Home Furnishing Manufacturer
Home Furnishing Manufacturer
CASTELLINI MANUFACTURING
6521 Hamilton St.
Allentown, PA 18101
Gerald Rekve
Castellini Manufacturing manufactures solid furniture for the home, which will make productive home environments with well–designed furniture that incorporates new technology into the classic home model, in which real people can live happily.
This yearly business plan calls for another two years of solid growth. Because our sales growth has brought some working capital pressures, we are carefully planning to manage growth and provide for steady cash flow. We also expect to be profitable these next two years at a higher level. In all, this plan is a healthy company with solid long-term prospects.
BUSINESS OVERVIEW
Castellini Manufacturing was established in 1971 by the Castellini Family when they immigrated into the United States. We were able to develop sales through distributors of home furniture that sell directly to home owners.
Objectives
- Increase sales beyond the half–million mark by 2009
- Maintain a gross margin close to 40 percent, despite the sales increase
- Increase the net profit to more than 12 percent of sales by 2009
Mission
Castellini Manufacturing manufactures solid furniture for the home, which will make productive home environments with well–designed furniture that incorporates new technology into the classic home model, in which real people can live happily. We are sensitive to the look and feel of good wood and fine furniture. We always provide the best possible value to our customers who care about quality home environments, and we want every dollar spent with us to be well spent. We also create and nurture a healthy, creative, respectful, and fun home environment, in which our employees are fairly compensated and encouraged to respect the customer and the quality of the product we produce. We seek fair and responsible profit, enough to keep the company financially healthy for the long-term and to fairly compensate owners and investors for their money and risk.
Keys to Success
- The highest in quality of the end product: quality wood, quality workmanship, quality design, quality of end result.
- Successful marketing: Our target market is a quality–conscious customer regardless of where they live, and with proper target marketing we will focus on the high–yield buyers.
- Almost–automatic assembly: we can't afford to ship fully–assembled furniture, but assembly must be so easy and automatic that it makes the customer feel better about the quality, not worse.
Company History
Castellini Manufacturing is a privately–owned specialty manufacturer of high–end home furniture for users who care about elegant home space. Our customers are in all levels of income that can afford very high quality home furniture.
Castellini Manufacturing is a Pennsylvania corporation, owned entirely by Tony and Tanya Castellini. It was created in 1971. At that time, the product line and industrial property rights (including trademarks) were purchased from the heirs to the Castellini family. Castellini Manufacturing had actually existed since 1971 as a small family manufacturer when the furniture line was inherited by Tony and Tanya Castellini. The Castellinis moved to Pennsylvania from New Jersey to take over the business as part of an inheritance.
Sales took a big jump in 1971, when we reached more effective channels of distribution. The key was winning a place in the National Furniture Distributors' home shows for Furniture Stores, which led to winning the interest of the national furniture distributors and display space in hundreds of retail stores.
Profitability was our major challenge during our past two years, but we now have better management of our costs.
| 2004 | 2005 | 2006 | |
|---|---|---|---|
| Sales | $2,300,000 | $2,500,000 | $2,700,000 |
OPERATIONS
Castellini Manufacturing is located in Allentown, Pennsylvania. The facility is a state of the art production facility with room to employ up to 500 production workers. The majority of the equipment has been installed in the last ten years. Over the course of the business life, the owners always believed in keeping up with current production methods. This allows for more profit potential.
Over the next ten years it will be determined if there is a need for a western seaboard location to manufacture the furniture. Right now the determination has been made to stay with one location and ship to wherever the need is greatest.
Our Pennsylvania location is a distinct advantage for local wood. We can buy higher quality oak and cherry than either of our competitors (one in Michigan, one in New Jersey). Since our sales increased over the last two years, we have been able to buy at better prices, because of higher volumes.
We work with several wood suppliers, some local. Allentown Oak supplies most of our oak and a bit of cherry and some other specialty woods. Allentown Oak has been in business for as long as we have, and has given us good service and good prices. This is a good, stable supplier. Wood Suppliers is a good second source, particularly for cherry and specialty woods. We've used Fantastic Wood as well, frequently, for filling in when either of our main two suppliers were short.
