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Our biggest savings of the year
Victorian Renovations
Financial Plan
The following financial information shows the assumptions and outcomes of the purchase, renovation, and rental of the first property on Fifth and Pearl. No attempt has been made to discuss the implications of purchasing other buildings, since these will happen on a more ad hoc basis.
7.1 Important Assumptions
The following are conservative assumptions that will influence our financial projections.
| General Assumptions | |||
| Year 1 | Year 2 | Year 3 | |
| Plan Month | 1 | 2 | 3 |
| Current Interest Rate | 9.00% | 9.00% | 9.00% |
| Long-term Interest Rate | 6.75% | 6.75% | 6.75% |
| Tax Rate | 30.00% | 30.00% | 30.00% |
| Other | 0 | 0 | 0 |
7.2 Break-even Analysis
The regular Break-even Analysis is not appropriate for this project, but the following text explains the Break-even chart.
Investors will receive 66% of the rental income from the property. It is estimated that this property will produce $2400 per month of rental. At maximum occupancy, the payout to investors will be fixed monthly cost of $1,600. The remaining $800 per month will be kept in a savings account to pay for general upkeep of the building and any unexpected repairs. It is estimated that routine bills and maintenance will be no more than $400 per month.
| Break-even Analysis | |
| Monthly Revenue Break-even | $1,417 |
| Assumptions: | |
| Average Percent Variable Cost | 10% |
| Estimated Monthly Fixed Cost | $1,275 |
7.3 Projected Profit and Loss
The following Profit and Loss table illustrates that VR will lose money in the first year, but in the second year, on this single property, the company will make a healthy return of 10% in 2002 and 15% in 2003.
| Pro Forma Profit and Loss | |||
| Year 1 | Year 2 | Year 3 | |
| Sales | $21,600 | $23,760 | $26,136 |
| Direct Cost of Sales | $2,160 | $2,376 | $2,614 |
| Other Production Expenses | $18,000 | $0 | $0 |
| Total Cost of Sales | $20,160 | $2,376 | $2,614 |
| Gross Margin | $1,440 | $21,384 | $23,522 |
| Gross Margin % | 6.67% | 90.00% | 90.00% |
| Expenses | |||
| Payroll | $0 | $0 | $0 |
| Sales and Marketing and Other Expenses | $9,500 | $1,300 | $1,400 |
| Depreciation | $3,200 | $4,800 | $4,800 |
| Leased Equipment | $0 | $0 | $0 |
| Utilities | $2,300 | $1,200 | $1,300 |
| Insurance | $300 | $300 | $350 |
| Rent | $0 | $0 | $0 |
| Payroll Taxes | $0 | $0 | $0 |
| Other | $0 | $0 | $0 |
| Total Operating Expenses | $15,300 | $7,600 | $7,850 |
| Profit Before Interest and Taxes | ($13,860) | $13,784 | $15,672 |
| EBITDA | ($10,660) | $18,584 | $20,472 |
| Interest Expense | $10,668 | $10,380 | $10,061 |
| Taxes Incurred | $0 | $1,021 | $1,684 |
| Net Profit | ($24,528) | $2,383 | $3,928 |
| Net Profit/Sales | -113.56% | 10.03% | 15.03% |
7.4 Projected Cash Flow
The following Balance Sheet shows healthy cash flow that will enable VR to maintain the existing location at Fifth and Pearl and allow Doug and Sarah to purchase a second property in Portland in year two of the operation.
| Pro Forma Cash Flow | |||
| Year 1 | Year 2 | Year 3 | |
| Cash Received | |||
| Cash from Operations | |||
| Cash Sales | $21,600 | $23,760 | $26,136 |
| Subtotal Cash from Operations | $21,600 | $23,760 | $26,136 |
| 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 | $21,600 | $23,760 | $26,136 |
| Expenditures | Year 1 | Year 2 | Year 3 |
| Expenditures from Operations | |||
| Cash Spending | $0 | $0 | $0 |
| Bill Payments | $41,654 | $16,489 | $17,339 |
| Subtotal Spent on Operations | $41,654 | $16,489 | $17,339 |
| 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 | $3,938 | $4,572 | $4,891 |
| Purchase Other Current Assets | $0 | $0 | $0 |
| Purchase Long-term Assets | $0 | $0 | $0 |
| Dividends | $0 | $0 | $0 |
| Subtotal Cash Spent | $45,592 | $21,061 | $22,231 |
| Net Cash Flow | ($23,992) | $2,699 | $3,905 |
| Cash Balance | $50,508 | $53,207 | $57,112 |
7.5 Projected Balance Sheet
The Balance Sheet shows a healthy company with a positive net worth that will ensure future financial stability and the ability to grow through investment in other properties in the future.
