Musical Instrument Store Business Plan

MusicWest

Financial Plan

We expect revenues and sales to increase dramatically between the second and fourth years of operation. After that high growth period, we expect growth to be steady and stable for the foreseeable future. This industry is very susceptible to consumers’ judgements about the store based on inventory, brands offered, pricing and staffing. It is crucial that we generate sufficient cash reserves during the growth years to be able to jump on future opportunities, allowing us to increase our market share.

8.1 Important Assumptions

The financial plan depends on certain assumptions, most of which are shown in the following table. The key assumptions are:

Economy proceeding, as in recent trends, of 2 to 4% annual growth.
No new major band and orchestral competitors on a large scale within the next two years in our direct vicinity.
No unforeseen changes with our major vendors in regards to lines carried.
No major change in our relationship with China or other foreign governments that would hinder product supply.

General Assumptions
	Year 1	Year 2	Year 3
Plan Month	1	2	3
Current Interest Rate	6.50%	6.50%	6.50%
Long-term Interest Rate	6.50%	6.50%	6.50%
Tax Rate	30.00%	30.00%	30.00%
Other	0	0	0

8.2 Projected Profit and Loss

If we take advantage of the current market conditions in Albuquerque, we can achieve great gains in market share during our start-up year and beyond. Our assumptions for sales are conservative compared to industry averages in similarly sized markets.

Musical instrument store business plan, financial plan chart image

Pro Forma Profit and Loss
	Year 1	Year 2	Year 3
Sales	$514,778	$650,150	$696,900
Direct Cost of Sales	$258,011	$326,570	$350,075
Other Production Expenses	$0	$0	$0
Total Cost of Sales	$258,011	$326,570	$350,075

Gross Margin	$256,767	$323,580	$346,825
Gross Margin %	49.88%	49.77%	49.77%


Expenses
Payroll	$144,150	$148,950	$168,850
Sales and Marketing and Other Expenses	$51,200	$55,400	$58,900
Depreciation	$0	$0	$0
Acountant Expense	$5,200	$5,500	$6,000
Utilities	$17,120	$18,000	$19,000
Insurance	$4,800	$5,200	$5,700
Rent	$30,000	$30,000	$30,000
Payroll Taxes	$0	$0	$0
Website Maintenance	$300	$325	$350

Total Operating Expenses	$252,770	$263,375	$288,800

Profit Before Interest and Taxes	$3,997	$60,205	$58,025
EBITDA	$3,997	$60,205	$58,025
Interest Expense	$11,746	$9,526	$7,210
Taxes Incurred	$0	$15,204	$15,244

Net Profit	($7,748)	$35,475	$35,570
Net Profit/Sales	-1.51%	5.46%	5.10%

8.3 Break-even Analysis

For break-even analysis purposes, we are assuming per month running costs as shown below. Payroll on its own is a substantial portion of these costs. The break-even assumptions are based on the personal experience of the co-owner, David Moore, based on his actual experiences as manager of King Music Centers, Inc., and Marc’s Guitar Center for an average month’s need. We believe we can achieve higher than industry average margins by selectively choosing products that allow these margins to be possible, and by value-added marketing of these products and related services.

Break-even Analysis


Monthly Revenue Break-even	$42,230

Assumptions:
Average Percent Variable Cost	50%
Estimated Monthly Fixed Cost	$21,064

8.4 Projected Cash Flow

Our cash flow projections show only a slight negative cash flow that our cash “in bank” will easily allow us to cover, without the need for accessing additional lines of credit financing. We will maintain a positive cash balance throughout the foreseeable future.

Pro Forma Cash Flow
	Year 1	Year 2	Year 3
Cash Received

Cash from Operations
Cash Sales	$514,778	$650,150	$696,900
Subtotal Cash from Operations	$514,778	$650,150	$696,900

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	$0	$0
Subtotal Cash Received	$514,778	$650,150	$696,900

Expenditures	Year 1	Year 2	Year 3

Expenditures from Operations
Cash Spending	$144,150	$148,950	$168,850
Bill Payments	$229,463	$454,298	$492,649
Subtotal Spent on Operations	$373,613	$603,248	$661,499

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	$35,628	$35,628	$35,628
Purchase Other Current Assets	$0	$0	$0
Purchase Long-term Assets	$0	$0	$0
Dividends	$0	$0	$0
Subtotal Cash Spent	$409,241	$638,876	$697,127

Net Cash Flow	$105,537	$11,274	($227)
Cash Balance	$174,037	$185,311	$185,084

8.5 Projected Balance Sheet

The projections in the balance sheet are quite solid. We do not anticipate any trouble meeting our debt obligations as long as we follow through with the plans and strategies set forth in this business plan.

