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.




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 |