Pyramid Engineering
Financial Plan
We want to finance growth mainly through cash flow and equity, but will need a second short-term loan, in the amount of $26,391, in the next year to cover our cash flow.
The most important factor in our case is collection days. We can’t push our clients hard on collection days, because they are larger companies and will normally have marketing authority, not financial authority. Therefore we need to develop a permanent systems of receivables financing, using one of the established accounting systems. In turn, we must intend to ensure that our investment is compatible with our growth plan, management style, and vision.
Compatibility in this regard means:
- A fundamental respect for giving our customers value, and for maintaining a healthy and congenial workplace.
- Respect for realistic forecasts, conservative cash flow, and financial management.
- Cash flow as first priority, growth second, profits third.
- Willingness to follow the plans objectives and contribute valuable input to strategy and implementation decisions.
The financial plan which follows summarizes information regarding the following items:
- Important Assumptions
- Key Financial Indicators
- Break-Even Analysis
- Projected Profit and Loss
- Projected Cash flow
- Projected Balance Sheet
- Business Ratios
8.1 Important Assumptions
The financial plan depends on important assumptions. From the beginning, we recognize that collection days are critical, but not a factor we can influence easily. Interest rates, tax rates, and personnel burden are based on conservative assumptions.
Some of the more important underlying assumptions are:
- We assume strong economy, without major recession.
- We assume that there are no unforeseen changes in economic policy to make our services immediately obsolete.
Others include 60-day average collection days, sales entirely on invoice basis, including a favorable deposit policy, expenses on a net 39-day basis, 30 days on the average for payment of invoices, and present-day interest rates.
General Assumptions | |||
2004 | 2005 | 2006 | |
Plan Month | 1 | 2 | 3 |
Current Interest Rate | 6.00% | 6.00% | 6.00% |
Long-term Interest Rate | 10.00% | 10.00% | 10.00% |
Tax Rate | 30.00% | 30.00% | 30.00% |
Other | 0 | 0 | 0 |
8.2 Projected Profit and Loss
The gross margin for a service-based business is a reflection of the efficiency at which those services are offered. labor is our primary expense, and the only cost directly associated with sales. Given our sales rate over the last 6 months, we expect both to remain fairly constant. Gross margin, because we use no inventory, looks to be 100% for all year. After taking labor into account, a more realistic gross margin for Year 1 is 26%. We expect that our increased efficiency in Years 2 and 3 will produce a higher annual gross margin of 34% and 38%, respectively.
Net Profit /Sales will increase steadily through 2005.




Pro Forma Profit and Loss | |||
2004 | 2005 | 2006 | |
Sales | $349,752 | $400,756 | $433,718 |
Direct Cost of Sales | $0 | $0 | $0 |
Hidden Row | $0 | $0 | $0 |
Total Cost of Sales | $0 | $0 | $0 |
Gross Margin | $349,752 | $400,756 | $433,718 |
Gross Margin % | 100.00% | 100.00% | 100.00% |
Expenses | |||
Payroll | $248,328 | $259,290 | $267,604 |
Sales and Marketing and Other Expenses | $7,200 | $7,200 | $7,200 |
Depreciation | $612 | $612 | $612 |
Rent | $7,200 | $7,200 | $7,200 |
Utilities | $13,560 | $8,400 | $8,400 |
Insurance | $12,000 | $12,000 | $12,000 |
Payroll Taxes | $9,600 | $9,600 | $9,600 |
125 – Flexible Spending Account | $9,600 | $9,600 | $9,600 |
Automobile Expense | $5,400 | $3,600 | $3,600 |
Bank Service Charges | $600 | $600 | $600 |
Charity / Contributions | $600 | $600 | $600 |
Interest Expense | $1,800 | $360 | $360 |
Licenses and Permits | $1,800 | $720 | $720 |
Office Supplies | $6,000 | $6,000 | $6,000 |
Payroll taxes & Expenses | $9,600 | $9,600 | $9,600 |
Postage and Delivery | $840 | $850 | $860 |
Printing and Reproduction | $2,400 | $2,400 | $2,400 |
Professional Fees | $1,200 | $1,200 | $1,200 |
Professional Improvement (CEUs) | $600 | $600 | $600 |
Travel & Ent | $1,200 | $1,200 | $1,200 |
Other | $0 | $0 | $0 |
Total Operating Expenses | $340,140 | $341,632 | $349,956 |
Profit Before Interest and Taxes | $9,612 | $59,124 | $83,762 |
EBITDA | $10,224 | $59,736 | $84,374 |
Interest Expense | $2,243 | $2,137 | $1,338 |
Taxes Incurred | $2,211 | $17,096 | $24,727 |
Net Profit | $5,158 | $39,891 | $57,697 |
Net Profit/Sales | 1.47% | 9.95% | 13.30% |
8.3 Break-even Analysis
The following chart and table summarize our break-even analysis. We are currently averaging sales above our break-even point. Any decrease in sales lasting longer than 3 months will generate decreases in payroll across the board to maintain net profits and capital.

