Group Publishing, Inc.

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Magazine Publisher Business Plan

Financial Plan

After initial capitalization growth can be financed largely through internal cash flow provided subscription targets are met. In the event of a sales shortfall, marketing can be cut back temporarily to preserve cash. Or, more likely, additional investment may be sought to re-accelerate productive campaigns if growth demands more funding.

The company created by this plan will generate cash as soon as subscription base reaches critical mass.

7.1 Important Assumptions

The following table illustrates the financial assumptions used as the basis for this plan. The key element is six inventory turns per year. This reflects the issues of the magazine as well as ad revenue. Ad space is treated as an inventory item.

Subscriptions are paid in advance. Only 10% of receivables are collected in 30 days, primarily from wholesale accounts. These are notoriously slow payors, so care must be taken not to let these collections run past 60 days. This will be more significant if book sales become a higher-than-expected percentage of revenue.

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 Key Financial Indicators

The following chart represents changes in critical profit variables. Note that margins and expenses are consistently controlled and net profit increases nicely. Inventory turns slow down somewhat in the third year due to the burden of higher inventories for increasing book sales.

7.3 Break-even Analysis

This break-even analysis is applicable to the early 1997 time frame only. Key fixed costs represent the "burn" rate prior to major acceleration of marketing plans. Thus, if subscriptions didn't flow in as planned this represents the point at which the company could continue to survive without increasing marketing. In that event, management could "buy" time to raise additional capital.

Break-even Analysis
Monthly Units Break-even 7,584
Monthly Revenue Break-even $92,759
Assumptions:
Average Per-Unit Revenue $12.23
Average Per-Unit Variable Cost $2.44
Estimated Monthly Fixed Cost $74,223

7.4 Projected Profit and Loss

We expect net income to near $1 million in year one and $2.4 million in year three. Net profit margins will improve as subscriptions mature and marketing costs decrease.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $3,101,771 $4,787,330 $6,378,100
Direct Cost of Sales $619,816 $990,350 $1,305,000
Production Payroll $0 $0 $0
Author's Royalties: 15% $80,754 $172,995 $275,475
Total Cost of Sales $700,570 $1,163,345 $1,580,475
Gross Margin $2,401,201 $3,623,985 $4,797,625
Gross Margin % 77.41% 75.70% 75.22%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $51,000 $70,000 $77,000
Advertising/Promotion $386,176 $72,000 $90,000
Travel $7,500 $9,000 $11,000
Entertainment & Meals $2,400 $3,000 $3,600
Miscellaneous $12,000 $15,000 $18,000
Total Sales and Marketing Expenses $459,076 $169,000 $199,600
Sales and Marketing % 14.80% 3.53% 3.13%
General and Administrative Expenses
General and Administrative Payroll $160,800 $236,000 $270,000
Marketing/Promotion $0 $0 $0
Depreciation $0 $0 $0
Leased Equipment $10,200 $12,500 $14,000
Telephone $7,200 $7,500 $7,800
Postage $138,200 $279,000 $465,000
Rent $30,000 $30,000 $36,000
Utilities $9,000 $10,000 $10,500
Insurance $12,000 $12,000 $14,000
Payroll Taxes $0 $0 $0
Other General and Administrative Expenses $0 $0 $0
Total General and Administrative Expenses $367,400 $587,000 $817,300
General and Administrative % 11.84% 12.26% 12.81%
Other Expenses:
Other Payroll $64,200 $66,000 $72,000
Consultants $0 $0 $0
Other Expenses $0 $0 $0
Total Other Expenses $64,200 $66,000 $72,000
Other % 2.07% 1.38% 1.13%
Total Operating Expenses $890,676 $822,000 $1,088,900
Profit Before Interest and Taxes $1,510,525 $2,801,985 $3,708,725
EBITDA $1,510,525 $2,801,985 $3,708,725
Interest Expense $0 $0 $0
Taxes Incurred $453,157 $840,596 $1,112,618
Net Profit $1,057,368 $1,961,390 $2,596,108
Net Profit/Sales 34.09% 40.97% 40.70%

7.5 Projected Cash Flow

The table below illustrates cash accumulation from the initial assumption of $150K capital infusion. At no point does the company run out of cash. We expect to buy back the initial outside investment in year three.

