Our financial plan anticipates one year of negative profits as we gain sales volume. We have budgeted enough investment to cover these losses and have an additional credit line available if sales do not match predictions.
Annual financial data is presented with associated topics. Monthly table data is provided in the Appendix.
7.1 Important Assumptions
We are assuming approximately 75% sales on credit and average interest rates below 10%. These are considered to be conservative in case our predictions are erroneous.
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
8.00%
8.00%
8.00%
Tax Rate
30.00%
30.00%
30.00%
Other
0
0
0
7.2 Break-even Analysis
Our break-even analysis is based on the assumption that our gross margin is 100%. In other words, we will have insignificant direct cost of sales. Since each project will be of different scope, length, and complexity, it is difficult to assign an average per unit revenue figure. However, it is conservatively believed that during the first three years, average profitability per month per "segment" (based on client size) will be about $8,000. This is because, at first, we will be dealing with smaller companies that have smaller projects. We expect that about three to four projects per month will guarantee a break-even point, for the first year, averaged over 12 months.
Break-even Analysis
Monthly Revenue Break-even
$22,210
Assumptions:
Average Percent Variable Cost
0%
Estimated Monthly Fixed Cost
$22,210
7.3 Projected Profit and Loss
The following table itemizes our revenues and associated costs. We expect to be paying higher costs in marketing and advertising than other companies as we attempt to build sales volume. As the reader can see, we expect monthly profits to begin in third quarter 2004 and yearly profits to occur in 2005.
Pro Forma Profit and Loss
Year 1
Year 2
Year 3
Sales
$231,000
$356,000
$460,000
Direct Cost of Sales
$0
$0
$0
Other Costs of Sales
$1,200
$0
$0
Total Cost of Sales
$1,200
$0
$0
Gross Margin
$229,800
$356,000
$460,000
Gross Margin %
99.48%
100.00%
100.00%
Expenses
Payroll
$177,840
$181,000
$223,000
Sales and Marketing and Other Expenses
$12,000
$24,000
$24,000
Depreciation
$0
$2,500
$2,500
Rent
$12,000
$12,000
$13,000
Utilities
$3,600
$3,600
$4,000
Insurance
$3,000
$3,000
$3,000
Payroll Taxes
$26,676
$27,150
$33,450
Travel
$24,200
$12,000
$10,000
Other
$7,200
$8,000
$10,000
Total Operating Expenses
$266,516
$273,250
$322,950
Profit Before Interest and Taxes
($36,716)
$82,750
$137,050
EBITDA
($36,716)
$85,250
$139,550
Interest Expense
$5,021
$4,420
$3,440
Taxes Incurred
$0
$23,499
$40,083
Net Profit
($41,737)
$54,831
$93,527
Net Profit/Sales
-18.07%
15.40%
20.33%
7.4 Projected Cash Flow
The following is our cash flow table and chart. We do not expect to have any short-term cash flow problems even though we will be operating at a loss for the first year. Our short-term loan will be repaid by the end of 2006. Our long-term loan will be paid off in ten years.
Pro Forma Cash Flow
Year 1
Year 2
Year 3
Cash Received
Cash from Operations
Cash Sales
$57,750
$89,000
$115,000
Cash from Receivables
$121,425
$238,956
$321,668
Subtotal Cash from Operations
$179,175
$327,956
$436,668
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
$0
$0
$0
Sales of Other Current Assets
$0
$0
$0
Sales of Long-term Assets
$0
$0
$0
New Investment Received
$3,000
$0
$0
Subtotal Cash Received
$182,175
$327,956
$436,668
Expenditures
Year 1
Year 2
Year 3
Expenditures from Operations
Cash Spending
$177,840
$181,000
$223,000
Bill Payments
$89,413
$116,481
$139,058
Subtotal Spent on Operations
$267,253
$297,481
$362,058
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out
$0
$0
$0
Principal Repayment of Current Borrowing
$2,000
$6,000
$8,000
Other Liabilities Principal Repayment
$0
$0
$0
Long-term Liabilities Principal Repayment
$2,000
$3,000
$4,000
Purchase Other Current Assets
$0
$7,000
$10,000
Purchase Long-term Assets
$0
$0
$0
Dividends
$15,000
$20,000
$56,000
Subtotal Cash Spent
$286,253
$333,481
$440,058
Net Cash Flow
($104,078)
($5,525)
($3,390)
Cash Balance
$13,222
$7,697
$4,307
7.5 Projected Balance Sheet
The Projected Balance Sheet is shown below.
Pro Forma Balance Sheet
Year 1
Year 2
Year 3
Assets
Current Assets
Cash
$13,222
$7,697
$4,307
Accounts Receivable
$51,825
$79,869
$103,201
Other Current Assets
$5,000
$12,000
$22,000
Total Current Assets
$70,047
$99,566
$129,508
Long-term Assets
Long-term Assets
$10,000
$10,000
$10,000
Accumulated Depreciation
$0
$2,500
$5,000
Total Long-term Assets
$10,000
$7,500
$5,000
Total Assets
$80,047
$107,066
$134,508
Liabilities and Capital
Year 1
Year 2
Year 3
Current Liabilities
Accounts Payable
$8,484
$9,671
$11,587
Current Borrowing
$14,000
$8,000
$0
Other Current Liabilities
$0
$0
$0
Subtotal Current Liabilities
$22,484
$17,671
$11,587
Long-term Liabilities
$43,000
$40,000
$36,000
Total Liabilities
$65,484
$57,671
$47,587
Paid-in Capital
$103,000
$103,000
$103,000
Retained Earnings
($46,700)
($108,437)
($109,606)
Earnings
($41,737)
$54,831
$93,527
Total Capital
$14,563
$49,394
$86,921
Total Liabilities and Capital
$80,047
$107,066
$134,508
Net Worth
$14,563
$49,394
$86,921
7.6 Business Ratios
We have included industry standard ratios from the advertising consultant industry, Standard Industrial Classification (SIC) code 7311.9901, to compare with ours. As this is a new sub-market of the overall industry, we expect some significant differences especially in sales growth, financing ratios, long-term asset investments and net worth. However, our projections indicate a healthy company that will be able to obtain land retain long-term profitability.
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