Bauman's Frozen Custard

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Frozen Custard Shop Business Plan

Financial Plan

Bauman's Frozen Custard expects to raise $70,000 in long-term debt with $25,000 from the owners.  A short term loan of $5,000 will be used to maintain a level of cash necessary to maintain expected inventory levels and to buy additional inventory should sales be higher than expected.  The long-term debt will be paid back over the next ten years.  No other immediate financing needs are expected.

With sales increasing from $66,000 the first year to over $113,000 by year three, Bauman's Custard will begin to turn a net profit early in year two, and increase net worth in years two and three after initial decreases.

7.1 Important Assumptions

One important assumption is the initial sales projections. We made this estimate by taking an assumed hourly average observed at a local ice cream shop. We then drastically cut the number to reflect seasonality, our unknown brand name, and reduced foot traffic. These estimates are extremely conservative, and we expect actual sales to surpass them almost immediately.

We assumed the borrowing rate at 4.08% for the short term and 5.20% for the long term and an increase of 1.00% per year for the next two years in the interest rate due to a recovering economy. We also assumed initial investment in equipment and fixtures at $69,800.

 

General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 4.08% 5.08% 6.08%
Long-term Interest Rate 5.20% 6.20% 7.20%
Tax Rate 0.00% 30.00% 30.00%
Other 0 0 0

7.2 Break-even Analysis

The break-even analysis shows that Bauman's Frozen Custard has sufficient sales strength to remain viable.  Our break-even point is $7,058 per month. We estimate our average sales price at $2.50, which is an approximate sale price for a medium-size dessert at our retail outlet. This translates in the break-even unit sales of 2,823 per month. Our sales forecast for the first year calls for an average of 2,228 units per month. This was calculated by total yearly sales ($66,840), divided by 12 months, divided by average sale price per customer ($2.50). However, in the second year we expect to sell, on average, 435 more units a month than our break even point. This will allow Bauman's Frozen Custard and Italian Ice to increase the net worth of the business after our initial year of operations.

Break-even Analysis
Monthly Revenue Break-even $6,719
Assumptions:
Average Percent Variable Cost 26%
Estimated Monthly Fixed Cost $4,972

7.3 Projected Profit and Loss

Over the first year we expect to incur a loss of $16,753.  This will largely be due to the losses during the start up months and recurring payroll and other expenses.  Over the next year we expect to see a more stable and sustainable profit level of $3,337, and in the third year we expect our profits to grow to $6,396.  This is based on our estimation that sales will grow by 46% over the second year.  This occurs because of the increase in brand awareness of the company, our continuous advertising campaign, and 8% annual industry growth over all.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $66,840 $97,760 $113,402
Direct Cost of Sales $17,378 $25,418 $28,350
Other Costs of Goods $0 $0 $0
Total Cost of Sales $17,378 $25,418 $28,350
Gross Margin $49,462 $72,342 $85,051
Gross Margin % 74.00% 74.00% 75.00%
Expenses
Payroll $20,094 $23,837 $30,784
Sales and Marketing and Other Expenses $8,150 $4,800 $4,800
Depreciation $4,668 $4,668 $4,668
Rent $12,660 $12,913 $13,171
Utilities $12,400 $12,400 $12,400
Insurance $1,692 $1,692 $1,692
Payroll Taxes $0 $0 $0
Other $0 $0 $0
Total Operating Expenses $59,664 $60,311 $67,516
Profit Before Interest and Taxes ($10,202) $12,032 $17,535
EBITDA ($5,534) $16,700 $22,203
Interest Expense $3,536 $3,689 $3,780
Taxes Incurred $0 $2,503 $4,127
Net Profit ($13,739) $5,840 $9,629
Net Profit/Sales -20.55% 5.97% 8.49%

7.4 Projected Cash Flow

Bauman's Frozen Custard and Italian Ice expects to manage cash flow over the first year with the assistance of retained earnings and cash reserves from our short-term loan of $5,000.This financing is required to assist in covering unforseen expenses and help us through seasonal fluctuations in customers. We expect to finance our long-term assets with a $70,000 long-term loan, on which we expect to make monthly payments over the next ten years. During 2005-06, we will incur a loss in cash flow as long as our expenses exceed our revenues.

