Palms and Bonds

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Business Development Business Plan

Financial Plan

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. We can't push our clients hard on collection days, because they are in larger companies and will normally have marketing authority, not financial authority. Therefore we need to develop a permanent system of receivables financing, using one of the established financial companies in that business. In turn we intend to ensure that our investors are 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, and conservative cash flow and financial management.
  3. Cash flow as first priority, growth second, profits third.
  4. Willingness to follow the company and contribute valuable input to strategy and implementation decisions.

Of these only the last two are flexible.

7.1 Important Assumptions

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. At least we are planning on the problem, and dealing with it. Interest rates, tax rates, and personnel burden are based on conservative assumptions.

Some of the more important underlying assumptions are:

  • We assume a strong economy, without major recession.
  • We assume, of course, that there are no unforeseen changes in economic policy to make our clients' products immediately obsolete.

The table below summarizes key financial assumptions, including 30-day average collection days, sales entirely on invoice basis including the 30% deposit policy, expenses mainly on net 30 basis, 30 days on average for payment of invoices, and present-day interest rates.

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 25.42% 25.00% 25.42%
Other 0 0 0

7.2 Key Financial Indicators

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.

7.3 Break-even Analysis

The following table summarizes our break-even analysis. With fixed costs at a bare minimum, we don't really expect to reach break-even until several months into the business operation. The break-even assumes variable costs of 20 percent of revenue. This assumption is probably too high, and therefore conservative, because, at least in the beginning, most of our cost of fulfillment is actually the compensation of the consultants.

Note: All displayed currency values represent Botswanan Pula (P).

Break-even Analysis
Monthly Revenue Break-even $11,807
Assumptions:
Average Percent Variable Cost 22%
Estimated Monthly Fixed Cost $9,244

7.4 Expense Forecast

Initial marketing expenses were relatively high as we sought to become known on the market. This was brought about by the development of sales literature, advertising expenses, 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. The expenses generated by our marketing strategies will be high in the initial stages of design and implementation. However with time these programs will start generating revenue for the business, which we shall in turn reinvest. The fruits of the above are soon to be gained.

7.5 Projected Profit and Loss

Our projected profit and loss is shown on the following table, with sales increasing from more than P366,000 the first year to P612,000 the second, and P734,400 in the third year. Profits may not seem that impressive, but are relatively good for a start-up firm in our business. Hence we do expect to more than break-even in the first year of operation.

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. Initially, we will depend on our internal consultants for most of fulfillment, which is why costs should be lower than shown, although occasionally we shall engage the services of outside consultants as discussed in our personnel plan. We prefer to project conservatively so that we make sure we have enough cash.

Note: All displayed currency values represent Botswanan Pula (P).

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $366,300 $612,000 $734,400
Direct Cost of Sales $79,500 $117,000 $140,400
Other $0 $0 $0
Total Cost of Sales $79,500 $117,000 $140,400
Gross Margin $286,800 $495,000 $594,000
Gross Margin % 78.30% 80.88% 80.88%
Expenses
Payroll $77,300 $142,600 $161,596
Sales and Marketing and Other Expenses $15,030 $12,000 $14,400
Depreciation $0 $0 $0
Public Relations $2,400 $2,400 $3,600
Utilities $1,800 $1,800 $2,400
Insurance $0 $0 $0
Rent $14,400 $18,000 $19,200
Payroll Taxes $0 $0 $0
Other $0 $0 $0
Total Operating Expenses $110,930 $176,800 $201,196
Profit Before Interest and Taxes $175,870 $318,200 $392,804
EBITDA $175,870 $318,200 $392,804
Interest Expense $0 $0 $0
Taxes Incurred $44,148 $79,550 $99,838
Net Profit $131,723 $238,650 $292,966
Net Profit/Sales 35.96% 39.00% 39.89%

7.6 Projected Cash Flow

Cash flow projections are critical to our success. The first year monthly cash flow chart appears below and the monthly figures are shown in the appendix. The annual cash flow figures are included here.

