The Scarlet Tassel

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Home Accessories and Gifts Business Plan

Financial Plan

The Scarlet Tassel's financial plan makes some critical assumptions that will determine the potential for future success.

  • The Economy. This could not be a better time to start a business as the economy reaches its lowest point of the business cycle and begins its trek back up. Consumer spending is up. "The Commerce Department reported consumers had increased their spending by 1% in July, the largest advance in nine months." Source: The Wall Street Journal, "In Uneasy Times, Consumers Boost a Fragile U.S. Economy", September 3, 2002
  • Owner Experience. A shorter learning curve will be brought to the business by Deirdre and Shelly due to their extensive backgrounds and in-depth market knowledge.
  • Managed Costs. A clear understanding of the need to manage costs and forecast future needs so that the business is not "broad-sided" by the unexpected.
  • Wise Purchases. Finding the right product, at the right price will enable the business to meet planned margins and maintain inventory at an attractive level with a high turn rate.

8.1 Projected Profit and Loss

The projected Profit and Loss for three years is detailed in the table and charts following. Monthly projected Profit and Loss for Year One is available in the Appendix. Some assumptions and inclusions to be noted are:

  • Accounting and Legal includes: CPA, attorney and payroll service costs.
  • Insurance includes: Business property, liability and interruption and key person life insurance. Health Insurance as an employee benefit will be considered in Year Three and is reflected as such.
  • Miscellaneous includes: Bank account fees, employment advertising, software maintenance, Web hosting, annual Internet name registration, software upgrades, annual search engine registration when applicable, off-site data backup, and other.
  • Merchant Fees assume 80% of total revenue is in credit card sales and are calculated at 2.5%.
  • Outbound Freight increases Year Two due to improved RTV procedures. Additional increases in Year Three are expected due to the development of the Web and the outbound shipping that will result from an e-commerce business.
  • Rent assumes 3,500 square feet of retail space is charged at fixed per square cost foot plus taxes, maintenance and insurance.
  • Payroll taxes and workman's compensation were calculated at 12% of payroll.
  • A 3% inflation factor was applied to select operation expenses for Years Two and Three.
  • Marketing and advertising has been maintained for all three years at approximately 4.5% to 6.5% of total revenue.
  • Travel costs were increased by 20% in Years Two and Three based on the assumption that the state of the airline and hotel industries will recover from the current economic trends and react with increased rates and as well, to allow for an additional employee to travel if needed.
Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $589,000 $829,000 $995,000
Direct Cost of Sales $265,050 $373,050 $447,750
Other Production Expenses $0 $0 $0
Total Cost of Sales $265,050 $373,050 $447,750
Gross Margin $323,950 $455,950 $547,250
Gross Margin % 55.00% 55.00% 55.00%
Expenses
Payroll $94,337 $152,591 $214,707
Travel $9,900 $10,680 $12,816
Depreciation $19,726 $19,726 $19,726
Dues & Subscriptions $729 $802 $882
Entertainment $700 $721 $743
Insurance $2,552 $2,617 $9,885
Marketing and Advertising $39,113 $44,979 $51,726
Merchant Fees $11,780 $16,580 $19,900
Miscellaneous $2,268 $3,330 $3,563
Outbound Freight $600 $1,200 $4,203
Rent $97,992 $102,892 $108,036
Repairs & Maintenance $600 $618 $637
Supplies--Office, POS, Giftwrap, Packaging $2,706 $3,247 $3,897
Taxes--Other and Licenses $1,595 $1,700 $1,850
Telephone and Utilities $10,116 $10,419 $10,732
Payroll Taxes $14,151 $22,889 $32,206
Other $3,600 $4,000 $4,500
Total Operating Expenses $312,464 $398,991 $500,010
Profit Before Interest and Taxes $11,486 $56,959 $47,240
EBITDA $31,212 $76,685 $66,967
Interest Expense $11,884 $10,272 $8,424
Taxes Incurred $0 $14,006 $11,645
Net Profit ($398) $32,681 $27,172
Net Profit/Sales -0.07% 3.94% 2.73%

8.2 Break-even Analysis

The Break-even Analysis in the table and chart following illustrate the number of units and retail sales that The Scarlet Tassel must make to break-even each month. 

Break-even Analysis
Monthly Revenue Break-even $47,343
Assumptions:
Average Percent Variable Cost 45%
Estimated Monthly Fixed Cost $26,039

8.3 Projected Cash Flow

The projected Cash Flow for three years is detailed in the table and chart following. Monthly projected Cash Flow for Year One is available for review in the Appendix.

