Grutzen Watches
Financial Plan
Growth will be supported by cash flow and owner investment. This will keep initial growth slow and manageable, and will allow the management to have complete control over the firm.
7.1 Important Assumptions
Grutzen’s financial plan relies on several important assumptions – most of which are shown in the following table.
The key assumptions are:
- Sufficient access to capital.
- Steady economy without a major recession.
- No unforeseen drastic technology changes.
| 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 | 9.00% | 9.00% | 9.00% |
| Tax Rate | 25.42% | 25.00% | 25.42% |
| Other | 0 | 0 | 0 |
7.2 Key Financial Indicators
- Keeping average collection days at 60 days or below is very important as this could become a major cause of cash flow problems for the first year.
- Gross margins must remain above 55%.
7.3 Break-even Analysis
The Break-even Analysis chart and table show that if the costs stay at the current, or relatively stable, level Grutzen Watches will be able to make a steady profit by the second year.
| Break-even Analysis | |
| Monthly Revenue Break-even | $74,602 |
| Assumptions: | |
| Average Percent Variable Cost | 38% |
| Estimated Monthly Fixed Cost | $45,909 |
7.4 Projected Profit and Loss
The following table and chart shows Grutzen’s expectations for profit and loss. The company will begin to make a profit in its second year of operation.
| Pro Forma Profit and Loss | |||
| Year 1 | Year 2 | Year 3 | |
| Sales | $1,066,000 | $1,307,000 | $1,515,000 |
| Direct Cost of Sales | $410,000 | $500,000 | $610,000 |
| Other | $33,000 | $38,000 | $43,000 |
| Total Cost of Sales | $443,000 | $538,000 | $653,000 |
| Gross Margin | $623,000 | $769,000 | $862,000 |
| Gross Margin % | 58.44% | 58.84% | 56.90% |
| Expenses | |||
| Payroll | $296,400 | $323,000 | $349,000 |
| Sales and Marketing and Other Expenses | $100,675 | $112,900 | $129,200 |
| Depreciation | $3,504 | $3,500 | $3,500 |
| Leased Equipment | $72,000 | $80,000 | $81,000 |
| Utilities | $6,325 | $7,000 | $8,000 |
| Insurance | $18,000 | $21,000 | $23,000 |
| Rent | $48,000 | $51,000 | $55,000 |
| Other | $6,000 | $6,300 | $6,500 |
| Payroll Taxes | $0 | $0 | $0 |
| Other | $0 | $0 | $0 |
| Total Operating Expenses | $550,904 | $604,700 | $655,200 |
| Profit Before Interest and Taxes | $72,096 | $164,300 | $206,800 |
| EBITDA | $75,600 | $167,800 | $210,300 |
| Interest Expense | $6,180 | $2,810 | $900 |
| Taxes Incurred | $16,480 | $40,373 | $52,333 |
| Net Profit | $49,437 | $121,118 | $153,567 |
| Net Profit/Sales | 4.64% | 9.27% | 10.14% |
7.5 Projected Cash Flow
Cash flow will be managed with a revolving line of credit. We expect to borrow $41,000 in the first year to cover our receivables.
| Pro Forma Cash Flow | |||
| Year 1 | Year 2 | Year 3 | |
| Cash Received | |||
| Cash from Operations | |||
| Cash Sales | $533,000 | $653,500 | $757,500 |
| Cash from Receivables | $453,350 | $635,493 | $741,959 |
| Subtotal Cash from Operations | $986,350 | $1,288,993 | $1,499,459 |
| Additional Cash Received | |||
| Sales Tax, VAT, HST/GST Received | $0 | $0 | $0 |
| New Current Borrowing | $41,000 | $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 | $1,027,350 | $1,288,993 | $1,499,459 |
| Expenditures | Year 1 | Year 2 | Year 3 |
| Expenditures from Operations | |||
| Cash Spending | $296,400 | $323,000 | $349,000 |
| Bill Payments | $677,740 | $849,960 | $1,005,944 |
| Subtotal Spent on Operations | $974,140 | $1,172,960 | $1,354,944 |
| Additional Cash Spent | |||
| Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
| Principal Repayment of Current Borrowing | $40,000 | $31,000 | $0 |
| Other Liabilities Principal Repayment | $0 | $0 | $0 |
| Long-term Liabilities Principal Repayment | $4,000 | $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 | $1,018,140 | $1,207,960 | $1,358,944 |
| Net Cash Flow | $9,210 | $81,033 | $140,515 |
| Cash Balance | $79,210 | $160,243 | $300,758 |
7.6 Projected Balance Sheet
As seen in the balance sheet, a strong growth in net worth is expected over the next three years.
