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Computer Reseller Business Plan


COMPUTECH MANAGEMENT


14853 Holyfield Ave.

Denver, CO 96774


This plan for revamping an aging computer reseller reflects the changes that any mature company needs to make to compete in a changing business climate. Capital infusion will allow the company to expand its service capacity and carve out a more secure place for itself in a highly competitive field. Note the increased emphasis on promotional efforts to help the company re-launch itself. This business plan was compiled using Business Plan Pro, by Palo Alto Software ©.




  • EXECUTIVE SUMMARY
  • COMPANY SUMMARY
  • PRODUCTS
  • MARKET ANALYSIS SUMMARY
  • STRATEGY AND IMPLEMENTATION SUMMARY
  • MANAGEMENT SUMMARY
  • FINANCIAL PLAN

EXECUTIVE SUMMARY

By focusing on its strengths, its key customers, and the underlying values they need, CompuTech Management (CTM) will increase sales to more than $10 million in three years, while also improving the gross margin on sales and cash management and working capital.

This business plan leads the way. It renews our vision and strategic focus: adding value to our target market segments, the small business and high-end home office users, in our local market. It also provides the step-by-step plan for improving our sales, gross margin, and profitability.

This plan includes this summary, and chapters on the company, products and services, market focus, action plans and forecasts, management team, and financial plan.


Objectives

  1. Sales increasing to more than $10 million by the third year.
  2. Bring gross margin back up to above 25%, and maintain that level.
  3. Sell $2 million of service, support, and training by 1998.
  4. Improve inventory turnover to 6 turns next year, 7 in 1996, and 8 in 1997.


Mission

CTM is built on the assumption that the management of information technology forbusiness is like legal advice, accounting, graphic arts, and other bodies of knowledge, in that it is not inherently a do-it-yourself prospect. Smart business people who aren't computer hobbyists need to find quality vendors of reliable hardware, software, service, and support. They need to use these quality vendors as they use their other professional service suppliers, as trusted allies.

CTM is such a vendor. It serves its clients as a trusted ally, providing them with the loyalty of a business partner and the economics of an outside vendor. We make sure that our clients have what they need to run their businesses as well as possible, with maximum efficiency and reliability. Many of our information applications are mission critical, so we give our clients the assurance that we will be there when they need us.



Keys to Success


  1. Differentiate from box-pushing, price-oriented businesses by offering and delivering service and support — and charging for it.
  2. Increase gross margin to more than 25%.
  3. Increase our non-hardware sales to 20% of the total sales by the third year.


COMPANY SUMMARY

CTM is a 10-year-old computer reseller with sales of $7 million per year, declining margins, and market pressure. It has a good reputation, excellent people, and a steady position in the local market, but has been having trouble maintaining healthy financials.



Company Ownership

CTM is a privately-held C corporation owned in majority by its founder and president, Eugene Foley. There are six part owners, including four investors and two past employees. The largest of these (in percent of ownership) are Dean Radcliff, our attorney, and Steve Holcomb, our public relations consultant. Neither owns more than 15%, but both are active participants in management decisions.

Company History

CTM has been caught in the vice grip of margin squeezes that have affected computer resellers worldwide. The detailed numbers below include other indicators of some concern:


  • The gross margin % has been declining steadily.
  • Inventory turnover is getting steadily worse.

These concerns are part of the general trend affecting computer resellers. The margin squeeze is happening throughout the computer industry worldwide.



Past Performance

  1994 1995 1996
Sales $3,773,889 $4,661,902 $5,301,059
Gross $1,189,495 $1,269,261 $1,127,568
Gross % (calculated) 31.52% 27.23% 21.27%
Operating Expenses $752,083 $902,500 $1,052,917
Collection period (days) 35 40 45
Inventory turnover 7 6 5
Balance Sheet     1996
Short-term Assets      
Cash     $55,432
Accounts receivable     $395,107
Inventory     $651,012
Other Short-term Assets     $25,000
Total Short-term Assets     $1,126,551
Long-term Assets      
Capital Assets     $350,000
Accumulated Depreciation     $50,000
Total Long-term Assets     $300,000
Total Assets     $1,426,551
Debt and Equity      
Accounts Payable     $223,897
Short-term Notes     $90,000
Other ST Liabilities     $15,000
Subtotal Short-term Liabilities     $328,897
Long-term Liabilities     $284,862
Total Liabilities     $613,759
Paid in Capital     $500,000
Retained Earnings     $238,140
Earnings $437,411 $366,761 $74,652
Total Equity     $812,792
Total Debt and Equity     $1,426,551
Other Inputs     1996
Payment days     30
Sales on credit     $3,445,688
Receivables turnover     8.72

Company Locations and Facilities

We have one location, a 7,000 square foot store in a suburban shopping center located conveniently close to the downtown area. It includes a training area, service department, offices, and showroom area.



