Cresta Testing

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Software Testing Business Plan

Financial Plan

Cresta will finance growth with a long-term loan. We recognize that this means we will have to grow more slowly than we might like. The most important factor in our case is collection days. We can't push our clients hard on collection days, because they are in larger companies and our direct contacts will normally not have financial authority. Therefore we need to develop a permanent system of receivables financing, using one of the established accounting systems. In turn we intend to ensure that our investors are compatible with our growth plan, management style, and vision. Compatibility in this regard means:

  1. A fundamental respect for giving our customers value, and for maintaining a healthy and congenial workplace.
  2. Respect for realistic forecasts, conservative cash flow, and financial management.
  3. Cash flow as first priority, growth second, profits third.
  4. Willingness to follow the project objectives and contribute valuable input to strategy and implementation decisions.

Of these, only the last two are flexible.

8.1 Key Financial Indicators

We foresee major growth in sales and operating expenses, and a bump in our collection days as we spread the business during expansion.  Collection days are very important. We do not want to let our average collection days get above 50 under any circumstances. This could cause a serious problem with cash flow, because our working capital situation is chronically tight. However, we recognize that we cannot control this factor easily, because of the relationship with our clients.

8.2 Projected Profit and Loss

Our projected profit and loss is shown on the following table, with sales increasing from more than $2.5 million the first year to more than $6.7 million the third, and profits slightly below the profit level achieved in 2000 on similar revenue. This difference in profit is attributable to pressure on rates in a competitive market as well as additional expenses incurred in building the business. We are projecting conservatively regarding cost of sales and gross margin. The detailed monthly projections are included in the appendix.

Pro Forma Profit and Loss
2003 2004 2005
Sales $2,564,007 $4,742,453 $6,792,899
Direct Cost of Sales $765,904 $1,415,311 $2,024,670
Production Payroll $468,750 $787,500 $1,157,625
Commissions $64,100 $118,561 $169,822
Total Cost of Sales $1,298,754 $2,321,372 $3,352,117
Gross Margin $1,265,253 $2,421,080 $3,440,782
Gross Margin % 49.35% 51.05% 50.65%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $275,000 $525,000 $551,250
Advertising/Promotion $24,000 $25,200 $26,460
Other Sales and Marketing Expenses $49,500 $51,975 $54,574
Total Sales and Marketing Expenses $348,500 $602,175 $632,284
Sales and Marketing % 13.59% 12.70% 9.31%
General and Administrative Expenses
General and Administrative Payroll $350,000 $612,500 $771,750
Sales and Marketing and Other Expenses $0 $0 $0
Depreciation $12,000 $12,600 $13,230
Communications $18,000 $23,500 $24,675
Rent $72,000 $125,000 $131,250
Utilities $12,000 $18,200 $19,110
Insurance $24,000 $25,200 $26,460
Payroll Taxes $0 $0 $0
Other General and Administrative Expenses $84,000 $92,400 $97,020
Total General and Administrative Expenses $572,000 $909,400 $1,083,495
General and Administrative % 22.31% 19.18% 15.95%
Other Expenses:
Other Payroll $0 $0 $0
Consultants $0 $0 $0
Other Other Expenses $0 $0 $0
Total Other Expenses $0 $0 $0
Other % 0.00% 0.00% 0.00%
Total Operating Expenses $920,500 $1,511,575 $1,715,779
Profit Before Interest and Taxes $344,753 $909,505 $1,725,003
EBITDA $356,753 $922,105 $1,738,233
Interest Expense $15,568 $14,249 $13,149
Taxes Incurred $131,674 $358,102 $684,741
Net Profit $197,511 $537,154 $1,027,112
Net Profit/Sales 7.70% 11.33% 15.12%

8.3 Projected Cash Flow

Cresta has unique timing issues with respect to managing cash. Consultants are used as a means of keeping overhead down but consultants require payment in a timely manner when compared to the timing of services rendered. Cresta's challenge is to ensure that customer payments for such services are collected in an equally timely manner to ensure sufficient cash to sustain operations. Notwithstanding the first plan year cash struggle, once the business reaches critical mass, the positive margins achieved enable the business to become relatively "cash rich."

