7.0 Financial Plan
The financial plan will cover the following:
- Required Cost of Start-Up
- Profit and Loss
- Cash Flow
- Balance Sheet
- Financial Ratios
7.1 Important Assumptions
M = 1,000
MM = 1,000,000
The estimated average billable rate: $113.07 per hour; this analysis employs a conservative billing rate; this model can easily be adapted to demonstrate higher hourly billing providing additional 'cushion' to the financial analysis.
INCOME STATEMENT ASSUMPTIONS
The company currently employs one database administrator and four programmers.
Company plans to hire two additional programmers in Year Two
In Year Three, the company plans to hire three additional programmers
Estimate the company will grow revenues 20% annually and assets by 25% (coincides with industry peers).
The company assumes to generate additional 20% in revenue streams from residuals created by long term contracts
Advertising expense is estimated to be .93% of revenues
Accounting and Legal is estimated to be 4.76% of revenues. Primarily this will be attributed to a tax service for the purposes of payroll and income taxes.
Legal expenses will be minimal, but in the event the company creates a patent, then this expense could potentially increase.
Professional Fees represent s.57% of revenue and compares favorably with industry peers
Annual rent is $9,600 or 2.43% of revenue in Year One. The company occupies 1,200 square feet of a 34,000 square foot building located at the desirable Mint Street location in heart of downtown, Charlotte, North Carolina.
Wages represent the largest component of annual expenses and are estimated to be $296M in Year One, $409M in Year Two, and $580M in Year Three. Like its peers, the IT Company's largest expense is in the form of wages, salaries and bonuses.
BALANCE SHEET ASSUMPTIONS
The company was formed two years ago as a sole proprietorship and recently reorganized as an S-Corporation. Rather than owner's contribution, the owner advanced approximately $33M in the form of loan to be repaid. The loan is fully amortizing based on a five year term.
7.2 Start-Up Costs
Although not technically a ‘start-up’, initial expenses include working capital and computer hardware and software.
Table 7.2 Start-Up Costs
7.3 Source and Use of Funds
The source of funds for the initial funding were in the form of owner contribution and loan to owner the loan is fully amortizing over at 6.25% over a five year term.
7.4 Break-Even Analysis
As a service provider, ITS has no cost of goods sold or overhead. Rather than try to consider employees wages as overhead, the break even chart below demonstrates the point where fixed costs less variable costs (in terms of billable hours ) equals zero.
Table 7.4 Break-Even Analysis
7.5.1 Projected Profit and Loss
Company's gross profit appears in line when compared with peers. As a service provider they have little or no overhead. In addition to billable hours, the IT Company needs to strive for residual income in the form of long term contracts. This repeat business will act as a cushion in the event of an economic downturn.
Over the three year estimate, the company's total expenses appear in line with industry peers based on same sized revenues and assets. Total expenses approximate 93% of total revenues.
Salaries, wages and bonuses represent the largest component of expenses. To retain talent and get the higher billable hours, comes with a price. Offsetting this however, is barring any unforeseen expenses; this industry enjoys high profit margins, typically above 6%.
Table 7.5.1 Pro Forma Profit and Loss
7.5.2 Projected Cash Flow
The statement of cash flow shows the incoming and outgoing cash of the business.
Table 7.5.2 Pro Forma Cash Flow
7.5.3 Projected Balance Sheet
Liquidity is key in this industry. Cash and trade receivables represent approximately 53% of total assets, resulting in positive working capital and cash flow. Right now, this company is enjoying the benefits of positive cash flow, but as has been seen in the past, this industry is economically sensitive and the similar downturns such as those of as 2000-2001 or 2008-2009 could quickly deplete cash reserves. IT companies must also maintain liquidity to keep current with technology. As new technology advances, the IT Company must be prepared to keep pace and make smart purchases to partner with this technology.
Table 7.5.3 Pro Forma Balance Sheet
7.6 Business Ratios
Because of the high level of business risk, many IT companies' financial risk and leverage profiles tend to be more conservative, characterized by relatively high levels of equity capital, modest debt, and often substantial cash reserves accumulated because they need cash available to protect against cyclicality and unexpected downturns in earnings. (Standard and Poor’s)ITS’ business ratios also demonstrates these attributes.
Table 7.6 Ratio Analysis
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