Baby Nappies World
The financial plan shall be essential if we are to meet our objectives. The intention is to finance growth through cash flow.
One of the most important factors will be the payment terms as agreed between the client or customer. We can’t push our customers hard on collection days, because they are extremely sensitive and will normally judge us on our terms. However there are certain instances where we will have the bargaining power instead of the customer. Examples include informal traders and actual consumers of our products. Therefore there is need to develop a permanent system of receivables financing mutually agreed between both parties. Hence in the financial plan we intend to have the following:
- A fundamental respect for giving our customers value, and for maintaining a healthy and congenial workplace.
- Cash flow as first priority, growth second, profits third.
- Respect for realistic forecasts, and conservative cash flow and financial management.
Of these only (1) and (3) are flexible.
7.1 Important Assumptions
The financial plan depends on important assumptions, most of which are included in the financial plan as annual assumptions. The monthly assumptions are included in the appendix. From the beginning, we recognize that collection days are critical, but not a factor we can influence easily. At least we are planning on the problem, and dealing with it. 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, of course, that there are no unforeseen changes in economic policy to make our products and service immediately obsolete.
Other key financial assumptions, including 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.
|Year 1||Year 2||Year 3|
|Current Interest Rate||10.00%||10.00%||10.00%|
|Long-term Interest Rate||10.00%||10.00%||10.00%|
7.2 Key Financial Indicators
We foresee growth in sales at a faster rate than operating expenses, and a bump in our collection days as we seek to spread the business during start-up.
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.
7.3 Break-even Analysis
Our break-even analysis will be based on running costs, that is costs we shall incur in keeping the business running, including salaries and wages, rent, machine maintenance costs, water and electricity, insurance amongst others. We estimate the company will comfortably exceed the break-even sales volume.
|Monthly Revenue Break-even||P16,967|
|Average Percent Variable Cost||48%|
|Estimated Monthly Fixed Cost||P8,766|
7.4 Revenue Generation
Baby Nappies World will receive its revenue streams from sales of its diapers and sanitary pads. However we will also look into whether we are able to generate revenue from by-products obtained from manufacturing our main products. Additional research into the above shall be undertaken.
7.5 Expense Forecast
Initial expenses shall not be extremely high considering the fact that the manufacture of our products does not require much electricity (220v) or water. Expenses will be brought about by transport charges incurred in delivering our products to customers, as well as going out on sales calls procuring orders. However the strategy will involve including these charges in the prices of our products. As time progresses we intend to undertake marketing programs to ensure awareness of our existence on the market. Invariably this will result in marketing expenses being incurred.
7.6 Projected Profit and Loss
Our projected profit and loss is shown in the appendix, with sales increasing from more than P748,800 the first year to more than P1,075,200 the second, and P1,142,400 in the third year. We do expect to more than break-even in the first year of operation. As with the break-even, we are projecting very conservatively regarding cost of sales and gross margin. Our cost of sales should be much lower, and gross margin higher, than in this projection.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||P361,920||P389,760||P389,760|
|Total Cost of Sales||P361,920||P389,760||P389,760|
|Gross Margin %||51.67%||63.75%||65.88%|
|Sales and Marketing and Other Expenses||P16,200||P20,400||P20,400|
|Total Operating Expenses||P105,198||P148,000||P185,480|
|Profit Before Interest and Taxes||P281,682||P537,440||P567,160|
7.7 Projected Cash Flow
Our cash flow is shown in the following chart and table.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Cash from Receivables||P462,480||P763,194||P847,905|
|Subtotal Cash from Operations||P649,680||P1,031,994||P1,133,505|
|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||P9,000||P0||P0|
|Subtotal Cash Received||P658,680||P1,031,994||P1,133,505|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||P499,115||P616,090||P665,568|
|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||P0||P0||P0|
|Purchase Other Current Assets||P0||P0||P0|
|Purchase Long-term Assets||P0||P0||P0|
|Subtotal Cash Spent||P499,115||P616,090||P665,568|
|Net Cash Flow||P159,565||P415,904||P467,937|
7.8 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.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||P0||P0||P0|
|Total Current Assets||P331,456||P793,314||P1,270,146|
|Total Long-term Assets||P43,477||P32,677||P21,877|
|Liabilities and Capital||Year 1||Year 2||Year 3|
|Other Current Liabilities||P0||P0||P0|
|Subtotal Current Liabilities||P39,803||P44,786||P46,220|
|Total Liabilities and Capital||P374,933||P825,991||P1,292,023|
7.9 Business Ratios
Standard business ratios are shown in the following table. The Industry Profile column shows ratios for Standard Industry Code (SIC) 2676, Sanitary Paper Products.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||0.00%||0.00%||0.00%||27.70%|
|Total Current Assets||88.40%||96.04%||98.31%||66.50%|
|Percent of Sales|
|Selling, General & Administrative Expenses||20.44%||22.26%||24.68%||21.20%|
|Profit Before Interest and Taxes||37.62%||49.99%||49.65%||2.90%|
|Total Debt to Total Assets||10.62%||5.42%||3.58%||53.80%|
|Pre-tax Return on Net Worth||84.05%||68.80%||45.53%||6.20%|
|Pre-tax Return on Assets||75.13%||65.07%||43.90%||13.50%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||30.87%||41.49%||40.67%||n.a|
|Return on Equity||68.97%||57.10%||37.29%||n.a|
|Accounts Receivable Turnover||5.67||5.67||5.67||n.a|
|Accounts Payable Turnover||12.44||12.17||12.17||n.a|
|Total Asset Turnover||2.00||1.30||0.88||n.a|
|Debt to Net Worth||0.12||0.06||0.04||n.a|
|Current Liab. to Liab.||1.00||1.00||1.00||n.a|
|Net Working Capital||P291,653||P748,528||P1,223,927||n.a|
|Assets to Sales||0.50||0.77||1.13||n.a|
|Current Debt/Total Assets||11%||5%||4%||n.a|