Zenergy Medical Industries
Our Start-up requirements for cash, inventory, expenses and assets will see us through the first year, as we hire our contracted sales representatives and secure increasing market share. Even with our conservative estimates, based on market research and the industry knowledge of the the founders, we will far surpass the break-even point from the first month of sales. This financial advantage is largely a result of the deferred salaries of the principals, who will take salaries starting in the second year based on the success of the business (projections below).
Our commission structure for contracted sales representatives, along with our shipping methods, means that our variable costs always exceed our fixed costs – we have low overhead, and are investing in low-risk face-to-face sales time to generate profits. Rent, travel for the founders, and payroll for our part-time office manager are the largest operating expenses. With a qualified medical biller, we should collect quickly on reimbursements, and maintain a positive cash balance throughout.
We will repay the initial loan within three years, at 10% interest. If sales go better than projected, we may pay it off sooner. We do not expect future rounds of investment or loans, since the business will be self-sustaining by the end of year one. By the end of the third year, Zenergy will have a respectable net worth.
As mentioned previously, we plan to personally invest to cover portion of the initial start-up costs for the business. For the first year, our requirements will be met as follows:
- Private funding from Aktum, Finkelstein, and Acropolis.
- An SBA Micro-Loan.
- Cash generated from ongoing operations beginning in months three through six.
We will seek credit terms of 60 days from our suppliers until we build up sufficient cash flow to be able to accept net 30 terms.
|Start-up Expenses to Fund||$3,305|
|Start-up Assets to Fund||$12,275|
|Total Funding Required||$15,580|
|Non-cash Assets from Start-up||$2,775|
|Cash Requirements from Start-up||$9,500|
|Additional Cash Raised||$0|
|Cash Balance on Starting Date||$9,500|
|Liabilities and Capital|
|Accounts Payable (Outstanding Bills)||$0|
|Other Current Liabilities (interest-free)||$0|
|Additional Investment Requirement||$0|
|Total Planned Investment||$10,580|
|Loss at Start-up (Start-up Expenses)||($3,305)|
|Total Capital and Liabilities||$12,275|
We are assuming the following key points:
- We will submit our application to CMS by March 7 and receive a Medicare provider number in 60 days.
- We will successfully recruit field clinical sales reps per our schedule to reach seven reps by December 2005 with the first reps coming on line to begin selling in May.
- We will be able to successfully leverage our corporate account relationships to drive business for the field sales force.
- We will successfully secure supplier agreements with X Industries and Y Corporation with favorable credit terms (60 days) at the outset; and with availability of product samples, marketing materials, and token inventory at no cost or a nominal cost.
- We will be able to routinely receive reimbursement from the DMERCs in 30-45 days.
|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%|
The following table and chart show our break-even point in the first year, when the three VPs are deferring compensation. With a low monthly fixed cost and variable costs (including commission and shipping), we need to sell per month the amount calculated below to break even. Market research and previous experience assures us that we will easily surpass the break-even point even in our first month of sales.
|Monthly Revenue Break-even||$3,312|
|Average Percent Variable Cost||25%|
|Estimated Monthly Fixed Cost||$2,497|
Projected Profit and Loss
Notes on Profit and Loss statement for year one:
- Non-inventory Costs of Goods Sold are tracked at the top of the table. These are variable costs, such as commission and shipping.
- Low payroll expense in the first year- all reps will be contract employees paid straight commission, no expenses or benefits. The managers will not take a salary in the first year, but will take salaries in the second and third years dependent upon first year performance and profits. The only personnel in year one is our part-time office manager.
- Marketing and promotion expenses will include website management; creation and printing of custom “program overview” flyers for corporate accounts to distribute to member facilities, mailers to go to facilities in a reps major MSA, and any other sales collateral that must be developed.
- Rent assumes $450 per month lease.
- Telecommunications of $200 per month assumes primary phone line with call forwarding and answering machine capabilities, tied-in to a receptionist, with a number listed under our business name in directory assistance; DSL internet line; phone card for long-distance calling.
- General Liability insurance assumes $30 per month to cover the place of business.
- Legal expenses include drafting of initial start-up documents and contracts, with minimal additional work on a monthly basis.
- Accounting assumes $20 per hour and seven hours per month to close the books, handle commissions, etc.
- Stationery and office supplies includes business cards and stationery, files, miscellaneous supplies, etc.
- Travel – left unbudgeted at this time.
- Equipment assumes $1,000 purchase up-front during start-up phase.
- Other – unanticipated expenses.
- Note: 10% of profits will be allocated to repay initial cash investments by Acropolis, Finkelstein, and Aktum at 5% simple interest. 10% of profits will be paid to Finkelstein and Acropolis to cover corporate overhead costs.
Notes on Years two and three growth assumptions:
- Increase stationery and office supplies (.52%), telecommunications (.52%), marketing (.65%), legal (.26%) and accounting (.39%) as a consistent % of sales.
