Rosafarbenes Nilpferd & Sons Engineering, Inc.

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Electronic Engineering Business Plan

Financial Plan

Rosafarbenes Nilpferd & Sons Engineering's dramatic growth in sales poses substantial financing needs for receivables as well as inventory.  In 2001 and 2002 virtually all of this need can be supported by accumulated earnings. RNSE will need a line of credit to provide cash in the first year until accounts receivables begin to turn over into cash. Projections indicate a need for a line of approximately $135,000 which could stretch to $200,000.  As the receivables are projected to be high in the first year, and stem from prime quality customers, commercial banking lines of credit (or A/R factoring) should be easily obtainable supported by this current asset without a need for reliance on inventory.

7.1 Important Assumptions

Interest rate is assumed to be 10% if a commercial line of credit is obtained.  Should it be necessary to arrange for factoring of the receivables, interest expense would increase.  In the first year, factoring would add an additional cost of $10,000-$12,000.

The federal tax rate on corporate profits is graduated, beginning at 15% on profits up to $50,000.  The average weighted federal tax rate on profits up to $335,000 works out to 34%.  On profits in excess of $335,000 the federal tax rate is 34%.  To this an additional 9.5% has been added for Freedonia state corporate taxes.

The period of 45 days for receivables is not unusual, but the inventory turn-over is projected to be slow due to a need to keep higher levels than was necessary only a few years ago.  The growth in demand for components has put pressure on suppliers to keep up with the demand.  The risk of maintaining inadequate stocks of certain key components must be minimized by larger than normal forward purchasing.

General Assumptions
2000 2001 2002
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 43.50% 43.50% 43.50%
Other 0 0 0

7.2 Break-even Analysis

In the first quarter of year 2000 the first generation of Technology 1 devices sold an average of 133 units monthly.  The second generation (smaller, faster, smarter) will be ready by early June.  Many customers for Rosafarbenes Nilpferd & Sons Engineering's products are holding back their orders awaiting the newer version.  The break-even analysis, below, indicates monthly sales needed to break even.

Break-even Analysis
Monthly Units Break-even 89
Monthly Revenue Break-even $45,431
Assumptions:
Average Per-Unit Revenue $511.07
Average Per-Unit Variable Cost $203.21
Estimated Monthly Fixed Cost $27,366

7.3 Projected Profit and Loss

Projected gross profits for year 2000 will be strong and will climb even further in the second and third year.  Despite substantial investments in marketing (primarily advertising and sales staff), net profits before taxes are projected to  be high.

Explanations for projected expenses are outlined below:

Advertising
The actual expenditures were used for January, February and March.  This expense averaged $817 for 1999.  An additional $50,000 is budgeted for advertising during 2000, $150,000 in 2001, and $250,000 in year 2002.

Documentation Printing
This relates to the specification sheets and manuals that are included with sold products.  We project this expense in year 2000 at the same rate ($96 monthly) as 1999.  In years 2001 and 2002 we have increased this expense to reflect the projected increased sales.  We have assumed, with increased volume of sales, some efficiencies can be had in per unit printing costs.

Electronic Testing Equipment
The actual expenditures were recorded for the first quarter of 2000.  This is a significant expense which came to $1,430 in 1999, but will increase to $500 monthly in 2000 and to $650 monthly in 2001 and $750 monthly in year 2002.

Merchant Services
These services relate to fees paid to credit card companies when credit cards are accepted as cash payment for a sale.  These fees are about 3% (some more, some less) of the sales price.  Actual figures were used for the first quarter, thereafter, we'll assume fees to be 3% of cash sales.

Computer Parts
Actual figures are given for the first quarter.  Thereafter, the historical monthly average of $542 is used for projection purposes.

Professional Fees
These include accounting ($95/month), legal and miscellaneous outside services such as photography, etc.  Actual figures are given for the first quarter, then $500 monthly is projected, increasing in years 2001 and 2002 to reflect increased sales. 

Computer Software
Actual expenditure is given for the first quarter 2000.  Thereafter, an average monthly figure of $200 is projected.

Office Supplies
The actual figures are given for the first quarter, and $350 monthly is projected thereafter.

Travel
Travel is kept at historical levels for 2000 but will double in years 2001 and 2002.

