Expenses
$210,750
$220,550
$224,850
Profit Before Interest and Taxes
$101,989
$120,463
$148,764
EBITDA
$101,989
$120,463
$148,764
Interest Expense
$29,885
$29,660
$29,411
Taxes Incurred
$20,188
$25,425
$33,618
Net Profit
$51,916
$65,378
$85,736
Net Profit/Sales
15.19%
17.39%
20.73%
8.4 Projected Cash Flow
The Cash Flow projections are outlined below. Again, these projections are based on our basic assumptions with revenue generation factors carrying the most significant weight regarding the outcome. We are anticipating that we will not need to invest any additional capital into the business with a healthy cash flow in place.
Pro Forma Cash Flow
Year 1
Year 2
Year 3
Cash Received
Cash from Operations
Cash Sales
$341,830
$376,013
$413,614
Subtotal Cash from Operations
$341,830
$376,013
$413,614
Additional Cash Received
Sales Tax, VAT, HST/GST Received
$0
$0
$0
New Current Borrowing
$0
$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
$341,830
$376,013
$413,614
Expenditures
Year 1
Year 2
Year 3
Expenditures from Operations
Cash Spending
$105,000
$117,000
$119,000
Bill Payments
$169,225
$193,409
$207,626
Subtotal Spent on Operations
$274,225
$310,409
$326,626
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out
$0
$0
$0
Principal Repayment of Current Borrowing
$0
$0
$0
Other Liabilities Principal Repayment
$0
$0
$0
Long-term Liabilities Principal Repayment
$2,646
$2,831
$3,029
Purchase Other Current Assets
$0
$0
$0
Purchase Long-term Assets
$0
$0
$0
Dividends
$6,000
$6,000
$3,000
Subtotal Cash Spent
$282,871
$319,240
$332,655
Net Cash Flow
$58,959
$56,773
$80,959
Cash Balance
$64,959
$121,732
$202,692
8.5 Projected Balance Sheet
The Balance Sheet in the following table shows sufficient growth and a very acceptable financial position. The monthly estimates are included and shown in the appendix.
Pro Forma Balance Sheet
Year 1
Year 2
Year 3
Assets
Current Assets
Cash
$64,959
$121,732
$202,692
Other Current Assets
$10,000
$10,000
$10,000
Total Current Assets
$74,959
$131,732
$212,692
Long-term Assets
Long-term Assets
$370,000
$370,000
$370,000
Accumulated Depreciation
$0
$0
$0
Total Long-term Assets
$370,000
$370,000
$370,000
Total Assets
$444,959
$501,732
$582,692
Liabilities and Capital
Year 1
Year 2
Year 3
Current Liabilities
Accounts Payable
$15,689
$15,915
$17,168
Current Borrowing
$0
$0
$0
Other Current Liabilities
$0
$0
$0
Subtotal Current Liabilities
$15,689
$15,915
$17,168
Long-term Liabilities
$350,354
$347,523
$344,494
Total Liabilities
$366,043
$363,438
$361,662
Paid-in Capital
$65,000
$65,000
$65,000
Retained Earnings
($38,000)
$7,916
$70,294
Earnings
$51,916
$65,378
$85,736
Total Capital
$78,916
$138,294
$221,030
Total Liabilities and Capital
$444,959
$501,732
$582,692
Net Worth
$78,916
$138,294
$221,030
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 7011.0401, Bed and Breakfast Inns are shown for comparison.
The following will enable us to keep on track. If we fail in any of these areas we will need to re-evaluate our business mode:
Month-to-month annual comparisons indicate an increase of 10% or greater.
Do not depend on credit line to meet cash requirements.
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