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Plan Outline
Hardware Retail Franchise Business Plan
Hisarlik Hardware
Financial Plan
The business will need substantial start-up capital. It is expected that a good portion of that amount will be secured through SBA financing.
Sales are expected to start conservatively the first year and increase steadily through the fifth year of operations. Operating income will pay back the start-up loan over a seven year amortization.
Inventory Turnover ratios are predicted to be in excess of 4.3. The goal will be to get this ratio to exceed 5.0. To do that Hisarlik will be required to purchase smartly and drive sales.
Cash will be retained in the business to cover cash operating needs as well as future expansion of other Hisarlik Hardware locations.
It is expected that dividends will be paid to the investors annually. The amount of the dividends is estimated to be 50% of profits.
After the first year of operations, it is expected that Hector Priamson will be able to trim expenses in the business as efficiency, experience, and knowledge work together and help the business operate better. Estimates are extremely conservative in the budgeting process.
8.1 Start-up Funding
Owner
Hector Priamson will invest cash, benefits and labor to the start up.
Investors
Troy Enterprises is in the process of negotiating with potential investors for the seed cash needed to start the business. It is expected that a tidy sum will be raised to start the business. It is expected that no more than 15% interest will be given to each investor.
Bank Financing
Troy Enterprises is submitting business plans and other requested documents to financial institutions in pursuit of the additional money needed to finance the rest of the company and provide operating cash for the business. It is expected that the loan will be a part of the SBA 7(a) program. It is assumed that the terms of the loan will require repayment in 7 years, at a rate of 8%.
| Start-up Funding | |
| Start-up Expenses to Fund | £83,332 |
| Start-up Assets to Fund | £716,668 |
| Total Funding Required | £800,000 |
| Assets | |
| Non-cash Assets from Start-up | £620,504 |
| Cash Requirements from Start-up | £96,164 |
| Additional Cash Raised | £0 |
| Cash Balance on Starting Date | £96,164 |
| Total Assets | £716,668 |
| Liabilities and Capital | |
| Liabilities | |
| Current Borrowing | £0 |
| Long-term Liabilities | £625,000 |
| Accounts Payable (Outstanding Bills) | £0 |
| Other Current Liabilities (interest-free) | £0 |
| Total Liabilities | £625,000 |
| Capital | |
| Planned Investment | |
| Hector Priamson | £50,000 |
| Investor 1 | £75,000 |
| Investor 2 | £50,000 |
| Additional Investment Requirement | £0 |
| Total Planned Investment | £175,000 |
| Loss at Start-up (Start-up Expenses) | (£83,332) |
| Total Capital | £91,668 |
| Total Capital and Liabilities | £716,668 |
| Total Funding | £800,000 |
8.2 Important Assumptions
The table below presents the assumptions used in the financial calculations of this business plan.
| General Assumptions | |||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Plan Month | 1 | 2 | 3 | 4 | 5 |
| Current Interest Rate | 8.00% | 8.00% | 8.00% | 8.00% | 8.00% |
| Long-term Interest Rate | 8.00% | 8.00% | 8.00% | 8.00% | 8.00% |
| Tax Rate | 30.00% | 30.00% | 30.00% | 30.00% | 30.00% |
| Other | 0 | 0 | 0 | 0 | 0 |
8.3 Key Financial Indicators
As shown in the Benchmarks chart below, our key financial indicators are:
- Projected Sales: Projections are based on estimates calculated by Building Blocks based on demographics and potential in the market place. Sales will consistently increase as the store gains experience, in addition to the consistent growth expected in the home improvement category nationwide.
- Gross Margins: Building Blocks expects that the Gross Margin can increase in years 2-5, however for this analysis, the gross margin was kept consistent at 42% on inventory sales. Overall, the rental and other income have driven the gross margin up by 2 points. Building Blocks expects that Gross Margin on inventory could rise as high as 44%.
- Operating Expenses: Operating expenses growth is primarily caused by an increase in salaries as the business gets established, as well as a small percentage increase for COL over the next five years. Operating expenses are expected to increase at a rate of 6-8% per year.
- Inventory Turnover: Hisarlik Hardware will maintain just-in-time inventory levels. Building Blocks distribution will help maintain those levels. Inventory is projected to turn 4.3 times per year. The goal is to get inventory turns to exceed 5.0, through good purchasing decisions.
