Comgate

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Remodeling Business Plan

Financial Plan

Due to initial losses, resulting in a need to resort to shareholder loans, cash flow pressures caused accounts payable to be stretched out to 30 days and more. The financial projections have reduced this to 10 days for the year 2001 and beyond, in hopes of filling this gap with increased bank lines of credit. This would allow the company to take advantage of trade discounts. Failing to do so is expensive, as it becomes the most expensive form of credit (approximately 36% p.a.).

7.1 Important Assumptions

Personnel Burden:
The hourly basic wage rates were totalled ($241.73) as were the total after FICA, State Unemployment, FUTA and health benefits ($291.66). The difference came to 21%. The actual burden of 21.95% is from the September, 2000 financials.

Interest Rates:
Looking at the various rates in effect (see Cash flow Section), 9% was taken as an average rate.

Payment Days:
In order to show the cash flow effect we elected to assume 10 days so as to take advantage of all trade discounts. This change from 30 days to 10 days will take place in 2001. The cost of not taking the discounts is nearly 36% per annum. It is preferred to finance negative cash flow through bank lines of credit.

Collection Days:
Collection days, after netting out down-payments with orders, average approximately 30 days.

Tax Rate:
The tax rate reflects the present sliding scale:

ProfitsFederalState
$0 to $50,00015% 9.5%
$50,000 to $75,00025% 9.5%
$75,000 to $100,00034% 9.5%
$100,000 to $335,00039%9.5%
$335,000 and up34% 9.5%
General Assumptions
2000 2001 2002
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 9.00% 9.00% 9.00%
Tax Rate 25.42% 25.00% 25.42%
Other 0 0 0

7.2 Break-even Analysis

The break-even chart is not suitable for multiple custom woodwork items. However, if we use pilasters as an example, the unit price is $316.96 and the unit cost is $44.09 (material cost). If we assume that all plant labor is fixed, whether there is work for the staff or not, it would be necessary to produce and sell 136 pilasters per month. According to best estimates, one pilaster takes four man hours. With 8,000 man hours per year (666 man hours monthly) it is possible to produce 167 pilasters. So, to break even on pilasters alone it would be necessary to work at 81% of capacity.

If, instead, we take cabinets, and use a cost price of $57.66 per Linear Foot LF and a price of $194.76 per LF it would be necessary to produce 270 linear feet of cabinets monthly. At 1.65 man hours per LF, it would be possible to produce 404 linear feet. Break-even on cabinets needs 67% of capacity.

Doors (cope and stick) cost $130.53 per unit and sell for $592.35. Each door takes five hours to produce. It would require 80 doors to break even, out of a maximum capacity of 133 doors. This would be 60% of capacity to break even.

All other things being equal, based on the above analysis, it would be more profitable to produce doors than cabinets, and likewise more profitable to produce cabinets than pilasters.

In the calculations above, it has been assumed that there is no problem in keeping the six site carpenters working full time. The net profit from this activity has been deducted from fixed expenses. If, instead, we assume that the company makes no money on-site services, the monthly expenses would be $89,925 higher. In this case, it would take 96 doors monthly, rather than only 80, to break even.

Break-even Analysis
Monthly Units Break-even 521
Monthly Revenue Break-even $31,432
Assumptions:
Average Per-Unit Revenue $60.28
Average Per-Unit Variable Cost $26.52
Estimated Monthly Fixed Cost $17,602

7.3 Key Financial Indicators

As mentioned in the chapter on Company History, a more in-depth analysis of past performance is listed on an Excel spreadsheet in Appendix A. The top two rows summarize 1999 and 1998 financial sheet information in an easy to read format. These categories of information are then used to calculate important ratios to compare Comgate results will industry averages. The ratios have been organized into five main groups: Liquidity, Safety, Profitability, Balance Sheet, and Operations Management. Brief comments are made below concerning these ratio comparisons:

Liquidity:
Liquidity decreased from 1.27 in 1998 to 1.19, due entirely to a large project on Orange. The large commercial contractor involved took far longer to pay than was anticipated. The project has since been completed and all outstandings have been settled. Despite the 1.19 current ratio for 1999, it is still superior to the average of 1.01 for all AWI members and fairly close to those members in the Northeast Region (1.24).

Safety:
The debt-to-equity ratios have been calculated reflecting certain adjustments. Owner loans have been removed from long-term liabilities and placed into equity. The Debt/Equity ratio for 1999, of 11 to 1, is far higher than the average. It reflects the early start-up losses; however, the leverage improved remarkably from 1998, when it was 25 to 1.

