Ideally, we would want to bring in as much as £1 million of equity investment from investors compatible with our growth plan, management style, and vision, in return for some equity ownership. We are not going to talk about specifics of a deal until we have met the right partners. This plan does not call for equity from outside investors.
If and when the time for outside investors comes, we want compatible investors or no investors at all. Compatibility means:
- A fundamental respect for giving our customers value, and for maintaining a healthy and happy workplace.
- Respect for realistic forecasts, and conservative cash flow and financial management.
- Cash flow as first priority, growth second, profits third.
- Located in the UK or Ireland.
- Willingness to follow the company carefully and contribute valuable input to strategy and implementation decisions.
Of these, only the last two are flexible.
We want to establish a mechanism for employees to acquire fair stock options that can become valuable as the company grows.
7.1 Important Assumptions
The financial plan depends on important assumptions, most of which are shown in the following table. The 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.
|Current Interest Rate||10.50%||10.50%||10.50%|
|Long-term Interest Rate||11.00%||11.00%||11.00%|
7.2 Projected Profit and Loss
The following table shows that we expect to maintain gross margin but increase net profit margin during the next three years. The single most important factor in the improving profit margin is the economies of scale in our general and administrative expenses. These expenses should decline as a percentage of sales, from more than 15 percent of sales in 2005 to less than 9% in 2007.
We don’t expect to decrease sales and marketing expenses as a percent of sales. The packaged software business requires heavy marketing expenses.
We also intend to maintain and increase the percent of revenue spent on development. By 2007 we’ll be spending almost 7% of sales on product development. This is the key to our future.
The following table shows just the annual numbers. The detailed monthly projections for 2005 are included in the appendix.
|Pro Forma Profit and Loss|
|Direct Cost of Sales||£143,051||£305,460||£564,060|
|Total Cost of Sales||£290,890||£585,010||£1,066,060|
|Gross Margin %||71.84%||69.27%||71.53%|
|Sales and Marketing Expenses|
|Sales and Marketing Payroll||£48,000||£53,000||£58,000|
|Graphics and collaterals||£35,000||£70,000||£140,000|
|Trade Shows and Events||£6,000||£12,000||£24,000|
|Total Sales and Marketing Expenses||£441,175||£814,530||£1,545,120|
|Sales and Marketing %||42.71%||42.79%||41.27%|
|General and Administrative Expenses|
|General and Administrative Payroll||£90,000||£99,000||£109,000|
|Sales and Marketing and Other Expenses||£0||£0||£0|
|Dues and subscriptions||£600||£750||£938|
|Maintenance and repairs||£1,800||£2,250||£2,813|
|Other General and Administrative Expenses||£0||£0||£0|
|Total General and Administrative Expenses||£154,449||£180,988||£214,531|
|General and Administrative %||14.95%||9.51%||5.73%|
|Total Other Expenses||£31,500||£65,000||£200,000|
|Total Operating Expenses||£627,124||£1,060,518||£1,959,651|
|Profit Before Interest and Taxes||£114,906||£257,973||£718,289|
7.3 Key Financial Indicators
The following chart shows changes in key financial indicators: sales, gross margin, operating expenses, collection days, and stock turnover. The growth in sales is the most obvious change, and operating expenses with sales. We believe the growing market for our products, the larger potential market, justifies the growth projections.
We expect to maintain gross margin at a high level without major changes.
The projections for collection days and stock turnover show that we are already expecting improvements as our increasing sales gives us greater economies of scale, and greater negotiation strength with our channel partners.
7.4 Break-even Analysis
Our break-even analysis is based on our cost and price structure at present. As we grow, the fixed costs will grow in proportion to our employee numbers.
|Monthly Units Break-even||1,087|
|Monthly Revenue Break-even||£60,661|
|Average Per-Unit Revenue||£55.78|
|Average Per-Unit Variable Cost||£7.73|
|Estimated Monthly Fixed Cost||£52,260|
7.5 Projected Cash Flow
The following chart is most important for illustrating our cash projections for the next 12 months. Because of our dependence on sales through channels, and the channels’ tendency to pay slow, there are wide variations that must be supported with working capital acquired through short-term credit on receivables and stock.
