Financial Plan for Bremner & Sons Company
Financial Plan
Executive Summary
Bremner & Sons Company is a medium scale manufacturing company that Bremner intends
to establish and commence its operations from January 1, the year 2017. The Company has
opted to manufacture a collection of unique phone covers that allows a phone to retain its
battery power for a longer period. Depending on the usage and type of battery, the covers
can extend the battery usage capacity by more than 70% because of its advanced insulation
system that incorporates special type of materials. The phone covers come in three
different types. The Ultra which retains the power by 50%, while the Deluxe retains and also
boosts power utilization by 60% while the royal phone covers retains and boosts battery
capacities by more than 70%. The cost of producing the phone covers is the same hence
they all sell almost at the same average price. This paper looks at the prospect of the
business operating profitably and the forecast for the next three years.
Introduction
Bremner & Sons Company would be partly financed using the savings that Bremner saved
while in active employment and also a loan of one million dollars to import special raw
materials. The special insulation materials is imported from Asia and also parts of Northern
African. To cater for inflation the selling price is set to increase by between 2.5 to 3%
annually. While the commission for the sales agents is pegged at 7.5% of the total sales
revenue. There are two special machines which have to be used. Bremner saved enough
money while working for university hospitals in Coventry and Warwickshire to buy only one
machine. The other machine would be hired from special suppliers. The phone industry is
lucrative and the market is highly dynamic. The models of different phones are introduced
Financial Plan for Bremner & Sons Company 4
into market almost monthly increasing the obsolescence rates to very high levels. The
advanced phone cover products targets the different models and has a provision of
changing with the times rendering the changes as a market or opportunity for introduction
of new phone covers.
The challenge however is on the cost of distribution and marketing. The company has a
forecasted a marketing budget that would be close to $200,000 annually. High rates of
obsolescence also mean that new products have to be introduced into the market and
potential customers have to be informed on regular basis.
Breakeven Analysis
Bremner & Sons Company has a budgeted production of 2,541,209 units of all the three
types of products. In the first year the average price per product has been pegged at 2.87
dollars but in the subsequent years the price would be increased by the rate of between 2.5
to 3 % to take care of inflation. The company has also decided to hire a sales marketer that
would be paid a commission of 7.5% on all sales. The cost of manufacturing the units have
been worked down to a variable cost of $2.09 in the first year, $2.93 in the second year and
$3 in the third year. The total sales in the first year are expected to be 7,288,325 while in
the second and third year the sales would amount to $9001332 and 11701262 respectively
while the fixed expenses would amount to $169102, $175203 and 181551 respectively for
the three years. The total costs for same period would be $5480819, $665013 and 8555398
respectively for the first, second and third year. In the year 2017, the company would have
to sell a minimum of 217,405 units to breakeven or register a sales turnover of $623,528. In
the following year due to a decrease in the costs of goods and the increase i the price rates,
the units required to recover all the fixed costs and the variable costs would amount to
212830 units while in the third year the breakeven units would amount to 212369 units.
Financial Plan for Bremner & Sons Company 5
Break-Even Graph
Sales 7288324 Sales
7
Figures in $m
6 Net Profit Area
TC
TC (5480818)5
4 Sales Line
3 Net Loss Area VC
Cost Line
2
1
Break-Even Break-Even Point
(623528)
Fixed Costs Fixed Cost Line FC
(169102)
0 10 30 40 50 60 70 80 90 100
Production Capacity (%)
The sales for the two years would also be 624226 and 638,446 for the second and the third
year respectively (Brealey, Myers, Allen 2005). The cost of sales for Bremner and Sons is
50% compared to over 66% for a multinational company like Chesapeake Energy
Corporation which means that the company would be efficient in optimizing its resources.
Bremner & Sons Company
Breakeven Analysis 2017 2018 2019
Prices(Per Unit)
2.8680540
2.9329753
3.0062996
variable Costs (Unit)
2.09
2.11
2.15
Fixed Costs
169,102.00
175,202.80
181,550.93
Contribution margin
0.78
0.82
0.85
Breakeven Units
217,404.55
212,830.38
212,369.42
Breakeven Sales
623,528.00
624,226.23
638,446.10
Projected Profit and Loss Account
In the first year, Bremner & Sons Expects to manufacture and sell 2,541,209 units at a price
of $2.8681 earning sales revenue of $7,288,325. The gross profit during this period is
Financial Plan for Bremner & Sons Company 6
expected to amount to $2,878,888 after deduction a sales commission of 7.5% amounting
to $ $546,624 and other allowances and returns costing $218,650.