Profitability:
The gross margins are substantially higher than the average, which reflects the higher-end nature of the company's work. Operating profit saw a healthy increase from 6.12% in 1998, to 9.67% in 1999. This is not as good as the operating results of the top 25% of AWI members (22.4%) but still more than double the margin for all AWI members (4.2%).

Balance Sheet:
The ratio of Sales to Net Fixed Assets is a good measure of efficiency. Comgate's ratio of 9.53 is not only a substantial increase over 1998, but is nearly equal to the top 25% of all AWI member results. Obviously the very high operating results to equity ratio merely reflects the narrow equity situation. The same can be said for the fixed assets to equity ratio. The A/R turnover (in days) as well as the A/P days turnover were slowed by the above-mentioned large Orange project. The low inventory days turnover reflects the proportionally lower material content of the high-end business.

Operations Management:
The most remarkable ratio in this group of ratios is the very high percentage of non-plant produced sales to total sales. This reflects the revenue from outside on-site subcontracted carpenters and installers.

Note: appendices A - K have been omitted from this sample plan presentation.

7.4 Projected Profit and Loss

Other Expenses (CoGS): There are several expenses that are included here:

  1. Shop supplies run about $300 per month.
  2. Fire insurance for machinery runs $209.55 monthly.
  3. Storage space rental costs $105 monthly.
  4. Factory rental is $1,958 monthly of which 90% ($1,762) is allocated to CoGS. The remaining $196/month is charged to General and Administrative expenses. Beginning in January, we assume a doubling of rental space will be made available at a monthly cost of $2,000.
  5. Repairs and maintenance comes to about $272 per month.
  6. The company truck costs approximately $200 monthly.
  7. Utilities (electricity, waste removal, and security) come to $267 monthly. They are applied 90% to plant ($240 monthly).The other 10% ($27 monthly) is charge to General and Administrative expenses.
  8. Take-offs and listing, the CAD contract employee, costs $70/hr and works 35 hours weekly. Most of this expense (60%) can be charged to the client and is a wash. The remainder ($49,000) is split 60% for Plant ($29,400) which is $2,450/month starting in September 2000.
  9. The remaining $19,600 is charged to General and Administrative expenses.

These CoGS expenses come to to $3,088.55 (January-August) and $5,538.55 per month after August, 2000. Beginning January, 2001 the total grows to $7,538 due to the increased space and rent.

Sales and Marketing Expenses:

  • Andrew Comins's salary is included here at $40,000 annually.
  • Travel expenses were doubled in projections, and average $100 monthly.
  • Advertising and promotional expenses have not been projected because production is now at 100% capacity and is expected to stay that way due to the marketing strategy of approaching designers and architects directly, stressing the company's CAD strengths.

General & Administrative:

