Batten-Hatchez Security expects to produce excess cash after a lean first year of operation which can finance its expansion to an office space along with a 5 year home equity loan to support significant growth of its employee base in its second and third years to 25 FTE security guards (which can be estimated as 10 full-time guards and 30 part-time guards). Future growth will be financed by the business and will include launching operations in other cities in Ourstate and launching a line of security products.
The founders will each provide matching start-up funding. The balance of start-up funding will be provided by angel investors who will be given up to 40% of shares in the business.
The long-term interest rate is 6% for a home equity loan taken out in year 2 to cover the cash needs for a move to an office space.
In addition to the assumptions shown in this table, the business makes the following assumptions:
The monthly break-even is low due to the cost savings by operating the office out of Chindit Batten's home in the first year of operations. This allows for the business to become profitable quickly.
Security guard labor is estimated at 55% of sales in the first year, dropping slightly to 53% by the third year as prices increase and cheaper labor becomes available due to the range of employees.
Marketing includes ongoing Web hosting and maintenance fees, continued revisions and reprinting of the brochure and stationery, additional direct mail campaigns, ongoing advertising in trade publications, and online advertising for the website.
Rent, utilities, and depreciation will be expenses beginning in the second year when an office space is required. Training requires the use of larger meeting rooms for groups of guards which will have to be rented separately in the first year of operations. Training cost will be reduced once an office is rented, as the business will choose a space with a conference room or table to hold employee training at the office. Training will be an ongoing expense both due to turnover and due to continued training and check-ins with employees. The surety bond must be renewed each year for the business.
Licenses and permits will include licenses for new guards to carry firearms and to operate, and continued renewals of licensing and permits for the business each year.
Net profit will swing to a net loss in the second year due to the opening of an office space. Net profit will occur in year 3 again as the business scales up to cover these additional costs.
Excess cash from the first year of operation and a $150,000 five year home equity loan from the business' owners will be used to finance the expansion to a rented office space in the second year, which will require the purchase of furniture, additional computer and phone equipment, and some improvements to the space. This loan will be taken out by one or both of the owners at 6% interest halfway through year 2 when cash is needed.
Cash flow is expected to become positive in the fifth month of operation due to the low fixed costs and launching without a full-time call center/office. Continued investments in communications equipment will be needed throughout the first year as additional guards join the business. In the second year, assets must be purchased for the office, including computers and equipment, furniture, and a phone system. Communications equipment purchases will continue to grow in the second year.
It is estimated that 70% of sales will be made on credit for payment within one month and 30% will be paid at or before the time of service.
The balance sheet demonstrates growth in net worth from retained earnings and cash held in the company for a future expansion effort.
The ratio table compares the business over its three years of projections to the average for Security Guard and Patrol Services, SIC code 7381, NAIC code 561612, of $1 - $5 million in annual revenues.