The company expects to employ nine permanent employees and two part time employees.
Full time Employees (9 x 12,000) 9
Part time Employees(2 x 960) 2
Salary/Wages 109920
Benefits 45072
Payroll Taxes 16488
Total 171480
The permanent employees would be paid a salary of $1000 per month while the casuals
earn $8 per hour (10hrs per day) plus some allowances. In one year both the permanent and
the casuals would earn a total salary of $171480 together with all statutory deductions and
taxes.
The marketing team also has a huge budget. The department is however managed by one
person who is the company’s marketing representative as well as the sales executive. The
administrative staffs would assist in other clerical and secretarial work in the marketing
department. The total marketing budget has been forecasted to $199200.
INCOME 2017 2018 2019
Gross Sales 7288324.675 9001331.636 11701261.61
(Commissions) 546624.3506 675099.8727 877594.6209
(Returns and allowances) 218649.7403 270039.9491 351037.8484
Net Sales 6523050.584 8056191.814 10472629.14
(Cost of Goods) 3644162.338 4500665.818 5850630.806
GROSS PROFIT 2878888.247 3555525.996 4621998.337
EXPENSES – General and Administrative
Salaries and wages – Fixed Exp 109920 113767.2 117749.052
Employee benefits – Fixed Exp 45072 47325.6 49691.88
Payroll taxes 16488 17065.08 17662.3578
Professional services 4500 4500 4500
Marketing and advertising 199200 199200 199200
Rent – Fixed Exp 6000 6000 6000
Equipment rental – Fixed Exp 1200 1200 1200
Maintenance – Fixed Exp 1200 1200 1200
Financial Plan for Bremner & Sons Company 7
Depreciation – Fixed Exp 5710 5710 5710
Insurance 1200 1200 1200
Telephone service 1200 1200 1200
Utilities 1200 1200 1200
Office supplies 1200 1200 1200
Postage and shipping 600 600 600
Travel 12000 12000 12000
Entertainment 6000 6000 6000
Interest on loans 54990.64676 0 0
Miscellaneous 1200 1200 1200
Others 0 0 0
TOTAL EXPENSES 468880.6468 420567.88 427513.2898
Net income before taxes 2410007.6 3134958.116 4194485.047
Provision for taxes on income 602501.9 783739.529 1048621.262
NET PROFIT 1807505.7 2351218.587 3145863.785
The interest receivable is from the interest payable by the bank on our deposits while the
interest payable is on the funds advanced to the company as shareholders equity.
Professional services include lawyers and accountants fees while the insurance cover is for
the machinery and other equipments that the company has as its assets. Employee benefits
include medical and leave expenses while miscellaneous expenses are the amounts payable
for newspapers, refreshments, cleaning detergents & tea expenses in the office. The net
profit amounts to 1807506 for the first year and $2351219 for the second year while the
third year is $3145864.
Bremner & Sons Balance Sheet
Bremner & Sons Company Balance Sheet
ASSETS 2017 2018 2019
Current Assets
Cash 6032349.66 13718431.2 23900743.7
Accounts Receivable 160481.9837 208618.208 265910.038
Inventory -3638338.711 -8131670.7 -13972768
Other Current Assets 0 0
Total Current Assets 2554492.933 5795378.73 10193885.9
Financial Plan for Bremner & Sons Company 8
Fixed Assets
Land 50000 50000 50000
Facilities 13500 13500 13500
Equipment 30000 30000 30000
Computers & Telecommunications 4000 4000 4000
(Less Accumulated Depreciation) 5710 11420 17130
Total Fixed Assets 91790 86080 80370
Other Assets 0 0 0
TOTAL ASSETS 2646282.933 5881458.73 10274255.9
LIABILITIES
Current Liabilities
Short-Term Notes Payable 0 0
Income Taxes Due 602501.9 1386241.43 2434862.69
Other Current Liabilities 0 0
Total Current Liabilities 602501.9 1386241.43 2434862.69
Long-Term Liabilities
Long-Term Notes Payable 0
Other Long-Term Liabilities 0
Total Long-Term Liabilities
NET WORTH
Paid-In Capital 200000 200000 200000
Retained Earnings 1843781.033 4295217.3 7639393.23
Total Net Worth 2043781.033 4495217.3 7839393.23
TOTAL LIABILITIES AND NET
WORTH
2646282.933 5881458.73 10274255.9
The balance sheet shows a total of $2,646,282 in assets for the first one year. The profit
earned would be circulated into the business hence in the second and third year the assets
would increase to $5,881,458 and $10,274,255 respectively. The cash account would
increase from $6,032,349 in the first year to $13,718,431 and $23,900,743 in the second
and the third year respectively. The land purchased at a cost of $5000 is intended for future
expansion for the showroom and sales promotion activities (Helfert 2007).
