Hisarlik Hardware

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Hardware Retail Franchise Business Plan

Financial Plan

The business will need substantial start-up capital.  It is expected that a good portion of that amount will be secured through SBA financing. 

Sales are expected to start conservatively the first year and increase steadily through the fifth year of operations.  Operating income will pay back the start-up loan over a seven year amortization. 

Inventory Turnover ratios are predicted to be in excess of 4.3.  The goal will be to get this ratio to exceed 5.0.  To do that Hisarlik will be required to purchase smartly and drive sales. 

Cash will be retained in the business to cover cash operating needs as well as future expansion of other Hisarlik Hardware locations. 

It is expected that dividends will be paid to the investors annually.  The amount of the dividends is estimated to be 50% of profits. 

After the first year of operations, it is expected that Hector Priamson will be able to trim expenses in the business as efficiency, experience, and knowledge work together and help the business operate better.  Estimates are extremely conservative in the budgeting process.

8.1 Start-up Funding

Owner

Hector Priamson will invest cash, benefits and labor to the start up.

Investors

Troy Enterprises is in the process of negotiating with potential investors for the seed cash needed to start the business.  It is expected that a tidy sum will be raised to start the business.  It is expected that no more than 15% interest will be given to each investor.

Bank Financing

Troy Enterprises is submitting business plans and other requested documents to financial institutions in pursuit of the additional money needed to finance the rest of the company and provide operating cash for the business.  It is expected that the loan will be a part of the SBA 7(a) program.  It is assumed that the terms of the loan will require repayment in 7 years, at a rate of 8%. 

Start-up Funding
Start-up Expenses to Fund $83,332
Start-up Assets to Fund $716,668
Total Funding Required $800,000
Assets
Non-cash Assets from Start-up $620,504
Cash Requirements from Start-up $96,164
Additional Cash Raised $0
Cash Balance on Starting Date $96,164
Total Assets $716,668
Liabilities and Capital
Liabilities
Current Borrowing $0
Long-term Liabilities $625,000
Accounts Payable (Outstanding Bills) $0
Other Current Liabilities (interest-free) $0
Total Liabilities $625,000
Capital
Planned Investment
Hector Priamson $50,000
Investor 1 $75,000
Investor 2 $50,000
Additional Investment Requirement $0
Total Planned Investment $175,000
Loss at Start-up (Start-up Expenses) ($83,332)
Total Capital $91,668
Total Capital and Liabilities $716,668
Total Funding $800,000

8.2 Important Assumptions

The table below presents the assumptions used in the financial calculations of this business plan.

General Assumptions
Year 1 Year 2 Year 3 Year 4 Year 5
Plan Month 1 2 3 4 5
Current Interest Rate 8.00% 8.00% 8.00% 8.00% 8.00%
Long-term Interest Rate 8.00% 8.00% 8.00% 8.00% 8.00%
Tax Rate 30.00% 30.00% 30.00% 30.00% 30.00%
Other 0 0 0 0 0

8.3 Key Financial Indicators

As shown in the Benchmarks chart below, our key financial indicators are:

  • Projected Sales:  Projections are based on estimates calculated by Building Blocks based on demographics and potential in the market place.  Sales will consistently increase as the store gains experience, in addition to the consistent growth expected in the home improvement category nationwide. 
  • Gross Margins:  Building Blocks expects that the Gross Margin can increase in years 2-5, however for this analysis, the gross margin was kept consistent at 42% on inventory sales.  Overall, the rental and other income have driven the gross margin up by 2 points.  Building Blocks expects that Gross Margin on inventory could rise as high as 44%. 
  • Operating Expenses:  Operating expenses growth is primarily caused by an increase in salaries as the business gets established, as well as a small percentage increase for COL over the next five years.  Operating expenses are expected to increase at a rate of 6-8% per year. 
  • Inventory Turnover:  Hisarlik Hardware will maintain just-in-time inventory levels.  Building Blocks distribution will help maintain those levels.  Inventory is projected to turn 4.3 times per year.  The goal is to get inventory turns to exceed 5.0, through good purchasing decisions.

8.4 Break-even Analysis

The Break-even Analysis has determined approximate break-even sales as shown below.  There will be a constant monitor on this number in an attempt to lower it.  Once again, it is believed that efficiencies, experience, and knowledge will help in decreasing the break-even number. 

Sales are expected to be well in excess of this number for each month.

