We plan to support our growth and debt obligations through increased sales and cash flow. Our major debt with Wachovia Bank is secured by personal and company collateral. Our financials do not include our estimate of the value of proprietary chemical formulations, nor the value of assignable customer contracts.
7.1 Important Assumptions
Positive The assumptions that support our projections in these tables are: The move to larger facilities and the additional equipment will result in increased production; and the back orders and new orders will be shipped. We have excellent agreements with our primary sources of supply and assume there will be no change in these relationships.We also assume that the demand for Creatine and our other products will continue to increase as evidenced in our market research.
Negative Another company could develop some of the formulations we have, in which case we would lose some of the technical and market advantage we now have. This will also decrease our valuation. If we cannot find a capable marketing person, who is both sales and technically savvy, in time to get into this market, we would be at a disadvantage. Our hope is that whomever takes an equity position in this project will add marketing expertise. Technology changes, as do buying habits and social structure. A major change in any one of these areas can have a detrimental effect on our business.
General Assumptions
FY 2001
FY 2002
FY 2003
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
25.00%
25.00%
25.00%
Other
0
0
0
7.2 Break-even Analysis
Our Break-even Analysis is based on running costs, the "burn rate" costs we incur to keep the business running, not on theoretical fixed costs that would be relevant only if we were closing. Between payroll, rent, utilities, and other basic day to day costs, we think the monthly figure shown below is a good estimate of fixed costs. Our average variable costs are shown as well. Our COS will be approximately 44% of sales, and we anticipate a healthy profit margin before taxes and debt service in 2001, increasing in 2002.
Our assumptions in average unit sales and average cost per kilogram depend on averaging. We do not really need to calculate an exact average because this is sufficiently close to help us to understand what the real break-even point will be.
Break-even Analysis
Monthly Revenue Break-even
$68,486
Assumptions:
Average Percent Variable Cost
44%
Estimated Monthly Fixed Cost
$38,358
7.3 Projected Profit and Loss
Our profit projection before taxes or debt service for 2001 is attainable. In 2002, we anticipate an increase in net profit, and in 2003 as well.
Pro Forma Profit and Loss
FY 2001
FY 2002
FY 2003
Sales
$2,217,375
$2,653,800
$3,450,000
Direct Cost of Sales
$975,445
$928,830
$1,207,500
Other
$0
$0
$0
Total Cost of Sales
$975,445
$928,830
$1,207,500
Gross Margin
$1,241,930
$1,724,970
$2,242,500
Gross Margin %
56.01%
65.00%
65.00%
Expenses
Payroll
$229,026
$250,000
$310,000
Sales and Marketing and Other Expenses
$104,800
$104,000
$29,000
Depreciation
$36,000
$36,000
$36,000
Leased Equipment
$11,172
$25,000
$25,000
Utilities
$12,000
$15,000
$18,000
Insurance
$3,545
$5,000
$0
Rent
$29,400
$30,000
$30,000
Payroll Taxes
$34,354
$37,500
$46,500
Other
$0
$0
$0
Total Operating Expenses
$460,297
$502,500
$494,500
Profit Before Interest and Taxes
$781,633
$1,222,470
$1,748,000
EBITDA
$817,633
$1,258,470
$1,784,000
Interest Expense
$34,739
$37,855
$41,455
Taxes Incurred
$186,723
$296,154
$426,636
Net Profit
$560,170
$888,461
$1,279,909
Net Profit/Sales
25.26%
33.48%
37.10%
7.4 Projected Cash Flow
Our cash position at the present time is negligible due to financial constraints in maintaining production for existing orders and being unable to expand to meet future demand. We expect to manage cash flow over the next three years with a couple infusions of new equity investment. We feel that, with the accompanying increases in accounts receivable and inventory, we can extend our line of short term credit. Because of our toll manufacturing capability, inventory can be maintained at a fairly constant level. Receivables, however, will increase dramatically in 2001, and possibly double by 2003.
