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CompuTech Business Plan: Financial Projections and Analysis


This is a TERM LONG activity that requires EACH student to prepare their own work for submission to their instructor before the end of the TERM. The work will be reviewed and marked for effort, completeness and independent work.

Students are asked to complete their work in an EXCEL file so that both calculations and outcomes can be validated. Full sentence answers to questions are expected at the completion of all numeric work.

The file you will submit will be expected to display your understanding of the issue, the calculation of the outcome and offer communication to the reader. This is essentially a “real life” submission that should be considered mature and professional:

The case:

Larry and Janice Martin have decided, after 20 years of working for others, that they wanted to open their own business. CompuTech would be a repair and sales shop in the Kitchener area. Between the two of them they thought that their experience in sales and service, along with their passion to strike out on their own, would serve as a great base.

As they prepared their Business Plan and the related financial projections they knew that there would be many business, operational and financial decisions that they would need to consider. This was to be important not only as they were sketching out their plan but also once the business started operating.

To get as full a preparation as possible they approached a number of small business consultants at local banks and with the local small business office of the local government. Not only were they reminded that they needed a unique offering but also the need to manage successfully each and every day. Beyond planning, operating and organizing they would need to operate their business and make decisions based on results. To make sure of this they needed the ability to read financial statements and analyze the results of their decisions before considering next steps.

To succeed they were reminded that they needed to operate to generate profits, to be able to pay bills and to grow the business through investment and growth. Further they knew that investing decisions at the start and throughout the life of the business, operating decisions on a day to day basis and above all financing decisions as to where and how to use monies from investors to make the greatest returns.

Larry and Janice intend to invest $200,000 in the business. Their financial projections show that during the first year of operations their business could generate $25,000 in profits. Subsequent years could grow well beyond this level. The couple could borrow on a long term basis $100,000 from the bank (@6%) and they could use $100,000 of their savings (which were currently generating 8% returns).

Module 1

Q1: With the above info what is CompuTech’s projected return on investment in year 1? What is their cost of capital? (Assume 0 tax rate for this work)

Q2: Should the couple launch their business based on your answer to Q1? Why or why not?

Q3: If small business is taxed at 33% what is the business’ Weighted Cost of Capital?

The Martins know that setting up some projected Income Statements are important. They need to look at what the first year of operations might look like and if possible they will need to look at the years thereafter to get an impression of what the long term might look like.

RM Purchases:  $132,000* (Raw Material Purchases is a part of COGS)

Sales Salaries:       80,000

Advertising:          3,000

Travel:                   2,000

Revenue:              360,000

Financing Costs:  10,000

Office Lease:        13,000

Depreciation:       38,000

Income Taxes:      22,000

Admin Salary:      40,000

A second financial statement that is key to understanding a business is the Balance Sheet. The Martins have estimated the following accounts to be a part of their initial Balance Sheet.

Trade Receivables: $35,000

Cash:                             15,000

Short Term Loan:          30,000

Share Capital:               100,000

Long Term Liabilities:    60,000

Property, Plant:             170,000

Prepaid Expenses:          5,000

Yearly LTD Retirement:  5,000

Retained Earnings:        25,000

Accumulated Dep’n:     38,000

Current Payables:         17,000

Inventories:                  50,000

Q1: With the above accounts, prepare CompuTech’s Income Statement for the year ended, December 31, 2021.

Q2: With the above accounts, prepare CompuTech’s Balance Sheet as at December 31, 2021.

Q3: Which of the above accounts are FIXED, and which are VARIABLE?

Q4: What is the COGS for the year 2021?

Profit decisions are important to the Martins. These decisions not only arise from understanding the market, pricing policies and margins the managers need to understand the tools and elements they need to consider as they target either profit levels or their ability to manage the elements of the profit calculation. For example, if CompuTech is operating at a loss or below BREAK EVEN then understanding how they might be able to manage costs, or volumes to generate profits becomes very important. BREAKEVEN analysis can help the Martins and CompuTech decide on any of the following: how many units they need to sell, what price should they sell at (and compared to what the market will bear), what levels their fixed costs are at, what product or service should a company promote more or less.

Module 2

Assuming the following: (i) the sales price for each CompuTech product sold is $50; (ii) each product sold costs $25 in Raw Material components; and the business Fixed Cost is as determined in your Income Statement.

Q1: What is the BE in units for CompuTech in 2021?

Q2: What impact would occur to the BE if the variable cost of materials rose by 10% during the year?

Q3: If the overall market for computer products in CompuTech’s market area is 20,000 units what share of the market does its BE (Q1) represent? Comment on what the calculated BE means relative to the total market.

Q4: If CompuTech were to hire a Sheridan student (annual cost for Part Time service $30,000 per year) to help in the marketing of CompuTech, what would the impact be on the company’s BE?

Q5: If the Sheridan student could impact unit sales by 20% growth, would their hiring be justified? Explain.

Q6: With the following information for a projected year 2022, prepare a pro-forma Income Statement for the year ending December 31, 2022, and then, calculate CompuTech’s (a) income before taxes, (b) contribution margin and (c) PV ratio.

RM Purchases:             $205,000

Sales Salaries:              60,000

Travel:                          3,000

Advertising:                 5,000

Admin Salaries:           38,000

Revenue:                     420,000

Depreciation:              40,000

Office leasing:             7,000

Finance Costs:            14,000

Income Taxes:            13,000

Q7: Assuming that the price per unit and the variable cost per unit have stayed the same as in calculations for 2021, what is the new BE in units for CompuTech in 2022? How does this compare to the BE in units for the previous year?

Q8: Consider as a sensitivity that if the total market in the CompuTech market area had experienced a shrinking in units during the year (of 25%) should the Martins be concerned? Explain.

By 2023 the Martins are projecting considerable improvement in their business. Using the following accounts prepare the Income Statement for the period ending December 31, 2023.

RM Purchases:          $406,000

Sales Salaries:           80,000

Travel:                       5,000

Advertising:             10,000

Depreciation:          80,000

Revenues:               700,000

Admin Salaries:      60,000

Office Leasing:      10,000

Finance Costs:      30,000

Income Taxes:      42,000

Q9: In a single EXCEL file complete a file displaying the three Income Statements that you have completed so far. Leave two blank columns between each year so that later we can do account changes between years.

Remember That CompuTech is still being formulated. Your work is expected to give insight to the Martins as to what are key issues, what is the prognosis for their business and essentially how comfortable they believe the future is for their impending business.

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