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Baby Nappies World

Financial Plan

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:

  1. A fundamental respect for giving our customers value, and for maintaining a healthy and congenial workplace.
  2. Cash flow as first priority, growth second, profits third.
  3. 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.

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 18.08% 17.00% 18.08%
Other 0 0 0

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.

Diaper manufacturer business plan, financial plan chart image

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.

Diaper manufacturer business plan, financial plan chart image

Break-even Analysis
Monthly Revenue Break-even P16,967
Assumptions:
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.

Diaper manufacturer business plan, financial plan chart image

Diaper manufacturer business plan, financial plan chart image

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales P748,800 P1,075,200 P1,142,400
Direct Cost of Sales P361,920 P389,760 P389,760
Other P0 P0 P0
Total Cost of Sales P361,920 P389,760 P389,760
Gross Margin P386,880 P685,440 P752,640
Gross Margin % 51.67% 63.75% 65.88%
Expenses
Payroll P43,824 P76,174 P104,661
Sales and Marketing and Other Expenses P16,200 P20,400 P20,400
Depreciation P10,800 P10,800 P10,800
Maintenance P800 P1,000 P800
Utilities P2,400 P3,000 P4,200
Installation Costs P600 P0 P0
Insurance P12,000 P12,000 P14,400
Rent P12,000 P13,200 P14,520
Payroll Taxes P6,574 P11,426 P15,699
Other P0 P0 P0
Total Operating Expenses P105,198 P148,000 P185,480
Profit Before Interest and Taxes P281,682 P537,440 P567,160
EBITDA P292,482 P548,240 P577,960
Interest Expense P0 P0 P0
Taxes Incurred P50,552 P91,365 P102,561
Net Profit P231,130 P446,075 P464,598
Net Profit/Sales 30.87% 41.49% 40.67%

7.7 Projected Cash Flow

Our cash flow is shown in the following chart and table.

Diaper manufacturer business plan, financial plan chart image

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales P187,200 P268,800 P285,600
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
Cash Spending P43,824 P76,174 P104,661
Bill Payments P455,291 P539,916 P560,907
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
Dividends P0 P0 P0
Subtotal Cash Spent P499,115 P616,090 P665,568
Net Cash Flow P159,565 P415,904 P467,937
Cash Balance P196,608 P612,512 P1,080,449

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
Assets
Current Assets
Cash P196,608 P612,512 P1,080,449
Accounts Receivable P99,120 P142,326 P151,222
Inventory P35,728 P38,476 P38,476
Other Current Assets P0 P0 P0
Total Current Assets P331,456 P793,314 P1,270,146
Long-term Assets
Long-term Assets P54,277 P54,277 P54,277
Accumulated Depreciation P10,800 P21,600 P32,400
Total Long-term Assets P43,477 P32,677 P21,877
Total Assets P374,933 P825,991 P1,292,023
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable P39,803 P44,786 P46,220
Current Borrowing P0 P0 P0
Other Current Liabilities P0 P0 P0
Subtotal Current Liabilities P39,803 P44,786 P46,220
Long-term Liabilities P0 P0 P0
Total Liabilities P39,803 P44,786 P46,220
Paid-in Capital P109,000 P109,000 P109,000
Retained Earnings (P5,000) P226,130 P672,205
Earnings P231,130 P446,075 P464,598
Total Capital P335,130 P781,205 P1,245,804
Total Liabilities and Capital P374,933 P825,991 P1,292,023
Net Worth P335,130 P781,205 P1,245,804

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.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 43.59% 6.25% 0.00%
Percent of Total Assets
Accounts Receivable 26.44% 17.23% 11.70% 27.60%
Inventory 9.53% 4.66% 2.98% 11.20%
Other Current Assets 0.00% 0.00% 0.00% 27.70%
Total Current Assets 88.40% 96.04% 98.31% 66.50%
Long-term Assets 11.60% 3.96% 1.69% 33.50%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 10.62% 5.42% 3.58% 33.80%
Long-term Liabilities 0.00% 0.00% 0.00% 20.00%
Total Liabilities 10.62% 5.42% 3.58% 53.80%
Net Worth 89.38% 94.58% 96.42% 46.20%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 51.67% 63.75% 65.88% 33.60%
Selling, General & Administrative Expenses 20.44% 22.26% 24.68% 21.20%
Advertising Expenses 0.96% 0.89% 0.84% 0.40%
Profit Before Interest and Taxes 37.62% 49.99% 49.65% 2.90%
Main Ratios
Current 8.33 17.71 27.48 1.77
Quick 7.43 16.85 26.65 1.24
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
Activity Ratios
Accounts Receivable Turnover 5.67 5.67 5.67 n.a
Collection Days 57 55 63 n.a
Inventory Turnover 10.91 10.51 10.13 n.a
Accounts Payable Turnover 12.44 12.17 12.17 n.a
Payment Days 27 28 30 n.a
Total Asset Turnover 2.00 1.30 0.88 n.a
Debt Ratios
Debt to Net Worth 0.12 0.06 0.04 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital P291,653 P748,528 P1,223,927 n.a
Interest Coverage 0.00 0.00 0.00 n.a
Additional Ratios
Assets to Sales 0.50 0.77 1.13 n.a
Current Debt/Total Assets 11% 5% 4% n.a
Acid Test 4.94 13.68 23.38 n.a
Sales/Net Worth 2.23 1.38 0.92 n.a
Dividend Payout 0.00 0.00 0.00 n.a