Based on market research, we expect the business to begin growing at 45% per month for the first 12 months, then at a yearly rate of 90% for the next two years. Due to our low initial investment costs, we can maintain the operations of the business with the cash buffer we will have from start up. In addition, we will almost immediately have a positive cash flow, allowing us the flexibility to cover any unforseen expenses.
- We have assumed no payroll expense for the startup period.
- 100% of sales will be made on credit, the industry standard. Although we do plan to sell some of our product (mostly for product promotion purposes) to the government agencies who usually demand substantially longer payment terms, our major target group will remain commercial entities. As such, we assume, on average, a 45-day collection schedule.
- Customers will pay for all relevant shipping charges.
- To be flexible in meeting the customer demand, we plan to maintain a minimal stock of product at a rented warehouse and dispatch it from there. The rest of the product we expect to be shipped from the outsourced producer’s site.
- Once we make the decision to address additional market segments, we will begin increasing our marketing and sales expenses to represent the expected increase in costs associated with developing packaging, advertisements, additional promotions, and creating awareness of our products in the differing markets.
- Initial target markets include all professional day care facilities with capacity for 20 or more children.
- Projections related to consumer acceptance were estimated using market surveys.
- Initial total market size is comprised of professional day care facilities in the greater Portland Metro area. Additional markets include Seattle and the greater Northwest in 2008.
- Further research to finally arrive at a working prototype will be outsourced to a chemist with extensive experience working with dyes.
- After a working prototype is developed it will be pushed through the appropriate regulatory channels.
- Funding for research for the first product (CHILDassure) will be provided for in the initial startup capital outlined in the start up table and summary.
- We will use our success in the day care market to propel and fund in additional research and development on an antibacterial version of our soap for use in restaurants (FOODassure) and hospitals (HEALTHassure).
- Should the cumulative $60,000 expenses earmarked during the second and third years for the patent protection of our products be minimized, our bottom line profitability will be positively affected.
|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%|
Key Financial Indicators
Sales – Our sales are projected to grow at a consistent rate of 90% yearly, and we believe this accurately reflects the realistic growth our product would be capable of attaining if we can properly utilize existing channels of distribution and gain social acceptance.
Gross Margin – As we grow, become more efficient, and gain economies of scale we begin to see a slight growth in our margins.
Operating Expenses – In 2007 and 2008 we see an increase in the number of operating expenses that we will incur. We begin incurring larger costs involving advertising, promotion, marketing, and payroll expenses.
Inventory Turnover – We will begin operations with a preliminary purchase of $50,000/ 38,000 gallons of soap. Our preliminary forecast suggests that for us to be flexible in meeting customer demand we will need to maintain a minimal inventory stock at a rented warehouse. We estimate that, on average, we will keep two weeks worth of inventory on hand.
Collection days – We will collect our accounts receivable on an average of 45 days. In 2007 and 2008 we will have the cash to cover unexpected costs or expenses so that we may decide to allow a longer collection period.
The following fixed costs reflect the relative costs for selling and distributing our product within the greater Portland metro area, and do not reflect the fixed costs necessary to expand further.
|Monthly Revenue Break-even||$11,250|
|Average Percent Variable Cost||40%|
|Estimated Monthly Fixed Cost||$6,750|
Projected Cash Flow
Overall, our business is expected to generate sufficient cashflows. Our cash balance will, among other things, depend on the level of inventory we’ll decided to keep at a rented warehouse. At the moment, our projections in this respect are preliminary and we expect to fine-tune them as the demand for our products grows.
We expect to secure a $50,000 line of credit in year 3 to finance our receivables, listed as “New Current Borrowing” in the table below.
