Based on market research, we expect the business to begin growing at 45% per month for the first 12 months, then at a yearly rate of 90% for the next two years. Due to our low initial investment costs, we can maintain the operations of the business with the cash buffer we will have from start up. In addition, we will almost immediately have a positive cash flow, allowing us the flexibility to cover any unforseen expenses.
Sales - Our sales are projected to grow at a consistent rate of 90% yearly, and we believe this accurately reflects the realistic growth our product would be capable of attaining if we can properly utilize existing channels of distribution and gain social acceptance.
Gross Margin - As we grow, become more efficient, and gain economies of scale we begin to see a slight growth in our margins.
Operating Expenses - In 2007 and 2008 we see an increase in the number of operating expenses that we will incur. We begin incurring larger costs involving advertising, promotion, marketing, and payroll expenses.
Inventory Turnover - We will begin operations with a preliminary purchase of $50,000/ 38,000 gallons of soap. Our preliminary forecast suggests that for us to be flexible in meeting customer demand we will need to maintain a minimal inventory stock at a rented warehouse. We estimate that, on average, we will keep two weeks worth of inventory on hand.
Collection days - We will collect our accounts receivable on an average of 45 days. In 2007 and 2008 we will have the cash to cover unexpected costs or expenses so that we may decide to allow a longer collection period.
The following fixed costs reflect the relative costs for selling and distributing our product within the greater Portland metro area, and do not reflect the fixed costs necessary to expand further.
Overall, our business is expected to generate sufficient cashflows. Our cash balance will, among other things, depend on the level of inventory we'll decided to keep at a rented warehouse. At the moment, our projections in this respect are preliminary and we expect to fine-tune them as the demand for our products grows.
We expect to secure a $50,000 line of credit in year 3 to finance our receivables, listed as "New Current Borrowing" in the table below.
In year 5 of operations, we will begin looking at our ability to begin paying back our initial investors the $250,000. Although the terms of the additionally sought investment are yet to be agreed upon, we belief that our investors will provide us with a buffer of some years before expecting a return on their investment, allowing us the capital and time to expand and grow at an appropriate or desired rate. Nevertheless, for planning purposes, we have made provisions to start paying out a modest dividend from the third year of our operations. Currently, we set dividend payments to be equal to 5% of net profits.
Our profit and loss projections reflect our expectation that monthly fixed costs will remain constant over the course of the first year.
Cost of goods sold increases at a decreasing rate, as economies of scale make soap production cheaper per unit as production volume increases. Based on these projections the company will become profitable in October, 2005.
Advertising expenses will remain steady during our first year of operations. However, Advertising and Promotion will grow in years 2007 and 2008 to reflect the purchase of print ads, PR brochures, and additional promotional content.
Once we have established a relationship with the manufacturer, we will purchase inventory in minimum quantities of approximately 15,000 gallons for approximately $20,000 per shipment (following the initial start-up inventory purchase, at $50,000). As sales increase we expect that inventory turnover rate to increase.
Our only significant Accounts Payable will be Inventory, which are a direct reflection of the level of inventory on hand. We will be paying off our Accounts Payable in accordance with sale of inventory. Therefore, as we begin to sell more soap, we will be increasingly capable of meeting our obligations in a more timely manner, ensuring that we have enough cash on hand to cover our short term liabilities.
The following table compares our ratios with standard ones from the soap and detergents industry (SIC Code 2841). Our current and quick ratios are much higher than industry averages. This is due in part to the substantial difference between our assets compared to our liabilities. Considering that we will be able to avoid any large loans and fund the company almost entirely independent of commercial creditors, there will necessarily be a discrepancy between our fairly large assets compared to our considerably smaller liabilities. Our business model and truly unique product allows us to outsource the manufacturing of the product, since our added value comes in the soon to be patented dye/soap formula. So, unlike other commercial-use soap makers in our industry, we do not need to purchase major capital assets, funded by loans.