PRODUCTS


Competitive Comparison

The only way we can hope to differentiate well is to define the vision of the company to be an information technology ally to our clients. We will not be able to compete in any effective way with the chains using boxes or products as appliances. We need to offer a real alliance.

The benefits we sell include many intangibles: confidence, reliability, knowing that somebody will be there to answer questions and help at the important times.

These are complex products, products that require serious knowledge and experience to use, and our competitors sell only the products themselves.

Unfortunately, we cannot sell the products at a higher price just because we offer services; the market has shown that it will not support that concept. We have to also sell the service and charge for it separately.



Sales Literature

Copies of our brochure and advertisements are available upon request. Of course one of our first tasks will be to change the message of our literature to make sure we are selling the company, rather than the product.



Sourcing

Our costs are part of the margin squeeze. As competition on price increases, the squeeze between manufacturer's price into channels and end-users ultimate buying price continues.

With the hardware lines, our margins are declining steadily. Our margins are being squeezed from the 25% of five years ago to more like 13-15% at present. In the main-line peripherals a similar trend shows, with prices for printers and monitors declining steadily. We are also starting to see that same trend with software

In order to hold costs down as much as possible, we concentrate our purchasing with Martinson, which offers 30-day net terms and overnight shipping from the warehouse in Denver. We need to concentrate on making sure our volume gives us negotiating strength.

In accessories and add-ons we can still get decent margins, 25% to 40%.



Technology

We have for years supported both Windows and Macintosh technology for CPUs, although we've switched vendors many times for the Windows (and previously DOS) lines. We are also supporting Novell, Banyon, and Microsoft networking, Xbase database software, and Claris application products.



MARKET ANALYSIS SUMMARY

CTM focuses on local markets, small business and home office, with special focus on the high-end home office and the 5-20 unit small business office.

Market Segmentation

The segmentation allows some room for estimates and nonspecific definitions. We focus on a small-medium level of small business, and it is hard to find information to make an exact classification. Our target companies are large enough to need the high-quality information technology management we offer, but too small to have a separate computer management staff such as an MIS department. We say that our target market has 10-50 employees, and needs 5-20 workstations tied together in a local area network; the definition is flexible.

Defining the high-end home office is even more difficult. We generally know the characteristics of our target market, but we can't find easy classifications that fit into available demographics. The high-end home office business is a business, not a hobby. It generates enough money to merit the owner's paying real attention to the quality of information technology management, meaning that there is both budget and concerns that warrant working with our level of quality service and support. We can assume that we aren't talking about home offices used only part-time by people who work elsewhere during the day, and that our target market home office wants to have powerful technology and a lot of links between computing, telecommunications, and video.



Industry Analysis

We are part of the computer reselling business, which includes several kinds of businesses:

  1. Computer dealers: storefront computer resellers, usually less than 5,000 square feet, often focused on a few main brands of hardware, usually offering only a minimum of software, and variable amounts of service and support. These are usually old-fashioned (1980s-style) computer stores and they usually offer relatively few reasons for buyers to shop with them. Their service and support is not usually very good and their prices are usually higher than the larger stores.
  2. Chain stores and computer superstores: these include major chains such as CompUSA, Computer City, Future Shop, etc. They are almost always more than 10,000 square feet of space, usually offer decent walk-in service, and are often warehouse-like locations where people go to find products in boxes with very aggressive pricing, and little support.
  3. Mail order: the market is served increasingly by mail order businesses that offer aggressivepricing of boxed product. For the purely price-driven buyer, who buys boxes and expects no service, these are very good options.
  4. Others: there are many other channels through which people buy their computers, usually variations of the main three types above.


Industry Participants

The national chains are a growing presence. CompUSA, Computer City, Incredible Universe, Babbages, Egghead, and others. They benefit from national advertising, economies of scale, volume buying, and a general trend toward name-brand loyalty for buying in the channels as well as for products.

Local computer stores are threatened. These tend to be small businesses, owned by people who started them because they liked computers. They are under-capitalized and under-managed. Margins are squeezed as they compete against the chains, in a competition based on price more than on service and support.

Distribution Patterns

Small Business buyers are accustomed to buying from vendors who visit their offices. They expect the copy machine vendors, office products vendors, and office furniture vendors, as well as the local graphic artists, freelance writers, or whomever, to visit their office to make their sales.

