Inception Loan: An original loan of $60,000 will be procured for the opening of HRT. At an annualized borrowing rate of 8%, interest payments of $400 will be made monthly.
Production: HRT will employ the following production schedule:
2001: 125,000 units (10,416/month).
2002: 250,000 units (20,833/month).
2003: 375,000 units (31,250/month).
Sales Forecasts: HRT has estimated the following unit sales forecasts:
2001: 106,800 units.
2002: 252,000 units.
2003: 375,000 units.
For simplicity, Price per Unit = $1.50, Cost per Unit = $.55
Salaries: HRT will hire and employ one administrative office manager in 2001, two in 2002, and three in 2003. The first year salary will be $19,800, increasing for inflation at 3% per year, per employee. Therefore, total salaries will be $40,788 in 2002, and $63,018 in 2003.
Rent: HRT will sign a three-year lease at business inception. Terms of this lease will include rent of $600 per month, and will include electricity.
Utilities: Per the schedule found earlier in the business plan, HRT will pay non-electric (included in rent) utilities of $200 per month over the term of the lease.
Equipment: Per the schedule found in the business plan regarding equipment, HRT will invest $5,500 up front for its machinery, to be depreciated straight-line over a useful life of five years. Therefore, yearly depreciation will be $1,100 per year ($92 per month). Also, HRT will equip its firm with office equipment (per schedule in business plan) at a one-time expense of $3,600.
Insurance: HRT will enter into a liability insurance policy at the cost of $2,400 per year.
Advertising: HRT will originally plan to invest 15% of gross sales into advertising expenses. This number may vary over time, but for preliminary financial planning, will be allocated as follows:
2001: $24,000.
2002: $56,700.
2003: $84,375.
Miscellaneous: HRT will reserve a miscellaneous expense account at the rate of 3% of gross sales, amortized evenly over each month, for unforeseen costs.
Taxes: As a Sub-chapter S Corporation, Hair Recycling Technologies pays no corporate tax. Rather, individual income taxes are paid by each owner based on his percentage of stake in the company. For this reason, Hair Recycling Technologies taxes will be $0, and are noted as such for reporting purposes.
10.1 Break-even Analysis
The chart and table below contain the Break-even Analysis for HRT.
Break-even Analysis
Monthly Revenue Break-even
$19,812
Assumptions:
Average Percent Variable Cost
43%
Estimated Monthly Fixed Cost
$11,310
10.2 Projected Profit and Loss
The most important assumption in the Projected Profit and Loss statement is the gross margin, which is supposed to increase to 25%. Month-by-month assumptions for profit and loss are included in the appendix.
Pro Forma Profit and Loss
Year 1
Year 2
Year 3
Sales
$160,200
$378,000
$562,500
Direct Cost of Sales
$68,748
$137,500
$206,250
Other Production Expenses
$0
$0
$0
Total Cost of Sales
$68,748
$137,500
$206,250
Gross Margin
$91,452
$240,500
$356,250
Gross Margin %
57.09%
63.62%
63.33%
Expenses
Payroll
$79,800
$136,788
$183,018
Advertising/Promotion
$28,806
$56,700
$84,375
Depreciation
$1,104
$1,104
$1,104
Leased Equipment
$0
$0
$0
Utilities
$2,400
$2,400
$2,400
Insurance
$2,400
$2,400
$2,400
Rent
$7,200
$7,200
$7,200
Payroll Burden
$11,970
$20,518
$27,453
Miscellaneous
$2,040
$10,000
$15,000
Total Operating Expenses
$135,720
$237,110
$322,950
Profit Before Interest and Taxes
($44,268)
$3,390
$33,300
EBITDA
($43,164)
$4,494
$34,404
Interest Expense
$4,540
$4,080
$3,600
Taxes Incurred
$0
$0
$743
Net Profit
($48,808)
($690)
$28,958
Net Profit/Sales
-30.47%
-0.18%
5.15%
10.3 Projected Cash Flow
The chart and table below project increasing cash flow throughout the first three years of plan implementation.
Pro Forma Cash Flow
Year 1
Year 2
Year 3
Cash Received
Cash from Operations
Cash Sales
$80,100
$189,000
$281,250
Cash from Receivables
$59,017
$160,336
$256,969
Subtotal Cash from Operations
$139,117
$349,336
$538,219
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
$26,000
$0
Subtotal Cash Received
$139,117
$375,336
$538,219
Expenditures
Year 1
Year 2
Year 3
Expenditures from Operations
Cash Spending
$79,800
$136,788
$183,018
Bill Payments
$121,701
$237,977
$348,990
Subtotal Spent on Operations
$201,501
$374,765
$532,008
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
$6,000
$6,000
$6,000
Purchase Other Current Assets
$0
$0
$0
Purchase Long-term Assets
$0
$0
$0
Dividends
$0
$0
$0
Subtotal Cash Spent
$207,501
$380,765
$538,008
Net Cash Flow
($68,384)
($5,429)
$211
Cash Balance
$8,237
$2,808
$3,019
10.4 Projected Balance Sheet
The following table projects healthy growth in sales and net worth.
Pro Forma Balance Sheet
Year 1
Year 2
Year 3
Assets
Current Assets
Cash
$8,237
$2,808
$3,019
Accounts Receivable
$21,083
$49,747
$74,029
Inventory
$8,497
$16,994
$25,492
Other Current Assets
$0
$0
$0
Total Current Assets
$37,817
$69,550
$102,539
Long-term Assets
Long-term Assets
$9,100
$9,100
$9,100
Accumulated Depreciation
$1,104
$2,208
$3,312
Total Long-term Assets
$7,996
$6,892
$5,788
Total Assets
$45,813
$76,442
$108,327
Liabilities and Capital
Year 1
Year 2
Year 3
Current Liabilities
Accounts Payable
$9,171
$20,490
$29,418
Current Borrowing
$0
$0
$0
Other Current Liabilities
$0
$0
$0
Subtotal Current Liabilities
$9,171
$20,490
$29,418
Long-term Liabilities
$54,000
$48,000
$42,000
Total Liabilities
$63,171
$68,490
$71,418
Paid-in Capital
$34,000
$60,000
$60,000
Retained Earnings
($2,550)
($51,358)
($52,048)
Earnings
($48,808)
($690)
$28,958
Total Capital
($17,358)
$7,952
$36,910
Total Liabilities and Capital
$45,813
$76,442
$108,327
Net Worth
($17,358)
$7,952
$36,910
10.5 Business Ratios
The following table contains important business ratios from the Soil Preparation Services industry, as determined by the Standard Industry Classification (SIC) Index.
Several explanations must be made to balance the company’s ratios against the industry averages. First of all is the relative newness of this type of industry, which means that the industry averages reflect companies that have very different products, consumers and overall circumstances. Therefore, there will be substantial differences in the general comparison between HRT and other firms. Furthermore, HRT is a start-up company that is seeking to introduce a new type of product to the market through limited distribution channels. The company is investing significant funds into advertising, and not expecting to see profits for the first two years. This is why the company has a consecutive if diminishing negative net worth during the period covered by this plan. As acquired assets gear up to full production and the marketing efforts generate more sales, this negative net worth will become more comparable to industry averages. Finally, as a start up, the company is seeking ways to maximize profit while reducing the need to invest in significant initial costs. Therefore the ratios of HRT’s assets and liabilities to the industry standard, which reflect more mature, established companies does not match well either.
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