The financial picture is quite encouraging. We have been slow to take on debt, but with our increase in sales we do expect to apply for a credit line with the bank, to a limit of £150,000. The credit line is easily supported by assets.
We do expect to be able to take some money out as dividends. The owners don't take overly generous salaries, so some draw is appropriate.
7.1 Important Assumptions
The accompanying table lists our main assumptions for developing our financial projections. The most sensitive assumption is the collection days. We would like to improve collection days to take pressure off of our working capital, but our increasing sales through channels makes the collection time a cost of doing business.
We also expect to see a decline in our stock turnover ratio, another unfortunate side effect of increasing sales through channel. We find ourselves having to buy earlier and hold more finished goods in order to deal with sales through the channel.
7.2 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 will be very hard to manage. We expect our gross margin to be a bit lower than before, because our projections show a slight decline as we go into new product areas and face new competition.
The projections for collection days and stock turnover show that we are already expecting a decline in these indicators, because of increasing sales through channels.
7.3 Break-even Analysis
Our break-even analysis is based on running costs, the "burn-rate" costs we incur to keep the business running, not on theoretical fixed costs that would be relevant only if we were closing. Between payroll, rent, utilities, and basic marketing costs, we think we have a good estimate of fixed costs.
Our assumptions on average unit sales and average per-unit costs depend on averaging. We don't really need to calculate an exact average, this is close enough to help us understand what a real break-even point might be.
The essential insight here is that our sales level seems to be running comfortably above break-even.
7.4 Projected Profit and Loss
We do expect a significant increase in profitability this year, and in the future, because we have learned how to deal with the increasing sales levels of selling through channels. Despite the lower profitability levels of recent years, we expect Net Profit/Sales to improve yearly through 2008.
Our higher sales volume has lowered our cost of goods and increased our gross margin. This increase in gross margin is important to profitability.
7.5 Projected Cash Flow
Although we expect to be more profitable in 2006, we still have drains on the cash flow. We need to invest in new assembly and manufacturing equipment, plus new computer equipment, and in miscellaneous current assets, including office equipment. Because of our increased sales through channels, and necessary increase in stock levels, we need to increase working capital. We plan to extend our credit line to cover as much as £150,000 in current credit, backed by receivables and stock. Our maximum extension at the end of the year is covered by receivables and stock that same month.
7.6 Projected Balance Sheet
Our projected balance sheet shows an increase in net worth in 2008, at which point we expect to be making a comfortable profit on projected sales. With the present financial projections we will be careful in supporting our working capital credit line, and we are growing assets both because we want to--new equipment--and because we have to grow receivables and stock to support growth in sales through channels.
7.7 Business Ratios
Our ratios look healthy and solid. Gross margin is projected to decline, return on assets increasing, and return on equity to improve as well. Debt and liquidity ratios also look tough, with debt to net worth running at more than 1.4 to one. The projections, if we make them, are manageable. The standard comparisons are based on standard financials for manufacturers of wood office furniture.