OSS Telecom Technology

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Telecommunications Products Business Plan

Financial Plan

The market and related entry strategy mentioned earlier in this Business Plan is reflected in the assumptions used to build the financial model and corresponding pro-forma financial statements.The management of OSS Telecom Technology, Inc. believes these projections to be on the conservative side and, therefore, very attainable.

7.1 Important Assumptions

Income Statement

The income statement presented here demonstrates the projected results of operations for the period FY 1999 through FY 2004 on a consolidated basis for OSS Telecom Technology and OSS Telecom Technology Taiwan.

Sources & Uses of Funds

There are two sources and uses of funds presented:

  • Assuming no cash infusion, a minimum cash requirement is calculated demonstrating the shortfall.
  • Assuming needed cash is raised in an initial private placement, what the cash position would be in each of the years.

Balance Sheet

There are two balance sheets presented which accompany the two above mentioned sources and uses of funds statements.

  • Related to the scenario of no cash infusion, a negative impact on the balance sheet creates a company that cannot survive under the current aggressive growth plan.
  • The balance sheet related to the projection of a $20 million private placement occurring in the first quarter of Fiscal Year (FY) 2001. This represents a company able to meet projections based upon its planned growth targets.
General Assumptions
FY 2001 FY 2002 FY 2003
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 25.00% 25.00% 25.00%
Other 0 0 0

7.2 Key Financial Indicators

The following chart focuses on the key financial indicators of the company.

7.3 Break-even Analysis

The following chart and table illustrate the break-even requirements for the company.

Break-even Analysis
Monthly Revenue Break-even $1,336,343
Assumptions:
Average Percent Variable Cost 13%
Estimated Monthly Fixed Cost $1,169,300

7.4 Projected Profit and Loss

The income statement presented here demonstrates the projected results of operations for the period FY 2001 through FY 2003 on a consolidated basis for OSS Telecom Technology and OSS Telecom Technology Taiwan.

License revenues consist of license fees for the company's software. Service revenues consist of fees for customer-defined customization, installation, and product support services. In addition, other lesser service revenues are for maintenance fees and training fees. After establishing the necessary infrastructure in the first two years, Net Profit/Sales will grow in FY 2003.

Revenue recognition for the various sources of fees is as follows:

  1. License revenues for one-time license sales without customization are recognized upon delivery of the software to the customer.
  2. License revenues for license sales, which require customization of the software, are recognized over the estimated term of the installation of such software based on the percentage of completion method of accounting.
  3. Maintenance fees are recognized ratably over the term of the maintenance contract.
  4. Training fees are recognized as the training is performed.
  5. Service revenues performed for customization and installation of both the initial system and subsequent upgrades are accounted for over the estimated term of such services based on the percentage of completion method of accounting.

Revenues are projected to grow significantly from FY 1999 that ends on March 31, 1999, through FY 2003. This represents a comfortable growth rate through FY 2003. Revenues are broken down into two major classifications:

  • License Sales
  • Services

License revenues are classified as new license sales and upgrade license sales. These are further broken down between current Customer Care and Billing (CCB) solutions and planned new products of Prepaid IN and Short Message Service.

Cost of Goods Sold (COGS) consists primarily of salaries and related labor loadings associated with installation, customization, and product support activities. It also includes third party costs associated with system integrators and, to a lesser extent, costs related to providing software maintenance and end-user training to customers. COGS are expected to be a decreasing percentage of revenues in FY 2000 through FY 2003 as the number of subscribers per license sale grows and there is a corresponding decrease in the cost per subscriber.

Gross margin is projected to stay high from FY 1999 onward and grow in FY 2003 as the company attains economy of scale. The compound annual growth rate for gross margin in FY 2004 will outpace revenue growth.

Other Income and Expense are associated with debt service, amortization of excess acquisition costs and interest income.