We also work with a number of specialty manufacturers for furniture fittings, drawer accessories, glass, shelving accessories, and related purchases.
Although we aren't a major player compared to the major furniture manufacturers, we are one of the biggest buyers of the custom materials we need. Most of our suppliers are selling through channels to hobbyists and carpenters, so they treat us as a major account.
Technology
We depend on our dominance of the latest in technology of ergonomics, combined with classic design elements of fine furniture. We must remain on top of new technologies in display, input and output, and communications.
Our assembly patents are an important competitive edge. No competitor can match the way we turn a drawback—having to assemble the product—into a feature. Our customer surveys confirm that customers take the interlocking assembly system as an enhancement to the sense of quality.
Products
Castellini Manufacturing offers very high–quality home furniture to the home owner who wants quality furniture in their home. The basis to our product is a classic style that incorporates the latest in production technology, yet looks very good in a high–end home. Our price lines are targeted to the middle and upper income levels. We will manufacture a wide range of products that gives us sales in all of areas of the home.
Our main lines are the bedroom set and the coffee table. They will be an elegant piece of home furniture designed to look good in executive homes. The bedroom set versions have similar production attributes as automakers use in their production cycle. The parts from one bedroom set can be used in another bedroom set.
We also make complementary pieces to fill out the home suite, including file cabinets and bookcases. These components are easy to change and manufacture as the design requirements change.
We also manufacture custom designs to fit exact measurements.
Competition
The main volume in the industry is now concentrated in four main brands, all of which compete for retail sales through major retail chain stores: Home Depot, Home Max, Staples, and others. These same four are also concentrating efforts in the major club discount stores. The growth of the home superstores made a few large brands dominant. Designs are similar and quite competitive, costs and cost control is critical, and channel management and channel marketing are the keys to this business's continued success. In main-stream home furniture, the rise of the home store channel has siphoned a lot of volume from the older and more traditional manufacturers. The channels that sold the more traditional lines are also suffering. What are left are smaller brands, smaller companies, and divisions of more traditional furniture companies. There are also some traditional manufacturers still making furniture lines focused mainly on home furnishings. Some of these have looked at times at our niche, and are competing for the same dollars.
Within our niche we have two significant competitors, Turner Furniture and Poole Manufacturing. Turner is a bigger company operating mainly in our same niche, but whose marketing is better than its product quality. Poole Manufacturing is a subsidiary of Wooden Furniture, a major furniture manufacturer, which has recently targeted our niche.
In general, however, our competition is not in our niche. We compete against generalized furniture manufacturers, cheaper traditional furniture, and the mainstream merchandise in the major furniture channels and home supply stores. It isn't that people choose our competitors instead of our product, it is that they choose lesser quality, mainstream materials instead of the higher quality furniture we offer. This was a major reason why we chose to remain in the high–end production of home furniture. Home owners after a while realize that they are buying a new couch every two years because the materials breakdown and do not stand up to our better materials. We know once a home owner buys our products, they will never switch back to the cheaper made items.
In the mainstream business, channels are critical to volume. The manufacturers with impact in the national sales are going to win display space in the store, and most buyers seem content to pick their product off the store floor. Price is critical, because the channels take significant margins. Buyers are willing to settle for laminated quality and serviceable design.
In direct sales to homes, price and volume is critical. The corporate buyer wants trouble–free buying in volume, at a great price. Reliable delivery is as important as reliable quality.
In the high–end specialty market, particularly in our niche, features are very important. Our target customer is not making selections based on price. The ergonomics, design, accommodation of the furniture features within the high–quality feel of good wood, is much more important than mere price. We are also seeing that assembly is critical to shipping and packing, but our customer doesn't accept any assembly problems.Weneedtomakesurethatthe piece comes together almost like magic, andas it does; it presents a greater feel of quality than if it hadn't required assembly at all.
