Planning the need for cash and other assets can be realised by a sound, realistic budget by determining the actual amount of money needed to open the business ( start-up costs ) and the amount needed to keep it open ( operating costs ).
The first step of building a sound financial plan is to devise a start-up budget. This budget will include one-time costs as acquisition of major equipment, personnel recruitment, the licenses / permits, etc.. ( Please refer to Section VI for more information )
An operating budget would be prepared close to the time of opening circus.
This budget would reflect the priorities in terms of how the money is spent,
how the expenses are incurred and how would these expenses be met ( income
). The operating budget would also include money to cover the first three
to six months of operation.
The financial plan will include the loan applications filed, a capital equipment and supply list, balance sheet, pro-forma income projections ( profit or loss statement ) and pro-forma cash flow.
As a consequence, the projected profit margins and the period of justification of the project would be identified by the financial analysis, and therefore the economical feasibility of the project would be determined. If the prospective returns on the investment would seem appealing for the investors and / or the creditors, then the required funds for the project could be raised, allowing the entrepreneur to enter the business.
B ) ANALYSIS OF COST ESTIMATES AND BASIC ACCOUNTING STATEMENTS
The analysis of the estimates of the possible cost figures and the projected
accounting statements depending on these estimates play an important role
in the economical feasibility study. Therefore, projected accounting statements
are proposed as the following:
INCOME PROJECTION STATEMENT
Annual Total
Total net sales (revenues) $ 2,304,000
Costs of sales (280,000)
Gross profit $ 2,024,000
Gross profit margin 87.8 %
Controllable expenses
Salaries/wages $ 434,400
Payroll expenses 125,000
Legal/accounting 3,000
Advertising 50,000
Office supplies 3,000
Total controllable expenses $ 615,400
Fixed expenses
Rent $ 20,000
Depreciation 20,000
Utilities 62,000
Insurance 100,000
License/permits 2,000
Loan payments 500,000
Total fixed expenses $ 704,000
Total expenses $ 1,319,400
Other Income (Loss) $ 173,226
Net profit (loss) $ 877,826
before taxes
Taxes (40%) $ 351,130
Net profit (loss) after $ 526,696
taxes
Annual Total $ 526,696
Annual Percentage 22.8 %
MONTHLY CASH FLOW PROJECTION
TOTAL
1. Cash on hand (beginning month) $ 50,000
2. Cash receipts
(a) Cash sales $206,436
(b) Collections from credit --
accounts
(c) Loan or other cash --
injections (specify)
3. Total cash receipts $206,436
4. Total cash available $256,436
(before cash out)
5. Cash paid out
(a) Purchases (merchandise) $ 8,980
(b) Gross wages (excludes withdrawals) 36,200
(c) Payroll expenses (taxes, etc.) 10,417
(d) Supplies (office and operating) 4,500
(e) Repairs and maintenance 696
(f) Advertising 4,167
(g) Car, delivery and travel 16,420
(h) Accounting and legal 350
(i) Rent 5,900
(j) Telephone 950
(k) Utilities 8,160
(l) Insurance 8,300
(m) Taxes (real estate, etc.) 3,880
(n) Interest 2,080
(o) Subtotal $111,000
(p) Loan principal payment 41,667
(r) Other start-up costs 1,100
6. Total cash paid out $153,767
7. Cash position (end of month) $102,669
Assets
Current assets
Cash $ 90,000
Petty cash $30,000
Accounts receivable $12,660
Short-term investment $ 440,000
Prepaid expenses $ 20,000
Long-term investment $ 0
Fixed assets
Land $ 787,500
Buildings $ 4,777,000
Equipment $ 850,000
Other assets
1. Small Circus Train $ 200,000
2. Animals $ 660,000
Total assets $ 7,860,160
Liabilities
Current Liabilities
Accounts payable $ 30,475
Notes payable $ 0
Interest payable $ 25,000
Taxes payable
Income tax $ 254,640
Sales tax (SBE) $ 47,500
Property tax $ 71,550
Payroll accrual $ 2,083
Long-term liabilities
Notes payable $ 4,500,000
Total liabilities $ 4,931,248
Net worth (owner equity) $ 1,166,192
Corporation
Capital stock $ 1,000,000
Retained earnings $ 762,720
Total net worth $ 2,928,912
Total liabilities and
total net worth $ 7,860,160
C ) PROJECT FINANCING AND FINANCIAL AND EFFICIENCY RATIOS
The project will be financed by long-term bank loans. The initial installation costs and beginning operation costs require an approximate sum of 8 million dollars. This capital requirement will be justified by taking 5 million dollars, 10 years credit at approximately 10% interest rate. Almost 1 million dollars of the capital will be given by the founders while the remaining 2 million dollars will be justified from issued stocks of the company.
Following financial ratios would be useful in evaluating the financial efficiency of the company.
Current Ratio = Current Assets / Current Liabilities = 4.89
Working Capital = Current Assets – Current Liabilities = $ 471,527
Working Capital Turnover Ratio = Net Sales / Working Capital = 4.89
Asset Turnover Ratio = Net Sales / Total Assets = 0.29
Return on Assets = Net Income / Total Assets = 0.049
Current Ratio, Asset Turnover Ratio and Return on Assets seem
to be normal since the business requires high start-up capital and fixed
assets. However, working capital seems to be weak because there is high
amount of interest expenses and since the business is in its first few
operating years, the current liabilities are high.
D ) ECONOMIC AND FINANCIAL EVALUATION UNDER CONDITIONS OF UNCERTAINTY
Within this scope, the business will amortise itself in approximately 5 years. And annual expected net profit after tax will be approximately 526,000 dollars. This yields 22.8% net profit margin. Our assumption for market interest rate for loans is 10%, meaning the minimum attractive rate of return in the market. Therefore, the business is profitable and feasible even in the uncertain conditions of our country.