There is usually a lot of leakage in ad-hoc purchasing through local chain stores and mail order. Often the administrators try to discourage this, but are only partially successful.

Unfortunately our Home Office target buyers may not expect to buy from us. Many of them turn immediately to the superstores (office equipment, office supplies, and electronics) and mail order to look for the best price, without realizing that there is a better option for them at only a little bit more.



Competition and Buying Patterns

The small business buyers understand the concept of service and support, and are much more likely to pay for it when the offering is clearly stated.

There is no doubt that we compete much more against all the box pushers than against other service providers. We need to effectively compete against the idea that businesses should buy computers as plug-in appliances that don't need ongoing service, support, and training.

Our focus group sessions indicated that our target Home Offices think about price but would buy based on quality service if the offering were properly presented. They think about price because that's all they ever see. We have very good indications that many would rather pay 10-20% morefor a relationship with a long-term vendor providing back-up and quality service and support; they end up in the box-pusher channels because they aren't aware of the alternatives.

Availability is also very important. The Home Office buyers tend to want immediate, local solutions to problems.


Main Competitors


Chain stores

We have Store 1 and Store 2 already within the valley, and Store 3 is expected by the end of next year. If our strategy works, we will have differentiated ourselves sufficiently to not have to compete against these stores.

Strengths: national image, high volume, aggressive pricing, economies of scale

Weaknesses: lack of product, service and support knowledge, lack of personal attention.


Other local computer stores

Store 4 and Store 5 are both in the downtown area. They are both competing against the chains in an attempt to match prices. When asked, the owners will complain that margins are squeezed by the chains and customers buy on price only. They say they tried offering services and that buyers didn't care, instead preferring lower prices. We think the problem is also that they didn't really offer good service, and also that they didn't differentiate from the chains.



MARKET ANALYSIS SUMMARY

The home offices in Denver are an important growing market segment. Nationally, there are approximately 30 million home offices, and the number is growing at 10% per year. Our estimate in this plan for the home offices in our market service area is based on an analysis published four months ago in the local newspaper.

Home offices include several types. The most important, for our plan's focus, are the home offices that are the only offices of real businesses, from which people make their primary living. These are likely to be professional services such as graphic artists, writers, and consultants, some accountants and the occasional lawyer, doctor, or dentist. There are also part-time home offices with people who are employed during the day but work at home at night, people who work at home to provide themselves with a part-time income, or people who maintain home offices relating to their hobbies; we will not be focusing on this segment.

Small business within our market includes virtually any business with a retail, office, professional, or industrial location outside of someone's home, and fewer than 30 employees. We estimate 45,000 such businesses in our market area.

The 30-employee cutoff is arbitrary. We find that the larger companies turn to other vendors, but we can sell to departments of larger companies, and we shouldn't be giving up leads when we get them.

Market Analysis
Potential Customers Total Customers Growth rate
Consumer 12,000 2%
Small Business 15,000 5%
Large Business 33,000 8%
Government 36,000 -2%
Other 19,000 0%
Total 115,000 2.78%


STRATEGY AND IMPLEMENTATION SUMMARY


  1. Emphasize service and support. We must differentiate ourselves from the box pushers. We need to establish our business offering as a clear and viable alternative for our target market, to the price-only kind of buying.
  2. Build a relationship-oriented business. Build long-term relationships with clients, not single-transaction deals with customers. Become their computer department, not just a vendor. Make them understand the value of the relationship.
  3. Focus on target markets. We need to focus our offerings on small business as the key market segment we should own. This means the 5-20 unit system, tied together in a local area network, in a company with 5-50 employees. Our values (training, installation, service, support, knowledge) are more cleanly differentiated in this segment.
    As a corollary, the high end of the home office market is also appropriate. We do not want to compete for the buyers who go to the chain stores or mail order, but we definitely want to be able to sell individual systems to the smart home office buyers who want a reliable, full-service vendor.
  4. Differentiate and fulfill the promise. We can't just market and sell service and support, we must actually deliver as well. We need to make sure we have the knowledge-intensive business and service-intensive business we claim to have.

Marketing Strategy

The marketing strategy is the core of the main strategy:

  1. Emphasize service and support
  2. Build a relationship business
  3. Focus on small business and high-end home office as key target markets


Pricing Strategy

We must charge appropriately for the high-end, high-quality service and support we offer. Our revenue structure has to match our cost structure, so the salaries we pay to assure good service and support must be balanced by the revenue we charge.

We cannot build the service and support revenue into the price of products. The market can't bear the higher prices and the buyer feels ill-used when they see the same product priced lower at the chains. Despite the logic behind this, the market doesn't support this concept.