  • Utilities (allocated 90% to plant and 10% in administration) come to $27 monthly.
  • Since the building is rented, the only insurance is for the contents which are primarily machines. This has been expensed totally in plant overheads, since the office furniture and equipment is small in relation to plant machinery.
  • Rent has been allocated 90% to plant and only 10% ($196/monthly) to administration based on square footage.
  • The contract/consultants category includes tax preparation, business planning and up-dating, and bookkeeping expenses. The bookkeeper ($450 weekly) beginning in September, which was unusually high for this year should be reduced in future years to about $2,000 annually, now that a professional bookkeeping company has been engaged. The business plan will run about $7,000 in year 2000 and about $2,000 yearly thereafter.
  • CAD charges, which have not been allocated to plant overheads, amount to $19,600 annually or $1,633 monthly beginning in September, 2000. Actual CAD costs are much higher, but it is assumed that 60% of CAD charges can be passed on the client and are a wash. Only 40% of these charges are reflected in the income statement (mostly in plant COGS).
  • Since over $110,000 in new fixed assets were added during 2000, no further capital additions are planned for 2001 and 2002. Depreciation will remain at 2000 levels.
  • Dues and subscriptions have been left at historical levels ($450 monthly).
  • Fees and Permits have also been kept at historical levels ($390 monthly).
  • Office Supplies have been projected at historical levels of $346 monthly.
  • Bank charges of $40 monthly.
Pro Forma Profit and Loss
2000 2001 2002
Sales $793,566 $1,152,876 $1,196,815
Direct Cost of Sales $349,165 $522,813 $534,584
Production Payroll $123,426 $194,724 $209,724
Other $46,868 $90,468 $90,468
Total Cost of Sales $519,459 $808,005 $834,776
Gross Margin $274,108 $344,871 $362,039
Gross Margin % 34.54% 29.91% 30.25%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $39,996 $40,000 $40,000
Advertising/Promotion $0 $0 $0
Travel $750 $1,200 $1,200
Miscellaneous $0 $0 $0
Total Sales and Marketing Expenses $40,746 $41,200 $41,200
Sales and Marketing % 5.13% 3.57% 3.44%
General and Administrative Expenses
General and Administrative Payroll $34,320 $34,320 $34,320
Sales and Marketing and Other Expenses $0 $0 $0
Depreciation $26,640 $26,640 $26,640
Depreciation $0 $0 $0
Depreciation $5,472 $5,472 $5,472
Depreciation $324 $324 $324
Depreciation $0 $0 $0
Depreciation $5,400 $5,400 $5,400
Fees and Permits $4,680 $4,680 $4,680
Office Supplies $4,152 $4,152 $4,152
Bank Charges $480 $480 $480
Rent $2,352 $2,352 $2,352
Payroll Taxes $43,404 $59,055 $62,348
Other General and Administrative Expenses $0 $0 $0
Total General and Administrative Expenses $127,224 $142,875 $146,168
General and Administrative % 16.03% 12.39% 12.21%
Other Expenses:
Other Payroll $0 $0 $0
Consultants $0 $0 $0
Contract/Consultants $36,725 $27,400 $27,400
CAD Contract Employee $6,532 $19,600 $19,600
Total Other Expenses $43,257 $47,000 $47,000
Other % 5.45% 4.08% 3.93%
Total Operating Expenses $211,227 $231,075 $234,368
Profit Before Interest and Taxes $62,880 $113,796 $127,672
EBITDA $89,520 $140,436 $154,312
Interest Expense $17,461 $18,536 $14,255
Taxes Incurred $11,480 $23,815 $28,827
Net Profit $33,940 $71,445 $84,590
Net Profit/Sales 4.28% 6.20% 7.07%

7.5 Projected Cash Flow

Fixed Assets:

In the first nine months of 2000, $110,412 was added in new machinery and equipment.

Increase (decrease) Other Liabilities:

At the end of 1999, there was $49,884 outstanding in shareholder loans. After netting out loans due from shareholders amounting to $20,396, loans from shareholders were reduced by $8,126.23. No further changes in years 2001 and 2002.

Change in Other Short-term assets:

At the end of 1999, there were only $1,465 in other short-term assets. This has been increased due to pre-paid insurance, and reflected in April, 2000 of $2,855. No change in 2001 or 2002.

Long-term Borrowing (repayment):

  • Applebee Leasing extended a secured loan in July to purchase fixed assets. This loan is repayable in 36 equal monthly installments of $1,816.07. A schedule is not available with breakdown of principle and interest. Assume principle repayment of $6,000 during 2000 $18,000 during 2001 and $24,000 during 2002.

  • Due to a change in ownership from Fleet Bank to Chase Bank, there has been some confusion as to the amounts of various loans. The borrower's understanding of facilities is:

    • $50,000 line of credit (fully outstanding) @ 2% over prime, about half of a seven-year term-loan (originally $64,000 in September, 1996) being repaid monthly at $1,268.80 (interest@ 8.25% and principle), and the remainder of a five-year term loan (originally $20,000 as of June, 1999) being repaid $437.90 monthly (interest @ 11.15% and principle).

    • Based on interim financial statements as of September, 2000, $10,974 of the term loans have been repaid since the end of 1999. We will assume principle repayments of $1,200 monthly throughout 2000, 2001, 2002, until this confusion has been clarified.
Pro Forma Cash Flow
2000 2001 2002
Cash Received
Cash from Operations
Cash Sales $0 $0 $0
Cash from Receivables $767,853 $1,068,195 $1,186,460
Subtotal Cash from Operations $767,853 $1,068,195 $1,186,460
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 $54,072 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $108,000 $0 $0
Subtotal Cash Received $929,925 $1,068,195 $1,186,460
Expenditures 2000 2001 2002
Expenditures from Operations
Cash Spending $197,742 $269,044 $284,044
Bill Payments $570,888 $806,874 $803,670
Subtotal Spent on Operations $768,630 $1,075,918 $1,087,714
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $1,200 $1,000 $20,000
Other Liabilities Principal Repayment $8,126 $0 $0
Long-term Liabilities Principal Repayment $19,100 $7,000 $64,800
Purchase Other Current Assets $2,855 $0 $0
Purchase Long-term Assets $110,412 $0 $0
Dividends $5,992 $0 $0
Subtotal Cash Spent $916,315 $1,083,918 $1,172,514
Net Cash Flow $13,610 ($15,723) $13,945
Cash Balance $17,598 $1,876 $15,821

7.6 Projected Balance Sheet

The following table represents Comgate's balance sheet.