Bremner & Sons Cash Flow
Bremner & Sons Cash Flow
Financial Plan for Bremner & Sons Company 9
CASH RECEIPTS 2017 2018 2019
Income from Sales
Cash Sales 5466244 6750999 8775946
Collections 1661599 2202197 2868024
Total Cash from Sales 7127843 8953195 11643970
Income from Financing
Interest Income 36275.33 100217.7 198312.1
Loan Proceeds 1000000 0 0
Equity Capital Investments 100000 0 0
Total Cash from Financing 1136275 100217.7 198312.1
Other Cash Receipts 0 0 0
TOTAL CASH RECEIPTS 8264118 9053413 11842282
CASH DISBURSEMENTS
Inventory 5823.627 7333.856 9533.63
Operating Expenses 408180 414857.9 421803.3
Commissions/Returns &
Allowances
765274.1 945139.8 1228632
Capital Purchases 97500 0 0
Loan Payments 1054991 0 0
Income Tax Payments 0 0 0
Investor Dividend Payments 0 0 0
Owner’s Draw 0 0 0
TOTAL CASH DISBURSEMENTS 2331768 1367332 1659969
NET CASH FLOW 5932350 7686082 10182313
Opening Cash Balance 100000 6032350 13718431
Cash Receipts
Cash Disbursements
ENDING CASH BALANCE 6032350 13718431 23900744
The ending cash flow balance amounted to $6032350 in the first year while the second year
it amounted to $13,718,431 and $23,900,744 in the third year. All the cash balances are to
be circulated in the business and no withdrawals are expected in the first three years of
trading (Fridson 2002).
Bremner & Sons Sales Projection
The opening cash balance in the Company’s bank account in the first month of business is
expected to amount to $100,000
Financial Plan for Bremner & Sons Company 10
Wages would be increased at 3.5% annually while the net income is to be taxed at 25% of
net income. The interest bearing account is pegged at 1%. The major capital expenditure are
land $5000 for future expansion while the vehicles are to be acquired at a cost of $13,500
(Van 8500 and Pickup truck $5000).
Bremner & Sons Sales Projection
2017 2018 2019
Royal Product Line 1
Unit Volume 0.02 1200000 1368033 1734997
Unit Price 0.025 3.00 3.08 3.15
Gross Sales 3600000 4206702 5468493
(Commissions) 0.075 270000 315502.6 410137
(Returns and Allowances) 0.03 108000 126201.1 164054.8
Net Sales 3222000 3764998 4894301
(Cost of Goods Sold) 0.5 1800000 2103351 2734247
GROSS PROFIT 1422000 1661647 2160055
Deluxe Product Line 2
Unit Volume 0.02 670604.5 850488.6 1078625
Unit Price 0.025 2.50 2.5625 2.626563
Gross Sales 1676511 2179377 2833077
(Commissions) 0.075 125738.3 163453.3 212480.7
(Returns and Allowances) 0.03 50295.34 65381.31 84992.3
Net Sales 1500478 1950543 2535604
(Cost of Goods Sold) 0.5 838255.6 1089689 1416538
GROSS PROFIT 662221.9 860854 1119065
Ultra Product Line 3
Unit Volume 0.02 670604.5 850488.6 1078625
Unit Price 0.025 3 3.075 3.151875
Gross Sales 2011813 2615253 3399692
(Commissions) 0.075 150886 196143.9 254976.9
(Returns and Allowances) 0.03 60354.4 78457.58 101990.8
Net Sales 1800573 2340651 3042724
(Cost of Goods Sold) 0.5 1005907 1307626 1699846
Financial Plan for Bremner & Sons Company 11
GROSS PROFIT 794666.3 1033025 1342878
Totals for All Product Lines
Total Unit Volume 2541209 3069010 3892247
Total Gross Sales 7288325 9001332 11701262
(Total Commissions) 546624.4 675099.9 877594.6
(Total Returns and Allowances) 218649.7 270039.9 351037.8
Total Net Sales 6523051 8056192 10472629
(Total Cost of Goods Sold) 3644162 4500666 5850631
TOTAL GROSS PROFIT 2878888 3555526 4621998
Price Per Unit 2.868054 2.932975 3.0063
Ratio Analysis
Liquidity
The current ratio in the first year is expected to be 4.24 while in the first and second year it
would amount to 4.18 and 4.19 respectively. The ratio of 4.24 to 1 is very impressive for a
manufacturing company which means that the total current assets have exceeded the
liabilities slightly more than four times. Bremner and Sons would be in a good position to
pay off their creditors without any problem. Its liquidity is very good as per the current ratio.
