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Supple Software

Financial Plan

Ideally, we would want to bring in some equity investment from investors compatible with our growth plan, management style, and vision, in return for some equity ownership. We are not going to talk about specifics of a deal until we have met the right partners. This plan does not call for equity from outside investors.

If and when the time for outside investors comes, we want compatible investors or no investors at all. Compatibility means:

  1. A fundamental respect for giving our customers value, and for maintaining a healthy and happy workplace.
  2. Respect for realistic forecasts, and conservative cash flow and financial management.
  3. Cash flow as first priority, growth second, profits third.
  4. Located in Oregon or the Northwest.
  5. Willingness to follow the company carefully and contribute valuable input to strategy and implementation decisions.

Of these, only the last two are flexible.

We want to establish a mechanism for employees to acquire fair stock options that can become valuable as the company grows.

7.1 Important Assumptions

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

  • We assume a slow-growth economy, without major recession.
  • We assume of course that there are no unforeseen changes in technology to make products immediately obsolete.
  • We assume access to equity capital and financing sufficient to maintain our financial plan as shown in the tables.

7.2 Key Financial Indicators

The following chart shows changes in key financial indicators: sales, gross margin, operating expenses, collection days, and inventory turnover. The growth in sales is the most obvious change, and operating expenses with sales. We believe the growing market for our products, the larger potential market, justifies the growth projections.

We expect to maintain gross margin at a high level without major changes.

The projections for collection days and inventory turnover show that we are already expecting improvements as our increasing sales gives us greater economies of scale, and greater negotiation strength with our channel partners.

Software publisher business plan, financial plan chart image

7.3 Projected Profit and Loss

The following table shows that we expect to maintain gross margin but increase net profit margin during the next three years. The single most important factor in the improving profit margin is the economies of scale in our general and administrative expenses. These expenses should decline as a percentage of sales from 1998 to 2000.

We don’t expect to decrease sales and marketing expenses as a percent of sales. The packaged software business requires heavy marketing expenses.

We also intend to maintain and increase the percent of revenue spent on development. By 2000 we’ll be spending almost 7% of sales on product development. This is the key to our future.

The following table shows just the annual numbers. The detailed monthly projections for 1988 are included in the appendix.

Software publisher business plan, financial plan chart image

Software publisher business plan, financial plan chart image

Software publisher business plan, financial plan chart image

Software publisher business plan, financial plan chart image

Pro Forma Profit and Loss
1998 1999 2000
Sales $1,032,920 $1,903,500 $3,744,000
Direct Cost of Sales $143,051 $305,468 $564,060
Production Payroll $33,300 $62,000 $91,000
Freight $20,546 $29,000 $33,800
Royalties $103,298 $197,550 $385,200
Total Cost of Sales $300,195 $594,018 $1,074,060
Gross Margin $732,725 $1,309,483 $2,669,940
Gross Margin % 70.94% 68.79% 71.31%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $48,000 $53,000 $58,000
Advertising/Promotion $210,000 $400,000 $770,000
Sales Commissions $61,981 $118,530 $231,120
Graphics and Collaterals $35,000 $70,000 $140,000
Printing $28,700 $57,000 $114,000
Public Relations $14,400 $29,000 $58,000
Research $2,000 $4,000 $8,000
Tollfree Telephone $6,000 $12,000 $24,000
Trade Shows and Events $6,000 $12,000 $24,000
Meals $4,300 $9,000 $18,000
Travel $12,800 $26,000 $52,000
Other Sales and Marketing Expenses $12,000 $24,000 $48,000
Total Sales and Marketing Expenses $441,181 $814,530 $1,545,120
Sales and Marketing % 42.71% 42.79% 41.27%
General and Administrative Expenses
General and Administrative Payroll $90,000 $99,000 $109,000
Marketing/Promotion $0 $0 $0
Depreciation $1,000 $1,250 $1,563
Online Services $3,600 $4,500 $5,625
Contributions $300 $375 $469
Dues and Subscriptions $600 $750 $938
Maintenance and Repairs $1,800 $2,250 $2,813
Office Supplies $1,200 $1,500 $1,875
Postage $2,400 $3,000 $3,750
Professional Fees $6,000 $7,500 $9,375
Telephone $9,000 $11,250 $14,063
Rent $10,800 $13,500 $16,875
Utilities $3,000 $3,750 $4,688
Insurance $6,000 $7,500 $9,375
Payroll Taxes $0 $0 $0
Other General and Administrative Expenses $0 $0 $0
Total General and Administrative Expenses $135,700 $156,125 $180,409
General and Administrative % 13.14% 8.20% 4.82%
Other Expenses:
Other Payroll $30,300 $50,000 $100,000
Consultants $0 $0 $0
Product Development $1,200 $15,000 $100,000
Total Other Expenses $31,500 $65,000 $200,000
Other % 3.05% 3.41% 5.34%
Total Operating Expenses $608,381 $1,035,655 $1,925,529
Profit Before Interest and Taxes $124,344 $273,828 $744,411
EBITDA $125,344 $275,078 $745,974
Interest Expense $1,734 $234 $234
Taxes Incurred $36,783 $82,078 $223,253
Net Profit $85,828 $191,516 $520,924
Net Profit/Sales 8.31% 10.06% 13.91%