Break-even Analysis
Monthly Revenue Break-even $102,932
Assumptions:
Average Percent Variable Cost 55%
Estimated Monthly Fixed Cost $45,915

8.5 Projected Profit and Loss

The Profit and Loss statement makes it very clear which areas will need attention.  Payroll is by far the largest expense the company incurs (besides cost of goods sold).  Staff will need to be managed and hours regulated so that hours worked correlate to sales.  Emphasis will be placed on minimizing expenses that do not help generate bottom line. 

The company generates a profit as sales revenue gets above the break-even line.  A push on sales will be very important in generating bottom line profits.  Interest expense is also a large line item that diminishes over time, but is a necessary expense on the front end of the business.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3 Year 4 Year 5
Sales $1,476,903 $1,840,977 $2,214,233 $2,343,370 $2,484,097
Direct Cost of Sales $818,091 $1,019,293 $1,223,152 $1,284,310 $1,348,525
Other Costs of Goods $0 $0 $0 $0 $0
Total Cost of Sales $818,091 $1,019,293 $1,223,152 $1,284,310 $1,348,525
Gross Margin $658,812 $821,683 $991,081 $1,059,061 $1,135,572
Gross Margin % 44.61% 44.63% 44.76% 45.19% 45.71%
Expenses
Payroll $248,224 $273,234 $299,183 $314,054 $324,096
Account Name $0 $0 $0 $0 $0
Depreciation $48,021 $48,021 $48,021 $48,021 $48,021
Advertising Expense-Circulars $15,136 $18,867 $22,693 $24,016 $25,458
Advertising Expense-Newspapers $3,397 $4,234 $5,093 $5,390 $5,713
Advertising Expense-Yellow Pages $2,604 $2,604 $2,604 $2,604 $2,604
Advertising Expense-National $7,680 $9,573 $11,514 $12,186 $12,917
Lease $114,638 $125,424 $134,933 $144,442 $153,951
Utilities $9,000 $9,250 $9,500 $9,750 $10,000
Telephone $4,431 $5,523 $6,643 $7,030 $7,452
Accounting and Legal $6,384 $7,661 $9,193 $11,032 $13,238
Store and Office Supplies $14,769 $18,410 $18,821 $19,919 $21,115
Insurance $10,032 $10,338 $10,648 $10,967 $11,296
Delivery Vehicle Expense $6,000 $6,000 $6,000 $6,000 $6,000
Payroll Taxes $22,321 $24,591 $26,926 $28,265 $29,169
Employee Benefits $16,428 $18,071 $19,426 $20,883 $22,449
State Property Tax Expense $2,500 $2,500 $2,500 $2,500 $2,500
Travel $2,871 $3,000 $3,200 $3,500 $4,000
Other $16,548 $17,052 $18,600 $20,400 $21,600
Total Operating Expenses $550,984 $604,353 $655,497 $690,957 $721,579
Profit Before Interest and Taxes $107,828 $217,330 $335,584 $368,104 $413,992
EBITDA $155,849 $265,351 $383,605 $416,125 $462,013
Interest Expense $47,148 $41,783 $35,771 $29,260 $22,208
Taxes Incurred $18,204 $52,664 $89,944 $101,653 $117,535
Other Income
Interest Income $0 $0 $0 $0 $0
Other Income Account Name $0 $0 $0 $0 $0
Total Other Income $0 $0 $0 $0 $0
Other Expense
Account Name $0 $0 $0 $0 $0
Other Expense Account Name $0 $0 $0 $0 $0
Total Other Expense $0 $0 $0 $0 $0
Net Other Income $0 $0 $0 $0 $0
Net Profit $42,476 $122,883 $209,869 $237,191 $274,249
Net Profit/Sales 2.88% 6.67% 9.48% 10.12% 11.04%

8.6 Projected Cash Flow

The company generates a net positive cash flow in its first year.  It is assumed that Accounts Payable will be repaid in 45 days.  Repayment of debt is a significant factor in the amount of cash that gets paid out.  Long-term debt is on a 7-year amortization. 

Dividends are paid in December of each year.  The assumption is that 50% of profits are paid out to shareholders and investors.

Pro Forma Cash Flow
Year 1 Year 2 Year 3 Year 4 Year 5
Cash Received
Cash from Operations
Cash Sales $1,476,903 $1,840,977 $2,214,233 $2,343,370 $2,484,097
Subtotal Cash from Operations $1,476,903 $1,840,977 $2,214,233 $2,343,370 $2,484,097
Additional Cash Received
Non Operating (Other) Income $0 $0 $0 $0 $0
Sales Tax, VAT, HST/GST Received $0 $0 $0 $0 $0
New Current Borrowing $0 $0 $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0 $0 $0
New Long-term Liabilities $0 $0 $0 $0 $0
Sales of Other Current Assets $0 $0 $0 $0 $0
Sales of Long-term Assets $0 $0 $0 $0 $0
New Investment Received $0 $0 $0 $0 $0
Subtotal Cash Received $1,476,903 $1,840,977 $2,214,233 $2,343,370 $2,484,097
Expenditures Year 1 Year 2 Year 3 Year 4 Year 5
Expenditures from Operations
Cash Spending $248,224 $273,234 $299,183 $314,054 $324,096
Bill Payments $998,841 $1,351,063 $1,682,641 $1,761,830 $1,851,152
Subtotal Spent on Operations $1,247,065 $1,624,298 $1,981,824 $2,075,884 $2,175,248
Additional Cash Spent
Non Operating (Other) Expense $0 $0 $0 $0 $0
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $0 $0 $0
Other Liabilities Principal Repayment $0 $0 $0 $0 $0
Long-term Liabilities Principal Repayment $66,629 $72,159 $78,148 $84,634 $91,659
Purchase Other Current Assets $0 $0 $0 $0 $0
Purchase Long-term Assets $0 $0 $0 $0 $0
Dividends $21,311 $61,442 $104,935 $118,596 $137,125
Subtotal Cash Spent $1,335,005 $1,757,898 $2,164,906 $2,279,113 $2,404,032
Net Cash Flow $141,898 $83,078 $49,327 $64,257 $80,065
Cash Balance $238,062 $321,140 $370,467 $434,724 $514,789

8.7 Projected Balance Sheet

The balance sheet is very straight forward.  No significant purchases of assets are expected or anticipated. 

Using Building Blocks' IAIS, online ordering, and weekly delivery systems allows Hisarlik Hardware to restock inventory in a just-in-time fashion.  Inventory levels will be maintained with re-orders tied to Cost of Goods Sold.  Additional inventory purchases will be made one month prior to participation in the quarterly Building Blocks nationally advertised Power Event sales. The first Power Event coincides with Hisarlik Hardware's Grand Opening.  Inventory will be allowed to drop somewhat at the end of December, after the Holiday purchasing, and for year-end tax accounting purposes.

There is a possibility of rental purchases in the future if the right products are found to add to the current inventory.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3 Year 4 Year 5
Assets
Current Assets
Cash $238,062 $321,140 $370,467 $434,724 $514,789
Inventory $334,000 $330,689 $396,826 $419,970 $445,190
Other Current Assets $30,400 $30,400 $30,400 $30,400 $30,400
Total Current Assets $602,462 $682,229 $797,693 $885,094 $990,379
Long-term Assets
Long-term Assets $246,104 $246,104 $246,104 $246,104 $246,104
Accumulated Depreciation $48,021 $96,042 $144,063 $192,084 $240,105
Total Long-term Assets $198,083 $150,062 $102,041 $54,020 $5,999
Total Assets $800,545 $832,291 $899,734 $939,114 $996,378
Liabilities and Capital Year 1 Year 2 Year 3 Year 4 Year 5
Current Liabilities
Accounts Payable $129,341 $171,805 $212,461 $217,880 $229,679
Current Borrowing $0 $0 $0 $0 $0
Other Current Liabilities $0 $0 $0 $0 $0
Subtotal Current Liabilities $129,341 $171,805 $212,461 $217,880 $229,679
Long-term Liabilities $558,371 $486,212 $408,064 $323,430 $231,771
Total Liabilities $687,712 $658,017 $620,525 $541,310 $461,450
Paid-in Capital $175,000 $175,000 $175,000 $175,000 $175,000
Retained Earnings ($104,643) ($123,609) ($105,660) ($14,387) $85,679
Earnings $42,476 $122,883 $209,869 $237,191 $274,249
Total Capital $112,833 $174,274 $279,209 $397,804 $534,928
Total Liabilities and Capital $800,545 $832,291 $899,734 $939,114 $996,378
Net Worth $112,833 $174,274 $279,209 $397,804 $534,928

8.8 Business Ratios

The Ratio Analysis looks very encouraging.  Industry Profile data is based on Standard Industrial Classification code 5252, Hardware Stores. 

  • Gross margin: Increases each year and peaks at 45%.  It is anticipated that after year two, the gross margin percentage could be increased by as much as 2 points.  The Gross Margin is a little high due to the fact that the rental income is included in this calculation with no cost of sales.
  • Selling, General and Administrative Expenses: It is encouraging that these expenses as a percentage of sales are decreasing.  These expense will continue to be looked at to find new savings to deliver bottom line.
  • Quick Ratio: The Quick Ratio is good staying in the 2 range for the entire first 5 years.
  • Net Profit margin: Net profit margin continues to grow.  The goal will be to minimize expenses and get the Net Profit margin in the 15 range.
  • Inventory Turnover: Inventory turnover as calculated here is 2.3 to 3.5 times.  The goal will be to get that percentage to exceed 5 times per year.  The calculation is skewed on this table because of rental income being included in sales.
Ratio Analysis
Year 1 Year 2 Year 3 Year 4 Year 5 Industry Profile
Sales Growth 0.00% 24.65% 20.27% 5.83% 6.01% 5.13%
Percent of Total Assets
Inventory 41.72% 39.73% 44.10% 44.72% 44.68% 47.00%
Other Current Assets 3.80% 3.65% 3.38% 3.24% 3.05% 22.34%
Total Current Assets 75.26% 81.97% 88.66% 94.25% 99.40% 82.03%
Long-term Assets 24.74% 18.03% 11.34% 5.75% 0.60% 17.97%
Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Current Liabilities 16.16% 20.64% 23.61% 23.20% 23.05% 31.52%
Long-term Liabilities 69.75% 58.42% 45.35% 34.44% 23.26% 21.36%
Total Liabilities 85.91% 79.06% 68.97% 57.64% 46.31% 52.88%
Net Worth 14.09% 20.94% 31.03% 42.36% 53.69% 47.12%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Gross Margin 44.61% 44.63% 44.76% 45.19% 45.71% 34.51%
Selling, General & Administrative Expenses 41.72% 37.96% 35.28% 35.07% 34.67% 21.03%
Advertising Expenses 1.02% 1.02% 1.02% 1.02% 1.02% 1.71%
Profit Before Interest and Taxes 7.30% 11.81% 15.16% 15.71% 16.67% 2.01%
Main Ratios
Current 4.66 3.97 3.75 4.06 4.31 2.22
Quick 2.08 2.05 1.89 2.13 2.37 0.67
Total Debt to Total Assets 85.91% 79.06% 68.97% 57.64% 46.31% 56.39%
Pre-tax Return on Net Worth 53.78% 100.73% 107.38% 85.18% 73.24% 4.50%
Pre-tax Return on Assets 7.58% 21.09% 33.32% 36.08% 39.32% 10.32%
Additional Ratios Year 1 Year 2 Year 3 Year 4 Year 5
Net Profit Margin 2.88% 6.67% 9.48% 10.12% 11.04% n.a
Return on Equity 37.64% 70.51% 75.17% 59.63% 51.27% n.a
Activity Ratios
Inventory Turnover 2.38 3.07 3.36 3.14 3.12 n.a
Accounts Payable Turnover 8.72 8.11 8.11 8.11 8.11 n.a
Payment Days 40 39 41 44 44 n.a
Total Asset Turnover 1.84 2.21 2.46 2.50 2.49 n.a
Debt Ratios
Debt to Net Worth 6.09 3.78 2.22 1.36 0.86 n.a
Current Liab. to Liab. 0.19 0.26 0.34 0.40 0.50 n.a
Liquidity Ratios
Net Working Capital $473,121 $510,424 $585,232 $667,214 $760,700 n.a
Interest Coverage 2.29 5.20 9.38 12.58 18.64 n.a
Additional Ratios
Assets to Sales 0.54 0.45 0.41 0.40 0.40 n.a
Current Debt/Total Assets 16% 21% 24% 23% 23% n.a
Acid Test 2.08 2.05 1.89 2.13 2.37 n.a
Sales/Net Worth 13.09 10.56 7.93 5.89 4.64 n.a
Dividend Payout 0.50 0.50 0.50 0.50 0.50 n.a

8.9 Long-term Plan

The long term plan is to develop a steady retail hardware business in the downtown Wilusa market.  As discussed, there is currently no competition.  They key will be to establish a solid business to discourage any competition from coming into the market or creating a level of loyalty that will not be fazed by competition. 

After two solid years of performance and establishment of Hisarlik Hardware, there are two areas of potential expansion.  First, look for opportunities in the current market.  What businesses can be combined logically with what has been established that will deliver additional bottom line profit.  Secondly, a second location will be developed in a new part of Wilusa.  An area that will deliver a similar characteristic to the first store that appears to be headed down the road of success.