Initially, the two principals of Employee Benefits Administrators invested into the business. This investment was used for the majority of start-up expenses. These purchases include IBM laptop computers, software licensing fees of Great Plains Software, computer accessories and a docking station, small business education, seminars on current employee benefit trends, memberships in organizations, rent and security deposit of an office, and various other start-up costs. Expenses continue to be paid by the principals, including rent, utilities, and other working capital.
Considering the forecasts predict an overall loss for the first year of business, EBA will follow avenues for obtaining a small business loan, preferably one guaranteed by the Small Business Association.
EBA is forecasting sales based on their group benefits knowledge, marketing research, and their strategic alliances with brokers and other professional associations.
The financials are based on the following assumptions.
Projected sales figures are based on the four different services Employee Benefits Administrators provides. Each service has a different "AVERAGE" client.
The sales forecast is based on obtaining:
Cost of Sales:
As EBA attains clients, the only direct cost of goods sold is the data storage fee paid to the Application Service Provider. This is a per employee per month charge and is related to Level One, Level Three and Level Four. (It is not related to Level Two, Flexible Spending Accounts, as it is not necessary to use the same information system to store the data.) This can be tracked in an ad-hoc database created by EBA. It is also forecasted that EBA will purchase a software package designed to track both Flexible Spending and COBRA. The cost of this software in 2000 was approximately $14,000 and is not scheduled to be purchased until the second calendar quarter of 2002. After this software is purchased, COGS will also decline for those clients who are contracted for COBRA and HIPAA administration only.
As stated above, the depreciable expense will be for the computer system/network. The non-depreciable start up expenses will include:
Financial Assumptions Definitions and Explanations:
Accounts Payable: EBA will be applying for a working capital loan of which the status is not yet determined.
Depreciation: EBA is using straight line depreciation for their computer and other equipment.
Insurance Expense: Liability (Errors and Omissions) Insurance has been purchased and the cost is $100 per month.
Legal and Accounting Fees: Employee Benefits Administrators has retained legal counsel. The hourly rate for counsel is $250, and hourly legal assistance is $60. Accounting will be handled by a local CPA yet to be determined.
Loan Expenses: The amounts noted in the financial statements are based on a $50,000 loan for five years at 9% interest.
Payroll Expense: Besides the two principals, the following additions to staff are planned:
Rent Expense: Employee Benefits Administrators is leasing a 500 square foot office in Morgantown, PA. The monthly rental is $600.
Salaries Expense: Each of the two principals of Employee Benefits Administrators will receive a yearly salary of $30,000.
Start-up Fee: A one time fee for transfer of employee data into the Human Resources Information System. Each COBRA/HIPAA client will pay $500; each Flexible Spending Account client will pay $500; each Basic Benefits and All-Inclusive client will pay $2,000.
Taxes: EBA is an LLC and as an entity is not taxed. However there is a payroll tax burden to include the employer's portion of Social Security and Medicare as well as state and federal unemployment.
Utilities Expense: The monthly electric expense is projected to be $200. The monthly phone expense is projected to be $200.
The following chart represents key financial indicators. The factors are Sales, Gross Margin%, Operating Expense, and Accounts Receivable.
The break-even point is based on other estimates and the projections contained in the financials. Based on an average fixed monthly cost, the break-even point in units is based on an average charge per unit with a variable cost per unit, as shown in the table and chart below. It should be noted that based in the fixed monthly cost is the cost of goods sold which, of course, increases with the number of units sold.
The projected Profit and Loss for the first three years is shown on the following table.
For the first year in business, EBA is expecting a loss. Please note that this first twelve months shows no sales in the first three months as the company is becoming established. Year two shows a net profit and year three shows a hefty increase in profit. These projections are conservative considering this is a service business and can greatly depend on the economy and the level of benefits employers can afford.
Cash flow projections are demonstrated by the following table and charts. Operating capital is needed and shown as a Current Borrowing capital loan. Cash flow is negative until the projected loan is received in May.
The projected balance sheet follows.
Table of business ratios follows. A comparison of Industry standard ratios is provided based on Standard Industrial Classification code, 8741, Management Services.