Key Competition
Turner Furniture. Turner has been operating since the middle 1950s, and grew up with traditional furniture. It was one of the first, certainly the first we are aware of, to develop Victorian traditional and market through advertising in fashion & home styles magazines. Today they are about twice our size. They have good relationships with two distributors. Their strengths include good marketing, strong advertising budget, good relationships with distributors, and strong direct sales. Their weaknesses include standardized products, lesser quality products, products with less sense of design, lack of quality materials, and lack of quality workmanship.
Poole Manufacturing. Poole Manufacturing is a division of Wooden Furniture, one of the largest manufacturers of mainstream home furnishings. Wooden bought Poole five years ago and is focusing on our niche. We see very good quality product and an excellent sense of design, but little movement in channels. Their strengths include financial backing and product quality. Their weaknesses include that they have not seemed to understand our niche, where to find the buyers, and how to market as a specialty niche instead of the more traditional furniture channels.
MARKETING & SALES
For 2009 we plan to develop a company online order catalogue, which would include all of our other products for the same target customers. The focus will be the executive home magazines, with furniture, lamps, and other accessories.
Our target market is people who want to have very fine furniture combined with an old fashioned sense of fine woods and fine woodworking.
| Potential customers | Growth | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|---|
| Eastern States | 1% | 2,407,000 | 2,727,000 | 2,057,250 | 2,577,003 | 2,000,071 |
| Mid-States | 4% | 11,777,000 | 11,575,000 | 11,555,570 | 12,555,504 | 12,323,555 |
| Northern States | 10% | 35,000,000 | 37,577,000 | 45,777,000 | 47,909,000 | 52,990,700 |
| Western States | 3% | 1,000,000 | 1,030,000 | 1,050,900 | 1,092,727 | 1,125,509 |
Target Market Strategy
Our segment definition is of itself strategic. We are definitely out to address the needs of the high–end buyer, who is willing to pay more for quality.
In our particular market, we also seek the buyer who appreciates two attributes: the quality of furniture workmanship and the excellence of design, with an understanding of technology and ergonomics built in.
Market Analysis
Our market has finally grown to recognize the disparity between most of the standard home furniture sold through channels, and our own products. The development of high–end homes, home owners, and baby–boomer executive is an important trend for us.
The home furniture industry has undergone a great deal of change in this decade. The growth of the home superstores made a few large brands dominant. They produce relatively inexpensive furniture that make compromises in order to stay at the low price level. Makers of higher-quality furniture are in general shuffling for niches to hide in. Although Castellini Manufacturing was essentially developed around a niche, many of the more traditional furniture makers are looking for niches, trying to deal with declining sales as the main volume goes elsewhere.
Growth Strategy
According to Furniture News Unlimited USA, the market for home furniture is growing at 12 percent per year, and is projected to increase. With the aging of the baby boomers, this will allow for the long-term sustainable growth of our lines of high-end furniture. This market needs to have quality home furnishings versus the low-end particle board-type products that are low in quality and lack in design and construction and materials. Most important is the growth in home offices with personal furniture equipment. As the cost of the furniture goes down steadily, the number of home offices goes up. According to the same publication, this is about 35 million right now, growing at 15 percent per year. Households spent $12 billion last year on home furnishings.
Distribution Patterns
The six main manufacturers are selling direct to the home superstores and buying discount clubs. This accounts for the main volume of distribution. The home furniture customer seems to be growing steadily more comfortable with the retail buy in the chain store.
The major corporate purchases are still made directly with manufacturers. Although this is still a major channel for some of the more traditional manufacturers, it is essentially closed to new competition. The direct channel is dominated by two manufacturers and three distributors. The distributors will occasionally take on a new line—happily, this has helped Castellini Manufacturing—but the main growth is in retail.
Published research indicates that 43 percent of the total sales volume in the market goes through the retail channel, most of that to the major national chains. Another 27 percent goes through the direct sales channel, although in this case direct sales include sales by distributors who are buying from multiple manufacturers. Most of the remainder (20 percent) is sold directly to buyers by other means.