The table shows just the annual results, which are less significant. The key to our business plan is the monthly cash flow table, in the appendix, which also shows up as the key numbers of the following chart.
|Pro Forma Cash Flow|
|Cash from Operations|
|Cash from Receivables||£345,775||£445,102||£870,943|
|Subtotal Cash from Operations||£1,120,465||£1,872,727||£3,678,943|
|Additional Cash Received|
|Sales Tax, VAT, HST/GST Received||£0||£0||£0|
|New Current Borrowing||£20,000||£0||£0|
|New Other Liabilities (interest-free)||£24,966||£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||£1,165,432||£1,872,727||£3,678,943|
|Expenditures from Operations|
|Subtotal Spent on Operations||£928,928||£1,672,390||£3,129,200|
|Additional Cash Spent|
|Sales Tax, VAT, HST/GST Paid Out||£0||£0||£0|
|Principal Repayment of Current Borrowing||£40,000||£2,336||£0|
|Other Liabilities Principal Repayment||£34,453||£0||£0|
|Long-term Liabilities Principal Repayment||£0||£0||£0|
|Purchase Other Current Assets||£0||£0||£0|
|Purchase Long-term Assets||£0||£50,000||£100,000|
|Subtotal Cash Spent||£1,003,381||£1,724,726||£3,229,200|
|Net Cash Flow||£162,051||£148,001||£449,743|
7.6 Projected Balance Sheet
The table shows the annual balance sheet results, with a healthy projected increase in net worth. Detailed monthly projections are in the appendix.
|Pro Forma Balance Sheet|
|Other Current Assets||£431||£431||£431|
|Total Current Assets||£206,159||£439,225||£990,336|
|Total Long-term Assets||£10,330||£59,080||£157,518|
|Liabilities and Capital||2005||2006||2007|
|Other Current Liabilities||£16,040||£16,040||£16,040|
|Subtotal Current Liabilities||£51,569||£139,998||£253,823|
|Total Liabilities and Capital||£216,489||£498,305||£1,147,854|
7.7 Business Ratios
Standard business ratios are included in the following table. The ratios show a plan for balanced, healthy growth. One of the more important indicators is the increase in working capital, which is critical to our channel sales strategy and our financial health.
The ratios for collection days and stock turnover are different than the ones in the assumptions table, because those are used as estimators to project balance sheet items for every month, while the ratios shown in this table are calculated on annual basis, using the same formulas used by our accountants, after the fact.
The standard comparisons are for this particular industry, software publishers. We feel that they illustrate the difference between software publishing and most other publishing businesses.
|Percent of Total Assets|
|Other Current Assets||0.20%||0.09%||0.04%||46.10%|
|Total Current Assets||95.23%||88.14%||86.28%||86.60%|
|Percent of Sales|
|Selling, General & Administrative Expenses||63.63%||57.87%||56.24%||50.00%|
|Profit Before Interest and Taxes||11.12%||13.55%||19.19%||1.30%|
|Total Debt to Total Assets||23.82%||28.09%||22.11%||52.10%|
|Pre-tax Return on Net Worth||68.57%||71.96%||80.34%||2.10%|
|Pre-tax Return on Assets||52.24%||51.75%||62.58%||4.30%|
|Net Profit Margin||8.16%||10.16%||14.31%||n.a|
|Return on Equity||51.10%||53.97%||59.92%||n.a|
|Accounts Receivable Turnover||7.07||7.07||7.07||n.a|
|Accounts Payable Turnover||22.09||12.17||12.17||n.a|
|Total Asset Turnover||4.77||3.82||3.26||n.a|
|Debt to Net Worth||0.31||0.39||0.28||n.a|
|Current Liab. to Liab.||1.00||1.00||1.00||n.a|
|Net Working Capital||£154,590||£299,228||£736,514||n.a|
|Assets to Sales||0.21||0.26||0.31||n.a|
|Current Debt/Total Assets||24%||28%||22%||n.a|