Therefore, we must make sure that we deliver and charge for service and support. Training, service, installation, networking support—all of this must be readily available and priced to sell and deliver revenue.





Promotion Strategy

We depend on newspaper advertising as our main way to reach new buyers. As we change strategies, however, we need to change the way we promote ourselves:

  1. Advertising We'll be developing our core positioning message: "24 Hour On-Site Service - 365 Days a Year With No Extra Charges" to differentiate our service from the competition. We will be using local newspaper advertising, radio and cable TV to launch the initial campaign.
  2. Sales Brochure Our collaterals have to sell the store,and visiting the store, not the specific book or discount pricing.
  3. We must radically improve our direct mail efforts, reaching our established customers with training, support services, upgrades, and seminars.
  4. It's time to work more closely with the local media. We could offer the local radio a regular talk show on technology for small business, as one example.


Sales Strategy


  1. We need to sell the company, not the product. We sell CTM, not Apple, IBM,Hewlett-Packard, or Compaq, or any of our software brand names.
  2. We have to sell our service and support. The hardware is like the razor, and the support, service, software services, training, and seminars are the razor blades. We need to serve our customers with what they really need.

Sales Forecast

The important elements of the sales forecast are shown in the Total Sales by Month in Year 1 table. The non-hardware sales increase to about $2 million total in the third year.

Sales Forecast      
Unit Sales 1997 1998 1999
Systems 1,666 1,750 1,850
Service 4,975 6,000 7,500
Software 3,725 5,000 6,500
Training 2,230 4,000 8,000
Other 4,575 5,000 5,500
Total Unit Sales 17,171 21,750 29,350
Unit Prices 1997 1998 1999
Systems $1,977 $1,984 $1,977
Service $73 $84 $87
Software $215 $195 $180
Training $47 $72 $79
Other $300 $300 $300
Total Sales 1997 1998 1999
Systems $3,293,500 $3,472,868 $3,657,248
Service $365,000 $504,000 $652,500
Software $799,250 $975,000 $1,170,000
Training $103,865 $288,000 $632,000
Other $1,372,500 $1,500,000 $1,650,000
Total Sales $5,934,115 $6,739,868 $7,761,748
Unit Direct Costs 1997 1998 1999
Systems $1,000 $992 $988
Service $60 $67 $70
Software $100 $98 $90
Training $22 $43 $47
Other $150 $150 $150
Direct Costs 1997 1998 1999
Systems $1,666,000 $1,736,434 $1,828,624
Service $298,500 $403,200 $522,000
Software $372,500 $487,500 $585,000
Training $49,506 $172,800 $379,200
Other $686,250 $750,000 $825,000
Subtotal Direct Costs $3,072,756 $3,549,934 $4,139,824


Service and Support

Our strategy hinges on providing excellent service and support. This is critical. We need to differentiate on service and support, and to therefore deliver as well.

  1. Training: details would be essential in a real business plan, but not in this sample plan.
  2. Upgrade offers: details would be essential in a real business plan, but not in this sample plan.
  3. Our own internal training: details would be essential in a real business plan, but not in this sample plan.
  4. Installation services: details would be essential in a real business plan, but not in this sample plan.
  5. Custom software services: details would be essential in a real business plan, but not in this sample plan.
  6. Network configuration services: details would be essential in a real business plan, but not in this sample plan.

Milestones

Our important milestones are shown on the table below.

Business Plan Milestones

Milestone Mngr Date Dept. Budget Act date Act $ Date P-A $ P-A
Corporate Identity TJ 12/17/95 Marketing $10,000 1/15/96 $12,004 (29) ($2,004)
Seminar implementation IR 1/10/96 Sales $1,000 12/27/95 $5,000 14 ($4,000)
Business Plan Review RJ 1/10/96 GM $0 1/23/96 $500 (13) ($500)
Upgrade mailer IR 1/16/96 Sales $5,000 2/12/96 $12,500 (27) ($7,500)
New corporate brochure TJ 1/16/96 Marketing $5,000 1/15/96 $5,000 1 $0
Delivery vans SD 1/25/96 Service $12,500 2/26/96 $3,500 (32) $9,000
Direct mail IR 2/16/96 Marketing $3,500 2/25/96 $2,500 (9) $1,000
Advertising RJ 2/16/96 GM $115,000 3/6/96 $100,000 (19) $15,000
X4 Prototype SG 2/25/96 Product $2,500 2/25/96 $0 0 $2,500
Service revamp SD 2/25/96 Product $2,500 2/25/96 $2,500 0 $0
6 Presentations IR 2/25/96 Sales $0 1/10/96 $1,000 46 ($1,000)
X4 Testing SG 3/6/96 Product $1,000 1/16/96 $0 50 $1,000
3 Accounts SD 3/17/96 Sales $0 3/17/96 $2,500 0 ($2,500)
L30 Prototype PR 3/26/96 Product $2,500 4/11/96 $15,000 (16) ($12,500)
Tech95 Expo TB 4/12/96 Marketing $15,000 1/25/96 $1,000 78 $14,000
VP S&M hired JK 6/11/96 Sales $1,000 7/25/96 $5,000 (44) ($4,000)
Mailing system SD 7/25/96 Service $5,000 7/14/96 $7,654 11 ($2,654)
Other             0 $0
Totals       $181,500   $175,658 11 $5,842