Business Strategy
We focus on a special kind of customer, the person who wants very high quality home furniture customized to work beautifully with modern lifestyles. What is important to the customer is elegance, fine workmanship, ease of use, ergonomics, and practicality. Our marketing strategy assumes that we need to go into niche areas to address our target customer's needs. The tie–in with the high–end quality magazines is perfect, because these magazines cater to our kind of customers. We position ourselves as the highest quality, offering status and prestige levels of purchase.
The product strategy is also based on quality; the intersection of technical understanding with very high quality woodworking and professional materials, and workmanship. Our most important competitive edge is our assembly strategy, which is based on interlocking wood pieces of such high quality that assembly is not only a pleasure for our customers; it is actually a feature that enhances the sense of quality.
Our main strategy at Castellini Manufacturing is to position ourselves at the top of the quality scale, featuring our combination of superb technology and fine old–fashioned woodworking, for the buyer who wants the best quality regardless of price. Tactics underneath that strategy include research and development related to new designs and new technology, choosing the right channels of distribution, and communicating our quality position to the market. Programs are mainly those listed in the milestones table, including new design programs, new equipment to keep up with design, channel development, channel marketing programs, our direct sales, and our continued presence in high–end magazines channels and new presence in the web.
Castellini Manufacturing offers the furniture buyer who wants design and quality furniture and quality of working environment a combination of the highest-quality furniture and latest technology. Our product is positioned very carefully: this is high–quality home furniture combining workmanship and ergonomics for the customer who understands quality, is a user of high technology equipment, and is willing to spend money on the best. Unlike the mainstream products, we do not use laminates or cheap manufacturing technology.
Our marketing strategy is based mainly on making the right information available to the right target customer. We can't afford to sell people on our expensive products, because most don't have the budget. What we really do is make sure that those who have the budget and appreciate the product know that it exists, and know where to find it.
The marketing has to convey the sense of quality in every picture, every promotion, and every publication. We can't afford to appear in second–rate magazines with poor illustrations that make the product look less than it is. We also need to leverage our presence using high–quality magazines and specialty distributors.
For discriminating personal furniture users who want to integrate their lifestyle with fine furniture, our family line offers exquisite workmanship and design combined with state–of–the–arts ergonomics and technology. Unlike the Poole line, Castellini Manufacturing makes no design compromises for standardization.
Sales Forecast
Our sales forecast assumes no change in costs or prices, which is a reasonable assumption for the last few years.
We are expecting to increase sales from $400,000 last year to $720,000 in the next year, which is almost doubling in size. The growth forecast is in line with our last year, and is relatively high for our industry because we are developing new channels. In 2007 and 2008 we expect growth closer to 50 percent per year, to a projected total of more than $1 million in 2009.
We are projecting significant change in the product line, or in the proportion between different lines. The key to our growth is the growth of the new channels.
Specific sales programs
- Magazine Sales: Develop placement with one additional magazine catering to the high–end home executive, paying for space and positioning. The budget is $20,000 for this program.
- Distributor Sales: We need to develop at least one new distributor, spending for co–promotion as required, and making direct sales calls.
- Direct Sales: We will do a mailing of new in–house magazines, developed by the marketing department, to add to our direct telephone sales. Tanya will be responsible, without a budget or a deadline because the magazines are a marketing program.
ADVERTISING
Our most important vehicle for sales promotion is the direct mail magazines published by the specialty retailer. Our advertising budget goes mainly for space in the specialty magazines. We also participate in major industry events, including both the spring and fall national furniture shows and the fall furniture show. Our total budget for events is $50,000, plus about half of the $44,000 travel budget. This year we will also promote our products with in–house magazines, including our own products plus related merchandise of interest to the same target market.
Our strategy focuses first on maintaining the identity with the high–end buyer who appreciates the best available quality, but is also very demanding regarding furniture systems and technology. We've been able to find these customers using a combination of direct mail magazines and direct sales to distributors.
For the next year we continue to focus on growing presence in the high–end direct mail magazines that find our specialty customer. We will work with speciality magazines more than ever, and we expect to gain position in the major airline magazines as well. Specialty retail is a new channel that could become important for us.
