Electronic Detectives

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Data Recovery Business Plan

Financial Plan

Our financial plan anticipates two years of negative profits as we gain sales volume. We have budgeted enough investment to cover these losses and have an additional credit line of $60,000 available if sales do not match predictions.

7.1 Important Assumptions

We are assuming approximately 75% sales on credit and average interest rates of 10%. These are considered to be conservative in case our predictions are erroneous.

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 30.00% 30.00% 30.00%
Other 0 0 0

7.2 Break-even Analysis

Our break-even analysis is based on the assumptions that our gross margin is 100%. In other words, we will have insignificant direct cost of sales. Since each project will be of different scope, length, and complexity, it is difficult to assign and average per unit revenue figure. However, it is conservatively believed that during the first three years, average profitability will be about $5,000. This is because we will be dealing with smaller companies at first that have smaller projects. We expect that about six projects per month will guarantee a break-even point.

Break-even Analysis
Monthly Revenue Break-even $25,483
Assumptions:
Average Percent Variable Cost 0%
Estimated Monthly Fixed Cost $25,483

7.3 Projected Profit and Loss

The following table itemizes our revenues and associated costs. We expect to be paying higher costs in marketing and advertising than other companies as we attempt to build sales volume. As the reader can see, we expect monthly profits to begin in November 2003 and yearly profits to occur in 2005.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $215,000 $481,000 $715,000
Direct Cost of Sales $0 $0 $0
Other Costs of Sales $15,800 $25,000 $65,000
Total Cost of Sales $15,800 $25,000 $65,000
Gross Margin $199,200 $456,000 $650,000
Gross Margin % 92.65% 94.80% 90.91%
Expenses
Payroll $216,000 $300,000 $340,000
Sales and Marketing and Other Expenses $30,000 $50,000 $50,000
Depreciation $2,400 $2,500 $2,500
Rent $24,000 $24,000 $28,000
Utilities $6,000 $6,000 $6,000
Insurance $12,000 $14,000 $15,000
Travel $8,200 $12,000 $12,000
Payroll Taxes $0 $0 $0
Other $7,200 $10,000 $10,000
Total Operating Expenses $305,800 $418,500 $463,500
Profit Before Interest and Taxes ($106,600) $37,500 $186,500
EBITDA ($104,200) $40,000 $189,000
Interest Expense $17,000 $15,150 $11,450
Taxes Incurred $0 $6,705 $52,515
Net Profit ($123,600) $15,645 $122,535
Net Profit/Sales -57.49% 3.25% 17.14%

7.4 Projected Cash Flow

The following is our cash flow chart and diagram. We do not expect to have any short-term cash flow problems even though we will be operating at a loss for the first two years. Our short-term SBA loan of $50,000 will be repaid in two equal payments in 2004-2005. Our $120,000 long-term loan will be paid off in ten years.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $53,750 $120,250 $178,750
Cash from Receivables $111,075 $298,673 $481,641
Subtotal Cash from Operations $164,825 $418,923 $660,391
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 $13,000 $0
Subtotal Cash Received $164,825 $431,923 $660,391
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $216,000 $300,000 $340,000
Bill Payments $150,401 $163,019 $242,805
Subtotal Spent on Operations $366,401 $463,019 $582,805
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $0 $25,000 $25,000
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $0 $12,000 $12,000
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $366,401 $500,019 $619,805
Net Cash Flow ($201,576) ($68,096) $40,586
Cash Balance $139,974 $71,878 $112,464

7.5 Projected Balance Sheet

The following is the projected balance sheet for Electronic Detectives.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $139,974 $71,878 $112,464
Accounts Receivable $50,175 $112,252 $166,861
Other Current Assets $0 $0 $0
Total Current Assets $190,149 $184,130 $279,325
Long-term Assets
Long-term Assets $128,000 $128,000 $128,000
Accumulated Depreciation $2,400 $4,900 $7,400
Total Long-term Assets $125,600 $123,100 $120,600
Total Assets $315,749 $307,230 $399,925
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $13,549 $13,385 $20,545
Current Borrowing $50,000 $25,000 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $63,549 $38,385 $20,545
Long-term Liabilities $120,000 $108,000 $96,000
Total Liabilities $183,549 $146,385 $116,545
Paid-in Capital $297,000 $310,000 $310,000
Retained Earnings ($41,200) ($164,800) ($149,155)
Earnings ($123,600) $15,645 $122,535
Total Capital $132,200 $160,845 $283,380
Total Liabilities and Capital $315,749 $307,230 $399,925
Net Worth $132,200 $160,845 $283,380

7.6 Business Ratios

We have included industry standard ratios from the detective agency industry to compare with ours. As this is a new sub market of the overall industry, we expect some significant differences especially in sales growth, financing ratios, long-term asset investments and net worth. However, our projections indicate a healthy company that will be able to obtain and retain long-term profitability.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 123.72% 48.65% 7.51%
Percent of Total Assets
Accounts Receivable 15.89% 36.54% 41.72% 29.53%
Other Current Assets 0.00% 0.00% 0.00% 41.06%
Total Current Assets 60.22% 59.93% 69.84% 74.47%
Long-term Assets 39.78% 40.07% 30.16% 25.53%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 20.13% 12.49% 5.14% 34.85%
Long-term Liabilities 38.00% 35.15% 24.00% 17.54%
Total Liabilities 58.13% 47.65% 29.14% 52.39%
Net Worth 41.87% 52.35% 70.86% 47.61%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 92.65% 94.80% 90.91% 100.00%
Selling, General & Administrative Expenses 165.21% 100.95% 78.76% 82.58%
Advertising Expenses 0.00% 0.00% 0.00% 1.75%
Profit Before Interest and Taxes -49.58% 7.80% 26.08% 1.21%
Main Ratios
Current 2.99 4.80 13.60 1.73
Quick 2.99 4.80 13.60 1.38
Total Debt to Total Assets 58.13% 47.65% 29.14% 2.33%
Pre-tax Return on Net Worth -93.49% 13.90% 61.77% 60.48%
Pre-tax Return on Assets -39.14% 7.27% 43.77% 5.91%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -57.49% 3.25% 17.14% n.a
Return on Equity -93.49% 9.73% 43.24% n.a
Activity Ratios
Accounts Receivable Turnover 3.21 3.21 3.21 n.a
Collection Days 55 82 95 n.a
Accounts Payable Turnover 8.87 12.17 12.17 n.a
Payment Days 37 30 25 n.a
Total Asset Turnover 0.68 1.57 1.79 n.a
Debt Ratios
Debt to Net Worth 1.39 0.91 0.41 n.a
Current Liab. to Liab. 0.35 0.26 0.18 n.a
Liquidity Ratios
Net Working Capital $126,600 $145,745 $258,780 n.a
Interest Coverage -6.27 2.48 16.29 n.a
Additional Ratios
Assets to Sales 1.47 0.64 0.56 n.a
Current Debt/Total Assets 20% 12% 5% n.a
Acid Test 2.20 1.87 5.47 n.a
Sales/Net Worth 1.63 2.99 2.52 n.a
Dividend Payout 0.00 0.00 0.00 n.a