Pro Forma Balance Sheet
2000 2001 2002
Assets
Current Assets
Cash $17,598 $1,876 $15,821
Accounts Receivable $187,026 $271,707 $282,063
Inventory $47,724 $71,458 $73,067
Other Current Assets $2,855 $2,855 $2,855
Total Current Assets $255,203 $347,897 $373,806
Long-term Assets
Long-term Assets $250,615 $250,615 $250,615
Accumulated Depreciation $131,533 $158,173 $184,813
Total Long-term Assets $119,082 $92,442 $65,802
Total Assets $374,285 $440,339 $439,608
Liabilities and Capital 2000 2001 2002
Current Liabilities
Accounts Payable $63,924 $66,533 $66,012
Current Borrowing $68,277 $67,277 $47,277
Other Current Liabilities $1,874 $1,874 $1,874
Subtotal Current Liabilities $134,075 $135,684 $115,163
Long-term Liabilities $134,151 $127,151 $62,351
Total Liabilities $268,226 $262,835 $177,514
Paid-in Capital $110,000 $110,000 $110,000
Retained Earnings ($37,881) ($3,941) $67,504
Earnings $33,940 $71,445 $84,590
Total Capital $106,059 $177,504 $262,094
Total Liabilities and Capital $374,285 $440,339 $439,608
Net Worth $106,059 $177,504 $262,094

7.7 Business Ratios

The table below shows some of the more important ratios. The table also includes business industry data for Standard Information Code (SIC) 2541, wood partitions and fixtures.

Ratio Analysis
2000 2001 2002 Industry Profile
Sales Growth 43.54% 45.28% 3.81% 4.70%
Percent of Total Assets
Accounts Receivable 49.97% 61.70% 64.16% 27.20%
Inventory 12.75% 16.23% 16.62% 28.50%
Other Current Assets 0.76% 0.65% 0.65% 18.00%
Total Current Assets 68.18% 79.01% 85.03% 73.70%
Long-term Assets 31.82% 20.99% 14.97% 26.30%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 35.82% 30.81% 26.20% 42.00%
Long-term Liabilities 35.84% 28.88% 14.18% 14.80%
Total Liabilities 71.66% 59.69% 40.38% 56.80%
Net Worth 28.34% 40.31% 59.62% 43.20%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 34.54% 29.91% 30.25% 33.80%
Selling, General & Administrative Expenses 30.25% 23.73% 23.22% 19.40%
Advertising Expenses 0.00% 0.00% 0.00% 1.50%
Profit Before Interest and Taxes 7.92% 9.87% 10.67% 2.00%
Main Ratios
Current 1.90 2.56 3.25 1.92
Quick 1.55 2.04 2.61 1.00
Total Debt to Total Assets 71.66% 59.69% 40.38% 56.80%
Pre-tax Return on Net Worth 42.83% 53.67% 43.27% 5.80%
Pre-tax Return on Assets 12.14% 21.63% 25.80% 13.50%
Additional Ratios 2000 2001 2002
Net Profit Margin 4.28% 6.20% 7.07% n.a
Return on Equity 32.00% 40.25% 32.27% n.a
Activity Ratios
Accounts Receivable Turnover 4.24 4.24 4.24 n.a
Collection Days 59 73 84 n.a
Inventory Turnover 10.91 8.77 7.40 n.a
Accounts Payable Turnover 9.02 12.17 12.17 n.a
Payment Days 30 29 30 n.a
Total Asset Turnover 2.12 2.62 2.72 n.a
Debt Ratios
Debt to Net Worth 2.53 1.48 0.68 n.a
Current Liab. to Liab. 0.50 0.52 0.65 n.a
Liquidity Ratios
Net Working Capital $121,128 $212,213 $258,643 n.a
Interest Coverage 3.60 6.14 8.96 n.a
Additional Ratios
Assets to Sales 0.47 0.38 0.37 n.a
Current Debt/Total Assets 36% 31% 26% n.a
Acid Test 0.15 0.03 0.16 n.a
Sales/Net Worth 7.48 6.49 4.57 n.a
Dividend Payout 0.18 0.00 0.00 n.a