MANAGEMENT SUMMARY

Our management philosophy is based on responsibility and mutual respect. People who work at CTM want to work at CTM because we have an environment that encourages creativity and achievement. The team includes 22 employees, under a president and four managers.



Organizational Structure

The team includes 22 employees, under a president and four managers.

Our main management divisions are sales, marketing, service, and administration. Service handles service, support, training, and development.



Management Team

Eugene Foley, President: 46 years old, founded CTM in 1984 to focus on reselling high-powered personal computers to small business. Degree in computer science, 15 years with Large Computer Company, Inc. in positions ending with project manager. Eugene has been attending courses at the local Small Business Development Center for more than six years now, steadily adding business skills and business training to his technical background.

Janice Carly, VP Marketing: 36 years old, joined us last year following a very successful career with Continental Computers. Her hiring was the culmination of a long recruiting search. WithContinental she managed the VAR marketing division. She is committed to re-engineering CTM to be a service and support business that sells computers, not vice-versa. MBA, undergraduate degree in history.

Max Webber, VP Service and Support: 48 years old, 18 years with Large Computers, Inc. in programming and service-related positions, 7 years with CTM. MS in computer science and BS in electrical engineering.

Annette Yezbick, VP Sales: 32, former teacher, joined CTM part-time in 1991 and went full-time in 1992. Very high people skills, BA in elementary education. She has taken several sales management courses at the local SBDC.

Mark Saul, Director of Administration: 43, started with CTM as a part-time bookkeeper in 1987, and has become full-time administrative and financial backbone of the company.



Management Team Gaps

At present we believe we have a good team for covering the main points of the business plan. The addition of Janice Carly was important as a way to cement our fundamental re-positioning and re-engineering.

At present, we are weakest in the area of technical capabilities to manage the database marketing programs and upgraded service and support, particularly with cross-platform networks. We also need to find a training manager.



Personnel Plan

The Personnel Plan reflects the need to bolster our capabilities to match our positioning. Our total headcount should increase to 22 this first year, and to 30 by the third year. Detailed monthly projections are included in the appendices.

Personnel Plan
Production 1997 1998 1999
Manager $12,000 $13,000 $14,000
Assistant $36,000 $40,000 $40,000
Technical $12,500 $35,000 $35,000
Technical $12,500 $35,000 $35,000
Technical $24,000 $27,500 $27,500
Fulfillment $24,000 $30,000 $60,000
Fulfillment $18,000 $22,000 $50,000
Other   $0 $0
Subtotal $139,000 $202,500 $261,500
Sales and Marketing 1997 1998 1999
Manager $72,000 $76,000 $80,000
Technical sales $60,000 $63,000 $85,000
Technical sales $45,500 $46,000 $46,000
Salesperson $40,500 $55,000 $64,000
Salesperson $40,500 $50,000 $55,000
Salesperson $33,500 $34,000 $45,000
Salesperson $31,000 $38,000 $45,000
Salesperson $21,000 $30,000 $33,000
Salesperson $0 $30,000 $33,000
Other $0   $0
Subtotal $344,000 $422,000 $486,000
Administration 1997 1998 1999
President $66,000 $69,000 $95,000
Finance $28,000 $29,000 $30,000
Admin Assistant $24,000 $26,000 $28,000
Bookkeeping $18,000 $25,000 $30,000
Clerical $12,000 $15,000 $18,000
Clerical $7,000 $15,000 $18,000
Clerical $0 $0 $15,000
Other $0 $0 $0
Subtotal $155,000 $179,000 $234,000
Other 1997 1998 1999
Programming $36,000 $40,000 $44,000
Other technical $0 $30,000 $33,000
Other $0 $0 $0
Subtotal $36,000 $70,000 $77,000
Total Headcount 22 25 30
Total Payroll $674,000 $873,500 $1,058,500
Payroll Burden $107,840 $139,760 $169,360
Total Payroll Expenditures $781,840 $1,013,260 $1,227,860


Other Management Considerations

Our attorney, Dean Radcliff, is also a co-founder. He invested significantly in the company over a period of time during the 1980s. He remains a good friend of Eugene and has been a steady source of excellent legal and business advice.

