Herr Haar

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Hair Replacement and Salon Business Plan

Financial Plan

Herr Haar is expecting growth of at least 5% each year and we anticipate the increase to continue as new clients come to the salon. Our financial plan for the next three years includes several new revenue streams from massage therapy and booth rental from affiliated stylists. The projections for the first year are therefore much different from the starting balances for our last year, even considering that the past performance included only six months of data. The major accompanying expense is a much higher personnel payroll, as well as higher rent for the new location, to accommodate all these people.

Our advertising expenses will be higher than those of similar businesses, because after only six months in business, we are still a "start-up," and because our new location and services will be unknown to many in the community without heavy advertising. We will work hard to keep costs down and to use word-of-mouth as much as possible to build our business.

Herr Haar is seeking financing to achieve the goal of becoming a great hair clinic which focuses on the total wellness of clients. We will use this money to renovate the new space, so that we can build our clientele base, increase revenues, maintain a positive cash flow, and steadily increase the net worth of the business with good management.

7.1 Important Assumptions

The following table shows important financials assumptions for our plan, including a projected interest rate for the short-term loan we are seeking. We are also assuming:

  • No serious disability on the part of either owner which prevents her from working
  • No new direct competition for hair replacement services in Anytown in the next three years
  • No sudden changes in licensing or technology which would make our services obsolete 
General Assumptions
2004 2005 2006
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

For our break-even analysis, we assume running costs which include full payroll, rent, utilities, and an estimation of other running costs.  Payroll alone, at our present rate, is only $8,930/month. We will reach our break-even point at the new location in March.

Break-even Analysis
Monthly Revenue Break-even $17,601
Assumptions:
Average Percent Variable Cost 23%
Estimated Monthly Fixed Cost $13,535

7.3 Projected Profit and Loss

We expect net profit to reach $17,795 at the end of the next fiscal year. We will take on a smaller net profit in years two and three in order to increase the salaries of our workers as the salon becomes busier. Happy employees make for good customer experiences, which generates increased revenues.

Pro Forma Profit and Loss
2004 2005 2006
Sales $244,438 $266,742 $280,079
Direct Cost of Sales $56,473 $59,498 $62,473
Other Costs of Goods $0 $0 $0
Total Cost of Sales $56,473 $59,498 $62,473
Gross Margin $187,965 $207,244 $217,606
Gross Margin % 76.90% 77.69% 77.69%
Expenses
Payroll $107,155 $134,208 $141,969
Marketing/Promotion $5,400 $5,400 $5,400
Depreciation $204 $220 $220
Rent $21,000 $21,000 $21,000
Utilities $4,488 $4,488 $4,488
Insurance $996 $996 $996
Payroll Taxes $16,073 $20,131 $0
Merchant Account Fees $1,800 $2,000 $2,000
Moving Expenses $2,300 $0 $0
Redecorating New Location $3,000 $0 $0
Total Operating Expenses $162,416 $188,444 $176,073
Profit Before Interest and Taxes $25,549 $18,800 $41,533
EBITDA $25,753 $19,020 $41,753
Interest Expense $128 $0 $0
Taxes Incurred $7,626 $5,640 $12,460
Net Profit $17,795 $13,160 $29,073
Net Profit/Sales 7.28% 4.93% 10.38%

7.4 Projected Cash Flow

Herr Haar expects to manage cash flow conservatively over the next three years. The business will generate more than enough cash flow to cover all of its expenses, and we will pace growth slowly.

In addition to showing repayment of the loan, the Cash Flow table, below, shows the purchase of new current assets in January. We will purchase a water- and energy-efficient washing machine and dryer in the first month to clean towels and drapes from hair services and massage.

Pro Forma Cash Flow
2004 2005 2006
Cash Received
Cash from Operations
Cash Sales $244,438 $266,742 $280,079
Subtotal Cash from Operations $244,438 $266,742 $280,079
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $4,000 $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 $248,438 $266,742 $280,079
Expenditures 2004 2005 2006
Expenditures from Operations
Cash Spending $107,155 $134,208 $141,969
Bill Payments $115,270 $121,706 $109,986
Subtotal Spent on Operations $222,425 $255,915 $251,955
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $4,000 $0 $0
Other Liabilities Principal Repayment $600 $535 $0
Long-term Liabilities Principal Repayment $0 $0 $0
Purchase Other Current Assets $1,400 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $228,425 $256,450 $251,955
Net Cash Flow $20,013 $10,292 $28,124
Cash Balance $21,044 $31,337 $59,461

7.5 Projected Balance Sheet

The Balance Sheet shows our projected steady increase in net worth. With no accounts receivable, our cash sales go immediately into our assets. We also expect a steady increase in retained earnings.