8.4 Break-even Analysis
The Break-even Analysis has determined approximate break-even sales as shown below. There will be a constant monitor on this number in an attempt to lower it. Once again, it is believed that efficiencies, experience, and knowledge will help in decreasing the break-even number.
Sales are expected to be well in excess of this number for each month.
| Break-even Analysis | |
| Monthly Revenue Break-even | £102,932 |
| Assumptions: | |
| Average Percent Variable Cost | 55% |
| Estimated Monthly Fixed Cost | £45,915 |
8.5 Projected Profit and Loss
The Profit and Loss statement makes it very clear which areas will need attention. Payroll is by far the largest expense the company incurs (besides cost of goods sold). Staff will need to be managed and hours regulated so that hours worked correlate to sales. Emphasis will be placed on minimizing expenses that do not help generate bottom line.
The company generates a profit as sales revenue gets above the break-even line. A push on sales will be very important in generating bottom line profits. Interest expense is also a large line item that diminishes over time, but is a necessary expense on the front end of the business.
| Pro Forma Profit and Loss | |||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Sales | £1,476,903 | £1,840,977 | £2,214,233 | £2,343,370 | £2,484,097 |
| Direct Cost of Sales | £818,091 | £1,019,293 | £1,223,152 | £1,284,310 | £1,348,525 |
| Other Costs of Goods | £0 | £0 | £0 | £0 | £0 |
| Total Cost of Sales | £818,091 | £1,019,293 | £1,223,152 | £1,284,310 | £1,348,525 |
| Gross Margin | £658,812 | £821,683 | £991,081 | £1,059,061 | £1,135,572 |
| Gross Margin % | 44.61% | 44.63% | 44.76% | 45.19% | 45.71% |
| Expenses | |||||
| Payroll | £248,224 | £273,234 | £299,183 | £314,054 | £324,096 |
| Account Name | £0 | £0 | £0 | £0 | £0 |
| Depreciation | £48,021 | £48,021 | £48,021 | £48,021 | £48,021 |
| Advertising Expense-Circulars | £15,136 | £18,867 | £22,693 | £24,016 | £25,458 |
| Advertising Expense-Newspapers | £3,397 | £4,234 | £5,093 | £5,390 | £5,713 |
| Advertising Expense-Yellow Pages | £2,604 | £2,604 | £2,604 | £2,604 | £2,604 |
| Advertising Expense-National | £7,680 | £9,573 | £11,514 | £12,186 | £12,917 |
| Lease | £114,638 | £125,424 | £134,933 | £144,442 | £153,951 |
| Utilities | £9,000 | £9,250 | £9,500 | £9,750 | £10,000 |
| Telephone | £4,431 | £5,523 | £6,643 | £7,030 | £7,452 |
| Accounting and Legal | £6,384 | £7,661 | £9,193 | £11,032 | £13,238 |
| Store and Office Supplies | £14,769 | £18,410 | £18,821 | £19,919 | £21,115 |
| Insurance | £10,032 | £10,338 | £10,648 | £10,967 | £11,296 |
| Delivery Vehicle Expense | £6,000 | £6,000 | £6,000 | £6,000 | £6,000 |
| Payroll Taxes | £22,321 | £24,591 | £26,926 | £28,265 | £29,169 |
| Employee Benefits | £16,428 | £18,071 | £19,426 | £20,883 | £22,449 |
| State Property Tax Expense | £2,500 | £2,500 | £2,500 | £2,500 | £2,500 |
| Travel | £2,871 | £3,000 | £3,200 | £3,500 | £4,000 |
| Other | £16,548 | £17,052 | £18,600 | £20,400 | £21,600 |
| Total Operating Expenses | £550,984 | £604,353 | £655,497 | £690,957 | £721,579 |
| Profit Before Interest and Taxes | £107,828 | £217,330 | £335,584 | £368,104 | £413,992 |
| EBITDA | £155,849 | £265,351 | £383,605 | £416,125 | £462,013 |
| Interest Expense | £47,148 | £41,783 | £35,771 | £29,260 | £22,208 |
| Taxes Incurred | £18,204 | £52,664 | £89,944 | £101,653 | £117,535 |
| Other Income | |||||
| Interest Income | £0 | £0 | £0 | £0 | £0 |
| Other Income Account Name | £0 | £0 | £0 | £0 | £0 |
| Total Other Income | £0 | £0 | £0 | £0 | £0 |
| Other Expense | |||||
| Account Name | £0 | £0 | £0 | £0 | £0 |
| Other Expense Account Name | £0 | £0 | £0 | £0 | £0 |
| Total Other Expense | £0 | £0 | £0 | £0 | £0 |
| Net Other Income | £0 | £0 | £0 | £0 | £0 |
| Net Profit | £42,476 | £122,883 | £209,869 | £237,191 | £274,249 |
| Net Profit/Sales | 2.88% | 6.67% | 9.48% | 10.12% | 11.04% |
8.6 Projected Cash Flow
The company generates a net positive cash flow in its first year. It is assumed that Accounts Payable will be repaid in 45 days. Repayment of debt is a significant factor in the amount of cash that gets paid out. Long-term debt is on a 7-year amortization.
Dividends are paid in December of each year. The assumption is that 50% of profits are paid out to shareholders and investors.
| Pro Forma Cash Flow | |||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Cash Received | |||||
| Cash from Operations | |||||
| Cash Sales | £1,476,903 | £1,840,977 | £2,214,233 | £2,343,370 | £2,484,097 |
| Subtotal Cash from Operations | £1,476,903 | £1,840,977 | £2,214,233 | £2,343,370 | £2,484,097 |
| Additional Cash Received | |||||
| Non Operating (Other) Income | £0 | £0 | £0 | £0 | £0 |
| Sales Tax, VAT, HST/GST Received | £0 | £0 | £0 | £0 | £0 |
| New Current Borrowing | £0 | £0 | £0 | £0 | £0 |
| New Other Liabilities (interest-free) | £0 | £0 | £0 | £0 | £0 |
| New Long-term Liabilities | £0 | £0 | £0 | £0 | £0 |
| Sales of Other Current Assets | £0 | £0 | £0 | £0 | £0 |
| Sales of Long-term Assets | £0 | £0 | £0 | £0 | £0 |
| New Investment Received | £0 | £0 | £0 | £0 | £0 |
| Subtotal Cash Received | £1,476,903 | £1,840,977 | £2,214,233 | £2,343,370 | £2,484,097 |
| Expenditures | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Expenditures from Operations | |||||
| Cash Spending | £248,224 | £273,234 | £299,183 | £314,054 | £324,096 |
| Bill Payments | £998,841 | £1,351,063 | £1,682,641 | £1,761,830 | £1,851,152 |
| Subtotal Spent on Operations | £1,247,065 | £1,624,298 | £1,981,824 | £2,075,884 | £2,175,248 |
| Additional Cash Spent | |||||
| Non Operating (Other) Expense | £0 | £0 | £0 | £0 | £0 |
| Sales Tax, VAT, HST/GST Paid Out | £0 | £0 | £0 | £0 | £0 |
| Principal Repayment of Current Borrowing | £0 | £0 | £0 | £0 | £0 |
| Other Liabilities Principal Repayment | £0 | £0 | £0 | £0 | £0 |
| Long-term Liabilities Principal Repayment | £66,629 | £72,159 | £78,148 | £84,634 | £91,659 |
| Purchase Other Current Assets | £0 | £0 | £0 | £0 | £0 |
| Purchase Long-term Assets | £0 | £0 | £0 | £0 | £0 |
| Dividends | £21,311 | £61,442 | £104,935 | £118,596 | £137,125 |
| Subtotal Cash Spent | £1,335,005 | £1,757,898 | £2,164,906 | £2,279,113 | £2,404,032 |
| Net Cash Flow | £141,898 | £83,078 | £49,327 | £64,257 | £80,065 |
| Cash Balance | £238,062 | £321,140 | £370,467 | £434,724 | £514,789 |
8.7 Projected Balance Sheet
The balance sheet is very straight forward. No significant purchases of assets are expected or anticipated.