Note: All displayed currency values represent Botswanan Pula (P).

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $91,575 $153,000 $183,600
Cash from Receivables $205,695 $412,697 $527,733
Subtotal Cash from Operations $297,270 $565,697 $711,333
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 $297,270 $565,697 $711,333
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $77,300 $142,600 $161,596
Bill Payments $139,989 $229,073 $275,803
Subtotal Spent on Operations $217,289 $371,673 $437,399
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 $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $217,289 $371,673 $437,399
Net Cash Flow $79,981 $194,024 $273,934
Cash Balance $100,381 $294,406 $568,340

7.7 Projected Balance Sheet

The balance sheet shows healthy growth of net worth, and strong financial position.

Note: All displayed currency values represent Botswanan Pula (P).

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $100,381 $294,406 $568,340
Accounts Receivable $69,030 $115,333 $138,399
Other Current Assets $0 $0 $0
Total Current Assets $169,411 $409,738 $706,739
Long-term Assets
Long-term Assets $0 $0 $0
Accumulated Depreciation $0 $0 $0
Total Long-term Assets $0 $0 $0
Total Assets $169,411 $409,738 $706,739
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $17,289 $18,966 $23,000
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $17,289 $18,966 $23,000
Long-term Liabilities $0 $0 $0
Total Liabilities $17,289 $18,966 $23,000
Paid-in Capital $70,000 $70,000 $70,000
Retained Earnings ($49,600) $82,123 $320,773
Earnings $131,723 $238,650 $292,966
Total Capital $152,123 $390,773 $683,739
Total Liabilities and Capital $169,411 $409,738 $706,739
Net Worth $152,122 $390,773 $683,739

7.8 Business Ratios

The following table provides important business ratios for the consulting industry, as determined by the Standard Industry Classification (SIC) Index code 8742, Management Consulting Services.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 67.08% 20.00% 8.60%
Percent of Total Assets
Accounts Receivable 40.75% 28.15% 19.58% 24.40%
Other Current Assets 0.00% 0.00% 0.00% 46.70%
Total Current Assets 100.00% 100.00% 100.00% 74.90%
Long-term Assets 0.00% 0.00% 0.00% 25.10%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 10.21% 4.63% 3.25% 42.80%
Long-term Liabilities 0.00% 0.00% 0.00% 17.20%
Total Liabilities 10.21% 4.63% 3.25% 60.00%
Net Worth 89.79% 95.37% 96.75% 40.00%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 78.30% 80.88% 80.88% 0.00%
Selling, General & Administrative Expenses 42.29% 41.89% 40.77% 83.50%
Advertising Expenses 2.14% 0.98% 0.98% 1.20%
Profit Before Interest and Taxes 48.01% 51.99% 53.49% 2.60%
Main Ratios
Current 9.80 21.60 30.73 1.59
Quick 9.80 21.60 30.73 1.26
Total Debt to Total Assets 10.21% 4.63% 3.25% 60.00%
Pre-tax Return on Net Worth 115.61% 81.43% 57.45% 4.40%
Pre-tax Return on Assets 103.81% 77.66% 55.58% 10.90%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 35.96% 39.00% 39.89% n.a
Return on Equity 86.59% 61.07% 42.85% n.a
Activity Ratios
Accounts Receivable Turnover 3.98 3.98 3.98 n.a
Collection Days 56 73 84 n.a
Accounts Payable Turnover 9.10 12.17 12.17 n.a
Payment Days 27 29 27 n.a
Total Asset Turnover 2.16 1.49 1.04 n.a
Debt Ratios
Debt to Net Worth 0.11 0.05 0.03 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $152,122 $390,773 $683,739 n.a
Interest Coverage 0.00 0.00 0.00 n.a
Additional Ratios
Assets to Sales 0.46 0.67 0.96 n.a
Current Debt/Total Assets 10% 5% 3% n.a
Acid Test 5.81 15.52 24.71 n.a
Sales/Net Worth 2.41 1.57 1.07 n.a
Dividend Payout 0.00 0.00 0.00 n.a