Pro Forma Cash Flow
2003 2004 2005
Cash Received
Cash from Operations
Cash Sales $0 $0 $0
Cash from Receivables $2,119,891 $4,261,712 $6,340,405
Subtotal Cash from Operations $2,119,891 $4,261,712 $6,340,405
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 $185,000 $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 $2,304,891 $4,261,712 $6,340,405
Expenditures 2003 2004 2005
Expenditures from Operations
Cash Spending $1,093,750 $1,925,000 $2,480,625
Bill Payments $1,163,308 $2,237,469 $3,189,392
Subtotal Spent on Operations $2,257,058 $4,162,469 $5,670,017
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $9,180 $9,180 $9,155
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $5,000 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $2,271,238 $4,171,649 $5,679,172
Net Cash Flow $33,654 $90,063 $661,233
Cash Balance $186,344 $276,407 $937,640

8.4 Projected Balance Sheet

The balance sheet in the following table shows managed but sufficient growth of net worth, and a sufficiently healthy financial position. The monthly estimates are included in the appendix.

Pro Forma Balance Sheet
2003 2004 2005
Assets
Current Assets
Cash $186,344 $276,407 $937,640
Accounts Receivable $565,827 $1,046,567 $1,499,061
Other Current Assets $15,933 $15,933 $15,933
Total Current Assets $768,103 $1,338,907 $2,452,634
Long-term Assets
Long-term Assets $92,595 $92,595 $92,595
Accumulated Depreciation $27,496 $40,096 $53,326
Total Long-term Assets $65,099 $52,499 $39,269
Total Assets $833,202 $1,391,406 $2,491,903
Liabilities and Capital 2003 2004 2005
Current Liabilities
Accounts Payable $156,156 $186,386 $268,926
Current Borrowing $18,335 $9,155 $0
Other Current Liabilities $84,483 $84,483 $84,483
Subtotal Current Liabilities $258,974 $280,024 $353,409
Long-term Liabilities $180,000 $180,000 $180,000
Total Liabilities $438,974 $460,024 $533,409
Paid-in Capital $544,732 $544,732 $544,732
Retained Earnings ($348,015) ($150,504) $386,650
Earnings $197,511 $537,154 $1,027,112
Total Capital $394,228 $931,382 $1,958,494
Total Liabilities and Capital $833,202 $1,391,406 $2,491,903
Net Worth $394,228 $931,382 $1,958,494

8.5 Business Ratios

Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 7371, Custom Computer Programming Industry, are shown for comparison.

Ratio Analysis
2003 2004 2005 Industry Profile
Sales Growth 140.32% 84.96% 43.24% 16.14%
Percent of Total Assets
Accounts Receivable 67.91% 75.22% 60.16% 17.80%
Other Current Assets 1.91% 1.15% 0.64% 49.69%
Total Current Assets 92.19% 96.23% 98.42% 72.10%
Long-term Assets 7.81% 3.77% 1.58% 27.90%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 31.08% 20.13% 14.18% 36.04%
Long-term Liabilities 21.60% 12.94% 7.22% 19.42%
Total Liabilities 52.69% 33.06% 21.41% 55.46%
Net Worth 47.31% 66.94% 78.59% 44.54%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 49.35% 51.05% 50.65% 100.00%
Selling, General & Administrative Expenses 41.36% 39.59% 35.45% 76.16%
Advertising Expenses 0.94% 0.53% 0.39% 1.23%
Profit Before Interest and Taxes 13.45% 19.18% 25.39% 2.22%
Main Ratios
Current 2.97 4.78 6.94 1.45
Quick 2.97 4.78 6.94 1.13
Total Debt to Total Assets 52.69% 33.06% 21.41% 63.01%
Pre-tax Return on Net Worth 83.50% 96.12% 87.41% 4.79%
Pre-tax Return on Assets 39.51% 64.34% 68.70% 12.96%
Additional Ratios 2003 2004 2005
Net Profit Margin 7.70% 11.33% 15.12% n.a
Return on Equity 50.10% 57.67% 52.44% n.a
Activity Ratios
Accounts Receivable Turnover 4.53 4.53 4.53 n.a
Collection Days 57 62 68 n.a
Accounts Payable Turnover 8.07 12.17 12.17 n.a
Payment Days 28 28 25 n.a
Total Asset Turnover 3.08 3.41 2.73 n.a
Debt Ratios
Debt to Net Worth 1.11 0.49 0.27 n.a
Current Liab. to Liab. 0.59 0.61 0.66 n.a
Liquidity Ratios
Net Working Capital $509,129 $1,058,883 $2,099,225 n.a
Interest Coverage 22.15 63.83 131.19 n.a
Additional Ratios
Assets to Sales 0.32 0.29 0.37 n.a
Current Debt/Total Assets 31% 20% 14% n.a
Acid Test 0.78 1.04 2.70 n.a
Sales/Net Worth 6.50 5.09 3.47 n.a
Dividend Payout 0.00 0.00 0.00 n.a