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I Tech Solutions

Financial Plan

We want to finance growth mainly through cash flow and equity. 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 will normally have marketing authority, not 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 2 are flexible.

7.1 Break-even Analysis

The following table and chart summarizes our Break-even Analysis. We don’t really expect to reach break-even until several months into the business operation, as illustrated in the financials.

Note: All currency values in the charts and tables are expressed in the Botswana Pula (P).

Computer support business plan, financial plan chart image

Break-even Analysis
Monthly Revenue Break-even P47,662
Average Percent Variable Cost 50%
Estimated Monthly Fixed Cost P23,831

7.2 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 a strong economy, without major recession.
  • We assume that there are no unforeseen changes in economic policy to make our products and service immediately obsolete.

Others include 30-day average collection days, sales entirely on invoice basis, including a favorable deposit policy, expenses mainly on a net 30-day basis, 30 days on average for payment of invoices, and present-day interest rates.

General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 17.00% 17.00% 17.00%
Long-term Interest Rate 17.00% 17.00% 17.00%
Tax Rate 25.42% 25.00% 25.42%
Other 0 0 0

7.3 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 30 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.

Computer support business plan, financial plan chart image

7.4 Projected Profit and Loss

Initial marketing and training expenses will be relatively high as we seek to become known on the market and staff get trained in provision of our services. This will be brought about by the development of sales literature, advertising expenses, and function expenses. As our market share increases and capital is generated, further marketing programs and the expansion of those in existence at the time will be undertaken, to ensure market development. However, with time, these programs will start generating revenue for the business, which we shall reinvest.

Our projected Profit and Loss is shown in the appendix, with sales increasing steadily from the first year through the second, and into the third year. We do expect to more than break-even in the first year of operation. Our cost of sales should be much lower, and gross margin higher, than in this projection.

Note: All currency values in the charts and tables are expressed in the Botswana Pula (P).

Computer support business plan, financial plan chart image

Computer support business plan, financial plan chart image

Computer support business plan, financial plan chart image

Computer support business plan, financial plan chart image

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales P1,422,225 P2,528,400 P3,034,080
Direct Cost of Sales P711,114 P1,264,200 P1,517,040
Other P0 P0 P0
Total Cost of Sales P711,114 P1,264,200 P1,517,040
Gross Margin P711,111 P1,264,200 P1,517,040
Gross Margin % 50.00% 50.00% 50.00%
Payroll P149,400 P199,200 P237,720
Sales and Marketing and Other Expenses P95,772 P154,140 P182,196
Depreciation P0 P0 P0
Utilities P3,600 P3,960 P4,356
Telephone P6,000 P6,600 P7,260
Insurance P14,400 P15,840 P17,424
Rent P16,800 P18,480 P20,328
Insurance P0 P0 P0
Payroll Taxes P0 P0 P0
Other P0 P0 P0
Total Operating Expenses P285,972 P398,220 P469,284
Profit Before Interest and Taxes P425,139 P865,980 P1,047,756
EBITDA P425,139 P865,980 P1,047,756
Interest Expense P92,497 P75,684 P58,140
Taxes Incurred P82,612 P197,574 P251,527
Net Profit P250,030 P592,722 P738,089
Net Profit/Sales 17.58% 23.44% 24.33%

7.5 Projected Cash Flow

The chart and table below present the cash flow projections for I Tech Solutions.

Note: All currency values in the charts and tables are expressed in the Botswana Pula (P).

Computer support business plan, financial plan chart image

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales P426,668 P758,520 P910,224
Cash from Receivables P763,507 P1,589,396 P2,041,349
Subtotal Cash from Operations P1,190,174 P2,347,916 P2,951,573
Additional Cash Received
Sales Tax, VAT, HST/GST Received P0 P0 P0
New Current Borrowing P0 P0 P0
New Other Liabilities (interest-free) P0 P0 P0
New Long-term Liabilities P0 P0 P0
Sales of Other Current Assets P0 P0 P0
Sales of Long-term Assets P0 P0 P0
New Investment Received P0 P0 P0
Subtotal Cash Received P1,190,174 P2,347,916 P2,951,573
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending P149,400 P199,200 P237,720
Bill Payments P1,002,379 P1,773,057 P2,068,003
Subtotal Spent on Operations P1,151,779 P1,972,257 P2,305,723
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out P0 P0 P0
Principal Repayment of Current Borrowing P0 P0 P0
Other Liabilities Principal Repayment P0 P0 P0
Long-term Liabilities Principal Repayment P103,200 P103,200 P103,200
Purchase Other Current Assets P141,200 P0 P0
Purchase Long-term Assets P240,000 P0 P0
Dividends P0 P0 P0
Subtotal Cash Spent P1,636,179 P2,075,457 P2,408,923
Net Cash Flow (P446,005) P272,459 P542,650
Cash Balance P46,246 P318,705 P861,356

7.6 Projected Balance Sheet

The balance sheet shows healthy growth of net worth, and strong financial position. The three-year estimates are included in the appendix.

Note: All currency values in the charts and tables are expressed in the Botswana Pula (P).

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Current Assets
Cash P46,246 P318,705 P861,356
Accounts Receivable P232,051 P412,535 P495,042
Inventory P92,708 P164,814 P197,777
Other Current Assets P141,200 P141,200 P141,200
Total Current Assets P512,205 P1,037,254 P1,695,374
Long-term Assets
Long-term Assets P240,000 P240,000 P240,000
Accumulated Depreciation P0 P0 P0
Total Long-term Assets P240,000 P240,000 P240,000
Total Assets P752,205 P1,277,254 P1,935,374
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable P113,124 P148,651 P171,882
Current Borrowing P0 P0 P0
Other Current Liabilities P0 P0 P0
Subtotal Current Liabilities P113,124 P148,651 P171,882
Long-term Liabilities P496,800 P393,600 P290,400
Total Liabilities P609,924 P542,251 P462,282
Paid-in Capital P100,000 P100,000 P100,000
Retained Earnings (P207,749) P42,281 P635,003
Earnings P250,030 P592,722 P738,089
Total Capital P142,281 P735,003 P1,473,092
Total Liabilities and Capital P752,205 P1,277,254 P1,935,374
Net Worth P142,281 P735,003 P1,473,092

7.7 Business Ratios

The following table shows important ratios from the computer related services industry, as determined by the Standard Industry Classification (SIC) Index #7379, Computer Related Services.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 77.78% 20.00% 7.20%
Percent of Total Assets
Accounts Receivable 30.85% 32.30% 25.58% 21.70%
Inventory 12.32% 12.90% 10.22% 3.50%
Other Current Assets 18.77% 11.05% 7.30% 46.70%
Total Current Assets 68.09% 81.21% 87.60% 71.90%
Long-term Assets 31.91% 18.79% 12.40% 28.10%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 15.04% 11.64% 8.88% 51.40%
Long-term Liabilities 66.05% 30.82% 15.00% 19.10%
Total Liabilities 81.08% 42.45% 23.89% 70.50%
Net Worth 18.92% 57.55% 76.11% 29.50%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 50.00% 50.00% 50.00% 0.00%
Selling, General & Administrative Expenses 32.96% 27.34% 26.62% 80.70%
Advertising Expenses 0.97% 0.42% 0.38% 1.20%
Profit Before Interest and Taxes 29.89% 34.25% 34.53% 1.70%
Main Ratios
Current 4.53 6.98 9.86 1.27
Quick 3.71 5.87 8.71 1.01
Total Debt to Total Assets 81.08% 42.45% 23.89% 70.50%
Pre-tax Return on Net Worth 233.79% 107.52% 67.18% 3.50%
Pre-tax Return on Assets 44.22% 61.87% 51.13% 11.80%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 17.58% 23.44% 24.33% n.a
Return on Equity 175.73% 80.64% 50.10% n.a
Activity Ratios
Accounts Receivable Turnover 4.29 4.29 4.29 n.a
Collection Days 56 66 78 n.a
Inventory Turnover 10.91 9.82 8.37 n.a
Accounts Payable Turnover 9.86 12.17 12.17 n.a
Payment Days 27 26 28 n.a
Total Asset Turnover 1.89 1.98 1.57 n.a
Debt Ratios
Debt to Net Worth 4.29 0.74 0.31 n.a
Current Liab. to Liab. 0.19 0.27 0.37 n.a
Liquidity Ratios
Net Working Capital P399,081 P888,603 P1,523,492 n.a
Interest Coverage 4.60 11.44 18.02 n.a
Additional Ratios
Assets to Sales 0.53 0.51 0.64 n.a
Current Debt/Total Assets 15% 12% 9% n.a
Acid Test 1.66 3.09 5.83 n.a
Sales/Net Worth 10.00 3.44 2.06 n.a
Dividend Payout 0.00 0.00 0.00 n.a