Cresta Testing
Financial Plan
Cresta will finance growth with a long-term loan. We recognize that this means we will have to grow more slowly than we might like. The most important factor in our case is collection days. We can’t push our clients hard on collection days, because they are in larger companies and our direct contacts will normally not have financial authority. Therefore we need to develop a permanent system of receivables financing, using one of the established accounting systems. In turn we intend to ensure that our investors are compatible with our growth plan, management style, and vision. Compatibility in this regard means:
- A fundamental respect for giving our customers value, and for maintaining a healthy and congenial workplace.
- Respect for realistic forecasts, conservative cash flow, and financial management.
- Cash flow as first priority, growth second, profits third.
- Willingness to follow the project objectives and contribute valuable input to strategy and implementation decisions.
Of these, only the last two are flexible.
8.1 Key Financial Indicators
We foresee major growth in sales and operating expenses, and a bump in our collection days as we spread the business during expansion. Collection days are very important. We do not want to let our average collection days get above 50 under any circumstances. This could cause a serious problem with cash flow, because our working capital situation is chronically tight. However, we recognize that we cannot control this factor easily, because of the relationship with our clients.
8.2 Projected Profit and Loss
Our projected profit and loss is shown on the following table, with sales increasing from more than $2.5 million the first year to more than $6.7 million the third, and profits slightly below the profit level achieved in 2000 on similar revenue. This difference in profit is attributable to pressure on rates in a competitive market as well as additional expenses incurred in building the business. We are projecting conservatively regarding cost of sales and gross margin. The detailed monthly projections are included in the appendix.




Pro Forma Profit and Loss | |||
2003 | 2004 | 2005 | |
Sales | $2,564,007 | $4,742,453 | $6,792,899 |
Direct Cost of Sales | $765,904 | $1,415,311 | $2,024,670 |
Production Payroll | $468,750 | $787,500 | $1,157,625 |
Commissions | $64,100 | $118,561 | $169,822 |
Total Cost of Sales | $1,298,754 | $2,321,372 | $3,352,117 |
Gross Margin | $1,265,253 | $2,421,080 | $3,440,782 |
Gross Margin % | 49.35% | 51.05% | 50.65% |
Operating Expenses | |||
Sales and Marketing Expenses | |||
Sales and Marketing Payroll | $275,000 | $525,000 | $551,250 |
Advertising/Promotion | $24,000 | $25,200 | $26,460 |
Other Sales and Marketing Expenses | $49,500 | $51,975 | $54,574 |
Total Sales and Marketing Expenses | $348,500 | $602,175 | $632,284 |
Sales and Marketing % | 13.59% | 12.70% | 9.31% |
General and Administrative Expenses | |||
General and Administrative Payroll | $350,000 | $612,500 | $771,750 |
Sales and Marketing and Other Expenses | $0 | $0 | $0 |
Depreciation | $12,000 | $12,600 | $13,230 |
Communications | $18,000 | $23,500 | $24,675 |
Rent | $72,000 | $125,000 | $131,250 |
Utilities | $12,000 | $18,200 | $19,110 |
Insurance | $24,000 | $25,200 | $26,460 |
Payroll Taxes | $0 | $0 | $0 |
Other General and Administrative Expenses | $84,000 | $92,400 | $97,020 |
Total General and Administrative Expenses | $572,000 | $909,400 | $1,083,495 |
General and Administrative % | 22.31% | 19.18% | 15.95% |
Other Expenses: | |||
Other Payroll | $0 | $0 | $0 |
Consultants | $0 | $0 | $0 |
Other Other Expenses | $0 | $0 | $0 |
Total Other Expenses | $0 | $0 | $0 |
Other % | 0.00% | 0.00% | 0.00% |
Total Operating Expenses | $920,500 | $1,511,575 | $1,715,779 |
Profit Before Interest and Taxes | $344,753 | $909,505 | $1,725,003 |
EBITDA | $356,753 | $922,105 | $1,738,233 |
Interest Expense | $15,568 | $14,249 | $13,149 |
Taxes Incurred | $131,674 | $358,102 | $684,741 |
Net Profit | $197,511 | $537,154 | $1,027,112 |
Net Profit/Sales | 7.70% | 11.33% | 15.12% |
8.3 Projected Cash Flow
Cresta has unique timing issues with respect to managing cash. Consultants are used as a means of keeping overhead down but consultants require payment in a timely manner when compared to the timing of services rendered. Cresta’s challenge is to ensure that customer payments for such services are collected in an equally timely manner to ensure sufficient cash to sustain operations. Notwithstanding the first plan year cash struggle, once the business reaches critical mass, the positive margins achieved enable the business to become relatively “cash rich.”

Pro Forma Cash Flow | |||
2003 | 2004 | 2005 | |
Cash Received | |||
Cash from Operations | |||
Cash Sales | $0 | $0 | $0 |
Cash from Receivables | $2,119,891 | $4,261,712 | $6,340,405 |
Subtotal Cash from Operations | $2,119,891 | $4,261,712 | $6,340,405 |
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 | $185,000 | $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 | $2,304,891 | $4,261,712 | $6,340,405 |
Expenditures | 2003 | 2004 | 2005 |
Expenditures from Operations | |||
Cash Spending | $1,093,750 | $1,925,000 | $2,480,625 |
Bill Payments | $1,163,308 | $2,237,469 | $3,189,392 |
Subtotal Spent on Operations | $2,257,058 | $4,162,469 | $5,670,017 |
Additional Cash Spent | |||
Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
Principal Repayment of Current Borrowing | $9,180 | $9,180 | $9,155 |
Other Liabilities Principal Repayment | $0 | $0 | $0 |
Long-term Liabilities Principal Repayment | $5,000 | $0 | $0 |
Purchase Other Current Assets | $0 | $0 | $0 |
Purchase Long-term Assets | $0 | $0 | $0 |
Dividends | $0 | $0 | $0 |
Subtotal Cash Spent | $2,271,238 | $4,171,649 | $5,679,172 |
Net Cash Flow | $33,654 | $90,063 | $661,233 |
Cash Balance | $186,344 | $276,407 | $937,640 |
8.4 Projected Balance Sheet
The balance sheet in the following table shows managed but sufficient growth of net worth, and a sufficiently healthy financial position. The monthly estimates are included in the appendix.