Miscellaneous
Included here are professional books, minor bank charges, Massachusetts annual report, etc.  Projected at $200 monthly, increasing in years 2001 and 2002.

Leased Equipment
These expenses relate to a computer that is on lease.  They are expected to continue at the same rate.

Online Services
Kept at historical levels.

Telephone
Actual figures are given for the first quarter.  Thereafter at $250/month increasing in years 2001 and 2002.

Utilities
Averaging $100 per month.  Are expected to increase as new space is acquired to accommodate staff hires.  Includes gas and electricity.

Insurance
Insurance related to a business policy which is expected to increase as additional office space is acquired.

Depreciation
Fixed assets are represented by such items as a printer and an iMAC computer plus some software.  Net capital assets are a bit over $4,000 as of 12/31/99.  Assume depreciation at $1,000 annually.

Rent
Currently two offices are rented. With the increase in staff, additional space will be acquired.

Health Care
This relates to the health care plan for the two current members and is projected at present actual cost.  It will increase proportionally as new employees are hired.

Contract/Consultants
These expenses are paid to independent computer technicians who regularly perform services for the company.  They charge $45/hr.  The actual costs for the first quarter are given.  The costs are projected at $2,200 per month, increasing as sales increase.

Pro Forma Profit and Loss
2000 2001 2002
Sales $1,613,970 $4,437,000 $14,790,000
Direct Cost of Sales $641,752 $1,782,150 $5,940,500
Other $0 $0 $0
Total Cost of Sales $641,752 $1,782,150 $5,940,500
Gross Margin $972,218 $2,654,850 $8,849,500
Gross Margin % 60.24% 59.83% 59.83%
Expenses
Payroll $155,848 $313,400 $618,400
Sales and Marketing and Other Expenses $125,793 $249,966 $438,955
Depreciation $1,000 $1,000 $1,000
Leased Equipment $2,628 $2,628 $2,628
Healthcare $10,272 $25,650 $51,360
On-line Services $1,225 $1,225 $1,225
Telephone $2,964 $3,500 $4,500
Utilities $1,200 $1,200 $1,200
Insurance $1,440 $1,600 $2,000
Rent $12,000 $18,000 $21,000
Payroll Taxes $14,026 $28,206 $55,656
Other $0 $0 $0
Total Operating Expenses $328,396 $646,375 $1,197,924
Profit Before Interest and Taxes $643,822 $2,008,475 $7,651,576
EBITDA $644,822 $2,009,475 $7,652,576
Interest Expense $7,030 $10,450 $3,700
Taxes Incurred $277,004 $869,141 $3,326,826
Net Profit $359,787 $1,128,884 $4,321,050
Net Profit/Sales 22.29% 25.44% 29.22%

7.4 Projected Cash Flow

The current borrowing of $14,866 outstanding at the end of 1999 was fully repaid in the first quarter 2000.

The cash flow reflects success in obtaining a line of credit in the range of $150,000-$200,000 which is drawn down and repaid in accordance with need during 2000 leaving a balance of $135,000 at the end of 2000 which is then repaid over the next two years.

Pro Forma Cash Flow
2000 2001 2002
Cash Received
Cash from Operations
Cash Sales $403,493 $1,109,250 $3,697,500
Cash from Receivables $829,439 $2,622,159 $8,504,861
Subtotal Cash from Operations $1,232,932 $3,731,409 $12,202,361
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 $245,000 $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 $1,477,932 $3,731,409 $12,202,361
Expenditures 2000 2001 2002
Expenditures from Operations
Cash Spending $155,848 $313,400 $618,400
Bill Payments $962,508 $3,108,271 $10,002,746
Subtotal Spent on Operations $1,118,356 $3,421,671 $10,621,146
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $14,866 $0 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $110,000 $85,000 $50,000
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $1,243,222 $3,506,671 $10,671,146
Net Cash Flow $234,709 $224,738 $1,531,215
Cash Balance $233,429 $458,168 $1,989,382

7.5 Projected Balance Sheet

Of the long-term liabilities, $12,000 relates to a family loan with no specific repayment schedule.  It carries an interest rate of 7%, although in the projections all LTD has been calculated at 10%.

