Tricky Widgets Manufacturing
Financial Plan
TWM expects to raise $4.5 million in loans along with $.5 million in private investment for start-up costs for the first three years. An additional $50 million in financing is expected to be raised in an initial public offering that is scheduled to occur between years three-five. This will provide the bulk of the financing required to grow operations at the planned rate.
7.1 Important Assumptions
Important assumptions for this plan are found in the following table.
| 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
TWM’s break-even analysis is based on the average of the first-year figures for total sales and by operating expenses. These are presented as per-unit revenue, per-unit cost, and fixed costs. These conservative assumptions make for a more accurate estimate of real risk.
| Break-even Analysis | |
| Monthly Units Break-even | 44 |
| Monthly Revenue Break-even | $2,381,000 |
| Assumptions: | |
| Average Per-Unit Revenue | $54,689.42 |
| Average Per-Unit Variable Cost | $43,751.53 |
| Estimated Monthly Fixed Cost | $476,200 |
7.3 Projected Profit and Loss
As the profit and loss table shows, TWM expects to continue its steady growth in profitability over the next three years of operations.
| Pro Forma Profit and Loss | |||
| Year 1 | Year 2 | Year 3 | |
| Sales | $54,251,903 | $62,660,948 | $75,819,747 |
| Direct Cost of Sales | $43,401,522 | $49,217,326 | $58,470,184 |
| Other | $0 | $0 | $0 |
| Total Cost of Sales | $43,401,522 | $49,217,326 | $58,470,184 |
| Gross Margin | $10,850,381 | $13,443,622 | $17,349,563 |
| Gross Margin % | 20.00% | 21.45% | 22.88% |
| Expenses | |||
| Payroll | $5,160,000 | $5,418,000 | $5,688,900 |
| Sales and Marketing and Other Expenses | $242,400 | $540,800 | $829,200 |
| Depreciation | $300,000 | $300,000 | $300,000 |
| Utilities | $12,000 | $14,000 | $15,000 |
| Payroll Taxes | $0 | $0 | $0 |
| Other | $0 | $0 | $0 |
| Total Operating Expenses | $5,714,400 | $6,272,800 | $6,833,100 |
| Profit Before Interest and Taxes | $5,135,981 | $7,170,822 | $10,516,463 |
| EBITDA | $5,435,981 | $7,470,822 | $10,816,463 |
| Interest Expense | $673,381 | $538,595 | $380,991 |
| Taxes Incurred | $1,338,780 | $1,989,668 | $3,040,642 |
| Net Profit | $3,123,819 | $4,642,559 | $7,094,831 |
| Net Profit/Sales | 5.76% | 7.41% | 9.36% |
7.4 Projected Cash Flow
The cash flow projection shows that provisions for ongoing expenses are adequate to meet TWM’s needs as the business generates cash flow sufficient to support operations. The second and third month decrease in cash flow reflects the payment of initial cost of goods sold prior to a large number of receipts being paid. As can be seen, TWM has anticipated such a decrease and has arranged a line of credit to cover cash shortages.
| Pro Forma Cash Flow | |||
| Year 1 | Year 2 | Year 3 | |
| Cash Received | |||
| Cash from Operations | |||
| Cash Sales | $27,125,951 | $31,330,474 | $37,909,873 |
| Cash from Receivables | $22,227,991 | $30,571,290 | $36,721,873 |
| Subtotal Cash from Operations | $49,353,943 | $61,901,764 | $74,631,747 |
| Additional Cash Received | |||
| Sales Tax, VAT, HST/GST Received | $0 | $0 | $0 |
| New Current Borrowing | $2,600,000 | $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 | $51,953,943 | $61,901,764 | $74,631,747 |
| Expenditures | Year 1 | Year 2 | Year 3 |
| Expenditures from Operations | |||
| Cash Spending | $5,160,000 | $5,418,000 | $5,688,900 |
| Bill Payments | $45,818,085 | $52,731,967 | $62,793,055 |
| Subtotal Spent on Operations | $50,978,085 | $58,149,967 | $68,481,955 |
| Additional Cash Spent | |||
| Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
| Principal Repayment of Current Borrowing | $0 | $2,600,000 | $0 |
| Other Liabilities Principal Repayment | $0 | $0 | $0 |
| Long-term Liabilities Principal Repayment | $276,036 | $276,038 | $276,038 |
| Purchase Other Current Assets | $0 | $0 | $0 |
| Purchase Long-term Assets | $0 | $0 | $0 |
| Dividends | $0 | $0 | $0 |
| Subtotal Cash Spent | $51,254,121 | $61,026,005 | $68,757,993 |
| Net Cash Flow | $699,822 | $875,759 | $5,873,754 |
| Cash Balance | $2,699,822 | $3,575,580 | $9,449,334 |
7.5 Projected Balance Sheet
TWM’s projected company balance sheet follows.
| Pro Forma Balance Sheet | |||
| Year 1 | Year 2 | Year 3 | |
| Assets | |||
| Current Assets | |||
| Cash | $2,699,822 | $3,575,580 | $9,449,334 |
| Accounts Receivable | $4,897,960 | $5,657,144 | $6,845,144 |
| Inventory | $4,425,915 | $5,018,988 | $5,962,558 |
| Other Current Assets | $100,000 | $100,000 | $100,000 |
| Total Current Assets | $12,123,697 | $14,351,712 | $22,357,036 |
| Long-term Assets | |||
| Long-term Assets | $2,500,000 | $2,500,000 | $2,500,000 |
| Accumulated Depreciation | $300,000 | $600,000 | $900,000 |
| Total Long-term Assets | $2,200,000 | $1,900,000 | $1,600,000 |
| Total Assets | $14,323,697 | $16,251,712 | $23,957,036 |
| Liabilities and Capital | Year 1 | Year 2 | Year 3 |
| Current Liabilities | |||
| Accounts Payable | $4,185,913 | $4,347,408 | $5,233,939 |
| Current Borrowing | $2,600,000 | $0 | $0 |
| Other Current Liabilities | $0 | $0 | $0 |
| Subtotal Current Liabilities | $6,785,913 | $4,347,408 | $5,233,939 |
| Long-term Liabilities | $4,223,964 | $3,947,926 | $3,671,888 |
| Total Liabilities | $11,009,877 | $8,295,334 | $8,905,827 |
| Paid-in Capital | $508,000 | $508,000 | $508,000 |
| Retained Earnings | ($318,000) | $2,805,819 | $7,448,378 |
| Earnings | $3,123,819 | $4,642,559 | $7,094,831 |
| Total Capital | $3,313,819 | $7,956,378 | $15,051,209 |
| Total Liabilities and Capital | $14,323,697 | $16,251,712 | $23,957,036 |
| Net Worth | $3,313,819 | $7,956,378 | $15,051,209 |
7.6 Business Ratios
Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 3531, Construction Machinery, are shown for comparison.
| Ratio Analysis | ||||
| Year 1 | Year 2 | Year 3 | Industry Profile | |
| Sales Growth | 0.00% | 15.50% | 21.00% | 0.10% |
| Percent of Total Assets | ||||
| Accounts Receivable | 34.19% | 34.81% | 28.57% | 31.10% |
| Inventory | 30.90% | 30.88% | 24.89% | 29.10% |
| Other Current Assets | 0.70% | 0.62% | 0.42% | 20.00% |
| Total Current Assets | 84.64% | 88.31% | 93.32% | 80.20% |
| Long-term Assets | 15.36% | 11.69% | 6.68% | 19.80% |
| Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
| Current Liabilities | 47.38% | 26.75% | 21.85% | 38.00% |
| Long-term Liabilities | 29.49% | 24.29% | 15.33% | 16.80% |
| Total Liabilities | 76.86% | 51.04% | 37.17% | 54.80% |
| Net Worth | 23.14% | 48.96% | 62.83% | 45.20% |
| Percent of Sales | ||||
| Sales | 100.00% | 100.00% | 100.00% | 100.00% |
| Gross Margin | 20.00% | 21.45% | 22.88% | 28.00% |
| Selling, General & Administrative Expenses | 14.59% | 14.37% | 13.73% | 15.20% |
| Advertising Expenses | 0.11% | 0.13% | 0.15% | 0.50% |
| Profit Before Interest and Taxes | 9.47% | 11.44% | 13.87% | 3.30% |
| Main Ratios | ||||
| Current | 1.79 | 3.30 | 4.27 | 2.11 |
| Quick | 1.13 | 2.15 | 3.13 | 1.14 |
| Total Debt to Total Assets | 76.86% | 51.04% | 37.17% | 54.80% |
| Pre-tax Return on Net Worth | 134.67% | 83.36% | 67.34% | 7.30% |
| Pre-tax Return on Assets | 31.16% | 40.81% | 42.31% | 16.20% |
| Additional Ratios | Year 1 | Year 2 | Year 3 | |
| Net Profit Margin | 5.76% | 7.41% | 9.36% | n.a |
| Return on Equity | 94.27% | 58.35% | 47.14% | n.a |
| Activity Ratios | ||||
| Accounts Receivable Turnover | 5.54 | 5.54 | 5.54 | n.a |
| Collection Days | 57 | 61 | 60 | n.a |
| Inventory Turnover | 10.91 | 10.42 | 10.65 | n.a |
| Accounts Payable Turnover | 11.94 | 12.17 | 12.17 | n.a |
| Payment Days | 27 | 29 | 27 | n.a |
| Total Asset Turnover | 3.79 | 3.86 | 3.16 | n.a |
| Debt Ratios | ||||
| Debt to Net Worth | 3.32 | 1.04 | 0.59 | n.a |
| Current Liab. to Liab. | 0.62 | 0.52 | 0.59 | n.a |
| Liquidity Ratios | ||||
| Net Working Capital | $5,337,783 | $10,004,304 | $17,123,097 | n.a |
| Interest Coverage | 7.63 | 13.31 | 27.60 | n.a |
| Additional Ratios | ||||
| Assets to Sales | 0.26 | 0.26 | 0.32 | n.a |
| Current Debt/Total Assets | 47% | 27% | 22% | n.a |
| Acid Test | 0.41 | 0.85 | 1.82 | n.a |
| Sales/Net Worth | 16.37 | 7.88 | 5.04 | n.a |
| Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |
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