| Pro Forma Balance Sheet | |||
| Year 1 | Year 2 | Year 3 | |
| Assets | |||
| Current Assets | |||
| Cash | $50,508 | $53,207 | $57,112 |
| Other Current Assets | $750 | $750 | $750 |
| Total Current Assets | $51,258 | $53,957 | $57,862 |
| Long-term Assets | |||
| Long-term Assets | $144,000 | $144,000 | $144,000 |
| Accumulated Depreciation | $3,200 | $8,000 | $12,800 |
| Total Long-term Assets | $140,800 | $136,000 | $131,200 |
| Total Assets | $192,058 | $189,957 | $189,062 |
| Liabilities and Capital | Year 1 | Year 2 | Year 3 |
| Current Liabilities | |||
| Accounts Payable | $1,274 | $1,363 | $1,431 |
| Current Borrowing | $0 | $0 | $0 |
| Other Current Liabilities | $0 | $0 | $0 |
| Subtotal Current Liabilities | $1,274 | $1,363 | $1,431 |
| Long-term Liabilities | $156,062 | $151,490 | $146,599 |
| Total Liabilities | $157,336 | $152,853 | $148,030 |
| Paid-in Capital | $60,000 | $60,000 | $60,000 |
| Retained Earnings | ($750) | ($25,278) | ($22,895) |
| Earnings | ($24,528) | $2,383 | $3,928 |
| Total Capital | $34,722 | $37,105 | $41,033 |
| Total Liabilities and Capital | $192,058 | $189,957 | $189,062 |
| Net Worth | $34,722 | $37,105 | $41,033 |
7.6 Business Ratios
The following table contains important ratios for the Single-family housing construction industry, as determined by the Standard Industry Classification (SIC) Index Number 1521.
| Ratio Analysis | ||||
| Year 1 | Year 2 | Year 3 | Industry Profile | |
| Sales Growth | 0.00% | 10.00% | 10.00% | 7.20% |
| Percent of Total Assets | ||||
| Other Current Assets | 0.39% | 0.39% | 0.40% | 30.60% |
| Total Current Assets | 26.69% | 28.40% | 30.60% | 80.40% |
| Long-term Assets | 73.31% | 71.60% | 69.40% | 19.60% |
| Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
| Current Liabilities | 0.66% | 0.72% | 0.76% | 44.20% |
| Long-term Liabilities | 81.26% | 79.75% | 77.54% | 11.50% |
| Total Liabilities | 81.92% | 80.47% | 78.30% | 55.70% |
| Net Worth | 18.08% | 19.53% | 21.70% | 44.30% |
| Percent of Sales | ||||
| Sales | 100.00% | 100.00% | 100.00% | 100.00% |
| Gross Margin | 6.67% | 90.00% | 90.00% | 18.10% |
| Selling, General & Administrative Expenses | 120.22% | 79.97% | 74.97% | 7.00% |
| Advertising Expenses | 1.39% | 0.00% | 0.00% | 0.20% |
| Profit Before Interest and Taxes | -64.17% | 58.01% | 59.96% | 3.50% |
| Main Ratios | ||||
| Current | 40.24 | 39.60 | 40.44 | 1.83 |
| Quick | 40.24 | 39.60 | 40.44 | 0.86 |
| Total Debt to Total Assets | 81.92% | 80.47% | 78.30% | 55.70% |
| Pre-tax Return on Net Worth | -70.64% | 9.17% | 13.68% | 5.40% |
| Pre-tax Return on Assets | -12.77% | 1.79% | 2.97% | 12.20% |
| Additional Ratios | Year 1 | Year 2 | Year 3 | |
| Net Profit Margin | -113.56% | 10.03% | 15.03% | n.a |
| Return on Equity | -70.64% | 6.42% | 9.57% | n.a |
| Activity Ratios | ||||
| Accounts Payable Turnover | 33.70 | 12.17 | 12.17 | n.a |
| Payment Days | 27 | 29 | 29 | n.a |
| Total Asset Turnover | 0.11 | 0.13 | 0.14 | n.a |
| Debt Ratios | ||||
| Debt to Net Worth | 4.53 | 4.12 | 3.61 | n.a |
| Current Liab. to Liab. | 0.01 | 0.01 | 0.01 | n.a |
| Liquidity Ratios | ||||
| Net Working Capital | $49,984 | $52,595 | $56,432 | n.a |
| Interest Coverage | -1.30 | 1.33 | 1.56 | n.a |
| Additional Ratios | ||||
| Assets to Sales | 8.89 | 7.99 | 7.23 | n.a |
| Current Debt/Total Assets | 1% | 1% | 1% | n.a |
| Acid Test | 40.24 | 39.60 | 40.44 | n.a |
| Sales/Net Worth | 0.62 | 0.64 | 0.64 | n.a |
| Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |