Although we are treating the business as a start-up company, the financial plan is solidly based on past performance. We have taken actual SIOT P&L income and expenses from the past three years, and eliminated corporate overhead expenses such as warehouse and administrative costs, inventory penalties, and corporate nominal interest. We then projected income based on actual past performance, and factored back in the revenue base that was relocated to Honolulu over the past two years (mainly service and supplies).
We approached the financial planning from a conservative standpoint, and based those numbers on achievable gross margins. Also, our actual interest and tax rates will most likely be lower than the assumed rates due to our being structured as an employee-owned corporation (ESOT).
7.1 Important Assumptions
The financial plan depends on important assumptions, most of which are shown in Table 7.1. As mentioned previously, we assumed interest and tax rates based on a "worst case" scenario, and these will be adjusted once we have finalized the initial funding and establish the ESOT. We have also assumed our personnel burden at 30% of payroll in order to allow for above-average benefits for our employees. As we shop around for benefits vendors, this assumption will be subject to revision as well.
Other key business assumptions are:
- We assume continued steady economic growth on the Neighbor Islands as predicted by Bank of Hawaii, and other Hawai'i economists.
- We assume the continued move towards convergence technology in the Information Industry.
- We assume access to the start-up funding necessary to re-shape and re-build the company, and to provide adequate initial capitalization.
7.2 Key Financial Indicators
As shown in the Benchmarks chart below, our key financial indicators are:
- Projected Sales: Projections are based on actual past performance, and are conservative. We will increase sales at an average rate of 15% per year.
- Gross Margins: Average gross margins are based on: hardware sales = 37%; service = 57%; supplies = 52%; and, other = 50%, for an overall operating gross margin of 49%.
- Operating Expenses: Operating expenses are based on providing our employee-owners with above average wages and benefits, and providing superior customer service. Expenses are projected to increase at the rate of 6% per year.
- Collection Days (A/R): Based on the extensive use of leasing, and including service and supply agreements into leasing packages, we will maintain an average A/R turnover of 30 days. This is projected to be reduced to 28 days in subsequent years by increasing efficiencies in our internal business processes.
- Inventory Turnover: We will maintain just-in-time inventory levels, or 11 turns per year. This will require accurate sales forecasting, and working closely with our manufacturers. We have already begun this process under SIOT, and the Neighbor Island inventory levels are well below previous years.
7.3 Break-even Analysis
For our break-even analysis, we assume running costs which include our full payroll, rent, and utilities, and an estimation of other running costs. Payroll alone, at present, is about $65,500 per month (including benefits and taxes).
We will monitor gross margins very closely, and maintain them at a midrange percentage by taking advantage of all promotions and discounts offered by our manufacturers. Canon USA has tentatively agreed to offer us "end column" pricing as a new dealer incentive.
The chart shows what we need to sell per month to break even, according to these assumptions. This is about 78% of our projected sales for our first year, and is well below what we have achieved annually over the past three years under more adverse operating conditions.
7.4 Projected Profit and Loss
Our Pro Forma Profit and Loss statement was constructed from a conservative point-of-view, and is based in large part on past performance. By strengthening our service position, and rebuilding our customer relationships, we will widen our customer base and increase sales.
Month-to-month assumptions for profit and loss are included in the appendix.
7.5 Projected Cash Flow
Because we are treating the new company as a start-up, the cash flow for FY2002 is somewhat exaggerated by the instant influx of new capital. Subsequent years however show a healthy growth in cash flow, mainly due to the short 60-month repayment of the start-up loan and increased sales.
7.6 Projected Balance Sheet
The Projected Balance Sheet is quite solid. We do not project any trouble meeting our debt obligations as long as we achieve our specific objectives.
7.7 Business Ratios
The following table shows our main business ratios, and is compared to national averages. Our SIC industry class is currently: Office equipment, nec - 5044.99.