Pro Forma Profit and Loss
FY 2001 FY 2002 FY 2003
Sales $17,148,730 $26,994,200 $40,752,700
Direct Cost of Sales $2,143,593 $3,374,276 $5,094,088
Production Payroll $712,800 $784,100 $862,600
Other $0 $0 $0
Total Cost of Sales $2,856,393 $4,158,376 $5,956,688
Gross Margin $14,292,337 $22,835,824 $34,796,012
Gross Margin % 83.34% 84.60% 85.38%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $5,586,000 $7,299,600 $9,742,560
Advertising/Promotion $946,800 $1,098,000 $1,185,000
Travel $3,060,000 $3,186,000 $3,297,000
Total Sales and Marketing Expenses $9,592,800 $11,583,600 $14,224,560
Sales and Marketing % 55.94% 42.91% 34.90%
General and Administrative Expenses
General and Administrative Payroll $2,382,000 $2,620,300 $2,882,400
Sales and Marketing and Other Expenses $0 $0 $0
Depreciation $26,400 $27,500 $28,700
Rent $54,000 $59,000 $64,000
Depreciation $276,000 $316,000 $398,000
Leased Equipment $158,400 $159,700 $164,300
Utilities $27,600 $28,400 $29,600
Payroll Taxes $0 $0 $0
Total General and Administrative Expenses $2,924,400 $3,210,900 $3,567,000
General and Administrative % 17.05% 11.89% 8.75%
Other Expenses:
Other Payroll $1,430,400 $1,573,500 $1,730,900
Contract/Consultants $84,000 $78,000 $69,000
Total Other Expenses $1,514,400 $1,651,500 $1,799,900
Other % 8.83% 6.12% 4.42%
Total Operating Expenses $14,031,600 $16,446,000 $19,591,460
Profit Before Interest and Taxes $260,737 $6,389,824 $15,204,552
EBITDA $287,137 $6,417,324 $15,233,252
Interest Expense $97,584 $88,000 $78,000
Taxes Incurred $40,788 $1,575,456 $3,781,638
Net Profit $122,365 $4,726,368 $11,344,914
Net Profit/Sales 0.71% 17.51% 27.84%

7.5 Projected Cash Flow

The primary assumption on the Sources and Uses Statement is that cash would be raised in an initial private placement.

Pro Forma Cash Flow
FY 2001 FY 2002 FY 2003
Cash Received
Cash from Operations
Cash Sales $4,287,183 $6,748,550 $10,188,175
Cash from Receivables $12,538,878 $18,995,975 $28,818,173
Subtotal Cash from Operations $16,826,060 $25,744,525 $39,006,348
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 $20,000,000 $0 $0
Subtotal Cash Received $36,826,060 $25,744,525 $39,006,348
Expenditures FY 2001 FY 2002 FY 2003
Expenditures from Operations
Cash Spending $10,111,200 $12,277,500 $15,218,460
Bill Payments $8,432,054 $9,715,680 $13,815,602
Subtotal Spent on Operations $18,543,254 $21,993,180 $29,034,062
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 $100,000 $100,000 $100,000
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $18,643,254 $22,093,180 $29,134,062
Net Cash Flow $18,182,806 $3,651,345 $9,872,287
Cash Balance $1,410,806 $5,062,151 $14,934,438

7.6 Projected Balance Sheet

The Balance Sheet presented accompanies the above mentioned sources and uses of funds statement, with the assumption of a projection of a $20 million private placement occurring in the first quarter of FY 2001. This represents a company able to meet projections based upon its planned growth targets.