However, the quick ratio is not encouraging. Most of the current asset is tied to stock. When
the stock is deducted from the current asset, the balance is unsustainable and it cannot pay
all the current liabilities. The normal standard ratio should be 1:1 and its -6:1. The same case
applies to the subsequent two years which have a quick ratio of -5.87 and -5.74.The
inventory turnover ratio is expected to be 0.42, 0.52 and 5.74 in 2017, 2018 and 2019
respectively. Compared to other national companies like Chesapeake Energy Corporation
(CHK), that had a current ratio of 1.27 in 2014 and 0.66 and 0.47 in 2013 and 2012
respectively. The liquidity status of CHK was not so high but it was stable. The returns on
Financial Plan for Bremner & Sons Company 12
fixed asset was also very high at 63% in 2014 but reduced drastically to 46 and 32% in 2013
and 2012 respectively.
Leverage
The company must be able to pay off all its debt otherwise it would be insolvent or be
declared bankrupt. However average debts are healthy for an expanding company. The debt
to assets ratio for Bremner & Sons is 23% in the first year while the two years have
registered 24%. The ratio of debt to assets is very low and the company should include more
debt in its records in order to take advantage of the tax benefits. The normal ratio of debts
to assets should be 50%. The interest times earned is 43 times in the first year (Bodie, Kane
& Marcus 2008). CHK has utilized its debt portfolio effectively for example in 2014, the debt
to asset ratio amounted to 55% while the previous years the ratio averaged 57%.
Bremner & Sons Financial Ratios 2017 2018 2019
Current Ratio Total Current Assets/Total current liabilities 4.24 4.18 4.19
Quick Ratio TT C/ Assets – inventories /TT/ C Liabilities -6.04 -5.87 -5.74
Inventory Turnover Cost of goods sold/Average inventory -0.42 -0.52 -0.68
Asset turnover Sales/Average total assets 1.16 1.44 1.87
Net assets turnover Net assets / total sales 0.28 0.50 0.67
Times interest earned EBIT/Annual Interest Expense 42.83 0.00 0.00
Debt to total Asset Debt/Assets 0.23 0.24 0.24
Interest cover EBIT/Annual Interest Expense 42.83 0.00 0.00
Profit margin on sale GP/sales 0.40 0.40 0.40
R.R return on assets EAT/Total Assets 0.68 0.40 0.31
R.R com stock equity Profit after taxes/Shareholders equity 0.68 0.40 0.31
ROE Return On Equity (ROE) 0.88 0.52 0.40
ROA Return on average Assets 0.29 0.38 0.50
Profitability
Financial Plan for Bremner & Sons Company 13
The gross profit on sales in the first year and the rest of the years is expected to be 40%
while the Net profit margin is 25% for the first year while for the second and third year is 26
and 27% respectively. The Return on Assets is 29% in the first year and 38% in the second
year and finally 50% in the third year. The return on capital employed in the first year is 88%
while in the second and third year it’s expected to be 52 and 40% respectively. On average
the profitability status of Bremner & Sons is very good. CHK had a GP ratio amounting to
34% and 35% in 2014 and 2013 respectively. Bremner profitability is within the average in
the market.
