After initial capitalization growth can be financed largely through internal cash flow provided subscription targets are met. In the event of a sales shortfall, marketing can be cut back temporarily to preserve cash. Or, more likely, additional investment may be sought to re-accelerate productive campaigns if growth demands more funding.
The company created by this plan will generate cash as soon as subscription base reaches critical mass.
7.1 Important Assumptions
The following table illustrates the financial assumptions used as the basis for this plan. The key element is six inventory turns per year. This reflects the issues of the magazine as well as ad revenue. Ad space is treated as an inventory item.
Subscriptions are paid in advance. Only 10% of receivables are collected in 30 days, primarily from wholesale accounts. These are notoriously slow payors, so care must be taken not to let these collections run past 60 days. This will be more significant if book sales become a higher-than-expected percentage of revenue.
7.2 Key Financial Indicators
The following chart represents changes in critical profit variables. Note that margins and expenses are consistently controlled and net profit increases nicely. Inventory turns slow down somewhat in the third year due to the burden of higher inventories for increasing book sales.
7.3 Break-even Analysis
This break-even analysis is applicable to the early 1997 time frame only. Key fixed costs represent the "burn" rate prior to major acceleration of marketing plans. Thus, if subscriptions didn't flow in as planned this represents the point at which the company could continue to survive without increasing marketing. In that event, management could "buy" time to raise additional capital.
7.4 Projected Profit and Loss
We expect net income to near $1 million in year one and $2.4 million in year three. Net profit margins will improve as subscriptions mature and marketing costs decrease.
7.5 Projected Cash Flow
The table below illustrates cash accumulation from the initial assumption of $150K capital infusion. At no point does the company run out of cash. We expect to buy back the initial outside investment in year three.
The chart illustrates the critical cash flow in year one. Note that early contributions on a monthly basis are minimal and only gain momentum in the second half of the year. If shortfalls occur early on more capital may be required.
7.6 Projected Balance Sheet
We project a strong growth in net worth over the next several years.
7.7 Business Ratios
These business ratios are limited in value since the company projects no debt. This will also be an advantage if debt capital is desired later without dilution to shareholders. Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 2721, Periodicals, are shown for comparison.