Fulham Furniture Manufacturer--UK

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UK Furniture Manufacturer Business Plan

Financial Plan

The financial picture is quite encouraging. We have been slow to take on debt, but with our increase in sales we do expect to apply for a credit line with the bank, to a limit of £150,000. The credit line is easily supported by assets.

We do expect to be able to take some money out as dividends. The owners don't take overly generous salaries, so some draw is appropriate.

7.1 Important Assumptions

The accompanying table lists our main assumptions for developing our financial projections. The most sensitive assumption is the collection days. We would like to improve collection days to take pressure off of our working capital, but our increasing sales through channels makes the collection time a cost of doing business.

We also expect to see a decline in our stock turnover ratio, another unfortunate side effect of increasing sales through channel. We find ourselves having to buy earlier and hold more finished goods in order to deal with sales through the channel.

General Assumptions
2006 2007 2008
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 9.00% 9.00% 9.00%
Tax Rate 25.42% 25.00% 25.42%
Other 0 0 0

7.2 Key Financial Indicators

The following chart shows changes in key financial indicators: sales, gross margin, operating expenses, collection days, and stock turnover. The growth in sales will be very hard to manage. We expect our gross margin to be a bit lower than before, because our projections show a slight decline as we go into new product areas and face new competition.

The projections for collection days and stock turnover show that we are already expecting a decline in these indicators, because of increasing sales through channels.

7.3 Break-even Analysis

Our break-even analysis is based on running costs, the "burn-rate" costs we incur to keep the business running, not on theoretical fixed costs that would be relevant only if we were closing. Between payroll, rent, utilities, and basic marketing costs, we think we have a good estimate of fixed costs.

Our assumptions on average unit sales and average per-unit costs depend on averaging. We don't really need to calculate an exact average, this is close enough to help us understand what a real break-even point might be.

The essential insight here is that our sales level seems to be running comfortably above break-even.

Break-even Analysis
Monthly Units Break-even 15
Monthly Revenue Break-even £21,961
Assumptions:
Average Per-Unit Revenue £1,513.93
Average Per-Unit Variable Cost £381.96
Estimated Monthly Fixed Cost £16,420

7.4 Projected Profit and Loss

We do expect a significant increase in profitability this year, and in the future, because we have learned how to deal with the increasing sales levels of selling through channels. Despite the lower profitability levels of recent years, we expect Net Profit/Sales to improve yearly through 2008.

Our higher sales volume has lowered our cost of goods and increased our gross margin. This increase in gross margin is important to profitability.

Pro Forma Profit and Loss
2006 2007 2008
Sales £451,150 £692,500 £1,092,500
Direct Cost of Sales £113,825 £174,000 £274,000
Production Payroll £51,600 £80,000 £185,000
Other £3,110 £0 £0
Total Cost of Sales £168,535 £254,000 £459,000
Gross Margin £282,615 £438,500 £633,500
Gross Margin % 62.64% 63.32% 57.99%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll £37,000 £65,000 £72,000
Miscellaneous £2,400 £2,600 £2,900
Advertising/Promotion £64,000 £70,400 £77,400
Events £6,250 £6,900 £7,600
Public Relations £750 £800 £900
Travel £4,500 £5,000 £5,500
Total Sales and Marketing Expenses £114,900 £150,700 £166,300
Sales and Marketing % 25.47% 21.76% 15.22%
General and Administrative Expenses
General and Administrative Payroll £48,000 £75,000 £100,000
Sales and Marketing and Other Expenses £0 £0 £0
Depreciation £1,000 £1,100 £1,200
Depreciation £1,500 £1,700 £1,900
Utilities £2,400 £2,600 £2,900
Insurance £500 £600 £700
Rent £3,600 £4,000 £4,400
Other £1,200 £1,300 £1,400
Payroll Taxes £20,940 £35,250 £57,300
Other General and Administrative Expenses £0 £0 £0
Total General and Administrative Expenses £79,140 £121,550 £169,800
General and Administrative % 17.54% 17.55% 15.54%
Other Expenses:
Other Payroll £3,000 £15,000 £25,000
Consultants £0 £0 £0
Contract/Consultants £0 £0 £0
Total Other Expenses £3,000 £15,000 £25,000
Other % 0.66% 2.17% 2.29%
Total Operating Expenses £197,040 £287,250 £361,100
Profit Before Interest and Taxes £85,575 £151,250 £272,400
EBITDA £86,575 £152,350 £273,600
Interest Expense £8,750 £14,000 £21,500
Taxes Incurred £19,016 £34,313 £63,770
Net Profit £57,809 £102,938 £187,130
Net Profit/Sales 12.81% 14.86% 17.13%

7.5 Projected Cash Flow

Although we expect to be more profitable in 2006, we still have drains on the cash flow. We need to invest in new assembly and manufacturing equipment, plus new computer equipment, and in miscellaneous current assets, including office equipment. Because of our increased sales through channels, and necessary increase in stock levels, we need to increase working capital. We plan to extend our credit line to cover as much as £150,000 in current credit, backed by receivables and stock. Our maximum extension at the end of the year is covered by receivables and stock that same month.