Our work with distributors has been promising. We hope to continue the relationship with distributors selling directly to larger homes, even though this takes working capital to support receivables.
Strategic Alliances
The accompanying table shows specific milestones, with responsibilities assigned, dates, and (in most cases) budgets. We are focusing in this plan on a few key milestones that should be accomplished.
| Milestone | Start Date | End Date | Budget | Manager | Department | |
|---|---|---|---|---|---|---|
| Third magazines placement | 5/15/2007 | 5/15/2007 | $ | 54,000 | Jan | Ads |
| Second magazines | 4/1/2007 | 5/13/2007 | $ | 55,000 | Jan | Ads |
| First magazines | 3/1/2007 | 4/13/2007 | $ | 97,000 | Jan | Ads |
| New distributor | 3/15/2007 | 4/30/2007 | $ | 5,000 | Jan | Travel |
| New distributor | 3/15/2007 | 4/30/2007 | $ | 3,000 | Jan | Sales |
| Our in-house magazines plan | 1/31/2007 | 2/12/2007 | $ | 0 | Mike | Other |
| In-house magazines design | 3/1/2007 | 4/1/2007 | $ | 2,000 | Mike | Other |
| In-house magazines mailing | 3/1/2007 | 5/1/2007 | $ | 5,000 | Mike | Other |
| Design product test | 7/15/2006 | 5/20/2007 | $ | 11,000 | Ben | Other |
| Design product release | 2/1/2007 | 10/15/2007 | $ | 14,000 | Mike | PR |
| Spring trade show | 1/1/2007 | 3/15/2007 | $ | 12,000 | Mike | PR |
| Fall trade show | 5/12/2007 | 2/15/2007 | $ | 4,000 | Mike | PR |
| Fall trade show | 5/12/2007 | 2/15/2007 | $ | 21,000 | Mike | Events |
| Spring trade show | 1/1/2007 | 5/23/2007 | $ | 10,000 | Mike | Events |
| Spring trade show | 1/5/2007 | 5/3/2007 | $ | 5,000 | Mike | Travel |
| Fall trade show | 5/15/2007 | 10/15/2007 | $ | 5,000 | Mike | Travel |
| Totals | ||||||
MANAGEMENT SUMMARY
We are a small company owned and operated by Tony and Tanya Castellini, husband and wife, as a Subchapter S corporation. Tony is the developer and designer of the products, and Tanya manages the company as president.
The management style reflects the participation of the owners. The company respects its community of co–workers and treats all workers well. We attempt to develop and nurture the company as a community. We are not very hierarchical. The theory is that of the Japanese style where low level employees have a huge impact on how the production lines work and are managed.
Organizational Structure
- Tanya Castellini, President, is responsible for overall business management. Our managers of finance, marketing, and sales report directly to Tanya. Tanya had a successful career in retail before becoming half–owner of Castellini Manufacturing. She was an area manager of Trinkets and Things, a buyer for Youth Styles, and merchandising assistant for the Sports Store. She has a degree in Business from Penn State.
- Tony Castellini, Manager and Designer, is responsible for product design and development, assembly, and manufacturing. Our workshop manager reports directly to Tony. Tony designed furniture for Oaken Accents before becoming half owner of Castellini Manufacturing He was responsible for one of the first executive desks designed to include customized fittings for personal computers, and was one of the first to design the monitor inside the desk under glass. He has a Business Degree from Penn State.
As co–owners, Tony and Tanya jointly develop business strategy and long–term plans. Tony is strong on product know–how and technology, and Tanya is strong on management and business know–how.
Management Team Gaps
We depend on our professionals, our CPA, and our attorney for some key management help. We don't have a strong background in finance or business management.
As we grow we will need to develop more manufacturing technique and more mass production. Tanya grew up with the hand–made and custom furniture business, knows fine woodworking well, but admits a weakness in establishing standardized assembly.
Personnel Plan
The personnel table assumes slow growth in employees, and 10 percent per annum pay raises. We already have a strong benefits policy (with fully–paid medical, dental, and life insurance, plus a profit sharing and 401K plan) and very low turnover. Salaries are generally in line with market pay for the Pennsylvania area, although our benefits are above standard market level, so we ultimately pay a bit more for our people than what might be considered standard in our market. Allentown, however, is on average a lower wage location than most of the more developed business areas. As we grow, we expect to see steady increases in our personnel to match the increases in sales.
| Personnel plan | 2008 | 2009 | 2010 | |||
|---|---|---|---|---|---|---|
| Workshop manager | $ | 33,000 | $ | 40,000 | $ | 50,000 |
| Assembly | $ | 17,000 | $ | 17,000 | $ | 19,000 |
| Marketing manager | $ | 35,000 | $ | 40,000 | $ | 50,000 |
| President | $ | 55,000 | $ | 55,000 | $ | 75,000 |
| Design | $ | 13,000 | $ | 17,000 | $ | 20,000 |
| Total payroll | $ | 153,000 | $ | 169,000 | $ | 214,000 |
FINANCIAL ANALYSIS
The financial position is strong. We have not taken on a lot of debt, but with our sales increase we do expect to apply for a credit line with the bank, to a limit of $300,000. The credit line is easily supported by assets. The credit line will be used to support our growth curves as we start building momentum. Also the credit line is there to give our managers less pressure in times where receivables are not coming as they may normally.
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.
Financial 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 inventory 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.
| General assumptions | 2008 | 2009 | 2010 |
|---|---|---|---|
| Plan month | 1 | 2 | 3 |
| Current interest rate | 7.00 percent | 7.00 percent | 7.00 percent |
| Long-term interest rate | 7.00 percent | 7.00 percent | 7.00 percent |
| Tax rate | 15.00 percent | 19.00 percent | 25.00 percent |
| Sales on credit percent | 55.00 percent | 55.00 percent | 55.00 percent |
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 $33,000 is 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.
| Break-even Analysis | ||
|---|---|---|
| Monthly units break-even | 55 | |
| Monthly revenue break-even | $ | 77,000 |
| Assumptions | ||
| Average per-unit revenue | $ | 1,100.00 |
| Average per-unit variable cost | $ | 500.00 |
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 to pass 5 percent in 2007, and remain at that level through 2010.
Our higher sales volume has lowered our cost of goods and increased our gross margin. This increase in gross margin is important to profitability.
| Pro Forma profit and loss | 2008 | 2009 | 2010 | |||
|---|---|---|---|---|---|---|
| Sales | $ | 300,000 | $ | 400,000 | $ | 500,000 |
| Direct costs of goods | $ | 111,000 | $ | 175,000 | $ | 275,000 |
| Production payroll | $ | 50,000 | $ | 73,000 | $ | 170,000 |
| Other | $ | 3,110 | $ | 0 | $ | 0 |
| Cost of goods sold | $ | 147,595 | $ | 252,000 | $ | 444,000 |
| Gross margin | $ | 200,700 | $ | 400,900 | $ | 577,000 |
| Operating expenses: | ||||||
| Sales and marketing expenses | ||||||
| Sales and marketing payroll | $ | 44,000 | $ | 55,000 | $ | 77,000 |
| Miscellaneous | $ | 4,200 | $ | 2,200 | $ | 3,300 |
| Advertising/Promotion | $ | 50,000 | $ | 70,000 | $ | 75,000 |
| Events | $ | 5,550 | $ | 5,232 | $ | 7,112 |
| Public relations | $ | 720 | $ | 400 | $ | 400 |
| Travel | $ | 7,500 | $ | 7,000 | $ | 5,000 |
| Total sales and marketing expenses | $ | 150,200 | $ | 222,700 | $ | 244,100 |
| General and administrative expenses: | ||||||
| General and administrative payroll | $ | 47,000 | $ | 75,000 | $ | 100,000 |
| Depreciation | $ | 1,400 | $ | 1,500 | $ | 1,200 |
| Leased equipment | $ | 4,500 | $ | 5,700 | $ | 11,900 |
| Utilities | $ | 2,500 | $ | 2,900 | $ | 4,900 |
| Insurance | $ | 1,200 | $ | 1,400 | $ | 1,500 |
| Building lease—own | $ | 9,000 | $ | 11,000 | $ | 12,000 |
| Other | $ | 1,200 | $ | 1,300 | $ | 1,400 |
| Payroll taxes | $ | 22,010 | $ | 30,000 | $ | 50,000 |
Projected Cash Flow
Although we expect to be more profitable in 2007, we still have drains on the cash flow. We need to invest $70,000 in new assembly and manufacturing equipment, plus $20,000 in new furniture equipment, and another $30,000 in miscellaneous short–term assets, including home furniture. Because of our increased sales through channels, and necessary increase in inventory levels, we need to increase working capital.
