Willamette Furniture

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Office Furniture Manufacturer Business Plan

Financial Plan

The financial picture is quite encouraging. We have been slow to take on debt, but with our increase in sales we do expect to apply for a credit line with the bank, to a limit of $150,000. The credit line is easily supported by assets.

We do expect to be able to take some money out as dividends. The owners don't take overly generous salaries, so some draw is appropriate.

7.1 Important Assumptions

The accompanying table lists our main assumptions for developing our financial projections. The most sensitive assumption is the collection days. We would like to improve collection days to take pressure off of our working capital, but our increasing sales through channels makes the collection time a cost of doing business.

We also expect to see a decline in our inventory turnover ratio, another unfortunate side effect of increasing sales through channel. We find ourselves having to buy earlier and hold more finished goods in order to deal with sales through the channel.

General Assumptions
1998 1999 2000
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 90.00% 90.00% 90.00%
Tax Rate 25.42% 25.00% 25.00%
Other 0 0 0

7.2 Key Financial Indicators

The following chart shows changes in key financial indicators: sales, gross margin, operating expenses, collection days, and inventory turnover. The growth in sales will be very hard to manage. We expect our gross margin to be a bit lower than before, because our projections show a slight decline as we go into new product areas and face new competition.

The projections for collection days and inventory turnover show that we are already expecting a decline in these indicators, because of increasing sales through channels.

7.3 Break-even Analysis

Our break-even analysis is based on running costs, the "burn-rate" costs we incur to keep the business running, not on theoretical fixed costs that would be relevant only if we were closing.

Our assumptions on average unit sales and average per-unit costs depend on averaging. We don't really need to calculate an exact average, this is close enough to help us understand what a real break-even point might be.

The essential insight here is that our sales level seems to be running comfortably above break-even.

Break-even Analysis
Monthly Units Break-even 13
Monthly Revenue Break-even $19,627
Assumptions:
Average Per-Unit Revenue $1,513.93
Average Per-Unit Variable Cost $381.96
Estimated Monthly Fixed Cost $14,675

7.4 Projected Profit and Loss

We do expect a significant increase in profitability this year, and in the future, because we have learned how to deal with the increasing sales levels of selling through channels. Despite the lower profitability levels of recent years, we expect to see very strong net profits in 1998, and remain at that level through 2000. Our higher sales volume has lowered our cost of goods and increased our gross margin. This increase in gross margin is important to profitability.

Pro Forma Profit and Loss
1998 1999 2000
Sales $451,150 $692,500 $1,079,000
Direct Cost of Sales $113,825 $174,000 $270,400
Production Payroll $51,600 $80,000 $185,000
Other Costs of Sales $3,110 $0 $0
Total Cost of Sales $168,535 $254,000 $455,400
Gross Margin $282,615 $438,500 $623,600
Gross Margin % 62.64% 63.32% 57.79%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $37,000 $65,000 $72,000
Advertising/Promotion $64,000 $70,400 $77,400
Miscellaneous $2,400 $2,600 $2,900
Events $6,250 $6,900 $7,600
Public Relations $750 $800 $900
Travel $4,500 $5,000 $5,500
Total Sales and Marketing Expenses $114,900 $150,700 $166,300
Sales and Marketing % 25.47% 21.76% 15.41%
General and Administrative Expenses
General and Administrative Payroll $48,000 $75,000 $100,000
Marketing/Promotion $0 $0 $0
Depreciation $1,000 $1,100 $1,200
Leased Equipment $1,500 $1,700 $1,900
Rent $3,600 $4,000 $4,400
Utilities $2,400 $2,600 $2,900
Insurance $500 $600 $700
Payroll Taxes $0 $0 $0
Other General and Administrative Expenses $1,200 $1,300 $1,400
Total General and Administrative Expenses $58,200 $86,300 $112,500
General and Administrative % 12.90% 12.46% 10.43%
Other Expenses:
Other Payroll $3,000 $15,000 $25,000
Consultants $0 $0 $0
Other Expenses $0 $0 $0
Total Other Expenses $3,000 $15,000 $25,000
Other % 0.66% 2.17% 2.32%
Total Operating Expenses $176,100 $252,000 $303,800
Profit Before Interest and Taxes $106,515 $186,500 $319,800
EBITDA $107,515 $187,600 $321,000
Interest Expense $6,094 $5,875 $4,875
Taxes Incurred $25,009 $45,156 $78,731
Net Profit $75,412 $135,469 $236,194
Net Profit/Sales 16.72% 19.56% 21.89%

7.5 Projected Cash Flow

Although we expect to be more profitable in 1998, we still have drains on the cash flow. We need to invest $25,000 in new assembly and manufacturing equipment, plus $15,000 in new computer equipment, and another $10,000 in miscellaneous short-term assets, including office equipment. Because of our increased sales through channels, and necessary increase in inventory levels, we need to increase working capital. We plan to extend our credit line to cover as much as $150,000 in short-term credit, backed by receivables and inventory.

