The most crucial issue affecting our financial plan is the receipt of start-up fees for the customization and installation of the software and extranet solution. This drives our cash flow, and all other aspects of our operation.
This table summarizes the general assumptions used to project our balance sheet.
The chart below shows the relative relationships, year-to-year, of four business indicators; sales, gross margin, operating expenses, collection days of accounts receivable.
We have a break-even point in sales/month for year one as shown below.
Monthly P&L fluctuate drastically due to the work required before a sale is closed. One to two months prior to closing a sale, we will incur travel costs and other miscellaneous expenses associated with our consulting service. Expenses are approximately 40% of fees. Set-up costs to the client (our commission), drive revenue in the period a sale is made, as do training fees. Associated direct costs are 10% and 50% respectively; however, as we anticipate a learning curve in training costs, these decrease to a flat rate in year two of eight percent.
The direct cost of start-up fees is our major expense. As the client prepares to go live with the product, we will need to travel more frequently to the site, bring in their key end-customers, and travel to the manufacturer more frequently as well. We have anticipated that start-up fees will grow 10% in year two and 15% in year three. Consulting fees are projected to grow at a steady rate of 20% and training fees at 30%. As a result, net profit is projected to grow at a conservative and realistic rate for the first three years.
Our cash flow assumptions are dependent on the start-up fee. We will receive 15-20% of the total fee in commission. Historical values of start-up fees are from $150K to $200K and the accounts have taken from one to four months to close. Conservative estimates lead us to believe that we can attain sales revenue from start-up fees of between $135K and $140K in year one.
Balance sheet is a result of key assumptions and estimated sales/cash flows.
The following table outlines important business ratios for pre-packaged software, as described by the standard industry classification (SIC) index, 7372.