We want to finance growth mainly through cash flow and equity. We recognize that this means we will have to grow more slowly than we might like.
The most important factor in our case is collection days, particularly with the bulk order customers. We can't push our customers hard on collection days, because they are extremely sensitive and will normally judge us on our terms. Hence they tend to have a certain degree of financial authority. Therefore we need to develop a permanent system of receivables financing systems, using a well-coordinated accounting department. In turn we intend to ensure that our investors are compatible with our growth plan, management style and vision.
Compatibility in this regard means:
The financial plan depends on important assumptions, most of which are shown in the following table as annual assumptions. The monthly assumptions are included in the appendix. 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:
Our break-even analysis will be based on running costs, that is costs we shall incur in keeping the business running, including salaries and wages, rent, water and electricity, insurance amongst others. Hence many fixed costs shall be included in these costs. We will thus aim to ensure that our sales levels are running comfortably above break-even.
The following chart and table summarize our break-even analysis. With fixed costs of approximately $41,040 per month at the outset (a bare minimum), we need to bill approximately $93,000to cover our costs. We don't really expect to reach break-even until several months into the business operation.
Our projected profit and loss is shown on the following table, with sales increasing from more than $1,466,000 the first year to more than $1,612,000 the second, and approximately $1,806,000 in the third year. Profits are calculated to be around $152,000 before tax the first year during the start-up phase of this business. This will be representative of a net profit margin of approximately 7%, which though may not seem that impressive is relatively good for a start-up firm in our line of business. As with the break-even, we are projecting very conservatively regarding cost of sales and gross margin. Our cost of sales should be much lower, and gross margin higher, than in this projection.
The following benchmark chart indicates our key financial indicators for the first three years. We foresee major growth in sales and operating expenses, and a bump in our collection days as we spread the business during expansion.
Collection days are very important. We do not want to let our average collection days get above 30 under any circumstances. This could cause a serious problem with cash flow, because our working capital situation is chronically tight. However, we recognize that we cannot control this factor easily, because of the relationship with our clients.
Initial marketing expenses are relatively high as we seek to become known on the market. This will be brought about by the development of sales literature, advertising expenses, and function expenses (including lunches and dinners with interested stakeholders). As our market share increases and capital is generated, further marketing programs and the expansion of those in existence at the time will be undertaken, to ensure market development. Once these programs will start generating revenue for the business, which we shall in turn reinvest.
Cash flow projections are critical to our success. Detailed monthly numbers are included in the appendix. However it should be noted that they do not take into account the required capital injection.
The balance sheet shows healthy growth of net worth, and strong financial position. The three-year estimates are included in the appendix.
The table below shows our business ratios.