Efficiency Ratios
This ratio indicates if the resources in a company are being utilized optimally. For example
the rate at which inventories are manufactured compared to the sales. Bremner’s ratio of –
0.42 indicates that the products would manufactured faster that the rate of sales. It points
to a scenario where the company would be compelled to hire more room to stock extra
products. This scenario would be very expensive and the company has to reconcile the rates
of production and the sales.
The asset turnover is $1.16 for every dollar that is invested in the company while in the
other two years the ratio was 1.44 and 1.87 respectively.
The ratios indicate that the company may face financial challenges in future as some of the
ratios like quick ratio indicate that the level of inventory in stock is very high and any sudden
need for cash to settle all the creditors may present a challenge.
Conclusion
Financial Plan for Bremner & Sons Company 14
The opportunity to manufacture and sell products also comes with risks and threats.
Bremner & Sons Company is no exception. Mr. Bremner and his son must be cautious and
take prudent measures to provide for bad debts and other unforeseen calamities like
change in customers tastes, new inventions and other threats that are posed by nature. A
provision is not a hidden reserve but a security against any eventuality that may present a
challenge to the existence of the business (Harrington 2003). The company would make a lot
of profit but the marketing and sales department must be very active and should use
strategic marketing plans to penetrate and position the branded products competitively in
the market. Compared with other successful companies in the market, Bremner and Sons
Company has a good chance of succeeding in its operations as its performance can be
compared to companies like Chesapeake that have been operational for many years.
Recommendation
Bremner & Sons Company should take advantage of debts to expand its business even more
as the debt to asset ratio is about 23% while the recommended ratio is about 50%. The
company can utilize its debt portfolio to optimize its production process like CHK have
utilized their debt portfolio effectively. But the company should restrict the amount of
inventory as most its capital is locked in inventory. The total inventory in the first year is
expected to amount $3,638,338 while in the second and the third year the inventory would
amount to $8,131,670 and $13,972,768 respectively.
Financial Plan for Bremner & Sons Company 15
References
Bodie, Z., Kane, A., & Marcus, A. J., 2008, Investments (7th International ed) Boston:
McGraw-Hill. 303.
Brealey, R.A, Myers, S. C., Allen, F., 2005, Principles of Corporate Finance Boston:
McGraw-Hill/Irwin.
Chesapeake Energy Corporation Annual Report (2014) Leadership Performance Value
retrieved February 20, 2016 from
http://www.chk.com/Documents/media/publications/annual-report-2014.pdf
Fridson, M., 2002, Financial Statement Analysis: A Practitioner’s Guide. New York: John
Wiley.
Harrington, D, R., 2003, Corporate Financial Analysis: Decisions in a Global Environment.
4th ed. Chicago: Richard D. Irwin, Inc.
Helfert, E, A., 2007, Techniques of Financial Analysis: A Modern Approach. 9th ed.
Chicago: Richard D. Irwin, Inc.
Financial Plan for Bremner & Sons Company 16
Appendices
Chesapeake 2014 2013 2012
Liquidity Ratios
Current Ratio Total Current Assets/Total current liabilities 1.27 0.66 0.47
Quick Ratio TT C/ Assets – inventories /TT/ C Liabilities 1.27 0.66 0.47
Asset Management
Ratios
Fixed Assets Turnover Sales/Fixed Assets 0.63 0.46 0.32
Days Sales Outstanding Accounts Receivable/Net Credit Sales *365 days N/A
Total Asset turnover Sales/Average total assets 4.5 3.7 2.6
Debt Management
Ratios
Times interest earned EBIT/Annual Interest Expense 36.96 7.35 -11.65
Total Debt to total Asset Debt/Assets 0.55 0.57 0.57
EBITDA Coverage Income+Interest+Dep+Tax/Interest Exp 39.07 9.115 22
Profitability Ratios
Profit margin on sale GP/sales 0.34 0.35 0.57
ROE Return On Equity (ROE) Net Income/Equity 0.11 0.05 -0.05
R.R return on assets Net Income/Total Assets 0.05 0.02 -0.02
Basic Earning Power Cash and Cash Equivalents/liabilities 0.184 0.039 0.017
Market Value Ratios
Price Earnings Ratio Price/earnings 10.412 37.18 -11.38
Price/Cash flow Price/Cash flow 0.01 0.05 -0.26
Book Value Market/Book 1947 2714 1662