In year 5 of operations, we will begin looking at our ability to begin paying back our initial investors the $250,000. Although the terms of the additionally sought investment are yet to be agreed upon, we belief that our investors will provide us with a buffer of some years before expecting a return on their investment, allowing us the capital and time to expand and grow at an appropriate or desired rate. Nevertheless, for planning purposes, we have made provisions to start paying out a modest dividend from the third year of our operations. Currently, we set dividend payments to be equal to 5% of net profits.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Cash from Receivables||$138,736||$362,031||$687,858|
|Subtotal Cash from Operations||$138,736||$362,031||$687,858|
|Additional Cash Received|
|Sales Tax, VAT, HST/GST Received||$0||$0||$0|
|New Current Borrowing||$0||$0||$50,000|
|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||$138,736||$362,031||$737,858|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||$185,981||$359,710||$654,395|
|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||$0||$0||$0|
|Purchase Other Current Assets||$0||$0||$0|
|Purchase Long-term Assets||$0||$0||$0|
|Subtotal Cash Spent||$185,981||$359,710||$654,395|
|Net Cash Flow||($47,245)||$2,320||$83,463|
Projected Profit and Loss
Our profit and loss projections reflect our expectation that monthly fixed costs will remain constant over the course of the first year.
Cost of goods sold increases at a decreasing rate, as economies of scale make soap production cheaper per unit as production volume increases. Based on these projections the company will become profitable in October, 2005.
Advertising expenses will remain steady during our first year of operations. However, Advertising and Promotion will grow in years 2007 and 2008 to reflect the purchase of print ads, PR brochures, and additional promotional content.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||$94,867||$178,351||$321,031|
|Total Cost of Sales||$94,867||$178,351||$321,031|
|Gross Margin %||60.00%||60.42%||62.50%|
|Other General and Administrative Expenses||$1,200||$1,200||$1,200|
|Total Operating Expenses||$81,000||$169,800||$245,100|
|Profit Before Interest and Taxes||$61,301||$102,469||$290,046|
Projected Balance Sheet
Once we have established a relationship with the manufacturer, we will purchase inventory in minimum quantities of approximately 15,000 gallons for approximately $20,000 per shipment (following the initial start-up inventory purchase, at $50,000). As sales increase we expect that inventory turnover rate to increase.
Our only significant Accounts Payable will be Inventory, which are a direct reflection of the level of inventory on hand. We will be paying off our Accounts Payable in accordance with sale of inventory. Therefore, as we begin to sell more soap, we will be increasingly capable of meeting our obligations in a more timely manner, ensuring that we have enough cash on hand to cover our short term liabilities.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||$0||$0||$0|
|Total Current Assets||$247,032||$253,723||$530,772|
|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||$77,422||$12,384||$88,150|
|Total Liabilities and Capital||$247,032||$253,723||$530,772|
The following table compares our ratios with standard ones from the soap and detergents industry (SIC Code 2841). Our current and quick ratios are much higher than industry averages. This is due in part to the substantial difference between our assets compared to our liabilities. Considering that we will be able to avoid any large loans and fund the company almost entirely independent of commercial creditors, there will necessarily be a discrepancy between our fairly large assets compared to our considerably smaller liabilities. Our business model and truly unique product allows us to outsource the manufacturing of the product, since our added value comes in the soon to be patented dye/soap formula. So, unlike other commercial-use soap makers in our industry, we do not need to purchase major capital assets, funded by loans.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||0.00%||0.00%||0.00%||21.00%|
|Total Current Assets||100.00%||100.00%||100.00%||73.73%|
|Percent of Sales|
|Selling, General & Administrative Expenses||24.35%||26.33%||26.71%||27.20%|
|Profit Before Interest and Taxes||25.85%||22.74%||33.88%||0.81%|
|Total Debt to Total Assets||31.34%||4.88%||16.61%||46.64%|
|Pre-tax Return on Net Worth||36.14%||42.46%||64.96%||1.89%|
|Pre-tax Return on Assets||24.81%||40.39%||54.18%||3.54%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||18.09%||15.92%||23.51%||n.a|
|Return on Equity||25.30%||29.72%||45.48%||n.a|
|Accounts Receivable Turnover||2.41||2.41||2.41||n.a|
|Accounts Payable Turnover||2.66||12.17||12.17||n.a|
|Total Asset Turnover||0.96||1.78||1.61||n.a|
|Debt to Net Worth||0.46||0.05||0.20||n.a|
|Current Liab. to Liab.||1.00||1.00||1.00||n.a|
|Net Working Capital||$169,611||$241,339||$442,621||n.a|
|Assets to Sales||1.04||0.56||0.62||n.a|
|Current Debt/Total Assets||31%||5%||17%||n.a|