AMT Computers

Start your own business plan »

Computer Hardware Reseller Business Plan

Financial Plan

The most important element in the financial plan is the critical need for improving several of the key factors that impact cash flow:

  1. We must at any cost stop the slide in inventory turnover and develop better inventory management to bring the turnover back up to 6 turns by the third year. This should also be a function of the shift in focus towards service revenues to add to the hardware revenues.

  2. We must also bring the gross margin back up to 30%. This too is related to improving the mix between hardware and service revenues, because the service revenues offer much better margins.

  3. We plan to borrow another $100,000 long-term this year. The amount seems in line with the balance sheet capabilities.

7.1 Important Assumptions

The financial plan depends on important assumptions, most of which are shown in Table 7.1. The key underlying assumptions are:

  1. We assume a slow-growth economy, without major recession.
  2. We assume of course that there are no unforeseen changes in technology to make products immediately obsolete.
General Assumptions
1996 1997 1998
Plan Month 1 2 3
Current Interest Rate 8.00% 8.00% 8.00%
Long-term Interest Rate 8.50% 8.50% 8.50%
Tax Rate 20.18% 20.18% 20.18%
Other 0 0 0

7.2 Key Financial Indicators

The Benchmark Comparison chart highlights our ambitious plans to correct declining gross margin and inventory turnover. The chart illustrates why we think the ambitious sales increases we plan are reasonable. We have had similar increases in the recent past.

7.3 Break-even Analysis

For our break-even analysis, we assume running costs which include our full payroll, rent, and utilities, and an estimation of other running costs. Payroll alone, at our present run rate, is only about $55,000. Margins are harder to assume. Our overall average is based on projections for the coming year. We hope to attain a margin that high in the future.

The chart shows how much we need to sell per month to break even, according to these assumptions.

Break-even Analysis
Monthly Units Break-even 642
Monthly Revenue Break-even $302,979
Assumptions:
Average Per-Unit Revenue $471.65
Average Per-Unit Variable Cost $336.91
Estimated Monthly Fixed Cost $86,555

7.4 Projected Profit and Loss

The most important assumption in the Projected Profit and Loss statement is the gross margin, which is supposed to increase. This is up from barely 21% in the last year. The increase in gross margin is based on changing our sales mix, and it is critical. Month-by-month assumptions for profit and loss are included in the appendix.

Pro Forma Profit and Loss
1996 1997 1998
Sales $6,468,634 $7,478,250 $9,182,740
Direct Cost of Sales $4,620,673 $5,266,450 $6,078,104
Production Payroll $139,000 $202,500 $203,500
Other Costs of Sales $0 $0 $0
Total Cost of Sales $4,759,673 $5,468,950 $6,281,604
Gross Margin $1,708,961 $2,009,300 $2,901,136
Gross Margin % 26.42% 26.87% 31.59%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $344,000 $422,000 $486,000
Ads $125,000 $140,000 $175,000
Catalog $25,000 $19,039 $19,991
Mailing $113,300 $120,000 $150,000
Promo $16,000 $20,000 $25,000
Shows $20,200 $25,000 $30,000
Literature $7,000 $10,000 $12,500
PR $1,000 $1,250 $1,500
Seminar $31,000 $45,000 $60,000
Service $10,250 $12,000 $15,000
Training $5,400 $7,000 $15,000
Total Sales and Marketing Expenses $698,150 $821,289 $989,991
Sales and Marketing % 10.79% 10.98% 10.78%
General and Administrative Expenses
General and Administrative Payroll $155,000 $179,000 $234,000
Marketing/Promotion $0 $0 $0
Depreciation $12,681 $13,315 $13,981
Leased Equipment $30,000 $31,500 $33,075
Rent $84,000 $88,200 $92,610
Utilities $9,000 $9,450 $9,923
Insurance $6,000 $6,300 $6,615
Payroll Taxes $0 $0 $0
Other General and Administrative Expenses $6,331 $6,648 $6,980
Total General and Administrative Expenses $303,012 $334,413 $397,184
General and Administrative % 4.68% 4.47% 4.33%
Other Expenses:
Other Payroll $36,000 $70,000 $77,000
Contract/Consultants $1,500 $5,000 $30,000
Other Expenses $0 $0 $0
Total Other Expenses $37,500 $75,000 $107,000
Other % 0.58% 1.00% 1.17%
Total Operating Expenses $1,038,662 $1,230,702 $1,494,175
Profit Before Interest and Taxes $670,299 $778,598 $1,406,961
EBITDA $682,980 $791,913 $1,420,942
Interest Expense $35,568 $31,710 $25,557
Taxes Incurred $128,111 $150,748 $278,816
Net Profit $506,619 $596,140 $1,102,588
Net Profit/Sales 7.83% 7.97% 12.01%

7.5 Projected Cash Flow

The cash flow depends on assumptions for inventory turnover, payment days, and accounts receivable management. Our projected 60-day collection days is not ideal, but it is realistic in this market, and hard for us to effectively change.  We're better off planning for it than ignoring it. We need significant new financing in March to get through a cash flow dip as we build up for mid-year sales.

Pro Forma Cash Flow
1996 1997 1998
Cash Received
Cash from Operations
Cash Sales $970,295 $1,121,738 $1,377,411
Cash from Receivables $4,496,795 $6,138,525 $7,437,311
Subtotal Cash from Operations $5,467,090 $7,260,263 $8,814,722
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 $100,000 $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 $5,567,090 $7,260,263 $8,814,722
Expenditures 1996 1997 1998
Expenditures from Operations
Cash Spending $674,000 $873,500 $1,000,500
Bill Payments $4,807,920 $6,016,976 $7,073,860
Subtotal Spent on Operations $5,481,920 $6,890,476 $8,074,360
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $26,000 $32,000 $32,000
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $36,709 $40,543 $43,989
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $5,544,629 $6,963,019 $8,150,349
Net Cash Flow $22,461 $297,244 $664,373
Cash Balance $77,893 $375,137 $1,039,509

7.6 Projected Balance Sheet

The Projected Balance Sheet is quite solid. We do not project any real trouble meeting our debt obligations--as long as we can achieve our specific objectives.

Pro Forma Balance Sheet
1996 1997 1998
Assets
Current Assets
Cash $77,893 $375,137 $1,039,509
Accounts Receivable $1,396,650 $1,614,638 $1,982,656
Inventory $556,810 $634,629 $732,436
Other Current Assets $25,000 $25,000 $25,000
Total Current Assets $2,056,353 $2,649,403 $3,779,602
Long-term Assets
Long-term Assets $350,000 $350,000 $350,000
Accumulated Depreciation $62,681 $75,996 $89,977
Total Long-term Assets $287,319 $274,004 $260,023
Total Assets $2,343,672 $2,923,407 $4,039,625
Liabilities and Capital 1996 1997 1998
Current Liabilities
Accounts Payable $443,022 $499,160 $588,779
Current Borrowing $64,000 $32,000 $0
Other Current Liabilities $15,000 $15,000 $15,000
Subtotal Current Liabilities $522,022 $546,160 $603,779
Long-term Liabilities $348,153 $307,610 $263,621
Total Liabilities $870,175 $853,770 $867,400
Paid-in Capital $500,000 $500,000 $500,000
Retained Earnings $466,878 $973,497 $1,569,637
Earnings $506,619 $596,140 $1,102,588
Total Capital $1,473,497 $2,069,637 $3,172,225
Total Liabilities and Capital $2,343,672 $2,923,407 $4,039,625
Net Worth $1,473,497 $2,069,637 $3,172,225

7.7 Business Ratios

The table follows with our main business ratios. We do intend to improve gross margin, collection days, and inventory turnover. The industry standards are taken for industry classification 5734 in the SIC code.  We assume that the difference between our results and the standards is that the standards include

Ratio Analysis
1996 1997 1998 Industry Profile
Sales Growth 22.03% 15.61% 22.79% 10.50%
Percent of Total Assets
Accounts Receivable 59.59% 55.23% 49.08% 19.20%
Inventory 23.76% 21.71% 18.13% 38.00%
Other Current Assets 1.07% 0.86% 0.62% 20.80%
Total Current Assets 87.74% 90.63% 93.56% 78.00%
Long-term Assets 12.26% 9.37% 6.44% 22.00%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 22.27% 18.68% 14.95% 44.60%
Long-term Liabilities 14.86% 10.52% 6.53% 14.10%
Total Liabilities 37.13% 29.20% 21.47% 58.70%
Net Worth 62.87% 70.80% 78.53% 41.30%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 26.42% 26.87% 31.59% 37.20%
Selling, General & Administrative Expenses 18.59% 18.90% 19.59% 22.30%
Advertising Expenses 1.93% 1.87% 1.91% 4.10%
Profit Before Interest and Taxes 10.36% 10.41% 15.32% 1.50%
Main Ratios
Current 3.94 4.85 6.26 1.78
Quick 2.87 3.69 5.05 0.75
Total Debt to Total Assets 37.13% 29.20% 21.47% 58.70%
Pre-tax Return on Net Worth 43.08% 36.09% 43.55% 3.80%
Pre-tax Return on Assets 27.08% 25.55% 34.20% 9.30%
Additional Ratios 1996 1997 1998
Net Profit Margin 7.83% 7.97% 12.01% n.a
Return on Equity 34.38% 28.80% 34.76% n.a
Activity Ratios
Accounts Receivable Turnover 3.94 3.94 3.94 n.a
Collection Days 58 86 84 n.a
Inventory Turnover 10.68 8.84 8.89 n.a
Accounts Payable Turnover 11.35 12.17 12.17 n.a
Payment Days 28 28 28 n.a
Total Asset Turnover 2.76 2.56 2.27 n.a
Debt Ratios
Debt to Net Worth 0.59 0.41 0.27 n.a
Current Liab. to Liab. 0.60 0.64 0.70 n.a
Liquidity Ratios
Net Working Capital $1,534,331 $2,103,243 $3,175,823 n.a
Interest Coverage 18.85 24.55 55.05 n.a
Additional Ratios
Assets to Sales 0.36 0.39 0.44 n.a
Current Debt/Total Assets 22% 19% 15% n.a
Acid Test 0.20 0.73 1.76 n.a
Sales/Net Worth 4.39 3.61 2.89 n.a
Dividend Payout 0.00 0.00 0.00 n.a