| Pro Forma Balance Sheet | |||
| Year 1 | Year 2 | Year 3 | |
| Assets | |||
| Current Assets | |||
| Cash | $79,210 | $160,243 | $300,758 |
| Accounts Receivable | $79,650 | $97,657 | $113,199 |
| Inventory | $35,200 | $42,927 | $52,371 |
| Other Current Assets | $5,000 | $5,000 | $5,000 |
| Total Current Assets | $199,060 | $305,827 | $471,327 |
| Long-term Assets | |||
| Long-term Assets | $35,000 | $35,000 | $35,000 |
| Accumulated Depreciation | $3,504 | $7,004 | $10,504 |
| Total Long-term Assets | $31,496 | $27,996 | $24,496 |
| Total Assets | $230,556 | $333,823 | $495,823 |
| Liabilities and Capital | Year 1 | Year 2 | Year 3 |
| Current Liabilities | |||
| Accounts Payable | $54,120 | $71,269 | $83,702 |
| Current Borrowing | $31,000 | $0 | $0 |
| Other Current Liabilities | $0 | $0 | $0 |
| Subtotal Current Liabilities | $85,120 | $71,269 | $83,702 |
| Long-term Liabilities | $16,000 | $12,000 | $8,000 |
| Total Liabilities | $101,120 | $83,269 | $91,702 |
| Paid-in Capital | $171,000 | $171,000 | $171,000 |
| Retained Earnings | ($91,000) | ($41,563) | $79,554 |
| Earnings | $49,437 | $121,118 | $153,567 |
| Total Capital | $129,437 | $250,554 | $404,121 |
| Total Liabilities and Capital | $230,556 | $333,823 | $495,823 |
| Net Worth | $129,437 | $250,554 | $404,121 |
7.7 Business Ratios
Standard business ratios are provided in the following table. The ratios show a strong, yet safe growth. Industry Profile ratios are based on Standard Industrial Classification (SIC) Index code 3873.
| Ratio Analysis | ||||
| Year 1 | Year 2 | Year 3 | Industry Profile | |
| Sales Growth | 0.00% | 22.61% | 15.91% | 3.90% |
| Percent of Total Assets | ||||
| Accounts Receivable | 34.55% | 29.25% | 22.83% | 27.20% |
| Inventory | 15.27% | 12.86% | 10.56% | 29.70% |
| Other Current Assets | 2.17% | 1.50% | 1.01% | 26.70% |
| Total Current Assets | 86.34% | 91.61% | 95.06% | 83.60% |
| Long-term Assets | 13.66% | 8.39% | 4.94% | 16.40% |
| Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
| Current Liabilities | 36.92% | 21.35% | 16.88% | 36.30% |
| Long-term Liabilities | 6.94% | 3.59% | 1.61% | 19.00% |
| Total Liabilities | 43.86% | 24.94% | 18.49% | 55.30% |
| Net Worth | 56.14% | 75.06% | 81.51% | 44.70% |
| Percent of Sales | ||||
| Sales | 100.00% | 100.00% | 100.00% | 100.00% |
| Gross Margin | 58.44% | 58.84% | 56.90% | 34.40% |
| Selling, General & Administrative Expenses | 58.66% | 54.01% | 50.88% | 23.80% |
| Advertising Expenses | 3.38% | 3.21% | 3.17% | 0.70% |
| Profit Before Interest and Taxes | 6.76% | 12.57% | 13.65% | 1.70% |
| Main Ratios | ||||
| Current | 2.34 | 4.29 | 5.63 | 2.42 |
| Quick | 1.93 | 3.69 | 5.01 | 1.31 |
| Total Debt to Total Assets | 43.86% | 24.94% | 18.49% | 55.30% |
| Pre-tax Return on Net Worth | 50.93% | 64.45% | 50.95% | 2.10% |
| Pre-tax Return on Assets | 28.59% | 48.38% | 41.53% | 4.80% |
| Additional Ratios | Year 1 | Year 2 | Year 3 | |
| Net Profit Margin | 4.64% | 9.27% | 10.14% | n.a |
| Return on Equity | 38.19% | 48.34% | 38.00% | n.a |
| Activity Ratios | ||||
| Accounts Receivable Turnover | 6.69 | 6.69 | 6.69 | n.a |
| Collection Days | 58 | 50 | 51 | n.a |
| Inventory Turnover | 10.91 | 12.80 | 12.80 | n.a |
| Accounts Payable Turnover | 13.43 | 12.17 | 12.17 | n.a |
| Payment Days | 27 | 26 | 28 | n.a |
| Total Asset Turnover | 4.62 | 3.92 | 3.06 | n.a |
| Debt Ratios | ||||
| Debt to Net Worth | 0.78 | 0.33 | 0.23 | n.a |
| Current Liab. to Liab. | 0.84 | 0.86 | 0.91 | n.a |
| Liquidity Ratios | ||||
| Net Working Capital | $113,941 | $234,558 | $387,625 | n.a |
| Interest Coverage | 11.67 | 58.47 | 229.78 | n.a |
| Additional Ratios | ||||
| Assets to Sales | 0.22 | 0.26 | 0.33 | n.a |
| Current Debt/Total Assets | 37% | 21% | 17% | n.a |
| Acid Test | 0.99 | 2.32 | 3.65 | n.a |
| Sales/Net Worth | 8.24 | 5.22 | 3.75 | n.a |
| Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |
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