Pro Forma Balance Sheet
2004 2005 2006
Assets
Current Assets
Cash $21,044 $31,337 $59,461
Inventory $6,053 $6,377 $6,696
Other Current Assets $3,075 $3,075 $3,075
Total Current Assets $30,172 $40,789 $69,232
Long-term Assets
Long-term Assets $1,800 $1,800 $1,800
Accumulated Depreciation $330 $550 $770
Total Long-term Assets $1,470 $1,250 $1,030
Total Assets $31,642 $42,039 $70,262
Liabilities and Capital 2004 2005 2006
Current Liabilities
Accounts Payable $12,049 $9,820 $8,970
Current Borrowing $0 $0 $0
Other Current Liabilities $535 $0 $0
Subtotal Current Liabilities $12,584 $9,820 $8,970
Long-term Liabilities $0 $0 $0
Total Liabilities $12,584 $9,820 $8,970
Paid-in Capital $0 $0 $0
Retained Earnings $1,264 $19,059 $32,219
Earnings $17,795 $13,160 $29,073
Total Capital $19,059 $32,219 $61,292
Total Liabilities and Capital $31,642 $42,039 $70,262
Net Worth $19,059 $32,219 $61,292

7.6 Business Ratios

Business ratios for the years of this plan are shown below.  Industry profile ratios based on the Standard Industrial Classification (SIC) Index code 7231, Cosmetologist and personal hygiene salon, are shown for comparison.

Our huge sales growth in the first year is, as stated before, due to a radical change in the revenue structure of the business in the new location. Although our asset base is smaller than many similar businesses, partly because we are leasing a location, our debt to asset ratio is quite good compared to the industry standard.

Ratio Analysis
2004 2005 2006 Industry Profile
Sales Growth 421.24% 9.12% 5.00% 0.43%
Percent of Total Assets
Inventory 19.13% 15.17% 9.53% 5.02%
Other Current Assets 9.72% 7.31% 4.38% 40.05%
Total Current Assets 95.35% 97.03% 98.53% 57.62%
Long-term Assets 4.65% 2.97% 1.47% 42.38%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 39.77% 23.36% 12.77% 24.84%
Long-term Liabilities 0.00% 0.00% 0.00% 21.36%
Total Liabilities 39.77% 23.36% 12.77% 46.20%
Net Worth 60.23% 76.64% 87.23% 53.80%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 76.90% 77.69% 77.69% 100.00%
Selling, General & Administrative Expenses 52.01% 52.44% 52.44% 74.37%
Advertising Expenses #NAME? 0.08% 0.08% 1.51%
Profit Before Interest and Taxes 10.45% 7.05% 14.83% 3.37%
Main Ratios
Current 2.40 4.15 7.72 1.73
Quick 1.92 3.50 6.97 1.33
Total Debt to Total Assets 39.77% 23.36% 12.77% 58.00%
Pre-tax Return on Net Worth 133.38% 58.35% 67.76% 7.63%
Pre-tax Return on Assets 80.34% 44.72% 59.11% 18.17%
Additional Ratios 2004 2005 2006
Net Profit Margin 7.28% 4.93% 10.38% n.a
Return on Equity 93.37% 40.85% 47.43% n.a
Activity Ratios
Inventory Turnover 12.00 9.57 9.56 n.a
Accounts Payable Turnover 10.28 12.17 12.17 n.a
Payment Days 28 33 31 n.a
Total Asset Turnover 7.73 6.35 3.99 n.a
Debt Ratios
Debt to Net Worth 0.66 0.30 0.15 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $17,589 $30,969 $60,262 n.a
Interest Coverage 199.08 0.00 0.00 n.a
Additional Ratios
Assets to Sales 0.13 0.16 0.25 n.a
Current Debt/Total Assets 40% 23% 13% n.a
Acid Test 1.92 3.50 6.97 n.a
Sales/Net Worth 12.83 8.28 4.57 n.a
Dividend Payout 0.00 0.00 0.00 n.a