Break-even Analysis | |
Monthly Revenue Break-even | $28,345 |
Assumptions: | |
Average Percent Variable Cost | 0% |
Estimated Monthly Fixed Cost | $28,345 |
8.4 Projected Cash Flow
Cash flow projections are critical to our success. The monthly cash flow is shown in the illustration, with one bar representing the cash flow per month, and the other the monthly balance. The first few months are critical. It may be necessary to inject additional capital in this time frame if the need arises. The annual cash flow figures are included here and more important detailed monthly numbers are included in the appendices.

Pro Forma Cash Flow | |||
2004 | 2005 | 2006 | |
Cash Received | |||
Cash from Operations | |||
Cash Sales | $0 | $0 | $0 |
Cash from Receivables | $359,562 | $392,397 | $428,316 |
Subtotal Cash from Operations | $359,562 | $392,397 | $428,316 |
Additional Cash Received | |||
Sales Tax, VAT, HST/GST Received | $0 | $0 | $0 |
New Current Borrowing | $26,000 | $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 | $0 | $0 | $0 |
Subtotal Cash Received | $385,562 | $392,397 | $428,316 |
Expenditures | 2004 | 2005 | 2006 |
Expenditures from Operations | |||
Cash Spending | $248,328 | $259,290 | $267,604 |
Bill Payments | $95,598 | $100,387 | $107,243 |
Subtotal Spent on Operations | $343,926 | $359,677 | $374,847 |
Additional Cash Spent | |||
Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
Principal Repayment of Current Borrowing | $13,326 | $13,325 | $13,325 |
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 | $0 | $0 | $0 |
Dividends | $0 | $0 | $0 |
Subtotal Cash Spent | $357,252 | $373,002 | $388,172 |
Net Cash Flow | $28,310 | $19,395 | $40,144 |
Cash Balance | $30,909 | $50,304 | $90,448 |
8.5 Projected Balance Sheet
With the payment of our liabilities, relatively low payroll and operating expenses, and a conservative sales forecast, our Balance Sheet shows an increasing net worth in every month and year of our plan. As a consulting and design business, the majority of our “capital” is intangible – the skills, experience, and reputation of our team. However, the nature of our work also keeps our costs low, so careful debt management and billing will soon produce a good profit, and a valuable company.
Pro Forma Balance Sheet | |||
2004 | 2005 | 2006 | |
Assets | |||
Current Assets | |||
Cash | $30,909 | $50,304 | $90,448 |
Accounts Receivable | $57,320 | $65,679 | $71,082 |
Other Current Assets | $0 | $0 | $0 |
Total Current Assets | $88,229 | $115,983 | $161,529 |
Long-term Assets | |||
Long-term Assets | $9,628 | $9,628 | $9,628 |
Accumulated Depreciation | $5,957 | $6,569 | $7,181 |
Total Long-term Assets | $3,671 | $3,059 | $2,447 |
Total Assets | $91,900 | $119,042 | $163,976 |
Liabilities and Capital | 2004 | 2005 | 2006 |
Current Liabilities | |||
Accounts Payable | $7,722 | $8,298 | $8,861 |
Current Borrowing | $42,283 | $28,958 | $15,633 |
Other Current Liabilities | $0 | $0 | $0 |
Subtotal Current Liabilities | $50,005 | $37,256 | $24,494 |
Long-term Liabilities | $0 | $0 | $0 |
Total Liabilities | $50,005 | $37,256 | $24,494 |
Paid-in Capital | $0 | $0 | $0 |
Retained Earnings | $36,737 | $41,895 | $81,786 |
Earnings | $5,158 | $39,891 | $57,697 |
Total Capital | $41,895 | $81,786 | $139,483 |
Total Liabilities and Capital | $91,900 | $119,042 | $163,976 |
Net Worth | $41,895 | $81,786 | $139,483 |
8.6 Business Ratios
Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 8712.01, Architectural Engineering, are shown for comparison.
