H2O Industries

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Water Purification Business Plan

Financial Plan

As of August 1999, stockholder equity stood at $112,000. Additional infusion of equity from new shareholders will boost the equity capital.

To complete the necessary planned additions to plant and equipment, a 5-year term loan will be required from a financial institution. The projected cash-flow is sufficient to repay this loan in quarterly installments. This term loan should be sufficient to cover the increases in accounts receivable, as well as to support growth in inventory of rental tanks.

7.1 Important Assumptions

Tax Rate:

Tax rate reflects the present sliding scale:

  • $0 to $50,000 @ 15% Federal, plus 9.5% State tax
  • $50 to $75,000 @ 25%
  • $75 to $100,000 @ 34%
  • $100 to $335,000 @ 39%
  • $335,000 and up @ 34%

Inventory Turnover:

Since this is a service business, the only inventory is that of chemicals and some resin, both of which do not need to be stored more than two weeks. Average is one week (inventory turnover rate of 48).

General Assumptions
Year 1 Year 2 Year 3
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 2.50% 0.00% 2.50%
Other 0 0 0

7.2 Break-even Analysis

The following table and chart show the Monthly Units and Monthly Revenue Break-even calculations based on the Average Per-Unit Revenue, Average Per-Unit Variable Costs and the Estimated Monthly Fixed Costs, as drawn from the other financial tables in this plan.

Break-even Analysis
Monthly Units Break-even 119
Monthly Revenue Break-even $34,235
Assumptions:
Average Per-Unit Revenue $287.08
Average Per-Unit Variable Cost $59.17
Estimated Monthly Fixed Cost $27,179

7.3 Projected Profit and Loss

The following table and charts give the yearly projected profit and loss statement for H20 Industries. For a monthly analysis, please see attached appendix.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $1,025,462 $1,684,911 $1,814,105
Direct Cost of Sales $211,347 $348,769 $375,852
Production Payroll $168,594 $172,800 $172,800
Other $0 $0 $0
Total Cost of Sales $379,941 $521,569 $548,652
Gross Margin $645,521 $1,163,342 $1,265,453
Gross Margin % 62.95% 69.04% 69.76%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $62,660 $75,000 $84,000
Advertising/Promotion $16,500 $12,000 $12,000
Travel $3,600 $6,000 $6,000
Fuel/oil for Vehicles: $11,520 $12,000 $12,500
Vehicle Repair: $20,004 $20,000 $20,000
Uniforms $1,200 $1,200 $1,200
Miscellaneous $10,800 $10,800 $10,800
Total Sales and Marketing Expenses $126,284 $137,000 $146,500
Sales and Marketing % 12.31% 8.13% 8.08%
General and Administrative Expenses
General and Administrative Payroll $49,096 $55,600 $55,600
Sales and Marketing and Other Expenses $0 $0 $0
Depreciation $36,000 $36,000 $36,000
Leased Equipment $15,252 $15,252 $15,252
Utilities $2,250 $2,250 $2,250
Insurance $11,796 $11,800 $11,800
Business Liab. Insurance: $12,000 $12,000 $12,000
Printing and Postage: $3,600 $3,600 $3,600
Telephone Expenses: $8,004 $8,000 $8,000
Auditing: $2,400 $2,400 $2,400
Rent $24,000 $24,000 $24,000
Payroll Taxes $35,464 $38,380 $39,519
Other General and Administrative Expenses $0 $0 $0
Total General and Administrative Expenses $199,862 $209,282 $210,421
General and Administrative % 19.49% 12.42% 11.60%
Other Expenses:
Other Payroll $0 $0 $0
Consultants $0 $0 $0
Contract/Consultants $0 $0 $0
Total Other Expenses $0 $0 $0
Other % 0.00% 0.00% 0.00%
Total Operating Expenses $326,146 $346,282 $356,921
Profit Before Interest and Taxes $319,375 $817,060 $908,533
EBITDA $355,375 $853,060 $944,533
Interest Expense $19,755 $12,323 $9,948
Taxes Incurred ($4,643) $0 $22,465
Net Profit $304,263 $804,737 $876,120
Net Profit/Sales 29.67% 47.76% 48.29%