Pro Forma Balance Sheet
FY 2001 FY 2002 FY 2003
Assets
Current Assets
Cash $1,410,806 $5,062,151 $14,934,438
Accounts Receivable $2,176,670 $3,426,345 $5,172,696
Other Current Assets $1,511,000 $1,511,000 $1,511,000
Total Current Assets $5,098,476 $9,999,496 $21,618,134
Long-term Assets
Long-term Assets $8,917,000 $8,917,000 $8,917,000
Accumulated Depreciation $1,720,400 $1,747,900 $1,776,600
Total Long-term Assets $7,196,600 $7,169,100 $7,140,400
Total Assets $12,295,076 $17,168,596 $28,758,534
Liabilities and Capital FY 2001 FY 2002 FY 2003
Current Liabilities
Accounts Payable $571,711 $818,863 $1,163,887
Current Borrowing $0 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $571,711 $818,863 $1,163,887
Long-term Liabilities $930,000 $830,000 $730,000
Total Liabilities $1,501,711 $1,648,863 $1,893,887
Paid-in Capital $21,667,000 $21,667,000 $21,667,000
Retained Earnings ($10,996,000) ($10,873,635) ($6,147,267)
Earnings $122,365 $4,726,368 $11,344,914
Total Capital $10,793,365 $15,519,733 $26,864,647
Total Liabilities and Capital $12,295,076 $17,168,596 $28,758,534
Net Worth $10,793,365 $15,519,733 $26,864,647

7.7 Business Ratios

The following is a summarized list of key business ratios for the company. The final column of the table, Industry Profiles, shows important ratios from the communications services industry, as defined by the Standard Industry Classification (SIC) Index code 4899, Communications Services, NEC (not elsewhere classified).

Ratio Analysis
FY 2001 FY 2002 FY 2003 Industry Profile
Sales Growth 48.95% 57.41% 50.97% 5.92%
Percent of Total Assets
Accounts Receivable 17.70% 19.96% 17.99% 18.27%
Other Current Assets 12.29% 8.80% 5.25% 41.72%
Total Current Assets 41.47% 58.24% 75.17% 63.98%
Long-term Assets 58.53% 41.76% 24.83% 36.02%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 4.65% 4.77% 4.05% 26.17%
Long-term Liabilities 7.56% 4.83% 2.54% 25.88%
Total Liabilities 12.21% 9.60% 6.59% 52.05%
Net Worth 87.79% 90.40% 93.41% 47.95%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 83.34% 84.60% 85.38% 54.99%
Selling, General & Administrative Expenses 84.55% 66.91% 56.20% 34.50%
Advertising Expenses 5.11% 3.64% 2.50% 1.31%
Profit Before Interest and Taxes 1.52% 23.67% 37.31% 2.80%
Main Ratios
Current 8.92 12.21 18.57 1.89
Quick 8.92 12.21 18.57 1.53
Total Debt to Total Assets 12.21% 9.60% 6.59% 63.38%
Pre-tax Return on Net Worth 1.51% 40.61% 56.31% 3.49%
Pre-tax Return on Assets 1.33% 36.71% 52.60% 9.54%
Additional Ratios FY 2001 FY 2002 FY 2003
Net Profit Margin 0.71% 17.51% 27.84% n.a
Return on Equity 1.13% 30.45% 42.23% n.a
Activity Ratios
Accounts Receivable Turnover 5.91 5.91 5.91 n.a
Collection Days 59 51 51 n.a
Accounts Payable Turnover 12.05 12.17 12.17 n.a
Payment Days 36 25 26 n.a
Total Asset Turnover 1.39 1.57 1.42 n.a
Debt Ratios
Debt to Net Worth 0.14 0.11 0.07 n.a
Current Liab. to Liab. 0.38 0.50 0.61 n.a
Liquidity Ratios
Net Working Capital $4,526,765 $9,180,633 $20,454,247 n.a
Interest Coverage 2.67 72.61 194.93 n.a
Additional Ratios
Assets to Sales 0.72 0.64 0.71 n.a
Current Debt/Total Assets 5% 5% 4% n.a
Acid Test 5.11 8.03 14.13 n.a
Sales/Net Worth 1.59 1.74 1.52 n.a
Dividend Payout 0.00 0.00 0.00 n.a