Compton Geotechnical Associates
Financial Plan
Our financial plan anticipates one year of negative profits as we gain sales volume. We have budgeted enough investment to cover these losses and have an additional credit line available if sales do not match predictions.
7.1 Important Assumptions
We are assuming approximately 75% sales on credit and average interest rates of 10%. These are considered to be conservative in case our predictions are erroneous.
| 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 |
7.2 Break-even Analysis
Our Break-even Analysis is based on the assumptions that our gross margin is 100%. In other words, we will have insignificant direct cost of sales. Since each project will be of different scope, length, and complexity, it is difficult to assign and average per unit revenue figure. However, it is conservatively believed that during the first three years, average profitability per month per segment will be about $8,000. This is because we will be dealing with smaller companies at first that have smaller projects. We expect that about three projects per month will guarantee a break-even point.
| Break-even Analysis | |
| Monthly Revenue Break-even | $23,444 |
| Assumptions: | |
| Average Percent Variable Cost | 1% |
| Estimated Monthly Fixed Cost | $23,256 |
7.3 Projected Profit and Loss
The following table itemizes our revenues and associated costs. We expect to be paying higher costs in marketing and advertising than other companies as we attempt to build sales volume. As the reader can see, we expect monthly profits to begin in fourth quarter of 2003 (see appendix for monthly Profit and Loss table).
| Pro Forma Profit and Loss | |||
| Year 1 | Year 2 | Year 3 | |
| Sales | $299,000 | $441,000 | $550,000 |
| Direct Cost of Sales | $2,400 | $0 | $0 |
| Other Costs of Sales | $7,000 | $7,000 | $7,000 |
| Total Cost of Sales | $9,400 | $7,000 | $7,000 |
| Gross Margin | $289,600 | $434,000 | $543,000 |
| Gross Margin % | 96.86% | 98.41% | 98.73% |
| Expenses | |||
| Payroll | $190,500 | $209,000 | $268,000 |
| Sales and Marketing and Other Expenses | $6,000 | $10,000 | $14,000 |
| Depreciation | $0 | $2,500 | $2,500 |
| Rent | $18,000 | $20,000 | $22,000 |
| Utilities | $3,600 | $3,600 | $4,000 |
| Insurance | $13,200 | $14,000 | $15,000 |
| Payroll Taxes | $28,575 | $31,350 | $40,200 |
| Travel | $12,000 | $12,000 | $15,000 |
| Other | $7,200 | $8,000 | $10,000 |
| Total Operating Expenses | $279,075 | $310,450 | $390,700 |
| Profit Before Interest and Taxes | $10,525 | $123,550 | $152,300 |
| EBITDA | $10,525 | $126,050 | $154,800 |
| Interest Expense | $6,100 | $5,500 | $4,300 |
| Taxes Incurred | $1,328 | $35,415 | $44,400 |
| Net Profit | $3,097 | $82,635 | $103,600 |
| Net Profit/Sales | 1.04% | 18.74% | 18.84% |
7.4 Projected Cash Flow
The following is our cash flow chart and diagram. We do not expect to have any short-term cash flow problems even though we will be operating at a loss for the first nine months. Our short-term loan will be repaid in two equal payments in 2004-2005. Our long-term loan will be paid off in ten years.
| Pro Forma Cash Flow | |||
| Year 1 | Year 2 | Year 3 | |
| Cash Received | |||
| Cash from Operations | |||
| Cash Sales | $74,750 | $110,250 | $137,500 |
| Cash from Receivables | $162,100 | $301,234 | $389,843 |
| Subtotal Cash from Operations | $236,850 | $411,484 | $527,343 |
| 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 | $3,000 | $0 | $0 |
| Subtotal Cash Received | $239,850 | $411,484 | $527,343 |
| Expenditures | Year 1 | Year 2 | Year 3 |
| Expenditures from Operations | |||
| Cash Spending | $190,500 | $209,000 | $268,000 |
| Bill Payments | $92,676 | $150,520 | $173,514 |
| Subtotal Spent on Operations | $283,176 | $359,520 | $441,514 |
| Additional Cash Spent | |||
| Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
| Principal Repayment of Current Borrowing | $0 | $8,000 | $8,000 |
| Other Liabilities Principal Repayment | $0 | $0 | $0 |
| Long-term Liabilities Principal Repayment | $0 | $4,000 | $4,000 |
| Purchase Other Current Assets | $0 | $0 | $0 |
| Purchase Long-term Assets | $0 | $0 | $0 |
| Dividends | $0 | $0 | $0 |
| Subtotal Cash Spent | $283,176 | $371,520 | $453,514 |
| Net Cash Flow | ($43,326) | $39,964 | $73,830 |
| Cash Balance | $61,474 | $101,438 | $175,267 |
7.5 Projected Balance Sheet
The following table shows the projected balance sheet for Compton Geotechnical.