The chart illustrates the critical cash flow in year one. Note that early contributions on a monthly basis are minimal and only gain momentum in the second half of the year. If shortfalls occur early on more capital may be required.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $2,791,594 $4,308,597 $5,740,290
Cash from Receivables $242,574 $441,996 $603,139
Subtotal Cash from Operations $3,034,168 $4,750,593 $6,343,429
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 $3,034,168 $4,750,593 $6,343,429
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $276,000 $372,000 $419,000
Bill Payments $1,582,258 $2,577,550 $3,334,557
Subtotal Spent on Operations $1,858,258 $2,949,550 $3,753,557
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $1,500,000
Subtotal Cash Spent $1,858,258 $2,949,550 $5,253,557
Net Cash Flow $1,175,910 $1,801,044 $1,089,872
Cash Balance $1,242,910 $3,043,954 $4,133,826

7.6 Projected Balance Sheet

We project a strong growth in net worth over the next several years.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $1,242,910 $3,043,954 $4,133,826
Accounts Receivable $67,603 $104,339 $139,010
Inventory $89,856 $143,573 $189,188
Other Current Assets $0 $0 $0
Total Current Assets $1,400,369 $3,291,866 $4,462,024
Long-term Assets
Long-term Assets $0 $0 $0
Accumulated Depreciation $0 $0 $0
Total Long-term Assets $0 $0 $0
Total Assets $1,400,369 $3,291,866 $4,462,024
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $276,001 $206,109 $280,160
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $276,001 $206,109 $280,160
Long-term Liabilities $0 $0 $0
Total Liabilities $276,001 $206,109 $280,160
Paid-in Capital $150,000 $150,000 $150,000
Retained Earnings ($83,000) $974,368 $1,435,757
Earnings $1,057,368 $1,961,390 $2,596,108
Total Capital $1,124,368 $3,085,757 $4,181,865
Total Liabilities and Capital $1,400,369 $3,291,866 $4,462,024
Net Worth $1,124,367 $3,085,757 $4,181,864

7.7 Business Ratios

These business ratios are limited in value since the company projects no debt. This will also be an advantage if debt capital is desired later without dilution to shareholders. Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 2721, Periodicals, are shown for comparison.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 54.34% 33.23% -1.70%
Percent of Total Assets
Accounts Receivable 4.83% 3.17% 3.12% 25.50%
Inventory 6.42% 4.36% 4.24% 5.40%
Other Current Assets 0.00% 0.00% 0.00% 54.10%
Total Current Assets 100.00% 100.00% 100.00% 85.00%
Long-term Assets 0.00% 0.00% 0.00% 15.00%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 19.71% 6.26% 6.28% 42.30%
Long-term Liabilities 0.00% 0.00% 0.00% 12.30%
Total Liabilities 19.71% 6.26% 6.28% 54.60%
Net Worth 80.29% 93.74% 93.72% 45.40%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 77.41% 75.70% 75.22% 56.10%
Selling, General & Administrative Expenses 43.32% 34.73% 34.52% 39.70%
Advertising Expenses 12.45% 1.50% 1.41% 1.90%
Profit Before Interest and Taxes 48.70% 58.53% 58.15% 4.20%
Main Ratios
Current 5.07 15.97 15.93 2.16
Quick 4.75 15.27 15.25 1.71
Total Debt to Total Assets 19.71% 6.26% 6.28% 54.60%
Pre-tax Return on Net Worth 134.34% 90.80% 88.69% 7.40%
Pre-tax Return on Assets 107.87% 85.12% 83.12% 16.20%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 34.09% 40.97% 40.70% n.a
Return on Equity 94.04% 63.56% 62.08% n.a
Activity Ratios
Accounts Receivable Turnover 4.59 4.59 4.59 n.a
Collection Days 56 66 70 n.a
Inventory Turnover 10.91 8.49 7.84 n.a
Accounts Payable Turnover 6.73 12.17 12.17 n.a
Payment Days 27 35 26 n.a
Total Asset Turnover 2.21 1.45 1.43 n.a
Debt Ratios
Debt to Net Worth 0.25 0.07 0.07 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $1,124,367 $3,085,757 $4,181,864 n.a
Interest Coverage 0.00 0.00 0.00 n.a
Additional Ratios
Assets to Sales 0.45 0.69 0.70 n.a
Current Debt/Total Assets 20% 6% 6% n.a
Acid Test 4.50 14.77 14.76 n.a
Sales/Net Worth 2.76 1.55 1.53 n.a
Dividend Payout 0.00 0.00 0.58 n.a