7.4 Break-even Analysis

Our break-even analysis is based on our cost and price structure at present. As we grow, the fixed costs will grow in proportion to our employee numbers.

Software publisher business plan, financial plan chart image

Break-even Analysis
Monthly Units Break-even 1,055
Monthly Revenue Break-even $58,848
Assumptions:
Average Per-Unit Revenue $55.78
Average Per-Unit Variable Cost $7.73
Estimated Monthly Fixed Cost $50,698

7.5 Projected Cash Flow

The following chart is most important for illustrating our cash projections for the next 12 months. Because of our dependence on sales through channels, and the channels’ tendency to pay slow, there are wide variations that must be supported with working capital acquired through short-term credit on receivables and inventory.

The table shows just the annual results, which are less significant. The key to our business plan is the monthly cash flow table, in the appendix, which also shows up as the key numbers of the following chart.

Software publisher business plan, financial plan chart image

Pro Forma Cash Flow
1998 1999 2000
Cash Received
Cash from Operations
Cash Sales $413,168 $761,400 $1,497,600
Cash from Receivables $656,182 $1,068,245 $2,090,263
Subtotal Cash from Operations $1,069,350 $1,829,645 $3,587,863
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $20,000 $0 $0
New Other Liabilities (interest-free) $24,966 $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 $1,114,316 $1,829,645 $3,587,863
Expenditures 1998 1999 2000
Expenditures from Operations
Cash Spending $201,600 $264,000 $358,000
Bill Payments $727,966 $1,413,737 $2,788,178
Subtotal Spent on Operations $929,566 $1,677,737 $3,146,178
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $40,000 $0 $0
Other Liabilities Principal Repayment $34,453 $0 $0
Long-term Liabilities Principal Repayment $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $50,000 $100,000
Dividends $0 $0 $0
Subtotal Cash Spent $1,004,019 $1,727,737 $3,246,178
Net Cash Flow $110,296 $101,908 $341,686
Cash Balance $110,921 $212,829 $554,515

7.6 Projected Balance Sheet

The table shows the annual balance sheet results, with a healthy projected increase in net worth. Detailed monthly projections are in the appendix.

