Third Degree I.D.
Financial Plan
Our financial plan is based on our assumption of achieving desired levels of sales. Our first-year revenues (projected at $360,000) will probably be insufficient to turn a profit in the first year. However, we plan to generate net profit starting in year two. Our initial cash reserve should be sufficient to keep us afloat during the first year. Subsequent years’ cash flows generate a cushion that will allow us to further develop our business.
8.1 Important Assumptions
Our main financial assumptions are summarized in the table below.
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 | 30.00% | 30.00% | 30.00% |
Other | 0 | 0 | 0 |
8.2 Break-even Analysis
The main development costs of the product will be our staff costs. Our variable costs are solely those related to packaging (5% of sales), since our staff costs are monthly payroll numbers, reflected in the P&L forecasts later in this document. Our Break-even Analysis is summarized in the table below.

Break-even Analysis | |
Monthly Revenue Break-even | $29,193 |
Assumptions: | |
Average Percent Variable Cost | 5% |
Estimated Monthly Fixed Cost | $27,733 |
8.3 Projected Profit and Loss
First-year revenue is generated primarily from curriculum and content development services. The first-year gross income goal is $360,000, which represents a development objective of at least three full MA programs or training programs (10 courses each) or a combination of comparable curricula. It is the intent of the partners that every development project will yield re-usable learning objects that can be subsequently re-packaged to meet the needs of additional clients. The partners also intend to solicit co-ownership agreements that allow Third Degree I.D. to re-license courses and curricula to institutions other than those for which they were first developed. The reusable learning objects and content re-licensure will provide a low-investment revenue stream that will contribute an increasingly large percentage of gross corporate revenue in subsequent years.
On the expense side, our staff costs are going to be our main cost. These are, technically, are our product development costs, as all three partners will be directly involved into the development of products for our clients. During the first year, we also plan to utilize services of outside consultants and contractors on the product development side. As stated earlier in this document, as our business grows, we plan to add additional staff. We also plan to utilize our CEO’s home office for the remaining part of 2004 and move into a new office space in January 2005.
Overall, we plan to end our first year of operations with a loss. Subsequent years wil show increasing profitability, as summarized in the table below.




Pro Forma Profit and Loss | |||
Year 1 | Year 2 | Year 3 | |
Sales | $360,000 | $560,000 | $770,000 |
Direct Cost of Sales | $18,000 | $28,000 | $38,500 |
Other Costs of Sales | $0 | $0 | $0 |
Total Cost of Sales | $18,000 | $28,000 | $38,500 |
Gross Margin | $342,000 | $532,000 | $731,500 |
Gross Margin % | 95.00% | 95.00% | 95.00% |
Expenses | |||
Payroll | $225,000 | $300,000 | $380,000 |
Sales and Marketing and Other Expenses | $6,000 | $10,000 | $15,000 |
Depreciation | $0 | $0 | $0 |
Rent | $8,800 | $14,000 | $16,000 |
Utilities | $1,000 | $1,500 | $2,000 |
Insurance | $3,600 | $4,000 | $5,000 |
Payroll Taxes | $0 | $0 | $0 |
Consultants | $75,000 | $0 | $0 |
Telecommunications | $2,600 | $4,000 | $5,000 |
Business Travel | $5,000 | $8,000 | $10,000 |
Moving Expenses/Redecorating | $1,000 | $0 | $0 |
Other | $4,800 | $10,000 | $10,000 |
Total Operating Expenses | $332,800 | $351,500 | $443,000 |
Profit Before Interest and Taxes | $9,200 | $180,500 | $288,500 |
EBITDA | $9,200 | $180,500 | $288,500 |
Interest Expense | $2,188 | $750 | $0 |
Taxes Incurred | $2,104 | $53,925 | $86,550 |
Net Profit | $4,909 | $125,825 | $201,950 |
Net Profit/Sales | 1.36% | 22.47% | 26.23% |
8.4 Projected Cash Flow
Our cash plan is based on the assumption that we meet our sales objectives and collect receivables within 60 days. This will be especially critical during our first year of operations, during which our cash balance will also depend on the initial cash contributions of the three founding partners and a two-year $30,000 loan. The combination of the two should be sufficient to keep our cash balance positive during the most critical first year of operations.
The table below summarizes our cash flow forecasts.