Our business ratios look different from the industry standards in part because we are counting our only direct cost of sales, our engineering labor, as an operating expense. The company is structured so that employees receive a monthly salary regardless of hours billed, so our expenses are all, essentially, operating expenses.
Ratio Analysis | ||||
2004 | 2005 | 2006 | Industry Profile | |
Sales Growth | 54.82% | 14.58% | 8.22% | 6.40% |
Percent of Total Assets | ||||
Accounts Receivable | 62.37% | 55.17% | 43.35% | 33.49% |
Other Current Assets | 0.00% | 0.00% | 0.00% | 37.48% |
Total Current Assets | 96.01% | 97.43% | 98.51% | 75.03% |
Long-term Assets | 3.99% | 2.57% | 1.49% | 24.97% |
Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
Current Liabilities | 54.41% | 31.30% | 14.94% | 34.27% |
Long-term Liabilities | 0.00% | 0.00% | 0.00% | 13.64% |
Total Liabilities | 54.41% | 31.30% | 14.94% | 47.91% |
Net Worth | 45.59% | 68.70% | 85.06% | 52.09% |
Percent of Sales | ||||
Sales | 100.00% | 100.00% | 100.00% | 100.00% |
Gross Margin | 100.00% | 100.00% | 100.00% | 100.00% |
Selling, General & Administrative Expenses | 34.29% | 21.45% | 19.18% | 83.39% |
Advertising Expenses | 0.00% | 0.00% | 0.00% | 0.24% |
Profit Before Interest and Taxes | 2.75% | 14.75% | 19.31% | 2.49% |
Main Ratios | ||||
Current | 1.76 | 3.11 | 6.59 | 1.84 |
Quick | 1.76 | 3.11 | 6.59 | 1.49 |
Total Debt to Total Assets | 54.41% | 31.30% | 14.94% | 56.44% |
Pre-tax Return on Net Worth | 17.59% | 69.68% | 59.09% | 6.92% |
Pre-tax Return on Assets | 8.02% | 47.87% | 50.27% | 15.90% |
Additional Ratios | 2004 | 2005 | 2006 | |
Net Profit Margin | 1.47% | 9.95% | 13.30% | n.a |
Return on Equity | 12.31% | 48.77% | 41.36% | n.a |
Activity Ratios | ||||
Accounts Receivable Turnover | 6.10 | 6.10 | 6.10 | n.a |
Collection Days | 60 | 56 | 58 | n.a |
Accounts Payable Turnover | 12.39 | 12.17 | 12.17 | n.a |
Payment Days | 29 | 29 | 29 | n.a |
Total Asset Turnover | 3.81 | 3.37 | 2.65 | n.a |
Debt Ratios | ||||
Debt to Net Worth | 1.19 | 0.46 | 0.18 | n.a |
Current Liab. to Liab. | 1.00 | 1.00 | 1.00 | n.a |
Liquidity Ratios | ||||
Net Working Capital | $38,224 | $78,727 | $137,036 | n.a |
Interest Coverage | 4.28 | 27.66 | 62.61 | n.a |
Additional Ratios | ||||
Assets to Sales | 0.26 | 0.30 | 0.38 | n.a |
Current Debt/Total Assets | 54% | 31% | 15% | n.a |
Acid Test | 0.62 | 1.35 | 3.69 | n.a |
Sales/Net Worth | 8.35 | 4.90 | 3.11 | n.a |
Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |