As a start-up company in an emerging and changing industry, we have intentionally designed a conservative plan, looking to ensure the achievement of our corporate goals along with a solid ROI to our investor/partner(s). We will of course revise our financial plan throughout the first year based on actual figures in sales, manufacturing costs, technological advances, personnel, office space, marketing costs, and so on.
Securing the patents (applied for) for our advanced devices and systems in a new and emerging industry will add immediate value to RQM.
Our plan’s success is also predicated on the following assumptions:
- Securing seed money with investor(s)/partner who will bring added value to RQM.
- The acceptance of our device(s)/systems by the public, the business sector and the military.
- The ability to attract strong C-Level management to our team as needed.
- Managing growth and production costs so as to maintain projected margins and cash flow.
- Staying ahead of technological advances in this field, and reacting to these changes in a timely and efficient manner.
- Managing the start-up of RQM with minimal personnel until steady growth necessitates hiring additional department management and support staff.
- Partnering with strong OEMs quickly in order to penetrate and dominate market share.
- Partnering with industry leaders (such as UPS, the U.S. Navy, etc.,) to assist in demonstrating the efficacy of our systems.
- Success in marketing our products for brand awareness and positioning.
- Adjusting and adapting to the market trends within this new and emerging industry.
7.1 The Investment Offering
We are currently in search of an investor/partner(s) who will bring more to RQM Technologies than just financing. The ideal Investor/Partner(s) we are seeking should bring expertise in the areas of legal, financial, and international regulatory issues, as a portion of our target market(s) will be international in scope in the near future. The Investor/Partner(s) will receive an equity position in the company and sit on the Board of Directors.
The success of this plan is predicated on securing start-up funding from an investor/partner in exchange for a minority equity stake in RQM. We are only looking for investor/partners that will also bring additional added value to RQM, such as expertise in finance, international business, C-Level contacts, industry networks, and more. Additional second round funding may eventually be needed to go into a larger scale production run, if RQM cannot self-fund our own growth. However, we believe that we will be in a position to fund ourselves, limiting the risks while increasing the ROI on our investor/partner(s).
Of particular interest to investors is the Dividends row in the Cash Flow table. We project increasing dividends, which will be distributed first to outside investors; the founders will defer dividends until the third year.
|Valuation, Investment, Shares|
|Equity Share Offering Percentage||30.00%||0.00%||0.00%|
|Investor Exit Payout||$1,350,000||$0||$0|
|Investor Years Until Exit||3||2||1|
|Share Ownership||Year 2004||Year 2005||Year 2006||Year 2007|
|Stock Split Multiple||0||0||0|
|Stock Options Issued||0||0||0||0|
|Investor Shares Issued||21,429||0||0|
|Price per share||$9.33||$0.00||$0.00||$63.00|
|Options Holders’ Shares||0||0||0||0|
|Year 2004 Investors’ Shares||21,429||21,429||21,429||21,429|
|Year 2005 Investors’ Shares||0||0||0|
|Year 2006 Investors’ Shares||0||0|
|Total Shares Outstanding||71,429||71,429||71,429||71,429|
|Equity Ownership Percentage||Year 2004||Year 2005||Year 2006||Year 2007|
|Option Holders’ Equity||0.00%||0.00%||0.00%||0.00%|
|Year 2004 Investors’ Equity||30.00%||30.00%||30.00%||30.00%|
|Year 2005 Investors’ Equity||0.00%||0.00%||0.00%|
|Year 2006 Investors’ Equity||0.00%||0.00%|
|Founders’ & Employees’ Equity||70.00%||70.00%||70.00%||70.00%|
7.2 Break-even Analysis
For our break-even analysis, we assume per month running costs which include our full payroll, rent, utilities, and an estimation of other running costs. Payroll alone, at our present run rate, is only about $18,000 per month. Margins are harder to estimate. Our overall average price point of $120 per unit is based on a cost of $60 (+ or – 2%), or a minimum gross profit margin of approximately 50%. We hope to attain a margin that high in the future as our cost per unit decreases, as manufactured volume increases, while focusing on a 20%-30% net profit.
The chart shows what we need to sell per month according to these assumptions in order to break even. This is about 80% of our planned average 2004 – 2005 monthly sales goals, even with four months of no revenue before sales begin; therefore we believe we can realistically achieve these goals and maintain these levels.
|Monthly Revenue Break-even||$156,331|
|Average Percent Variable Cost||50%|
|Estimated Monthly Fixed Cost||$78,165|
7.3 Important Assumptions
The financial plan depends on important assumptions, most of which are shown in the following table. The key underlying assumptions are:
- A slow start as we educate potential customers about this new technology.
- In contrast, we assume steady growth once the efficacy of our product and services are demonstrated.
- That there are no unforeseen changes in technology which could make products immediately obsolete, while newer technologies and in-house innovations will only advance the scope of our product line and target markets.
- Access to equity capital and financing sufficient to maintain our financial plan as shown in the tables.
- Ability to self-fund further growth after Start-up financing is secured.
- Maintaining or improving profit margins based on lower costs per unit for higher quantity production runs.
|Year 1||Year 2||Year 3|
|Current Interest Rate||6.00%||6.00%||6.00%|
|Long-term Interest Rate||8.50%||8.50%||8.50%|
7.4 Projected Profit and Loss
The Profit and Loss table, below, shows our projected sales, cost of sales, and operating expenses for the first three years. of particular note are the high Sales and Marketing expenses; our research indicates these approximate spending levels will be necessary for launching such a new and unique product successfully. We are currently taking bids from four prominent advertising agencies to manage this aspect of our product launches.
