Rosafarbenes Nilpferd & Sons Engineering's dramatic growth in sales poses substantial financing needs for receivables as well as inventory. In 2001 and 2002 virtually all of this need can be supported by accumulated earnings. RNSE will need a line of credit to provide cash in the first year until accounts receivables begin to turn over into cash. Projections indicate a need for a line of approximately $135,000 which could stretch to $200,000. As the receivables are projected to be high in the first year, and stem from prime quality customers, commercial banking lines of credit (or A/R factoring) should be easily obtainable supported by this current asset without a need for reliance on inventory.
Interest rate is assumed to be 10% if a commercial line of credit is obtained. Should it be necessary to arrange for factoring of the receivables, interest expense would increase. In the first year, factoring would add an additional cost of $10,000-$12,000.
The federal tax rate on corporate profits is graduated, beginning at 15% on profits up to $50,000. The average weighted federal tax rate on profits up to $335,000 works out to 34%. On profits in excess of $335,000 the federal tax rate is 34%. To this an additional 9.5% has been added for Freedonia state corporate taxes.
The period of 45 days for receivables is not unusual, but the inventory turn-over is projected to be slow due to a need to keep higher levels than was necessary only a few years ago. The growth in demand for components has put pressure on suppliers to keep up with the demand. The risk of maintaining inadequate stocks of certain key components must be minimized by larger than normal forward purchasing.
In the first quarter of year 2000 the first generation of Technology 1 devices sold an average of 133 units monthly. The second generation (smaller, faster, smarter) will be ready by early June. Many customers for Rosafarbenes Nilpferd & Sons Engineering's products are holding back their orders awaiting the newer version. The break-even analysis, below, indicates monthly sales needed to break even.
Projected gross profits for year 2000 will be strong and will climb even further in the second and third year. Despite substantial investments in marketing (primarily advertising and sales staff), net profits before taxes are projected to be high.
Explanations for projected expenses are outlined below:
The actual expenditures were used for January, February and March. This expense averaged $817 for 1999. An additional $50,000 is budgeted for advertising during 2000, $150,000 in 2001, and $250,000 in year 2002.
This relates to the specification sheets and manuals that are included with sold products. We project this expense in year 2000 at the same rate ($96 monthly) as 1999. In years 2001 and 2002 we have increased this expense to reflect the projected increased sales. We have assumed, with increased volume of sales, some efficiencies can be had in per unit printing costs.
Electronic Testing Equipment
The actual expenditures were recorded for the first quarter of 2000. This is a significant expense which came to $1,430 in 1999, but will increase to $500 monthly in 2000 and to $650 monthly in 2001 and $750 monthly in year 2002.
These services relate to fees paid to credit card companies when credit cards are accepted as cash payment for a sale. These fees are about 3% (some more, some less) of the sales price. Actual figures were used for the first quarter, thereafter, we'll assume fees to be 3% of cash sales.
Actual figures are given for the first quarter. Thereafter, the historical monthly average of $542 is used for projection purposes.
These include accounting ($95/month), legal and miscellaneous outside services such as photography, etc. Actual figures are given for the first quarter, then $500 monthly is projected, increasing in years 2001 and 2002 to reflect increased sales.
Actual expenditure is given for the first quarter 2000. Thereafter, an average monthly figure of $200 is projected.
The actual figures are given for the first quarter, and $350 monthly is projected thereafter.
Travel is kept at historical levels for 2000 but will double in years 2001 and 2002.
Included here are professional books, minor bank charges, Massachusetts annual report, etc. Projected at $200 monthly, increasing in years 2001 and 2002.
These expenses relate to a computer that is on lease. They are expected to continue at the same rate.
Kept at historical levels.
Actual figures are given for the first quarter. Thereafter at $250/month increasing in years 2001 and 2002.
Averaging $100 per month. Are expected to increase as new space is acquired to accommodate staff hires. Includes gas and electricity.
Insurance related to a business policy which is expected to increase as additional office space is acquired.
Fixed assets are represented by such items as a printer and an iMAC computer plus some software. Net capital assets are a bit over $4,000 as of 12/31/99. Assume depreciation at $1,000 annually.
Currently two offices are rented. With the increase in staff, additional space will be acquired.
This relates to the health care plan for the two current members and is projected at present actual cost. It will increase proportionally as new employees are hired.
These expenses are paid to independent computer technicians who regularly perform services for the company. They charge $45/hr. The actual costs for the first quarter are given. The costs are projected at $2,200 per month, increasing as sales increase.
The current borrowing of $14,866 outstanding at the end of 1999 was fully repaid in the first quarter 2000.
The cash flow reflects success in obtaining a line of credit in the range of $150,000-$200,000 which is drawn down and repaid in accordance with need during 2000 leaving a balance of $135,000 at the end of 2000 which is then repaid over the next two years.
Of the long-term liabilities, $12,000 relates to a family loan with no specific repayment schedule. It carries an interest rate of 7%, although in the projections all LTD has been calculated at 10%.
The following table outlines important business ratios for the electrical and electronic engineering industry, as described by the standard industry classification (SIC) index 8711.9905.