We estimate that our business will be cash flow positive in our second and third year. We expect second year cash flow to be approximately $646, and $4,162 our third year.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $66,840 $97,760 $113,402
Subtotal Cash from Operations $66,840 $97,760 $113,402
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 $0 $0
Subtotal Cash Received $66,840 $97,760 $113,402
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $20,094 $23,837 $30,784
Bill Payments $52,681 $63,756 $68,288
Subtotal Spent on Operations $72,775 $87,593 $99,072
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $5,000 $0 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $7,000 $7,000 $7,000
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $84,775 $94,593 $106,072
Net Cash Flow ($17,935) $3,167 $7,329
Cash Balance $6,883 $10,050 $17,379

7.5 Projected Balance Sheet

As stated earlier, the owners emphasize long-term growth in the business value over short-term returns. Our projected balance sheet shows a decrease in net worth over the first year to $3,185 from $19,938 at startup.  However, starting from the second year, our net worth steadily increases to $6,522 and by the end of the third year we expect the value of the firm to increase to $12,919.  With the present financial projections we will be careful in keeping costs to a minimum without making sacrifices to product quality.  It will not be necessary for Bauman's Frozen Custard and Italian Ice to purchase more assets, because our machinery has at least a twenty (20) year life span and will have production capacity that exceeds our needs.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $6,883 $10,050 $17,379
Inventory $1,922 $2,811 $3,135
Other Current Assets $0 $0 $0
Total Current Assets $8,805 $12,861 $20,514
Long-term Assets
Long-term Assets $69,800 $69,800 $69,800
Accumulated Depreciation $4,668 $9,336 $14,004
Total Long-term Assets $65,132 $60,464 $55,796
Total Assets $73,937 $73,325 $76,310
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $4,738 $5,285 $5,642
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $4,738 $5,285 $5,642
Long-term Liabilities $63,000 $56,000 $49,000
Total Liabilities $67,738 $61,285 $54,642
Paid-in Capital $25,000 $25,000 $25,000
Retained Earnings ($5,062) ($18,801) ($12,961)
Earnings ($13,739) $5,840 $9,629
Total Capital $6,200 $12,039 $21,668
Total Liabilities and Capital $73,937 $73,325 $76,310
Net Worth $6,200 $12,039 $21,668

7.6 Business Ratios

Our gross margin is significantly above the industry average (Frozen Custard Industry SIC 2024.0201).  We believe this is because a large part of this industry involves manufacturers who produce large quantities using economies of scale.  As a scoop shop, Bauman's Frozen Custard and Italian Ice can command a higher price per gallon than wholesale manufacturers, but more costs are incurred in terms of man hours and marketing expenses.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 46.26% 16.00% 1.21%
Percent of Total Assets
Inventory 2.60% 3.83% 4.11% 14.83%
Other Current Assets 0.00% 0.00% 0.00% 19.26%
Total Current Assets 11.91% 17.54% 26.88% 52.51%
Long-term Assets 88.09% 82.46% 73.12% 47.49%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 6.41% 7.21% 7.39% 25.80%
Long-term Liabilities 85.21% 76.37% 64.21% 25.21%
Total Liabilities 91.62% 83.58% 71.61% 51.01%
Net Worth 8.38% 16.42% 28.39% 48.99%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 74.00% 74.00% 75.00% 21.95%
Selling, General & Administrative Expenses 77.60% 60.27% 58.61% 13.02%
Advertising Expenses 0.00% 0.00% 0.00% 1.44%
Profit Before Interest and Taxes -15.26% 12.31% 15.46% 2.11%
Main Ratios
Current 1.86 2.43 3.64 1.74
Quick 1.45 1.90 3.08 1.05
Total Debt to Total Assets 91.62% 83.58% 71.61% 53.74%
Pre-tax Return on Net Worth -221.61% 69.29% 63.48% 8.09%
Pre-tax Return on Assets -18.58% 11.38% 18.03% 17.49%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -20.55% 5.97% 8.49% n.a
Return on Equity -221.61% 48.51% 44.44% n.a
Activity Ratios
Inventory Turnover 10.23 10.74 9.54 n.a
Accounts Payable Turnover 12.12 12.17 12.17 n.a
Payment Days 27 28 29 n.a
Total Asset Turnover 0.90 1.33 1.49 n.a
Debt Ratios
Debt to Net Worth 10.93 5.09 2.52 n.a
Current Liab. to Liab. 0.07 0.09 0.10 n.a
Liquidity Ratios
Net Working Capital $4,068 $7,576 $14,872 n.a
Interest Coverage -2.89 3.26 4.64 n.a
Additional Ratios
Assets to Sales 1.11 0.75 0.67 n.a
Current Debt/Total Assets 6% 7% 7% n.a
Acid Test 1.45 1.90 3.08 n.a
Sales/Net Worth 10.78 8.12 5.23 n.a
Dividend Payout 0.00 0.00 0.00 n.a