Pro Forma Balance Sheet | |||
2003 | 2004 | 2005 | |
Assets | |||
Current Assets | |||
Cash | $186,344 | $276,407 | $937,640 |
Accounts Receivable | $565,827 | $1,046,567 | $1,499,061 |
Other Current Assets | $15,933 | $15,933 | $15,933 |
Total Current Assets | $768,103 | $1,338,907 | $2,452,634 |
Long-term Assets | |||
Long-term Assets | $92,595 | $92,595 | $92,595 |
Accumulated Depreciation | $27,496 | $40,096 | $53,326 |
Total Long-term Assets | $65,099 | $52,499 | $39,269 |
Total Assets | $833,202 | $1,391,406 | $2,491,903 |
Liabilities and Capital | 2003 | 2004 | 2005 |
Current Liabilities | |||
Accounts Payable | $156,156 | $186,386 | $268,926 |
Current Borrowing | $18,335 | $9,155 | $0 |
Other Current Liabilities | $84,483 | $84,483 | $84,483 |
Subtotal Current Liabilities | $258,974 | $280,024 | $353,409 |
Long-term Liabilities | $180,000 | $180,000 | $180,000 |
Total Liabilities | $438,974 | $460,024 | $533,409 |
Paid-in Capital | $544,732 | $544,732 | $544,732 |
Retained Earnings | ($348,015) | ($150,504) | $386,650 |
Earnings | $197,511 | $537,154 | $1,027,112 |
Total Capital | $394,228 | $931,382 | $1,958,494 |
Total Liabilities and Capital | $833,202 | $1,391,406 | $2,491,903 |
Net Worth | $394,228 | $931,382 | $1,958,494 |
8.5 Business Ratios
Business ratios for the years of this plan are shown below. Industry profile ratios based on the Standard Industrial Classification (SIC) code 7371, Custom Computer Programming Industry, are shown for comparison.
Ratio Analysis | ||||
2003 | 2004 | 2005 | Industry Profile | |
Sales Growth | 140.32% | 84.96% | 43.24% | 16.14% |
Percent of Total Assets | ||||
Accounts Receivable | 67.91% | 75.22% | 60.16% | 17.80% |
Other Current Assets | 1.91% | 1.15% | 0.64% | 49.69% |
Total Current Assets | 92.19% | 96.23% | 98.42% | 72.10% |
Long-term Assets | 7.81% | 3.77% | 1.58% | 27.90% |
Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
Current Liabilities | 31.08% | 20.13% | 14.18% | 36.04% |
Long-term Liabilities | 21.60% | 12.94% | 7.22% | 19.42% |
Total Liabilities | 52.69% | 33.06% | 21.41% | 55.46% |
Net Worth | 47.31% | 66.94% | 78.59% | 44.54% |
Percent of Sales | ||||
Sales | 100.00% | 100.00% | 100.00% | 100.00% |
Gross Margin | 49.35% | 51.05% | 50.65% | 100.00% |
Selling, General & Administrative Expenses | 41.36% | 39.59% | 35.45% | 76.16% |
Advertising Expenses | 0.94% | 0.53% | 0.39% | 1.23% |
Profit Before Interest and Taxes | 13.45% | 19.18% | 25.39% | 2.22% |
Main Ratios | ||||
Current | 2.97 | 4.78 | 6.94 | 1.45 |
Quick | 2.97 | 4.78 | 6.94 | 1.13 |
Total Debt to Total Assets | 52.69% | 33.06% | 21.41% | 63.01% |
Pre-tax Return on Net Worth | 83.50% | 96.12% | 87.41% | 4.79% |
Pre-tax Return on Assets | 39.51% | 64.34% | 68.70% | 12.96% |
Additional Ratios | 2003 | 2004 | 2005 | |
Net Profit Margin | 7.70% | 11.33% | 15.12% | n.a |
Return on Equity | 50.10% | 57.67% | 52.44% | n.a |
Activity Ratios | ||||
Accounts Receivable Turnover | 4.53 | 4.53 | 4.53 | n.a |
Collection Days | 57 | 62 | 68 | n.a |
Accounts Payable Turnover | 8.07 | 12.17 | 12.17 | n.a |
Payment Days | 28 | 28 | 25 | n.a |
Total Asset Turnover | 3.08 | 3.41 | 2.73 | n.a |
Debt Ratios | ||||
Debt to Net Worth | 1.11 | 0.49 | 0.27 | n.a |
Current Liab. to Liab. | 0.59 | 0.61 | 0.66 | n.a |
Liquidity Ratios | ||||
Net Working Capital | $509,129 | $1,058,883 | $2,099,225 | n.a |
Interest Coverage | 22.15 | 63.83 | 131.19 | n.a |
Additional Ratios | ||||
Assets to Sales | 0.32 | 0.29 | 0.37 | n.a |
Current Debt/Total Assets | 31% | 20% | 14% | n.a |
Acid Test | 0.78 | 1.04 | 2.70 | n.a |
Sales/Net Worth | 6.50 | 5.09 | 3.47 | n.a |
Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |