Victorian Renovations

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Rental Remodeling Business Plan

Financial Plan

The following financial information shows the assumptions and outcomes of the purchase, renovation, and rental of the first property on Fifth and Pearl.  No attempt has been made to discuss the implications of purchasing other buildings, since these will happen on a more ad hoc basis.

7.1 Important Assumptions

The following are conservative assumptions that will influence our financial projections.

General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 9.00% 9.00% 9.00%
Long-term Interest Rate 6.75% 6.75% 6.75%
Tax Rate 30.00% 30.00% 30.00%
Other 0 0 0

7.2 Break-even Analysis

The regular Break-even Analysis is not appropriate for this project, but the following text explains the Break-even chart.

Investors will receive 66% of the rental income from the property.  It is estimated that this property will produce $2400 per month of rental. At maximum occupancy, the payout to investors will be fixed monthly cost of $1,600.  The remaining $800 per month will be kept in a savings account to pay for general upkeep of the building and any unexpected repairs.  It is estimated that routine bills and maintenance will be no more than $400 per month.

Break-even Analysis
Monthly Revenue Break-even $1,417
Assumptions:
Average Percent Variable Cost 10%
Estimated Monthly Fixed Cost $1,275

7.3 Projected Profit and Loss

The following Profit and Loss table illustrates that VR will lose money in the first year, but in the second year, on this single property, the company will make a healthy return of 10% in 2002 and 15% in 2003.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $21,600 $23,760 $26,136
Direct Cost of Sales $2,160 $2,376 $2,614
Other Production Expenses $18,000 $0 $0
Total Cost of Sales $20,160 $2,376 $2,614
Gross Margin $1,440 $21,384 $23,522
Gross Margin % 6.67% 90.00% 90.00%
Expenses
Payroll $0 $0 $0
Sales and Marketing and Other Expenses $9,500 $1,300 $1,400
Depreciation $3,200 $4,800 $4,800
Leased Equipment $0 $0 $0
Utilities $2,300 $1,200 $1,300
Insurance $300 $300 $350
Rent $0 $0 $0
Payroll Taxes $0 $0 $0
Other $0 $0 $0
Total Operating Expenses $15,300 $7,600 $7,850
Profit Before Interest and Taxes ($13,860) $13,784 $15,672
EBITDA ($10,660) $18,584 $20,472
Interest Expense $10,668 $10,380 $10,061
Taxes Incurred $0 $1,021 $1,684
Net Profit ($24,528) $2,383 $3,928
Net Profit/Sales -113.56% 10.03% 15.03%

7.4 Projected Cash Flow

The following Balance Sheet shows healthy cash flow that will enable VR to maintain the existing location at Fifth and Pearl and allow Doug and Sarah to purchase a second property in Portland in year two of the operation.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $21,600 $23,760 $26,136
Subtotal Cash from Operations $21,600 $23,760 $26,136
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 $21,600 $23,760 $26,136
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $0 $0 $0
Bill Payments $41,654 $16,489 $17,339
Subtotal Spent on Operations $41,654 $16,489 $17,339
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 $3,938 $4,572 $4,891
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $45,592 $21,061 $22,231
Net Cash Flow ($23,992) $2,699 $3,905
Cash Balance $50,508 $53,207 $57,112

7.5 Projected Balance Sheet

The Balance Sheet shows a healthy company with a positive net worth that will ensure future financial stability and the ability to grow through investment in other properties in the future.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $50,508 $53,207 $57,112
Other Current Assets $750 $750 $750
Total Current Assets $51,258 $53,957 $57,862
Long-term Assets
Long-term Assets $144,000 $144,000 $144,000
Accumulated Depreciation $3,200 $8,000 $12,800
Total Long-term Assets $140,800 $136,000 $131,200
Total Assets $192,058 $189,957 $189,062
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $1,274 $1,363 $1,431
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $1,274 $1,363 $1,431
Long-term Liabilities $156,062 $151,490 $146,599
Total Liabilities $157,336 $152,853 $148,030
Paid-in Capital $60,000 $60,000 $60,000
Retained Earnings ($750) ($25,278) ($22,895)
Earnings ($24,528) $2,383 $3,928
Total Capital $34,722 $37,105 $41,033
Total Liabilities and Capital $192,058 $189,957 $189,062
Net Worth $34,722 $37,105 $41,033

7.6 Business Ratios

The following table contains important ratios for the Single-family housing construction industry, as determined by the Standard Industry Classification (SIC) Index Number 1521.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 10.00% 10.00% 7.20%
Percent of Total Assets
Other Current Assets 0.39% 0.39% 0.40% 30.60%
Total Current Assets 26.69% 28.40% 30.60% 80.40%
Long-term Assets 73.31% 71.60% 69.40% 19.60%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 0.66% 0.72% 0.76% 44.20%
Long-term Liabilities 81.26% 79.75% 77.54% 11.50%
Total Liabilities 81.92% 80.47% 78.30% 55.70%
Net Worth 18.08% 19.53% 21.70% 44.30%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 6.67% 90.00% 90.00% 18.10%
Selling, General & Administrative Expenses 120.22% 79.97% 74.97% 7.00%
Advertising Expenses 1.39% 0.00% 0.00% 0.20%
Profit Before Interest and Taxes -64.17% 58.01% 59.96% 3.50%
Main Ratios
Current 40.24 39.60 40.44 1.83
Quick 40.24 39.60 40.44 0.86
Total Debt to Total Assets 81.92% 80.47% 78.30% 55.70%
Pre-tax Return on Net Worth -70.64% 9.17% 13.68% 5.40%
Pre-tax Return on Assets -12.77% 1.79% 2.97% 12.20%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -113.56% 10.03% 15.03% n.a
Return on Equity -70.64% 6.42% 9.57% n.a
Activity Ratios
Accounts Payable Turnover 33.70 12.17 12.17 n.a
Payment Days 27 29 29 n.a
Total Asset Turnover 0.11 0.13 0.14 n.a
Debt Ratios
Debt to Net Worth 4.53 4.12 3.61 n.a
Current Liab. to Liab. 0.01 0.01 0.01 n.a
Liquidity Ratios
Net Working Capital $49,984 $52,595 $56,432 n.a
Interest Coverage -1.30 1.33 1.56 n.a
Additional Ratios
Assets to Sales 8.89 7.99 7.23 n.a
Current Debt/Total Assets 1% 1% 1% n.a
Acid Test 40.24 39.60 40.44 n.a
Sales/Net Worth 0.62 0.64 0.64 n.a
Dividend Payout 0.00 0.00 0.00 n.a