Steve Holcomb, public relations consultant, is also a co-founder and co-owner. Like Radcliff, he invested in the early stages and remains a trusted confidant and vendor of public relations and advertising services.



FINANCIAL PLAN

The most important element in the financial plan is the critical need for improving several of the key factors that impact cash flow:

  1. We must at any cost stop the slide in inventory turnover and develop better inventory management to bring the turnover back up to 8 turns by the third year. This should also be a function of the shift in focus towards service revenues to add to the hardware revenues.
  2. We must also bring the gross margin back up to 25%. This too is related to improving the mix between hardware and service revenues, because the service revenues offer much better margins.
  3. We plan to borrow another $150,000 long-term this year. The amount seems in line with the balance sheet capabilities.


Important Assumptions

On our General Assumptions table, the most ambitious and also the most questionable assumption is our projected improvement in inventory turnover, from 5 turns last year to 6, 7, and then 8. This is critical to healthy cash flow, but will also be difficult.

General Assumptions

Note: Ratios in assumptions are used as estimators and may therefore have different values than ratios calculated in the ratios section.
  1997 1998 1999
Short Term Interest Rate 8.00% 8.00% 8.00%
Long Term Interest Rate 8.50% 8.50% 8.50%
Payment days 35 35 35
Collection days 45 45 45
Inventory Turnover 6.00 5.00 5.00
Tax Rate Percent 20.00% 20.00% 20.00%
Expenses in cash% 14.00% 14.00% 14.00%
Sales on credit 70.00% 75.00% 80.00%
Personnel Burden % 16.00% 16.00% 16.00%



Key Financial Indicators

Break-even Analysis

For our break-even analysis, we assume running costs of approximately $94,000 per month, which includes our full payroll, rent, and utilities, and an estimation of other running costs. Payroll alone, at our present run rate, is only about $55,000.

Margins are harder to assume. Our overall average of $343/248 is based on past sales. We hope to attain a margin that high in the future.

The chart shows that we need to sell about $340,000 per month to break even, according to theseassumptions. This is about half of our planned 1995 sales level, and significantly below our last year's sales level, so we believe we can maintain it.

Break Even Analysis:  
Monthly Units Break-even 620
Monthly Sales Break-even $214,232
Assumptions:  
Average Unit Sale $345.59
Average Per-Unit Cot $178.95
Fixed Cost $103,300



Projected Profit and Loss

The most important assumption in the Projected Profit and Loss statement is the gross margin, which is supposed to increase to 25%. This is up from barely 21% in the last year. The increase in gross margin is based on changing our sales mix, and it is critical.

Month-by-month assumptions for profit and loss are included in the appendices.

Projected Profit and Loss

Pro-forma Income Statement
  1997 1998 1999
Sales $5,934,115 $6,739,868 $7,761,748
Direct Cost of Sales $3,072,756 $3,549,934 $4,139,824
Production payroll $139,000 $202,500 $261,500
Other $6,000 $6,600 $7,260
Total Cost of Sales $3,217,756 $3,759,034 $4,408,584
Gross margin $2,716,359 $2,980,834 $3,353,164
Gross margin percent 45.78% 44.23% 43.20%
Operating expenses:      
Sales and marketing expenses
Sales/Marketing Salaries $344,000 $422,000 $486,000
Ads $150,000 $316,733 $332,570
Catalog $25,000 $19,039 $19,991
Mailing $113,300 $0 $0
Promo $16,000 $0 $0
Shows $20,200 $0 $0
Literature $7,000 $0 $0
PR $1,000 $0 $0
Seminar $31,000 $0 $0
Service $10,250 $0 $0
Training $60,000 $0 $0
  —————— —————— ——————
Total Sales and Marketing Expense $777,750 $757,772 $838,561
Sales and Marketing Percent 13.11% 11.24% 10.80%
General & Administrative Expenses
G&A Salaries $155,000 $179,000 $234,000
Leased Equipment $30,000 $31,500 $33,075
Utilities $9,000 $9,450 $9,923
Insurance $6,000 $6,300 $6,615
Rent $84,000 $88,200 $92,610
Depreciation $12,681 $13,315 $13,981
Payroll Burden $107,840 $139,760 $169,360
Other $6,331 $6,648 $6,980
  —————— —————— ——————
Total General and Administrative Expense $410,852 $474,173 $566,544
General and Administrative Percent 6.92% 7.04% 7.30%
Other Operating Expenses
Other Salaries $36,000 $70,000 $77,000
Contract/Consultants $12,000 $30,000 $30,000
Other $3,000 $3,150 $3,308
  —————— —————— ——————
Total Other Operating Expenses $51,000 $103,150 $110,308
Percent of Sales 0.86% 1.53% 1.42%
  —————— —————— ——————
Total Operating Expenses $1,239,602 $1,335,095 $1,515,413
Profit Before      
Interest and Taxes $1,476,757 $1,645,739 $1,837,751
Interest Expense ST $8,133 $6,000 $6,000
Interest Expense LT $22,545 $19,395 $15,849
Taxes Incurred $289,216 $324,069 $363,180
Net Profit $1,156,863 $1,296,275 $1,452,722
Net Profit/Sales 19.50% 19.23% 18.72%


