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.
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