Using Building Blocks' IAIS, online ordering, and weekly delivery systems allows Hisarlik Hardware to restock inventory in a just-in-time fashion. Inventory levels will be maintained with re-orders tied to Cost of Goods Sold. Additional inventory purchases will be made one month prior to participation in the quarterly Building Blocks nationally advertised Power Event sales. The first Power Event coincides with Hisarlik Hardware's Grand Opening. Inventory will be allowed to drop somewhat at the end of December, after the Holiday purchasing, and for year-end tax accounting purposes.
There is a possibility of rental purchases in the future if the right products are found to add to the current inventory.
| Pro Forma Balance Sheet | |||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Assets | |||||
| Current Assets | |||||
| Cash | £238,062 | £321,140 | £370,467 | £434,724 | £514,789 |
| Inventory | £334,000 | £330,689 | £396,826 | £419,970 | £445,190 |
| Other Current Assets | £30,400 | £30,400 | £30,400 | £30,400 | £30,400 |
| Total Current Assets | £602,462 | £682,229 | £797,693 | £885,094 | £990,379 |
| Long-term Assets | |||||
| Long-term Assets | £246,104 | £246,104 | £246,104 | £246,104 | £246,104 |
| Accumulated Depreciation | £48,021 | £96,042 | £144,063 | £192,084 | £240,105 |
| Total Long-term Assets | £198,083 | £150,062 | £102,041 | £54,020 | £5,999 |
| Total Assets | £800,545 | £832,291 | £899,734 | £939,114 | £996,378 |
| Liabilities and Capital | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Current Liabilities | |||||
| Accounts Payable | £129,341 | £171,805 | £212,461 | £217,880 | £229,679 |
| Current Borrowing | £0 | £0 | £0 | £0 | £0 |
| Other Current Liabilities | £0 | £0 | £0 | £0 | £0 |
| Subtotal Current Liabilities | £129,341 | £171,805 | £212,461 | £217,880 | £229,679 |
| Long-term Liabilities | £558,371 | £486,212 | £408,064 | £323,430 | £231,771 |
| Total Liabilities | £687,712 | £658,017 | £620,525 | £541,310 | £461,450 |
| Paid-in Capital | £175,000 | £175,000 | £175,000 | £175,000 | £175,000 |
| Retained Earnings | (£104,643) | (£123,609) | (£105,660) | (£14,387) | £85,679 |
| Earnings | £42,476 | £122,883 | £209,869 | £237,191 | £274,249 |
| Total Capital | £112,833 | £174,274 | £279,209 | £397,804 | £534,928 |
| Total Liabilities and Capital | £800,545 | £832,291 | £899,734 | £939,114 | £996,378 |
| Net Worth | £112,833 | £174,274 | £279,209 | £397,804 | £534,928 |
8.8 Business Ratios
The Ratio Analysis looks very encouraging. Industry Profile data is based on Standard Industrial Classification code 5252, Hardware Stores.
- Gross margin: Increases each year and peaks at 45%. It is anticipated that after year two, the gross margin percentage could be increased by as much as 2 points. The Gross Margin is a little high due to the fact that the rental income is included in this calculation with no cost of sales.
- Selling, General and Administrative Expenses: It is encouraging that these expenses as a percentage of sales are decreasing. These expense will continue to be looked at to find new savings to deliver bottom line.
- Quick Ratio: The Quick Ratio is good staying in the 2 range for the entire first 5 years.
- Net Profit margin: Net profit margin continues to grow. The goal will be to minimize expenses and get the Net Profit margin in the 15 range.
- Inventory Turnover: Inventory turnover as calculated here is 2.3 to 3.5 times. The goal will be to get that percentage to exceed 5 times per year. The calculation is skewed on this table because of rental income being included in sales.