Projected Cash Flow

The cash flow depends on assumptions for inventory turnover, payment days, and accounts receivable management. Our projected 45-day collection days is critical, and it is also reasonable. We need $150,000 in new financing in March to get through a cash flow dip as we build up for mid-year sales.

Pro-Forma Cash Flow
  1997 1998 1999
Net Profit: $1,156,863 $1,296,275 $1,452,722
Plus:      
Depreciation $12,681 $13,315 $13,981
Change in Accounts Payable $127,271 $47,683 $60,473
Current Borrowing (repayment) ($15,000) $0 $0
Increase (decrease) Other Liabilities $0 $0 $0
Long-term Borrowing (repayment) ($36,708) ($39,953) ($43,484)
Capital Input $0 $0 $0
Subtotal $1,245,106 $1,317,320 $1,483,691
Less: 1997 1998 1999
Change in Accounts Receivable $304,718 $151,799 $194,504
Change in Inventory $15,868 $267,992 $161,543
Change in Other ST Assets $0 $0 $0
Capital Expenditure $300,000 $200,000 $400,000
Dividends $0 $0 $0
Subtotal $620,586 $619,791 $756,047
Net Cash Flow $624,520 $697,529 $727,644
Cash balance $679,952 $1,377,481 $2,105,125

Projected Balance Sheet

The Projected Balance Sheet is quite solid. We do not project any real trouble meeting our debt obligations — as long as we can achieve our specific objectives.

Pro-forma Balance Sheet
    1997 1998 1999
Short-term Assets Starting Balances      
Cash $55,432 $679,952 $1,377,481 $2,105,125
Accounts receivable $395,107 $699,825 $851,624 $1,046,128
Inventory $651,012 $666,880 $934,872 $1,096,415
Other Short-term Assets $25,000 $25,000 $25,000 $25,000
Total Short-term Assets $1,126,551 $2,071,657 $3,188,978 $4,272,668
Long-term Assets        
Capital Assets $350,000 $650,000 $850,000 $1,250,000
Accumulated Depreciation $50,000 $62,681 $75,996 $89,977
Total Long-term Assets $300,000 $587,319 $774,004 $1,160,023
Total Assets $1,426,551 $2,658,976 $3,962,982 $5,432,691
Debt and Equity        
    1997 1998 1999
Accounts Payable $223,897 $351,168 $398,850 $459,323
Short-term Notes $90,000 $75,000 $75,000 $75,000
Other ST Liabilities $15,000 $15,000 $15,000 $15,000
Subtotal        
Short-term Liabilities $328,897 $441,168 $488,850 $549,323
Long-term Liabilities $284,862 $248,154 $208,201 $164,717
Total Liabilities $613,759 $689,322 $697,051 $714,040
Paid in Capital $500,000 $500,000 $500,000 $500,000
Retained Earnings $238,140 $312,792 $1,469,655 $2,765,930
Earnings $74,652 $1,156,863 $1,296,275 $1,452,722
Total Equity $812,792 $1,969,655 $3,265,930 $4,718,652
Total Debt and Equity $1,426,551 $2,658,976 $3,962,982 $5,432,691
Net Worth $812,792 $1,969,655 $3,265,930 $4,718,652

Business Ratios

The table follows with our main business ratios. We do intend to improve gross margin, collection days, and inventory turnover.