Pro Forma Balance Sheet
	Year 1	Year 2	Year 3
Assets

Current Assets
Cash	$174,037	$185,311	$185,084
Inventory	$22,460	$28,429	$30,475
Other Current Assets	$0	$0	$0
Total Current Assets	$196,498	$213,740	$215,559

Long-term Assets
Long-term Assets	$7,500	$7,500	$7,500
Accumulated Depreciation	$0	$0	$0
Total Long-term Assets	$7,500	$7,500	$7,500
Total Assets	$203,998	$221,240	$223,059

Liabilities and Capital	Year 1	Year 2	Year 3

Current Liabilities
Accounts Payable	$21,374	$38,769	$40,646
Current Borrowing	$0	$0	$0
Other Current Liabilities	$0	$0	$0
Subtotal Current Liabilities	$21,374	$38,769	$40,646

Long-term Liabilities	$164,372	$128,744	$93,116
Total Liabilities	$185,746	$167,513	$133,762

Paid-in Capital	$60,000	$60,000	$60,000
Retained Earnings	($34,000)	($41,748)	($6,273)
Earnings	($7,748)	$35,475	$35,570
Total Capital	$18,252	$53,727	$89,297
Total Liabilities and Capital	$203,998	$221,240	$223,059

Net Worth	$18,252	$53,727	$89,297

8.6 Business Ratios

The following table shows industry relevant ratios as determined by the standard industry classification index (SIC) under category 5736 – Musical Instrument Stores.

Ratio Analysis
	Year 1	Year 2	Year 3	Industry Profile
Sales Growth	0.00%	26.30%	7.19%	4.64%

Percent of Total Assets
Inventory	11.01%	12.85%	13.66%	37.97%
Other Current Assets	0.00%	0.00%	0.00%	27.27%
Total Current Assets	96.32%	96.61%	96.64%	79.90%
Long-term Assets	3.68%	3.39%	3.36%	20.10%
Total Assets	100.00%	100.00%	100.00%	100.00%

Current Liabilities	10.48%	17.52%	18.22%	38.59%
Long-term Liabilities	80.58%	58.19%	41.74%	14.67%
Total Liabilities	91.05%	75.72%	59.97%	53.26%
Net Worth	8.95%	24.28%	40.03%	46.74%

Percent of Sales
Sales	100.00%	100.00%	100.00%	100.00%
Gross Margin	49.88%	49.77%	49.77%	27.24%
Selling, General & Administrative Expenses	48.16%	42.21%	42.19%	12.59%
Advertising Expenses	5.63%	4.92%	4.88%	1.79%
Profit Before Interest and Taxes	0.78%	9.26%	8.33%	0.84%

Main Ratios
Current	9.19	5.51	5.30	1.81
Quick	8.14	4.78	4.55	0.75
Total Debt to Total Assets	91.05%	75.72%	59.97%	60.09%
Pre-tax Return on Net Worth	-42.45%	94.33%	56.91%	2.46%
Pre-tax Return on Assets	-3.80%	22.91%	22.78%	6.17%

Additional Ratios	Year 1	Year 2	Year 3
Net Profit Margin	-1.51%	5.46%	5.10%	n.a
Return on Equity	-42.45%	66.03%	39.83%	n.a

Activity Ratios
Inventory Turnover	3.82	12.83	11.89	n.a
Accounts Payable Turnover	11.74	12.17	12.17	n.a
Payment Days	27	23	29	n.a
Total Asset Turnover	2.52	2.94	3.12	n.a

Debt Ratios
Debt to Net Worth	10.18	3.12	1.50	n.a
Current Liab. to Liab.	0.12	0.23	0.30	n.a

Liquidity Ratios
Net Working Capital	$175,124	$174,971	$174,913	n.a
Interest Coverage	0.34	6.32	8.05	n.a

Additional Ratios
Assets to Sales	0.40	0.34	0.32	n.a
Current Debt/Total Assets	10%	18%	18%	n.a
Acid Test	8.14	4.78	4.55	n.a
Sales/Net Worth	28.20	12.10	7.80	n.a
Dividend Payout	0.00	0.00	0.00	n.a