Pro Forma Balance Sheet
2000 2001 2002
Assets
Current Assets
Cash $233,429 $458,168 $1,989,382
Accounts Receivable $403,397 $1,108,988 $3,696,627
Inventory $117,622 $326,637 $1,088,790
Other Current Assets $0 $0 $0
Total Current Assets $754,449 $1,893,793 $6,774,799
Long-term Assets
Long-term Assets $18,304 $18,304 $18,304
Accumulated Depreciation $14,478 $15,478 $16,478
Total Long-term Assets $3,826 $2,826 $1,826
Total Assets $758,275 $1,896,619 $6,776,625
Liabilities and Capital 2000 2001 2002
Current Liabilities
Accounts Payable $168,778 $263,238 $872,195
Current Borrowing $0 $0 $0
Other Current Liabilities $17,525 $17,525 $17,525
Subtotal Current Liabilities $186,303 $280,763 $889,720
Long-term Liabilities $147,000 $62,000 $12,000
Total Liabilities $333,303 $342,763 $901,720
Paid-in Capital $2,910 $2,910 $2,910
Retained Earnings $62,274 $422,061 $1,550,945
Earnings $359,787 $1,128,884 $4,321,050
Total Capital $424,971 $1,553,855 $5,874,905
Total Liabilities and Capital $758,275 $1,896,619 $6,776,625
Net Worth $424,971 $1,553,855 $5,874,905

7.6 Business Ratios

The following table outlines important business ratios for the electrical and electronic engineering industry, as described by the standard industry classification (SIC) index 8711.9905.

Ratio Analysis
2000 2001 2002 Industry Profile
Sales Growth 385.03% 174.91% 233.33% 1.74%
Percent of Total Assets
Accounts Receivable 53.20% 58.47% 54.55% 32.00%
Inventory 15.51% 17.22% 16.07% 2.11%
Other Current Assets 0.00% 0.00% 0.00% 37.08%
Total Current Assets 99.50% 99.85% 99.97% 71.19%
Long-term Assets 0.50% 0.15% 0.03% 28.81%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 24.57% 14.80% 13.13% 36.30%
Long-term Liabilities 19.39% 3.27% 0.18% 16.15%
Total Liabilities 43.96% 18.07% 13.31% 52.45%
Net Worth 56.04% 81.93% 86.69% 47.55%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 60.24% 59.83% 59.83% 100.00%
Selling, General & Administrative Expenses 37.37% 33.91% 30.36% 77.75%
Advertising Expenses 3.20% 3.38% 1.69% 0.33%
Profit Before Interest and Taxes 39.89% 45.27% 51.73% 3.13%
Main Ratios
Current 4.05 6.75 7.61 1.55
Quick 3.42 5.58 6.39 1.32
Total Debt to Total Assets 43.96% 18.07% 13.31% 56.41%
Pre-tax Return on Net Worth 149.84% 128.58% 130.18% 7.23%
Pre-tax Return on Assets 83.98% 105.35% 112.86% 16.60%
Additional Ratios 2000 2001 2002
Net Profit Margin 22.29% 25.44% 29.22% n.a
Return on Equity 84.66% 72.65% 73.55% n.a
Activity Ratios
Accounts Receivable Turnover 3.00 3.00 3.00 n.a
Collection Days 55 83 79 n.a
Inventory Turnover 10.83 8.02 8.39 n.a
Accounts Payable Turnover 6.61 12.17 12.17 n.a
Payment Days 28 25 20 n.a
Total Asset Turnover 2.13 2.34 2.18 n.a
Debt Ratios
Debt to Net Worth 0.78 0.22 0.15 n.a
Current Liab. to Liab. 0.56 0.82 0.99 n.a
Liquidity Ratios
Net Working Capital $568,145 $1,613,029 $5,885,079 n.a
Interest Coverage 91.58 192.20 2,067.99 n.a
Additional Ratios
Assets to Sales 0.47 0.43 0.46 n.a
Current Debt/Total Assets 25% 15% 13% n.a
Acid Test 1.25 1.63 2.24 n.a
Sales/Net Worth 3.80 2.86 2.52 n.a
Dividend Payout 0.00 0.00 0.00 n.a