Sit n' Caddy
The financial start-up plan for Garden Crafts is based on a capital contribution by the founding shareholders and the remaining capital produced from a short-term loan by the production facility seller.
The first year sales of the entire production inventory to one client will provide an adequate positive cash flow. The short-term loan will be retired in the second quarter of the second year. With the cost of goods sold and associated overhead matching the annual sales growth of 11%, the corporation projects an increase in net profits.
Proceeds will be distributed between a dividend and the remaining retained earnings parked in a short-term investment fund.
In conclusion, the financial plan appears solid.
7.1 Important Assumptions
Short- and long-term interest rates are an identical 10%. Garden Craft Inc. has agreed to purchase the shop machinery from the previous owner. The monthly payment of principal and interest appears as an expense in the profit and loss statement.
The inventory turnover rate is set at 12, since the production schedule will take into account the peaks and valleys of the seasonal sales forecast. Home Depot expects to receive two large shipments of approximately 3,500 units in April and November, and order in smaller quantities during the remainder of the year to handle inventory shortages.
On the advice of the retained CPA, Garden Craft Inc. will assume a tax liability of 25%.
Direct material costs will be billed to a contractor account at Home Depot. It is estimated that 10% of cash flow will be allocated to expenses.
The principal shareholders of the corporation have provided part of the necessary start-up capital with the balance financed to cover the note on the shop equipment purchase.
|Year 1||Year 2||Year 3|
|Current Interest Rate||10.00%||10.00%||10.00%|
|Long-term Interest Rate||10.00%||10.00%||10.00%|
7.2 Key Financial Indicators
The indicators include sales, gross margin, operating expenses, inventory turnover, and collection days. The focus of this chart is not on gross amounts, but the changes over the three-year period of each indicator.
The gross sales figures show an increase over the three-year period, a natural result of our projection of an 11% growth rate. The operating expenses also show an increase, though not in lock-step with the sales trend. The slight deviation occurs from expenses that are prepaid in the first year, as well as some additional expenses that do not occur after the 15th month.
The other indicators remain constant, showing little change over the course of the projected three years.
7.3 Break-even Analysis
Break-even costs for this plan are divided into two categories: Per unit and fixed costs. Labor is placed under per unit, since the amount of labor will be directly tied in to the number of units produced. Construction and equipment loan payments, utilities, and administrative costs are calculated under fixed costs.
Since this is a start-up company, the price of the product may be adjusted according to customer demand. Our initial shop capacity should exceed our break-even point by at least a factor of three, allowing for future growth if demand should exceed expectations.
|Monthly Units Break-even||439|
|Monthly Revenue Break-even||$8,789|
|Average Per-Unit Revenue||$20.00|
|Average Per-Unit Variable Cost||$5.00|
|Estimated Monthly Fixed Cost||$6,592|
7.4 Projected Profit and Loss
Garden Craft has forecasted an annual increase of sales to be 11% over the first three years of the business plan. Considering that the total first year production run will be sold to Home Depot, the profits for the first year over sales are healthy, followed by modest growth in the second and third year.
Retirement of the note for the purchase of shop machinery in the 15th month of operation creates a cash flow debit starting in the 16th month. That money contributes to the increase in the corporation’s net profit margin, and a solid financial future. The retained earnings will be parked in a mutual fund investment until it is determined whether expansion of the corporation is feasible. That decision could come as early as the second year of operation with the exploration of other market segments.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||$50,000||$55,500||$61,605|
|Total Cost of Sales||$50,000||$55,500||$61,605|
|Gross Margin %||75.00%||75.00%||75.00%|
|Sales and Marketing and Other Expenses||$1,500||$400||$400|
|Total Operating Expenses||$79,100||$80,025||$84,945|
|Profit Before Interest and Taxes||$70,900||$86,475||$99,870|
7.5 Projected Cash Flow
A key point to note on the cash flow is the fact that a part of all profits made during one month will be paid as dividends in the following month. This explains the dramatic decrease in cash flow during the month of May. Sales are projected to be very high in the previous month, yet very low in May. However, because of the large amount of profits that were realized in April, a good portion of the cash balance will be lowered when dividends are paid out of the account.
Half of all profits will be placed in a mutual fund with an estimated yield of 15%. This additional income to the company is labeled as Capital Input.
Because the cash balance is always positive, no additional funds or investments will be needed in the first three years.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Subtotal Cash from Operations||$200,000||$222,000||$246,420|
|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||$200,000||$222,000||$246,420|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||$144,843||$154,647||$171,752|
|Additional Cash Spent|
|Sales Tax, VAT, HST/GST Paid Out||$0||$0||$0|
|Principal Repayment of Current Borrowing||$0||$0||$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|
|Subtotal Cash Spent||$144,843||$154,647||$171,752|
|Net Cash Flow||$55,157||$67,353||$74,668|
7.6 Projected Balance Sheet
Among the items in the Assets section of the Balance Sheet, only Cash shows any major change, doubling itself each year. Because liabilities do not demonstrate much change in the three year period, Cash has the greatest impact on Net Worth, giving it an upward trend. Again, because previously projected cash balances are all positive for the first three years, no changes to Liabilities are scheduled or anticipated.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||$10,000||$10,000||$10,000|
|Total Current Assets||$70,057||$137,894||$213,099|
|Total Long-term Assets||$0||$0||$0|
|Liabilities and Capital||Year 1||Year 2||Year 3|
|Other Current Liabilities||$0||$0||$0|
|Subtotal Current Liabilities||$5,413||$8,394||$9,112|
|Total Liabilities and Capital||$70,057||$137,894||$213,099|
7.7 Business Ratios
The table below contains important business ratios for the wood products industry, as determined by the Standard Industry Classification (SIC) Index, 2499.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||14.27%||7.25%||4.69%||16.40%|
|Total Current Assets||100.00%||100.00%||100.00%||67.90%|
|Percent of Sales|
|Selling, General & Administrative Expenses||48.41%||45.79%||44.60%||15.40%|
|Profit Before Interest and Taxes||35.45%||38.95%||40.53%||5.50%|
|Total Debt to Total Assets||7.73%||6.09%||4.28%||46.60%|
|Pre-tax Return on Net Worth||109.68%||66.78%||48.96%||11.40%|
|Pre-tax Return on Assets||101.20%||62.71%||46.87%||21.40%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||26.57%||29.21%||30.23%||n.a|
|Return on Equity||82.21%||50.08%||36.52%||n.a|
|Accounts Payable Turnover||18.52||12.17||12.17||n.a|
|Total Asset Turnover||2.85||1.61||1.16||n.a|
|Debt to Net Worth||0.08||0.06||0.04||n.a|
|Current Liab. to Liab.||1.00||1.00||1.00||n.a|
|Net Working Capital||$64,644||$129,500||$203,987||n.a|
|Assets to Sales||0.35||0.62||0.86||n.a|
|Current Debt/Total Assets||8%||6%||4%||n.a|