All costs associated with manufacturing and distributing the physical products can be found under cost of sales in the Sales Forecast table, above.
We anticipate that sales will begin to generate a stable profit for RQM in February of 2005, about halfway through our first year.
|Pro Forma Profit and Loss|
|Year 1||Year 2||Year 3|
|Direct Cost of Sales||$975,750||$1,995,525||$2,747,679|
|Other Costs of Goods||$0||$0||$0|
|Total Cost of Sales||$975,750||$1,995,525||$2,747,679|
|Gross Margin %||50.00%||51.00%||53.00%|
|Sales and Marketing and Other Expenses||$216,000||$200,000||$250,000|
|Advertising & Marketing Collateral||$295,000||$350,000||$425,000|
|Company Vehicles and related expenses||$16,800||$18,000||$19,000|
|Trade Shows & Events||$30,000||$0||$0|
|Total Operating Expenses||$937,984||$1,360,000||$1,714,750|
|Profit Before Interest and Taxes||$37,766||$716,975||$1,383,696|
7.5 Projected Cash Flow
The Cash Flow table below shows that while initial cash flow will be out of the business, sufficient start-up funding, combined with projected sales revenues, should allow us to maintain a high positive cash balance throughout our first year, as we launch our products.
Of particular interest to investors is the Dividends row, below. We project increasing dividends, which will be distributed first to outside investors; the founders will defer dividends until the third year.
|Pro Forma Cash Flow|
|Year 1||Year 2||Year 3|
|Cash from Operations|
|Cash from Receivables||$745,583||$1,786,092||$2,713,875|
|Subtotal Cash from Operations||$1,721,333||$3,822,342||$5,636,938|
|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||$0||$0||$0|
|Subtotal Cash Received||$1,721,333||$3,822,342||$5,636,938|
|Expenditures||Year 1||Year 2||Year 3|
|Expenditures from Operations|
|Subtotal Spent on Operations||$1,863,592||$3,641,925||$4,889,180|
|Additional Cash Spent|
|Sales Tax, VAT, HST/GST Paid Out||$0||$0||$0|
|Principal Repayment of Current Borrowing||$0||$0||$0|
|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||$0||$0||$0|
|Subtotal Cash Spent||$1,913,592||$3,716,925||$5,114,180|
|Net Cash Flow||($192,259)||$105,417||$522,758|
7.6 Projected Balance Sheet
The Balance Sheet shows an increasingly stable cash position and net worth over the first three years, as our products become more established in the market. We do not plan to borrow money to fund growth, so our liabilities in all years represent simple Accounts Payable stemming from ongoing operating expenses.
|Pro Forma Balance Sheet|
|Year 1||Year 2||Year 3|
|Other Current Assets||$0||$0||$0|
|Total Current Assets||$518,108||$1,010,489||$1,843,338|
|Total Long-term Assets||$0||$0||$0|
|Liabilities and Capital||Year 1||Year 2||Year 3|
|Other Current Liabilities||$0||$0||$0|
|Subtotal Current Liabilities||$192,371||$257,870||$347,132|
|Total Liabilities and Capital||$518,108||$1,010,489||$1,843,338|
7.7 Business Ratios
Our main business ratios can be found in the following table, along with standard ratios for our industry, Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing (e.g. GPS), NAICS code 334220. We do intend to improve gross margin, collection days, and inventory turnover.
Our high gross margin reflects the nature of our particular kind of electronic equipment; a much higher percentage of our products’ value lies in the innovative design and (patents applied for) customizable interface, than in skilled assembly (the typical distinguishing feature in this industry). Our ratios will, therefore, differ from others in this industry.
|Year 1||Year 2||Year 3||Industry Profile|
|Percent of Total Assets|
|Other Current Assets||0.00%||0.00%||0.00%||31.89%|
|Total Current Assets||100.00%||100.00%||100.00%||84.79%|
|Percent of Sales|
|Selling, General & Administrative Expenses||48.65%||38.68%||36.43%||16.09%|
|Profit Before Interest and Taxes||1.94%||17.61%||23.67%||1.84%|
|Total Debt to Total Assets||37.13%||25.52%||18.83%||64.99%|
|Pre-tax Return on Net Worth||11.59%||95.26%||92.48%||2.57%|
|Pre-tax Return on Assets||7.29%||70.95%||75.06%||7.35%|
|Additional Ratios||Year 1||Year 2||Year 3|
|Net Profit Margin||1.35%||12.32%||16.57%||n.a|
|Return on Equity||8.12%||66.68%||64.74%||n.a|
|Accounts Receivable Turnover||4.24||4.24||4.24||n.a|
|Accounts Payable Turnover||9.57||12.17||12.17||n.a|
|Total Asset Turnover||3.77||4.03||3.17||n.a|
|Debt to Net Worth||0.59||0.34||0.23||n.a|
|Current Liab. to Liab.||1.00||1.00||1.00||n.a|
|Net Working Capital||$325,736||$752,619||$1,496,206||n.a|
|Assets to Sales||0.27||0.25||0.32||n.a|
|Current Debt/Total Assets||37%||26%||19%||n.a|