- 10% per year increase in rent associated with need for more services and facility related growth.
- 20% per year growth in liability insurance.
- Equipment lease expense doubles each year associated with rapid sales growth and expansion.
- 10% per year growth in miscellaneous expenses.
- Travel grows to $15,000 in year two and $25,000 in year three for increased recruitment, management, and corporate account sales calls.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||$112,840||$454,930||$834,900|
|Medicare Part B Billing||$16,043||$66,834||$136,329|
|Uncollectible Accounts Reserve||$91,675||$334,169||$681,646|
|Total Cost of Sales||$316,816||$1,206,810||$2,368,603|
|Gross Margin %||30.88%||27.77%||30.50%|
|General Liability Insurance||$360||$432||$518|
|Stationery and Office Supplies||$2,400||$8,688||$17,723|
|Total Operating Expenses||$29,960||$306,468||$380,136|
|Profit Before Interest and Taxes||$111,598||$157,567||$659,489|
Projected Cash Flow
Because of the relatively quick ramp-up process for sales people, and our relatively low start-up expenses, we believe we can start generating very positive cash flow within the first year. This is all contingent on achieving our expense targets for rent, insurance and other “fixed” items, plus contracting and training new sales reps per our plan and achieving successful reimbursement cycles from the DMERCs.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Cash from Receivables||$326,558||$1,299,253||$2,825,063|
|Subtotal Cash from Operations||$349,477||$1,382,796||$2,995,474|
|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||$200,000||$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||$349,477||$1,582,796||$2,995,474|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||$334,296||$1,576,764||$2,912,104|
|Additional Cash Spent|
|Sales Tax, VAT, HST/GST Paid Out||$0||$0||$0|
|Principal Repayment of Current Borrowing||$1,650||$1,650||$1,700|
|Other Liabilities Principal Repayment||$0||$0||$0|
|Long-term Liabilities Principal Repayment||$0||$12,000||$24,000|
|Purchase Other Current Assets||$0||$0||$0|
|Purchase Long-term Assets||$0||$0||$0|
|Subtotal Cash Spent||$335,946||$1,590,414||$2,937,804|
|Net Cash Flow||$13,531||($7,619)||$57,670|
Projected Balance Sheet
The Balance Sheet reflects the fact that many of our Assets will be tied up in Accounts Receivable; billing correctly and promptly, and following up on unpaid reimbursement claims, will be critical to the Cash balance. The Starting Balances are the requirements from the Start-up table and the Start-up Funding. By the end of the first year, we will increase the net worth of the business handsomely. Net Worth will continue to rise dramatically as we secure a higher market share and continue to contain costs.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||$275||$275||$275|
|Total Current Assets||$151,898||$492,036||$1,028,780|
|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||$66,797||$115,395||$226,876|
|Total Liabilities and Capital||$151,898||$492,036||$1,028,780|
Our comparison industry is Medical Equipment and Supplies, SIC Code 5047.03. Because we are a start-up, our sales growth rates will be much higher than the industry, especially given that we are competing in a small niche with fragmented competition. We have constructed our operation to keep start-up capital requirements to a minimum, building much of our expense into our variable cost structure (sales compensation, reimbursement/collections,) or farming it out (legal, accounting).
Because we do not have a retail storefront or extensive distribution facilities, our fixed overhead costs are extremely low. None of our three managing executives are on the payroll in the first year, and our sales team will be contract reps on straight commission. We have farmed out all legal, accounting, and reimbursement/collections to outside services to keep overhead and risk to a minimum.
As a result, we will have extremely favorable margins, SG&A, and current/quick ratios compared to industry standards.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||0.18%||0.06%||0.03%||20.32%|
|Total Current Assets||100.00%||100.00%||100.00%||86.96%|
|Percent of Sales|
|Selling, General & Administrative Expenses||13.90%||21.58%||17.32%||15.33%|
|Profit Before Interest and Taxes||24.35%||9.43%||19.35%||2.74%|
|Total Debt to Total Assets||43.97%||61.66%||37.99%||57.79%|
|Pre-tax Return on Net Worth||130.64%||78.41%||100.61%||5.85%|
|Pre-tax Return on Assets||73.19%||30.06%||62.38%||13.87%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||16.98%||6.20%||13.18%||n.a|
|Return on Equity||91.45%||54.89%||70.43%||n.a|
|Accounts Receivable Turnover||4.00||4.00||4.00||n.a|
|Accounts Payable Turnover||6.16||12.17||12.17||n.a|
|Total Asset Turnover||3.02||3.40||3.31||n.a|
|Debt to Net Worth||0.78||1.61||0.61||n.a|
|Current Liab. to Liab.||1.00||0.38||0.58||n.a|
|Net Working Capital||$85,101||$376,641||$801,904||n.a|
|Assets to Sales||0.33||0.29||0.30||n.a|
|Current Debt/Total Assets||44%||23%||22%||n.a|