| 2008 | 2009 | 2010 | ||||
|---|---|---|---|---|---|---|
| Cash received | ||||||
| Cash from operations | ||||||
| Cash sales | $ | 212,010 | $ | 233,000 | $ | 255,000 |
| Cash from receivables | $ | 270,000 | $ | 410,000 | $ | 720,100 |
| Additional cash received | ||||||
| New current borrowing | $ | 25,000 | $ | 200,000 | $ | 200,000 |
| New investment received | $ | 50,000 | $ | 0 | $ | 0 |
| Expenditures | ||||||
| Expenditures from operations | ||||||
| Cash spending | $ | 127,052 | $ | 145,495 | $ | 214,495 |
| Payment of accounts payable | $ | 304,727 | $ | 457,294 | $ | 727,353 |
| Additional cash spent | ||||||
| Principal repayment of current borrowing | $ | 10,000 | $ | 0 | $ | 0 |
| Purchase long-term assets | $ | 50,000 | $ | 20,000 | $ | 30,000 |
Projected Balance Sheet
Our projected balance sheet shows an increase in net worth to more than $660,000 in 2010, at which point we expect to be making 14 percent profit on sales of $1.6 million. 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 inventory to support growth in sales through channels.
Pro forma balance sheet
Assets
| Current assets | 2008 | 2009 | 2010 | ||||
|---|---|---|---|---|---|---|---|
| Cash | $ | 77,134 | $ | 157,152 | $ | 313,044 | |
| Accounts receivable | $ | 74,179 | $ | 113,752 | $ | 179,530 | |
| Inventory | $ | 47,270 | $ | 73,704 | $ | 15,220 | |
| Other current assets | $ | 2,375 | $ | 2,375 | $ | 2,375 | |
| Total current assets | |||||||
| Long-term assets | |||||||
| Long-term assets | $ | 53,210 | $ | 73,210 | $ | 103,210 | |
| Accumulated depreciation | $ | 2,720 | $ | 3,720 | $ | 5,020 | |
| Total long-term assets | $ | 50,490 | $ | 59,390 | $ | 97,190 | |
| Liabilities and capital | |||||||
| Current liabilities | |||||||
| Accounts payable | $ | 7,791 | $ | 9,977 | $ | 14,725 | |
| Current borrowing | $ | 200,000 | $ | 200,000 | $ | 200,000 | |
| Other current liabilities | $ | 1,703 | $ | 1,703 | $ | 1,703 | |
| Subtotal current liabilities | |||||||
| Total liabilities | $ | 125,594 | $ | 175,791 | $ | 271,527 | |
| Paid-in capital | $ | 54,500 | $ | 54,500 | $ | 54,500 | |
| Retained earnings | $ | 15,355 | $ | 71,354 | $ | 132,302 | |
| Earnings | $ | 27,709 | $ | 132,357 | $ | 176,170 | |
| Total capital | $ | 137,754 | $ | 240,702 | $ | 427,931 | |
| Total liabilities and capital | $ | 253,457 | $ | $417,593 | $ | $709,459 | |
Business Ratios
Our ratios look healthy and solid. Gross margin is projected to decline below 50 percent, return on assets getting to about 17 percent, and return on equity at 35 percent or better. 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.