Ratio Analysis
Profitability Ratios: 1997 1998 1999 RMA
Gross margin 45.78% 44.23% 43.20% 0
Net profit margin 19.50% 19.23% 18.72% 0
Return on Assets 43.51% 32.71% 26.74% 0
Return on Equity 58.73% 39.69% 30.79% 0
Activity Ratios 1997 1998 1999 RMA
AR Turnover 5.94 5.94 5.94 0
Collection days 48 56 56 0
Inventory Turnover 4.88 4.69 4.34 0
Accts payable turnover 9.00 8.80 8.79 0
Total asset turnover 2.23 1.70 1.43 0
Debt Ratios: 1997 1998 1999 RMA
Debt to net Worth 0.35 0.21 0.15 0
Short-term Debt to Liab. 0.64 0.70 0.77 0
Liquidity ratios        
Current Ratio 4.70 6.52 7.78 0
Quick Ratio 3.18 4.61 5.78 0
Net Working Capital $1,630,490 $2,700,127 $3,723,346 0
Interest Coverage 48.14 64.81 84.11 0
Additional ratios 1997 1998 1999 RMA
Assets to sales 0.45 0.59 0.70 0
Debt/Assets 26% 18% 13% 0
Current debt/Total Assets 17% 12% 10% 0
Acid Test 1.60 2.87 3.88 0
Asset Turnover 2.23 1.70 1.43 0
Sales/Net Worth 3.01 2.06 1.64 0

Appendix: Projected Balance Sheet

Pro-forma Balance Sheet

    Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97
Short-term Assets Starting Balances            
Cash $55,432 $206,949 $162,514 $143,335 $227,142 $219,347 $342,392
Accounts receivable $395,107 $456,049 $484,668 $599,622 $552,650 $479,500 $423,850
Inventory $651,012 $470,438 $505,882 $618,326 $570,548 $486,990 $433,480
Other Short-term Assets $25,000 $25,000 $25,000 $25,000 $25,000 $175,000 $175,000
Total Short-term Assets $1,126,551 $1,158,437 $1,178,065 $1,386,283 $1,375,340 $1,360,837 $1,374,722
Long-term Assets              
Capital Assets $350,000 $450,000 $550,000 $600,000 $600,000 $650,000 $650,000
Accumulated Depreciation $50,000 $51,000 $52,010 $53,030 $54,060 $55,100 $56,150
Total Long-term Assets $300,000 $399,000 $497,990 $546,970 $545,940 $594,900 $593,850
Total Assets $1,426,551 $1,557,437 $1,676,055 $1,933,253 $1,921,280 $1,955,737 $1,968,572
Debt and Equity              
    Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97
Accounts Payable $223,897 $264,437 $296,635 $335,167 $319,953 $284,561 $246,225
Short-term Notes $90,000 $90,000 $90,000 $165,000 $75,000 $75,000 $75,000
Other ST Liabilities $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
Subtotal Short-term Liabilities $328,897 $369,437 $401,635 $515,167 $409,953 $374,561 $336,225
Long-term Liabilities $284,862 $281,920 $278,958 $275,974 $272,970 $269,944 $266,897
Total Liabilities $613,759 $651,357 $680,593 $791,141 $682,923 $644,505 $603,121
Paid in Capital $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000
Retained Earnings $238,140 $312,792 $312,792 $312,792 $312,792 $312,792 $312,792
Earnings $74,652 $93,287 $182,670 $329,319 $425,565 $498,440 $552,659
Total Equity $812,792 $906,079 $995,462 $1,142,111 $1,238,357 $1,311,232 $1,365,451
Total Debt and Equity $1,426,551 $1,557,437 $1,676,055 $1,933,253 $1,921,280 $1,955,737 $1,968,572
Net Worth $812,792 $906,079 $995,462 $1,142,111 $1,238,357 $1,311,232 $1,365,451
Jul-97 Aug-97 Sep-97 Oct-97 Nov-97 Dec-97 1997 1998 1999
$217,918 $263,815 $292,826 $428,300 $483,679 $679,952 $679,952 $1,377,481 $2,105,125
$327,250 $278,775 $401,625 $691,075 $800,362 $699,825 $699,825 851,624 $1,046,128
$303,260 $300,760 $469,480 $792,768 $816,700 $666,880 $666,880 $934,872 $1,096,415
$475,000 $475,000 $325,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000
$1,323,428 $1,318,350 $1,488,931 $1,937,143 $2,125,742 $2,071,657 $2,071,657 $3,188,978 $4,272,668
$650,000 $650,000 $650,000 $650,000 $650,000 $650,000 $650,000 $850,000 $1,250,000
$57,211 $58,283 $59,366 $60,460 $61,565 $62,681 $62,681 $75,996 $89,977
$592,789 $591,717 $590,634 $589,540 $588,435 $587,319 $587,319 $774,004 $1,160,023
$1,916,217 $1,910,067 $2,079,565 $2,526,683 $2,714,177 $2

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