Pro Forma Balance Sheet
1998 1999 2000
Assets
Current Assets
Cash $110,921 $212,829 $554,515
Accounts Receivable $87,627 $161,481 $317,618
Inventory $7,680 $66,268 $105,816
Other Current Assets $431 $431 $431
Total Current Assets $206,658 $441,009 $978,379
Long-term Assets
Long-term Assets $35,577 $85,577 $185,577
Accumulated Depreciation $25,247 $26,497 $28,060
Total Long-term Assets $10,330 $59,080 $157,517
Total Assets $216,988 $500,089 $1,135,896
Liabilities and Capital 1998 1999 2000
Current Liabilities
Accounts Payable $32,140 $123,725 $238,608
Current Borrowing $2,336 $2,336 $2,336
Other Current Liabilities $16,039 $16,039 $16,039
Subtotal Current Liabilities $50,515 $142,100 $256,983
Long-term Liabilities $0 $0 $0
Total Liabilities $50,515 $142,100 $256,983
Paid-in Capital $76,960 $76,960 $76,960
Retained Earnings $3,686 $89,514 $281,029
Earnings $85,828 $191,516 $520,924
Total Capital $166,474 $357,989 $878,913
Total Liabilities and Capital $216,988 $500,089 $1,135,896
Net Worth $166,474 $357,989 $878,913

7.7 Business Ratios

Standard business ratios are included in the following table. The ratios show a plan for balanced, healthy growth. One of the more important indicators is the increase in working capital, which is critical to our channel sales strategy and our financial health.

The ratios for collection days and inventory turnover are different than the ones in the assumptions table, because those are used as estimators to project balance sheet items for every month, while the ratios shown in this table are calculated on annual basis, using the same formulas used by our accountants, after the fact.

The standard comparisons are for NAICS code 511210, Software Publishers. We feel that they illustrate the difference between software publishing and most other publishing businesses.

Ratio Analysis
1998 1999 2000 Industry Profile
Sales Growth 48.59% 84.28% 96.69% 15.97%
Percent of Total Assets
Accounts Receivable 40.38% 32.29% 27.96% 17.27%
Inventory 3.54% 13.25% 9.32% 3.49%
Other Current Assets 0.20% 0.09% 0.04% 46.98%
Total Current Assets 95.24% 88.19% 86.13% 67.74%
Long-term Assets 4.76% 11.81% 13.87% 32.26%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 23.28% 28.41% 22.62% 31.28%
Long-term Liabilities 0.00% 0.00% 0.00% 20.91%
Total Liabilities 23.28% 28.41% 22.62% 52.19%
Net Worth 76.72% 71.59% 77.38% 47.81%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 70.94% 68.79% 71.31% 100.00%
Selling, General & Administrative Expenses 63.47% 57.79% 56.20% 72.26%
Advertising Expenses 20.33% 20.25% 19.99% 1.67%
Profit Before Interest and Taxes 12.04% 14.39% 19.88% 1.78%
Main Ratios
Current 4.09 3.10 3.81 1.58
Quick 3.94 2.64 3.40 1.22
Total Debt to Total Assets 23.28% 28.41% 22.62% 62.02%
Pre-tax Return on Net Worth 73.65% 76.43% 84.67% 3.40%
Pre-tax Return on Assets 56.51% 54.71% 65.51% 8.96%
Additional Ratios 1998 1999 2000
Net Profit Margin 8.31% 10.06% 13.91% n.a
Return on Equity 51.56% 53.50% 59.27% n.a
Activity Ratios
Accounts Receivable Turnover 7.07 7.07 7.07 n.a
Collection Days 61 40 39 n.a
Inventory Turnover 9.84 8.26 6.56 n.a
Accounts Payable Turnover 22.51 12.17 12.17 n.a
Payment Days 29 19 23 n.a
Total Asset Turnover 4.76 3.81 3.30 n.a
Debt Ratios
Debt to Net Worth 0.30 0.40 0.29 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $156,144 $298,909 $721,396 n.a
Interest Coverage 71.73 1,172.21 3,186.69 n.a
Additional Ratios
Assets to Sales 0.21 0.26 0.30 n.a
Current Debt/Total Assets 23% 28% 23% n.a
Acid Test 2.20 1.50 2.16 n.a
Sales/Net Worth 6.20 5.32 4.26 n.a
Dividend Payout 0.00 0.00 0.00 n.a