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Professional Athletic Equipment

Financial Plan

Professional Athletic Equipment, Inc. desires to finance growth through a combination of equity/debt investment and internally generated cash flow. Because of the cost of initial tooling and inventory and marketing costs of establishing a market presence, the business will be financed primarily by investment in the early stages and is expected to burn cash. The target of break-even in year one will only apply if one stops at selling initial inventory and stops marketing or does not engage in additional production. Obviously, any of those courses would hinder growth. Thus, it is expected that additional investment will be required.

The most important indicator in our case is inventory turnover. We have to make sure that turnover stays above 5 on all production subsequent to test marketing, or we will be clogged with inventory.

Collection days are very important. We do not want to let our average collection days to get above 45 under any circumstances. This could cause a serious problem with cash flow, because working capital will be tight. Fortunately, most sales in test marketing will be direct via credit card. Thus, business at this stage will be basically for cash. Retail distribution entails 30 to 60 day billing cycles. Every effort will be made to collect on time and to offer billing term discounts. Major retailers are notoriously slow in payments. Even when sales are for cash, this plan assumes 45 day payments on all sales in order to be conservative on cash flow demands.

We must maintain gross margins of 70% and hold marketing costs to 30% of sales in all direct sales channels.

In retail channels gross margins based on wholesale pricing must be 40% and marketing costs held to 15% of sales. Volumes must be significant to support these numbers. An accurate forecast of retail sales potential can only be made after significant product acceptance by consumers. Estimates for year three retail sales contained in this plan should be considered as such. Subsequent plan revisions will have a higher degree of accuracy.

7.1 Break-even Analysis

The break-even analysis shows that Professional Athletic Equipment, Inc. has a good balance of fixed costs and sufficient sales strength to remain healthy. Our break-even point is close to 1430 units per month, while our sales forecast for the next year calls for 750 units per month on average.

Some costs included in the plan may be trimmed if necessary. Thus, there is room to cut the gap to break-even in year two with interim plan revision on the cost side, particularly by limiting ad and promotion expense and some fixed expense. The break even number of 1430 units a month is an extremely conservative break-even number since it assumes full marketing and media expenditures as called for by the plan. These expenses are treated as “fixed” when in fact they are “variable”. Thus, break even is based on full expenditures.

The initial production run will be 3200 units or approximately one third of the first year’s projected sales. This will preserve operating capital and incoming sales revenue will permit the company to function with some cash flow reserve during the first year. A close to break-even performance in year one on a new consumer product would be outstanding.

Since production gear up is short once molds are in place, additional production runs can be done on short notice. For the purpose of this first plan we have used a “zero inventory” model. That is, after the production run initially, we produce to need, which is driven by sales. Generally direct or mail order sales can ship within 30 days and often collect via credit card up front. Subsequent plans will include inventory balance on an on-going basis which will yield more accurate cash flow numbers in year two and three.

Sports medical equipment business plan, financial plan chart image

7.2 Important Assumptions

The financial plan depends on important assumptions, most of which are shown in the following table. They 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.
General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 0.00% 0.00% 0.00%
Other 0 0 0

7.3 Key Financial Indicators

  • The most important indicator in our case is inventory turnover. We have to make sure that turnover stays above 5, or we are clogged with inventory.
  • Collection days is very important. We do not want to let our average collection days get above 45 under any circumstances. This could cause a serious problem with cash flow, because our working capital situation is chronically tight.
  • We must maintain gross margins of 45 percent at the least, and hold marketing costs to no more than 20% of sales.
Sports medical equipment business plan, financial plan chart image

7.4 Projected Profit and Loss

All expenses estimated in this initial plan are considered to be accurate but not firm. Flexibility is assumed as the plan progresses through execution. Also, the assumption here is that we only raise $250,000 in initial capital. If we actually raise $500,000 it may or may not alter the sales forecast and increase advertising and promotion activity, but it will serve as a buffer of cash reserve.

The plan now projects a moderate loss in 1997, the first year of sales. This will be considered very acceptable when considered against the need to spend to introduce a new product. In fact, it is achievable only since we are pursuing low-cost channels of distribution in the test. Our over-all objective here remains only to prove salability and test various channels and promotional strategies, not to make an instant profit.

Year two assumes new sales into retail with a corresponding reduction in margin on the sales into that channel. Volumes increase as do ad and promo expenditures. Only one or two small retail chain or independent stores (assuming multiple locations) would be required to generate the sales volume sought provided the product has proven to be acceptable to consumers. We are thus forecasting a roll-over to profitability in 1998 with a strong bottom line. These are realistic targets.

If this is achieved, it would be a good time for management to look at a major financing, other acquisitions, and an aggressive national expansion of the “Body Armor.”