Pro Forma Cash Flow
2006 2007 2008
Cash Received
Cash from Operations
Cash Sales £338,363 £519,375 £819,375
Cash from Receivables £114,725 £159,394 £250,368
Subtotal Cash from Operations £453,088 £678,769 £1,069,743
Additional Cash Received
Sales Tax, VAT, HST/GST Received £0 £0 £0
New Current Borrowing £125,000 £50,000 £100,000
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 £50,000 £0 £0
Subtotal Cash Received £628,088 £728,769 £1,169,743
Expenditures 2006 2007 2008
Expenditures from Operations
Cash Spending £139,600 £235,000 £382,000
Bill Payments £247,594 £348,534 £518,561
Subtotal Spent on Operations £387,194 £583,534 £900,561
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out £0 £0 £0
Principal Repayment of Current Borrowing £10,000 £0 £0
Other Liabilities Principal Repayment £0 £0 £0
Long-term Liabilities Principal Repayment £0 £0 £0
Purchase Other Current Assets £0 £0 £0
Purchase Long-term Assets £50,000 £20,000 £30,000
Dividends £0 £0 £0
Subtotal Cash Spent £447,194 £603,534 £930,561
Net Cash Flow £180,894 £125,235 £239,182
Cash Balance £182,332 £307,567 £546,749

7.6 Projected Balance Sheet

Our projected balance sheet shows an increase in net worth in 2008, at which point we expect to be making a comfortable profit on projected sales. With the present financial projections we will be careful in supporting our working capital credit line, and we are growing assets both because we want to--new equipment--and because we have to grow receivables and stock to support growth in sales through channels.

Pro Forma Balance Sheet
2006 2007 2008
Assets
Current Assets
Cash £182,332 £307,567 £546,749
Accounts Receivable £25,667 £39,398 £62,155
Inventory £12,070 £18,451 £29,055
Other Current Assets £2,375 £2,375 £2,375
Total Current Assets £222,444 £367,791 £640,334
Long-term Assets
Long-term Assets £53,210 £73,210 £103,210
Accumulated Depreciation £2,720 £3,820 £5,020
Total Long-term Assets £50,490 £69,390 £98,190
Total Assets £272,934 £437,181 £738,524
Liabilities and Capital 2006 2007 2008
Current Liabilities
Accounts Payable £18,267 £29,576 £43,790
Current Borrowing £115,000 £165,000 £265,000
Other Current Liabilities £1,803 £1,803 £1,803
Subtotal Current Liabilities £135,070 £196,379 £310,593
Long-term Liabilities £0 £0 £0
Total Liabilities £135,070 £196,379 £310,593
Paid-in Capital £54,500 £54,500 £54,500
Retained Earnings £25,555 £83,364 £186,302
Earnings £57,809 £102,938 £187,130
Total Capital £137,864 £240,802 £427,931
Total Liabilities and Capital £272,934 £437,181 £738,524
Net Worth £137,864 £240,802 £427,931

7.7 Business Ratios

Our ratios look healthy and solid. Gross margin is projected to decline, return on assets increasing, and return on equity to improve as well. Debt and liquidity ratios also look tough, with debt to net worth running at more than 1.4 to one. The projections, if we make them, are manageable. The standard comparisons are based on standard financials for manufacturers of wood office furniture.

Ratio Analysis
2006 2007 2008 Industry Profile
Sales Growth 99.81% 53.50% 57.76% 4.60%
Percent of Total Assets
Accounts Receivable 9.40% 9.01% 8.42% 23.80%
Inventory 4.42% 4.22% 3.93% 32.10%
Other Current Assets 0.87% 0.54% 0.32% 19.00%
Total Current Assets 81.50% 84.13% 86.70% 74.90%
Long-term Assets 18.50% 15.87% 13.30% 25.10%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 49.49% 44.92% 42.06% 38.40%
Long-term Liabilities 0.00% 0.00% 0.00% 15.90%
Total Liabilities 49.49% 44.92% 42.06% 54.30%
Net Worth 50.51% 55.08% 57.94% 45.70%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 62.64% 63.32% 57.99% 32.40%
Selling, General & Administrative Expenses 54.30% 51.00% 41.94% 18.90%
Advertising Expenses 0.60% 0.41% 0.28% 1.40%
Profit Before Interest and Taxes 18.97% 21.84% 24.93% 1.80%
Main Ratios
Current 1.65 1.87 2.06 2.14
Quick 1.56 1.78 1.97 1.02
Total Debt to Total Assets 49.49% 44.92% 42.06% 54.30%
Pre-tax Return on Net Worth 55.73% 57.00% 58.63% 5.10%
Pre-tax Return on Assets 28.15% 31.39% 33.97% 11.10%
Additional Ratios 2006 2007 2008
Net Profit Margin 12.81% 14.86% 17.13% n.a
Return on Equity 41.93% 42.75% 43.73% n.a
Activity Ratios
Accounts Receivable Turnover 4.39 4.39 4.39 n.a
Collection Days 60 69 68 n.a
Inventory Turnover 12.00 11.40 11.54 n.a
Accounts Payable Turnover 13.94 12.17 12.17 n.a
Payment Days 28 24 25 n.a
Total Asset Turnover 1.65 1.58 1.48 n.a
Debt Ratios
Debt to Net Worth 0.98 0.82 0.73 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital £87,374 £171,412 £329,741 n.a
Interest Coverage 9.78 10.80 12.67 n.a
Additional Ratios
Assets to Sales 0.60 0.63 0.68 n.a
Current Debt/Total Assets 49% 45% 42% n.a
Acid Test 1.37 1.58 1.77 n.a
Sales/Net Worth 3.27 2.88 2.55 n.a
Dividend Payout 0.00 0.00 0.00 n.a