7.4 Projected Cash Flow

Cash Flow is an intrinsic projection for H20 Industries. We must maintain a suitable cash balance in the bank in order to be successful. The chart and table below outline our basic cash flow assumptions.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $0 $0 $0
Cash from Receivables $774,831 $1,523,736 $1,782,529
Subtotal Cash from Operations $774,831 $1,523,736 $1,782,529
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $50,000 $6,250 $6,250
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
Sales of Other Current Assets $50,000 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $0 $0 $0
Subtotal Cash Received $874,831 $1,529,986 $1,788,779
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $280,350 $303,400 $312,400
Bill Payments $439,684 $559,027 $590,514
Subtotal Spent on Operations $720,034 $862,427 $902,914
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $56,252 $0 $0
Other Liabilities Principal Repayment $16,810 $0 $0
Long-term Liabilities Principal Repayment $60,000 $30,000 $30,000
Purchase Other Current Assets $63,450 $10,350 $9,450
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $916,546 $902,777 $942,364
Net Cash Flow ($41,715) $627,209 $846,415
Cash Balance $82,508 $709,717 $1,556,132

7.5 Projected Balance Sheet

The projected balance sheet for H20 Industries is presented below.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $82,508 $709,717 $1,556,132
Accounts Receivable $250,631 $411,806 $443,382
Inventory $28,886 $47,669 $51,370
Other Current Assets $103,450 $113,800 $123,250
Total Current Assets $465,476 $1,282,992 $2,174,135
Long-term Assets
Long-term Assets $220,000 $220,000 $220,000
Accumulated Depreciation $36,000 $72,000 $108,000
Total Long-term Assets $184,000 $148,000 $112,000
Total Assets $649,476 $1,430,992 $2,286,135
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $45,461 $45,991 $48,763
Current Borrowing $15,102 $21,352 $27,602
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $60,563 $67,343 $76,365
Long-term Liabilities $120,000 $90,000 $60,000
Total Liabilities $180,563 $157,343 $136,365
Paid-in Capital $187,000 $187,000 $187,000
Retained Earnings ($22,350) $281,913 $1,086,650
Earnings $304,263 $804,737 $876,120
Total Capital $468,913 $1,273,650 $2,149,770
Total Liabilities and Capital $649,476 $1,430,992 $2,286,135
Net Worth $468,913 $1,273,650 $2,149,770

7.6 Business Ratios

The following table gives standard business ratios for the water treatment equipment manufacturer industry, as determined by the Standard Industry Classification (SIC) Index code 3589. The last column, Industry Profile, presents specific information and important ratios for this industry.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 64.31% 7.67% 8.10%
Percent of Total Assets
Accounts Receivable 38.59% 28.78% 19.39% 25.10%
Inventory 4.45% 3.33% 2.25% 21.60%
Other Current Assets 15.93% 7.95% 5.39% 25.80%
Total Current Assets 71.67% 89.66% 95.10% 72.50%
Long-term Assets 28.33% 10.34% 4.90% 27.50%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 9.32% 4.71% 3.34% 35.50%
Long-term Liabilities 18.48% 6.29% 2.62% 21.30%
Total Liabilities 27.80% 11.00% 5.96% 56.80%
Net Worth 72.20% 89.00% 94.04% 43.20%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 62.95% 69.04% 69.76% 32.10%
Selling, General & Administrative Expenses 33.28% 21.28% 20.22% 17.80%
Advertising Expenses 1.61% 0.71% 0.66% 0.90%
Profit Before Interest and Taxes 31.14% 48.49% 50.08% 3.40%
Main Ratios
Current 7.69 19.05 28.47 2.12
Quick 7.21 18.34 27.80 1.20
Total Debt to Total Assets 27.80% 11.00% 5.96% 56.80%
Pre-tax Return on Net Worth 63.90% 63.18% 41.80% 4.50%
Pre-tax Return on Assets 46.13% 56.24% 39.31% 10.40%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 29.67% 47.76% 48.29% n.a
Return on Equity 64.89% 63.18% 40.75% n.a
Activity Ratios
Accounts Receivable Turnover 4.09 4.09 4.09 n.a
Collection Days 56 72 86 n.a
Inventory Turnover 10.91 9.11 7.59 n.a
Accounts Payable Turnover 9.32 12.17 12.17 n.a
Payment Days 31 30 29 n.a
Total Asset Turnover 1.58 1.18 0.79 n.a
Debt Ratios
Debt to Net Worth 0.39 0.12 0.06 n.a
Current Liab. to Liab. 0.34 0.43 0.56 n.a
Liquidity Ratios
Net Working Capital $404,913 $1,215,650 $2,097,770 n.a
Interest Coverage 16.17 66.31 91.33 n.a
Additional Ratios
Assets to Sales 0.63 0.85 1.26 n.a
Current Debt/Total Assets 9% 5% 3% n.a
Acid Test 3.07 12.23 21.99 n.a
Sales/Net Worth 2.19 1.32 0.84 n.a
Dividend Payout 0.00 0.00 0.00 n.a