| Ratio Analysis | ||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Industry Profile | |
| Sales Growth | 0.00% | 24.65% | 20.27% | 5.83% | 6.01% | 5.13% |
| Percent of Total Assets | ||||||
| Inventory | 41.72% | 39.73% | 44.10% | 44.72% | 44.68% | 47.00% |
| Other Current Assets | 3.80% | 3.65% | 3.38% | 3.24% | 3.05% | 22.34% |
| Total Current Assets | 75.26% | 81.97% | 88.66% | 94.25% | 99.40% | 82.03% |
| Long-term Assets | 24.74% | 18.03% | 11.34% | 5.75% | 0.60% | 17.97% |
| Total Assets | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% |
| Current Liabilities | 16.16% | 20.64% | 23.61% | 23.20% | 23.05% | 31.52% |
| Long-term Liabilities | 69.75% | 58.42% | 45.35% | 34.44% | 23.26% | 21.36% |
| Total Liabilities | 85.91% | 79.06% | 68.97% | 57.64% | 46.31% | 52.88% |
| Net Worth | 14.09% | 20.94% | 31.03% | 42.36% | 53.69% | 47.12% |
| Percent of Sales | ||||||
| Sales | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% | 100.00% |
| Gross Margin | 44.61% | 44.63% | 44.76% | 45.19% | 45.71% | 34.51% |
| Selling, General & Administrative Expenses | 41.72% | 37.96% | 35.28% | 35.07% | 34.67% | 21.03% |
| Advertising Expenses | 1.02% | 1.02% | 1.02% | 1.02% | 1.02% | 1.71% |
| Profit Before Interest and Taxes | 7.30% | 11.81% | 15.16% | 15.71% | 16.67% | 2.01% |
| Main Ratios | ||||||
| Current | 4.66 | 3.97 | 3.75 | 4.06 | 4.31 | 2.22 |
| Quick | 2.08 | 2.05 | 1.89 | 2.13 | 2.37 | 0.67 |
| Total Debt to Total Assets | 85.91% | 79.06% | 68.97% | 57.64% | 46.31% | 56.39% |
| Pre-tax Return on Net Worth | 53.78% | 100.73% | 107.38% | 85.18% | 73.24% | 4.50% |
| Pre-tax Return on Assets | 7.58% | 21.09% | 33.32% | 36.08% | 39.32% | 10.32% |
| Additional Ratios | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Net Profit Margin | 2.88% | 6.67% | 9.48% | 10.12% | 11.04% | n.a |
| Return on Equity | 37.64% | 70.51% | 75.17% | 59.63% | 51.27% | n.a |
| Activity Ratios | ||||||
| Inventory Turnover | 2.38 | 3.07 | 3.36 | 3.14 | 3.12 | n.a |
| Accounts Payable Turnover | 8.72 | 8.11 | 8.11 | 8.11 | 8.11 | n.a |
| Payment Days | 40 | 39 | 41 | 44 | 44 | n.a |
| Total Asset Turnover | 1.84 | 2.21 | 2.46 | 2.50 | 2.49 | n.a |
| Debt Ratios | ||||||
| Debt to Net Worth | 6.09 | 3.78 | 2.22 | 1.36 | 0.86 | n.a |
| Current Liab. to Liab. | 0.19 | 0.26 | 0.34 | 0.40 | 0.50 | n.a |
| Liquidity Ratios | ||||||
| Net Working Capital | £473,121 | £510,424 | £585,232 | £667,214 | £760,700 | n.a |
| Interest Coverage | 2.29 | 5.20 | 9.38 | 12.58 | 18.64 | n.a |
| Additional Ratios | ||||||
| Assets to Sales | 0.54 | 0.45 | 0.41 | 0.40 | 0.40 | n.a |
| Current Debt/Total Assets | 16% | 21% | 24% | 23% | 23% | n.a |
| Acid Test | 2.08 | 2.05 | 1.89 | 2.13 | 2.37 | n.a |
| Sales/Net Worth | 13.09 | 10.56 | 7.93 | 5.89 | 4.64 | n.a |
| Dividend Payout | 0.50 | 0.50 | 0.50 | 0.50 | 0.50 | n.a |
8.9 Long-term Plan
The long term plan is to develop a steady retail hardware business in the downtown Wilusa market. As discussed, there is currently no competition. They key will be to establish a solid business to discourage any competition from coming into the market or creating a level of loyalty that will not be fazed by competition.
After two solid years of performance and establishment of Hisarlik Hardware, there are two areas of potential expansion. First, look for opportunities in the current market. What businesses can be combined logically with what has been established that will deliver additional bottom line profit. Secondly, a second location will be developed in a new part of Wilusa. An area that will deliver a similar characteristic to the first store that appears to be headed down the road of success.