Sports medical equipment business plan, financial plan chart image

Sports medical equipment business plan, financial plan chart image

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $0 $242,550 $4,042,500
Direct Cost of Sales $0 $63,520 $1,191,000
Lost Margin on Retail units $0 $0 $992,500
Total Cost of Sales $0 $63,520 $2,183,500
Gross Margin $0 $179,030 $1,859,000
Gross Margin % 0.00% 73.81% 45.99%
Payroll $18,000 $144,000 $240,000
Marketing/Promotion $23,700 $112,800 $868,600
Depreciation $1,500 $6,000 $6,000
Rent $1,500 $6,000 $24,000
Utilities $750 $6,000 $12,000
Insurance $3,249 $18,830 $18,830
Payroll Taxes $0 $0 $0
Other $0 $0 $0
Total Operating Expenses $48,699 $293,630 $1,169,430
Profit Before Interest and Taxes ($48,699) ($114,600) $689,570
EBITDA ($47,199) ($108,600) $695,570
Interest Expense $0 $1,000 $1,455
Taxes Incurred $0 $0 $0
Net Profit ($48,699) ($115,600) $688,115
Net Profit/Sales 0.00% -47.66% 17.02%

7.5 Projected Cash Flow

Cash flow in year two, 1997, needs a closer look on a month-to-month basis. Since this will be entirely a function of actual sales vs. inventory turns it will be addressed in detail in subsequent plan revisions. At this juncture, the “produce as needed” philosophy of management still is the operative mode. Subsequent revisions of this plan in years two and three will switch to a full inventory, payables, and receivables model. The following chart represents the use of cash from initial investment in 1996.

Sports medical equipment business plan, financial plan chart image

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $0 $242,550 $4,042,500
Subtotal Cash from Operations $0 $242,550 $4,042,500
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $0 $20,000 $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 $250,000 $0 $0
Subtotal Cash Received $250,000 $262,550 $4,042,500
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $18,000 $144,000 $240,000
Bill Payments $49,529 $172,802 $2,867,919
Subtotal Spent on Operations $67,529 $316,802 $3,107,919
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $10,900
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 $65,000 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $132,529 $316,802 $3,118,819
Net Cash Flow $117,471 ($54,252) $923,681
Cash Balance $117,471 $63,219 $986,900

7.6 Projected Balance Sheet

Preliminary Balance Sheet is estimated.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Current Assets
Cash $117,471 $63,219 $986,900
Inventory $25,437 $0 $0
Other Current Assets $0 $0 $0
Total Current Assets $142,908 $63,219 $986,900
Long-term Assets
Long-term Assets $65,000 $65,000 $65,000
Accumulated Depreciation $1,500 $7,500 $13,500
Total Long-term Assets $63,500 $57,500 $51,500
Total Assets $206,408 $120,719 $1,038,400
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $5,107 $15,018 $255,484
Current Borrowing $0 $20,000 $9,100
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $5,107 $35,018 $264,584
Long-term Liabilities $0 $0 $0
Total Liabilities $5,107 $35,018 $264,584
Paid-in Capital $250,000 $250,000 $250,000
Retained Earnings $0 ($48,699) ($164,299)
Earnings ($48,699) ($115,600) $688,115
Total Capital $201,301 $85,701 $773,816
Total Liabilities and Capital $206,408 $120,719 $1,038,400
Net Worth $201,301 $85,701 $773,816

7.7 Business Ratios

Business ratio estimates are preliminary, and the Industry Profile is based on Standard Industry Code #3949, Sporting and Athletic Goods.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 0.00% 1566.67% -2.30%
Percent of Total Assets
Inventory 12.32% 0.00% 0.00% 26.00%
Other Current Assets 0.00% 0.00% 0.00% 26.30%
Total Current Assets 69.24% 52.37% 95.04% 75.10%
Long-term Assets 30.76% 47.63% 4.96% 24.90%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 2.47% 29.01% 25.48% 35.50%
Long-term Liabilities 0.00% 0.00% 0.00% 14.20%
Total Liabilities 2.47% 29.01% 25.48% 49.70%
Net Worth 97.53% 70.99% 74.52% 50.30%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 0.00% 73.81% 45.99% 37.50%
Selling, General & Administrative Expenses 0.00% 121.47% 28.96% 23.50%
Advertising Expenses 0.00% 2.47% 0.15% 1.60%
Profit Before Interest and Taxes 0.00% -47.25% 17.06% 2.70%
Main Ratios
Current 27.98 1.81 3.73 2.27
Quick 23.00 1.81 3.73 1.18
Total Debt to Total Assets 2.47% 29.01% 25.48% 49.70%
Pre-tax Return on Net Worth -24.19% -134.89% 88.92% 5.40%
Pre-tax Return on Assets -23.59% -95.76% 66.27% 10.70%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 0.00% -47.66% 17.02% n.a
Return on Equity -24.19% -134.89% 88.92% n.a
Activity Ratios
Inventory Turnover 0.00 0.00 0.00 n.a
Accounts Payable Turnover 10.70 12.17 12.17 n.a
Payment Days 27 20 16 n.a
Total Asset Turnover 0.00 2.01 3.89 n.a
Debt Ratios
Debt to Net Worth 0.03 0.41 0.34 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $137,801 $28,201 $722,316 n.a
Interest Coverage 0.00 -114.60 473.93 n.a
Additional Ratios
Assets to Sales n.a. 0.50 0.26 n.a
Current Debt/Total Assets 2% 29% 25% n.a
Acid Test 23.00 1.81 3.73 n.a
Sales/Net Worth 0.00 2.83 5.22 n.a
Dividend Payout 0.00 0.00 0.00 n.a