It should be noted that The Scarlet Tassel expects to operate on a cash basis with vendors the first year, hence, no Accounts Payable for the first year. As credit is established with vendors, it is assumed that in the second year 40% to 50% of monies owed to vendors will be reflected in Accounts Payable. It is further assumed that in the third year 70% to 80% of monies owed to vendors will appear in Accounts Payable.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $589,000 $829,000 $995,000
Subtotal Cash from Operations $589,000 $829,000 $995,000
Additional Cash Received
Sales Tax, VAT, HST/GST Received $41,230 $58,030 $69,650
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 $630,230 $887,030 $1,064,650
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $559,682 $806,939 $949,328
Bill Payments $0 $0 $0
Subtotal Spent on Operations $559,682 $806,939 $949,328
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $41,230 $58,030 $69,650
Principal Repayment of Current Borrowing $0 $0 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $13,833 $16,682 $18,520
Purchase Other Current Assets $0 $5,000 $8,521
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $614,745 $886,651 $1,046,020
Net Cash Flow $15,485 $379 $18,630
Cash Balance $43,583 $43,962 $62,591

8.4 Pro Forma Balance Sheet

The projected Balance Sheet for three years is detailed in the table following. Monthly projections for the first year Balance Sheet are available for review in the Appendix. Planned numbers show that liabilities are expected to decrease approximately 40% by the end of Year Three, increasing owner's equity and net worth.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $43,583 $43,962 $62,591
Inventory $21,780 $52,127 $53,353
Other Current Assets $3,000 $8,000 $16,521
Total Current Assets $68,363 $104,088 $132,466
Long-term Assets
Long-term Assets $83,775 $83,775 $83,775
Accumulated Depreciation $19,726 $39,452 $59,178
Total Long-term Assets $64,049 $44,323 $24,597
Total Assets $132,412 $148,411 $157,063
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $0 $0 $0
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $0 $0 $0
Long-term Liabilities $106,167 $89,485 $70,965
Total Liabilities $106,167 $89,485 $70,965
Paid-in Capital $50,000 $50,000 $50,000
Retained Earnings ($23,357) ($23,755) $8,926
Earnings ($398) $32,681 $27,172
Total Capital $26,245 $58,926 $86,098
Total Liabilities and Capital $132,412 $148,411 $157,063
Net Worth $26,245 $58,926 $86,098

8.5 Business Ratios

The following table outlines some of the more important ratios from the {xxxxxxx} industry. The final column, Industry Profile, details specific ratios based on the industry as it is classified by the Standard Industry Classification (SIC) code, xxxx.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth n.a. 40.75% 20.02% 6.06%
0
Percent of Total Assets
Inventory 16.45% 35.12% 33.97% 36.38%
Other Current Assets 2.27% 5.39% 10.52% 32.54%
Total Current Assets 51.63% 70.14% 84.34% 86.35%
Long-term Assets 48.37% 29.86% 15.66% 13.65%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 0.00% 0.00% 0.00% 33.24%
Long-term Liabilities 80.18% 60.30% 45.18% 14.50%
Total Liabilities 80.18% 60.30% 45.18% 47.74%
Net Worth 19.82% 39.70% 54.82% 52.26%
0
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 55.00% 55.00% 55.00% 35.01%
Selling, General & Administrative Expenses 14.27% 1.29% 21.52% 15.32%
Advertising Expenses 3.15% 2.38% 1.98% 3.57%
Profit Before Interest and Taxes 1.95% 6.87% 4.75% 1.33%
0
Main Ratios
Current 0.00 0.00 0.00 2.27
Quick 0.00 0.00 0.00 1.02
Total Debt to Total Assets 80.18% 60.30% 45.18% 53.23%
Pre-tax Return on Net Worth -1.52% 79.23% 45.08% 4.06%
Pre-tax Return on Assets -0.30% 31.46% 24.71% 8.69%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -0.07% 3.94% 2.73% n.a
Return on Equity -1.52% 55.46% 31.56% n.a
Activity Ratios
Inventory Turnover 10.07 10.10 8.49 n.a
Accounts Payable Turnover 0.00 0.00 0.00 n.a
Payment Days 0 0 0 n.a
Total Asset Turnover 4.45 5.59 6.34 n.a
Debt Ratios
Debt to Net Worth 4.05 1.52 0.82 n.a
Current Liab. to Liab. 0.00 0.00 0.00 n.a
Liquidity Ratios
Net Working Capital $68,363 $104,088 $132,466 n.a
Interest Coverage 0.97 5.55 5.61 n.a
Additional Ratios
Assets to Sales 0.22 0.18 0.16 n.a
Current Debt/Total Assets 0% 0% 0% n.a
Acid Test 0.00 0.00 0.00 n.a
Sales/Net Worth 22.44 14.07 11.56 n.a
Dividend Payout 0.00 0.00 0.00 n.a