Our financial plan anticipates one year of negative profits as we gain sales volume. We have budgeted enough investment to cover these losses and have an additional credit line 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 per month per segment will be about $8,000. This is because we will be dealing with smaller companies at first that have smaller projects. We expect that about three projects per month will guarantee a break-even point.
Break-even Analysis
Monthly Revenue Break-even
$23,444
Assumptions:
Average Percent Variable Cost
1%
Estimated Monthly Fixed Cost
$23,256
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 fourth quarter of 2003 (see appendix for monthly Profit and Loss table).
Pro Forma Profit and Loss
Year 1
Year 2
Year 3
Sales
$299,000
$441,000
$550,000
Direct Cost of Sales
$2,400
$0
$0
Other Costs of Sales
$7,000
$7,000
$7,000
Total Cost of Sales
$9,400
$7,000
$7,000
Gross Margin
$289,600
$434,000
$543,000
Gross Margin %
96.86%
98.41%
98.73%
Expenses
Payroll
$190,500
$209,000
$268,000
Sales and Marketing and Other Expenses
$6,000
$10,000
$14,000
Depreciation
$0
$2,500
$2,500
Rent
$18,000
$20,000
$22,000
Utilities
$3,600
$3,600
$4,000
Insurance
$13,200
$14,000
$15,000
Payroll Taxes
$28,575
$31,350
$40,200
Travel
$12,000
$12,000
$15,000
Other
$7,200
$8,000
$10,000
Total Operating Expenses
$279,075
$310,450
$390,700
Profit Before Interest and Taxes
$10,525
$123,550
$152,300
EBITDA
$10,525
$126,050
$154,800
Interest Expense
$6,100
$5,500
$4,300
Taxes Incurred
$1,328
$35,415
$44,400
Net Profit
$3,097
$82,635
$103,600
Net Profit/Sales
1.04%
18.74%
18.84%
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 nine months. Our short-term loan will be repaid in two equal payments in 2004-2005. Our 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
$74,750
$110,250
$137,500
Cash from Receivables
$162,100
$301,234
$389,843
Subtotal Cash from Operations
$236,850
$411,484
$527,343
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
$3,000
$0
$0
Subtotal Cash Received
$239,850
$411,484
$527,343
Expenditures
Year 1
Year 2
Year 3
Expenditures from Operations
Cash Spending
$190,500
$209,000
$268,000
Bill Payments
$92,676
$150,520
$173,514
Subtotal Spent on Operations
$283,176
$359,520
$441,514
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out
$0
$0
$0
Principal Repayment of Current Borrowing
$0
$8,000
$8,000
Other Liabilities Principal Repayment
$0
$0
$0
Long-term Liabilities Principal Repayment
$0
$4,000
$4,000
Purchase Other Current Assets
$0
$0
$0
Purchase Long-term Assets
$0
$0
$0
Dividends
$0
$0
$0
Subtotal Cash Spent
$283,176
$371,520
$453,514
Net Cash Flow
($43,326)
$39,964
$73,830
Cash Balance
$61,474
$101,438
$175,267
7.5 Projected Balance Sheet
The following table shows the projected balance sheet for Compton Geotechnical.
Pro Forma Balance Sheet
Year 1
Year 2
Year 3
Assets
Current Assets
Cash
$61,474
$101,438
$175,267
Accounts Receivable
$62,150
$91,666
$114,323
Other Current Assets
$3,500
$3,500
$3,500
Total Current Assets
$127,124
$196,604
$293,090
Long-term Assets
Long-term Assets
$25,000
$25,000
$25,000
Accumulated Depreciation
$0
$2,500
$5,000
Total Long-term Assets
$25,000
$22,500
$20,000
Total Assets
$152,124
$219,104
$313,090
Liabilities and Capital
Year 1
Year 2
Year 3
Current Liabilities
Accounts Payable
$15,726
$12,071
$14,458
Current Borrowing
$16,000
$8,000
$0
Other Current Liabilities
$0
$0
$0
Subtotal Current Liabilities
$31,726
$20,071
$14,458
Long-term Liabilities
$45,000
$41,000
$37,000
Total Liabilities
$76,726
$61,071
$51,458
Paid-in Capital
$103,000
$103,000
$103,000
Retained Earnings
($30,700)
($27,603)
$55,032
Earnings
$3,097
$82,635
$103,600
Total Capital
$75,398
$158,033
$261,633
Total Liabilities and Capital
$152,124
$219,104
$313,090
Net Worth
$75,398
$158,033
$261,633
7.6 Business Ratios
We have included industry standard ratios from the construction and civil engineering industry to compare with ours. These ratios are as closely matched to our industry as management could find, however there are 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.
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