Pro Forma Cash Flow
FY 2001
FY 2002
FY 2003
Cash Received
Cash from Operations
Cash Sales
$221,738
$265,380
$345,000
Cash from Receivables
$1,530,100
$2,293,742
$2,932,272
Subtotal Cash from Operations
$1,751,837
$2,559,122
$3,277,272
Additional Cash Received
Sales Tax, VAT, HST/GST Received
$0
$0
$0
New Current Borrowing
$0
$0
$0
New Other Liabilities (interest-free)
$7,500
$0
$0
New Long-term Liabilities
$60,000
$60,000
$60,000
Sales of Other Current Assets
$0
$0
$0
Sales of Long-term Assets
$0
$0
$0
New Investment Received
$875,000
$425,000
$0
Subtotal Cash Received
$2,694,337
$3,044,122
$3,337,272
Expenditures
FY 2001
FY 2002
FY 2003
Expenditures from Operations
Cash Spending
$229,026
$250,000
$310,000
Bill Payments
$1,364,802
$1,515,967
$1,829,035
Subtotal Spent on Operations
$1,593,828
$1,765,967
$2,139,035
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out
$0
$0
$0
Principal Repayment of Current Borrowing
$7,291
$0
$0
Other Liabilities Principal Repayment
$9,000
$12,000
$12,000
Long-term Liabilities Principal Repayment
$24,000
$24,000
$24,000
Purchase Other Current Assets
$45,000
$35,000
$35,000
Purchase Long-term Assets
$50,000
$25,000
$25,000
Dividends
$0
$0
$0
Subtotal Cash Spent
$1,729,119
$1,861,967
$2,235,035
Net Cash Flow
$965,218
$1,182,155
$1,102,237
Cash Balance
$977,218
$2,159,373
$3,261,611
7.5 Projected Balance Sheet
Our projected balance sheet shows an increase in net worth in 2003, at which point we expect to be making enviable profits. Our financial projections show a significant part of our net worth to be from paid-in capital and a positive figure in retained earnings. We are increasing assets in order to meet our equipment and facility requirements, and because we need to increase our receivables and inventory to support our growth in sales. Monthly projections are in the appendices.
Pro Forma Balance Sheet
FY 2001
FY 2002
FY 2003
Assets
Current Assets
Cash
$977,218
$2,159,373
$3,261,611
Accounts Receivable
$481,038
$575,716
$748,444
Inventory
$128,852
$122,694
$159,505
Other Current Assets
$45,000
$80,000
$115,000
Total Current Assets
$1,632,108
$2,937,784
$4,284,560
Long-term Assets
Long-term Assets
$199,118
$224,118
$249,118
Accumulated Depreciation
$59,605
$95,605
$131,605
Total Long-term Assets
$139,513
$128,513
$117,513
Total Assets
$1,771,621
$3,066,297
$4,402,073
Liabilities and Capital
FY 2001
FY 2002
FY 2003
Current Liabilities
Accounts Payable
$163,869
$121,083
$152,951
Current Borrowing
$0
$0
$0
Other Current Liabilities
$42,003
$30,003
$18,003
Subtotal Current Liabilities
$205,872
$151,086
$170,954
Long-term Liabilities
$360,550
$396,550
$432,550
Total Liabilities
$566,422
$547,636
$603,504
Paid-in Capital
$1,689,820
$2,114,820
$2,114,820
Retained Earnings
($1,044,791)
($484,621)
$403,840
Earnings
$560,170
$888,461
$1,279,909
Total Capital
$1,205,199
$2,518,660
$3,798,569
Total Liabilities and Capital
$1,771,621
$3,066,297
$4,402,073
Net Worth
$1,205,199
$2,518,660
$3,798,569
7.6 Business Ratios
The following table outlines some of the more important ratios from the Chemical Products and Preparations manufacturing industry. The final column, Industry Profile, details specific ratios based on the industry as it is classified by the NAICS code, 325998.
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