Pro Forma Cash Flow
1998 1999 2000
Cash Received
Cash from Operations
Cash Sales $112,788 $173,125 $269,750
Cash from Receivables $288,966 $478,182 $743,283
Subtotal Cash from Operations $401,754 $651,307 $1,013,033
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $125,000 $50,000 $100,000
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 $50,000 $0 $0
Subtotal Cash Received $576,754 $701,307 $1,113,033
Expenditures 1998 1999 2000
Expenditures from Operations
Cash Spending $139,600 $235,000 $382,000
Bill Payments $231,587 $317,081 $458,115
Subtotal Spent on Operations $371,187 $552,081 $840,115
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $66,250 $50,000 $120,000
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 $50,000 $20,000 $30,000
Dividends $0 $0 $0
Subtotal Cash Spent $487,437 $622,081 $990,115
Net Cash Flow $89,317 $79,226 $122,918
Cash Balance $90,755 $169,981 $292,899

7.6 Projected Balance Sheet

Our projected balance sheet shows an increase in net worth to more than $400 thousand in 2000, at which point we expect to be making compelling profits on sales of $1.1 million. With the present financial projections we will be careful in supporting our working capital credit line, and we are growing assets both because we want to -- new equipment -- and because we have to grow receivables and inventory to support growth in sales through channels.

Pro Forma Balance Sheet
1998 1999 2000
Assets
Current Assets
Cash $90,755 $169,981 $292,899
Accounts Receivable $77,001 $118,194 $184,161
Inventory $12,070 $18,451 $28,673
Other Current Assets $2,375 $2,375 $2,375
Total Current Assets $182,201 $309,001 $508,109
Long-term Assets
Long-term Assets $53,210 $73,210 $103,210
Accumulated Depreciation $2,720 $3,820 $5,020
Total Long-term Assets $50,490 $69,390 $98,190
Total Assets $232,691 $378,391 $606,299
Liabilities and Capital 1998 1999 2000
Current Liabilities
Accounts Payable $16,671 $26,902 $38,616
Current Borrowing $58,750 $58,750 $38,750
Other Current Liabilities $1,803 $1,803 $1,803
Subtotal Current Liabilities $77,224 $87,455 $79,169
Long-term Liabilities $0 $0 $0
Total Liabilities $77,224 $87,455 $79,169
Paid-in Capital $54,500 $54,500 $54,500
Retained Earnings $25,555 $100,967 $236,436
Earnings $75,412 $135,469 $236,194
Total Capital $155,467 $290,936 $527,130
Total Liabilities and Capital $232,691 $378,391 $606,299
Net Worth $155,467 $290,936 $527,130

7.7 Business Ratios

Our ratios look healthy and solid. Gross margin is projected to decline slightly, return on assets will run well above industry standards, and return on equity is excellent. Debt and liquidity ratios also look good, with our Quick ratio increasing over the next three years.  The standard comparisons are based on SIC code 2521, manufacturers of wood office furniture.

Ratio Analysis
1998 1999 2000 Industry Profile
Sales Growth 99.81% 53.50% 55.81% 4.60%
Percent of Total Assets
Accounts Receivable 33.09% 31.24% 30.37% 23.80%
Inventory 5.19% 4.88% 4.73% 32.10%
Other Current Assets 1.02% 0.63% 0.39% 19.00%
Total Current Assets 78.30% 81.66% 83.81% 74.90%
Long-term Assets 21.70% 18.34% 16.19% 25.10%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 33.19% 23.11% 13.06% 38.40%
Long-term Liabilities 0.00% 0.00% 0.00% 15.90%
Total Liabilities 33.19% 23.11% 13.06% 54.30%
Net Worth 66.81% 76.89% 86.94% 45.70%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 62.64% 63.32% 57.79% 32.40%
Selling, General & Administrative Expenses 45.93% 43.76% 35.90% 18.90%
Advertising Expenses 14.19% 10.17% 7.17% 1.40%
Profit Before Interest and Taxes 23.61% 26.93% 29.64% 1.80%
Main Ratios
Current 2.36 3.53 6.42 2.14
Quick 2.20 3.32 6.06 1.02
Total Debt to Total Assets 33.19% 23.11% 13.06% 54.30%
Pre-tax Return on Net Worth 64.59% 62.08% 59.74% 5.10%
Pre-tax Return on Assets 43.16% 47.73% 51.94% 11.10%
Additional Ratios 1998 1999 2000
Net Profit Margin 16.72% 19.56% 21.89% n.a
Return on Equity 48.51% 46.56% 44.81% n.a
Activity Ratios
Accounts Receivable Turnover 4.39 4.39 4.39 n.a
Collection Days 58 69 68 n.a
Inventory Turnover 12.00 11.40 11.48 n.a
Accounts Payable Turnover 14.22 12.17 12.17 n.a
Payment Days 28 24 25 n.a
Total Asset Turnover 1.94 1.83 1.78 n.a
Debt Ratios
Debt to Net Worth 0.50 0.30 0.15 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $104,977 $221,546 $428,940 n.a
Interest Coverage 17.48 31.74 65.60 n.a
Additional Ratios
Assets to Sales 0.52 0.55 0.56 n.a
Current Debt/Total Assets 33% 23% 13% n.a
Acid Test 1.21 1.97 3.73 n.a
Sales/Net Worth 2.90 2.38 2.05 n.a
Dividend Payout 0.00 0.00 0.00 n.a