| Pro Forma Balance Sheet | |||
| Year 1 | Year 2 | Year 3 | |
| Assets | |||
| Current Assets | |||
| Cash | $61,474 | $101,438 | $175,267 |
| Accounts Receivable | $62,150 | $91,666 | $114,323 |
| Other Current Assets | $3,500 | $3,500 | $3,500 |
| Total Current Assets | $127,124 | $196,604 | $293,090 |
| Long-term Assets | |||
| Long-term Assets | $25,000 | $25,000 | $25,000 |
| Accumulated Depreciation | $0 | $2,500 | $5,000 |
| Total Long-term Assets | $25,000 | $22,500 | $20,000 |
| Total Assets | $152,124 | $219,104 | $313,090 |
| Liabilities and Capital | Year 1 | Year 2 | Year 3 |
| Current Liabilities | |||
| Accounts Payable | $15,726 | $12,071 | $14,458 |
| Current Borrowing | $16,000 | $8,000 | $0 |
| Other Current Liabilities | $0 | $0 | $0 |
| Subtotal Current Liabilities | $31,726 | $20,071 | $14,458 |
| Long-term Liabilities | $45,000 | $41,000 | $37,000 |
| Total Liabilities | $76,726 | $61,071 | $51,458 |
| Paid-in Capital | $103,000 | $103,000 | $103,000 |
| Retained Earnings | ($30,700) | ($27,603) | $55,032 |
| Earnings | $3,097 | $82,635 | $103,600 |
| Total Capital | $75,398 | $158,033 | $261,633 |
| Total Liabilities and Capital | $152,124 | $219,104 | $313,090 |
| Net Worth | $75,398 | $158,033 | $261,633 |
7.6 Business Ratios
We have included industry standard ratios from the construction and civil engineering industry to compare with ours. These ratios are as closely matched to our industry as management could find, however there are some significant differences, especially in sales growth, financing ratios, long-term asset investments and net worth. However, our projections indicate a healthy company that will be able to obtain and retain long-term profitability.
| Ratio Analysis | ||||
| Year 1 | Year 2 | Year 3 | Industry Profile | |
| Sales Growth | 0.00% | 47.49% | 24.72% | 6.39% |
| Percent of Total Assets | ||||
| Accounts Receivable | 40.85% | 41.84% | 36.51% | 39.28% |
| Other Current Assets | 2.30% | 1.60% | 1.12% | 34.90% |
| Total Current Assets | 83.57% | 89.73% | 93.61% | 77.16% |
| Long-term Assets | 16.43% | 10.27% | 6.39% | 22.84% |
| Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
| Current Liabilities | 20.86% | 9.16% | 4.62% | 38.24% |
| Long-term Liabilities | 29.58% | 18.71% | 11.82% | 13.12% |
| Total Liabilities | 50.44% | 27.87% | 16.44% | 51.36% |
| Net Worth | 49.56% | 72.13% | 83.56% | 48.64% |
| Percent of Sales | ||||
| Sales | 100.00% | 100.00% | 100.00% | 100.00% |
| Gross Margin | 96.86% | 98.41% | 98.73% | 100.00% |
| Selling, General & Administrative Expenses | 96.06% | 79.67% | 79.89% | 81.87% |
| Advertising Expenses | 0.00% | 0.00% | 0.00% | 0.32% |
| Profit Before Interest and Taxes | 3.52% | 28.02% | 27.69% | 2.33% |
| Main Ratios | ||||
| Current | 4.01 | 9.80 | 20.27 | 1.73 |
| Quick | 4.01 | 9.80 | 20.27 | 1.43 |
| Total Debt to Total Assets | 50.44% | 27.87% | 16.44% | 5.72% |
| Pre-tax Return on Net Worth | 5.87% | 74.70% | 56.57% | 57.36% |
| Pre-tax Return on Assets | 2.91% | 53.88% | 47.27% | 13.43% |
| Additional Ratios | Year 1 | Year 2 | Year 3 | |
| Net Profit Margin | 1.04% | 18.74% | 18.84% | n.a |
| Return on Equity | 4.11% | 52.29% | 39.60% | n.a |
| Activity Ratios | ||||
| Accounts Receivable Turnover | 3.61 | 3.61 | 3.61 | n.a |
| Collection Days | 55 | 85 | 91 | n.a |
| Accounts Payable Turnover | 6.70 | 12.17 | 12.17 | n.a |
| Payment Days | 28 | 35 | 28 | n.a |
| Total Asset Turnover | 1.97 | 2.01 | 1.76 | n.a |
| Debt Ratios | ||||
| Debt to Net Worth | 1.02 | 0.39 | 0.20 | n.a |
| Current Liab. to Liab. | 0.41 | 0.33 | 0.28 | n.a |
| Liquidity Ratios | ||||
| Net Working Capital | $95,398 | $176,533 | $278,633 | n.a |
| Interest Coverage | 1.73 | 22.46 | 35.42 | n.a |
| Additional Ratios | ||||
| Assets to Sales | 0.51 | 0.50 | 0.57 | n.a |
| Current Debt/Total Assets | 21% | 9% | 5% | n.a |
| Acid Test | 2.05 | 5.23 | 12.36 | n.a |
| Sales/Net Worth | 3.97 | 2.79 | 2.10 | n.a |
| Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |
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