Pro Forma Cash Flow | |||
Year 1 | Year 2 | Year 3 | |
Cash Received | |||
Cash from Operations | |||
Cash Sales | $0 | $0 | $0 |
Cash from Receivables | $281,333 | $516,296 | $724,111 |
Subtotal Cash from Operations | $281,333 | $516,296 | $724,111 |
Additional Cash Received | |||
Sales Tax, VAT, HST/GST Received | $0 | $0 | $0 |
New Current Borrowing | $0 | $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 | $281,333 | $516,296 | $724,111 |
Expenditures | Year 1 | Year 2 | Year 3 |
Expenditures from Operations | |||
Cash Spending | $225,000 | $300,000 | $380,000 |
Bill Payments | $116,130 | $137,108 | $183,622 |
Subtotal Spent on Operations | $341,130 | $437,108 | $563,622 |
Additional Cash Spent | |||
Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
Principal Repayment of Current Borrowing | $15,000 | $15,000 | $0 |
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 | $356,130 | $452,108 | $563,622 |
Net Cash Flow | ($74,797) | $64,188 | $160,489 |
Cash Balance | $41,279 | $105,467 | $265,957 |
8.5 Projected Balance Sheet
The table below summarizes our forecasted balance sheet. For the first two years of operations (i.e., until we generate a sufficient cash reserve), receivables represent our main current asset. Our fixed assets should be mostly limited to the computer equipment that we depreciate over 5 years. With manageable liabilities, our accounting net worth should steadily grow over the projected period.
Pro Forma Balance Sheet | |||
Year 1 | Year 2 | Year 3 | |
Assets | |||
Current Assets | |||
Cash | $41,279 | $105,467 | $265,957 |
Accounts Receivable | $78,667 | $122,370 | $168,259 |
Other Current Assets | $0 | $0 | $0 |
Total Current Assets | $119,946 | $227,838 | $434,216 |
Long-term Assets | |||
Long-term Assets | $13,000 | $13,000 | $13,000 |
Accumulated Depreciation | $0 | $0 | $0 |
Total Long-term Assets | $13,000 | $13,000 | $13,000 |
Total Assets | $132,946 | $240,838 | $447,216 |
Liabilities and Capital | Year 1 | Year 2 | Year 3 |
Current Liabilities | |||
Accounts Payable | $13,961 | $11,028 | $15,456 |
Current Borrowing | $15,000 | $0 | $0 |
Other Current Liabilities | $0 | $0 | $0 |
Subtotal Current Liabilities | $28,961 | $11,028 | $15,456 |
Long-term Liabilities | $0 | $0 | $0 |
Total Liabilities | $28,961 | $11,028 | $15,456 |
Paid-in Capital | $105,000 | $105,000 | $105,000 |
Retained Earnings | ($5,924) | ($1,016) | $124,809 |
Earnings | $4,909 | $125,825 | $201,950 |
Total Capital | $103,985 | $229,810 | $431,760 |
Total Liabilities and Capital | $132,946 | $240,838 | $447,216 |
Net Worth | $103,985 | $229,810 | $431,760 |
8.6 Business Ratios
The table below summarizes our key business ratios, with comparisons to standard ratios for our industry, Educational Computer Software (SIC Code 7372.9903).
Ratio Analysis | ||||
Year 1 | Year 2 | Year 3 | Industry Profile | |
Sales Growth | 0.00% | 55.56% | 37.50% | 5.21% |
Percent of Total Assets | ||||
Accounts Receivable | 59.17% | 50.81% | 37.62% | 19.34% |
Other Current Assets | 0.00% | 0.00% | 0.00% | 46.42% |
Total Current Assets | 90.22% | 94.60% | 97.09% | 68.91% |
Long-term Assets | 9.78% | 5.40% | 2.91% | 31.09% |
Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
Current Liabilities | 21.78% | 4.58% | 3.46% | 32.29% |
Long-term Liabilities | 0.00% | 0.00% | 0.00% | 20.16% |
Total Liabilities | 21.78% | 4.58% | 3.46% | 52.45% |
Net Worth | 78.22% | 95.42% | 96.54% | 47.55% |
Percent of Sales | ||||
Sales | 100.00% | 100.00% | 100.00% | 100.00% |
Gross Margin | 95.00% | 95.00% | 95.00% | 100.00% |
Selling, General & Administrative Expenses | 27.91% | 72.53% | 68.77% | 80.41% |
Advertising Expenses | 0.00% | 0.00% | 0.00% | 1.08% |
Profit Before Interest and Taxes | 2.56% | 32.23% | 37.47% | 1.17% |
Main Ratios | ||||
Current | 4.14 | 20.66 | 28.09 | 1.45 |
Quick | 4.14 | 20.66 | 28.09 | 1.16 |
Total Debt to Total Assets | 21.78% | 4.58% | 3.46% | 61.68% |
Pre-tax Return on Net Worth | 6.74% | 78.22% | 66.82% | 1.52% |
Pre-tax Return on Assets | 5.27% | 74.64% | 64.51% | 3.96% |
Additional Ratios | Year 1 | Year 2 | Year 3 | |
Net Profit Margin | 1.36% | 22.47% | 26.23% | n.a |
Return on Equity | 4.72% | 54.75% | 46.77% | n.a |
Activity Ratios | ||||
Accounts Receivable Turnover | 4.58 | 4.58 | 4.58 | n.a |
Collection Days | 57 | 66 | 69 | n.a |
Accounts Payable Turnover | 9.32 | 12.17 | 12.17 | n.a |
Payment Days | 27 | 34 | 26 | n.a |
Total Asset Turnover | 2.71 | 2.33 | 1.72 | n.a |
Debt Ratios | ||||
Debt to Net Worth | 0.28 | 0.05 | 0.04 | n.a |
Current Liab. to Liab. | 1.00 | 1.00 | 1.00 | n.a |
Liquidity Ratios | ||||
Net Working Capital | $90,985 | $216,810 | $418,760 | n.a |
Interest Coverage | 4.21 | 240.67 | 0.00 | n.a |
Additional Ratios | ||||
Assets to Sales | 0.37 | 0.43 | 0.58 | n.a |
Current Debt/Total Assets | 22% | 5% | 3% | n.a |
Acid Test | 1.43 | 9.56 | 17.21 | n.a |
Sales/Net Worth | 3.46 | 2.44 | 1.78 | n.a |
Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |