Startup Finance Analysis

Regarding the finance projection of the company, there will consider the startup expenses, variable costs of manufacture, and fixed costs of management, also the cash flow, income statement, and balance sheet these finance estimations will be included in this section to describe.

1. Expenses analysis

The expenses of startup on the first year that is shown in Table 1 here are divided into fixed assets and operating capital. The company estimates the fixed assets that need $66,600 to purchase the equipment, furniture, vehicle and other assets for business working. The detail of equipment and furniture can refer the appendix of B1 and B2. One company’s car uses for business which budget will be set as $25,000. Total fixed assets need $66,600 that is 7.73% to the total fund. To the operation capital, that includes pre-opening wages, pre-paid insurances, inventory, legal and accounting services, rents, utilities, supplies, advertising, license, and other operation expenses. The amount of operation capital could be $794,589 (92.27%) before we start to manufacture products. By this estimation, the company reserves $500,000 (58.06%) capital for making 2,400 sets WDIRC (or WDIRC+G products), and 11.35% ($97,760) for the first year working capital and payroll of employees. Regarding the office, the company plans to rent a business office, it will spend $60,000 (6.97%) for one year used. The total fund we need about $861,189 to prepare the startup capital for operation and asset buying.

2. Cash flow analysis

2.1 Cash flow on first year

The estimation of cash flow analysis is described in Section 2.1 and 2.2 to predict the first and first to third year cash flow. When the company starts its business operation, a plan of cash flow for the company is important. It presents the cash inflows and outflows of a business during a given period of time, and how much is to be paid for what purpose. Moreover by this analysis, the results can help the company to monitor the operation activities, invest activities and finance activities, and to get a better internal management and cash position.

2.1 First year cash flow analysis

The cash flow analysis of first year is shown in Table 2; there are twelve months to be analyzed for doing the cash estimation for the company to operate. This analysis is based on the prediction of sales in markets. The cash inflow most gets from the sale of WDIRC series products. At the beginning of startup, the company need to develop a prototype WDIRC and make a little mass production, the time it will take about nine months to develop, so the company estimate the inflow of cash will occur in the ninth months after the startup. The company expects to produce four hundred sets WDIRC and WDIRC+G per month (yearly product 1,200 sets) in the fourth quarter; so USD 66,180 to be expected from that since the product listing. Whatever, what is the cash outflows per month during the unlisted period? That total cash outflows include operation expenses and payrolls; the company estimates $15,782/month that needs to be had for operating. Once the company produces WDIRC products, the manufacture cost of WDIRC needs to be considered that is a variable cost depended on the amount of mass production of WDIRC. The prediction of goods sold cost is shown in the web-page of "Cost analysis of manufacture". According to the estimation, the end of first year, the net cash flow could be negative totally (-$113,161), cash inflow is less than cash outflow that reason is the products to listing too late (nine months later), if possible to listing as soon as possible is benefit for the company. Even the end of net cash flow is negative, but the end of operating cash is balanced, it can be used for producing WDIRCs in the next year. However, the balance is important for a startup company to management, so two factors we need to concern if the company hope to have a successful starting, the first one is the beginning budget that need to be enough for fulfilling this yearly operation, the other one is the product listed as soon as early.

2.2 Cash flow during the first to third year

Since the first year we start, a commercial type of WDIRC product was sold in markets, the cash will continue to inflowing with sales, Table 3 shows the second year the projection of cash inflow. The balanced from first year is $ 386,839, the production expects to have one thousand sets for one month at least in second year to WDIRC and WDIRC+G, respectively. The annual sale of WDIRC, WDIRC+G and WFR expect to have $1,985,400, the accounts receivable should have $4,268,610. Totally the year cash inflows are about $6,254,010. Regarding the cash outflows, that includes cost of goods sold, operating expenses, payroll and taxes, at the end of second year, the total cash outflows estimate to be had $5,801,685. Net cash flows are $452,325; it turns into the next year cash balance. By this estimation, the company expects the cash balance could be turned positive in the second year. This is a conservative estimation if the company only produces one thousand sets of WDIRC series products per month. The operating expenses and manufacture costs are varied that depends on the amount of production, so if the company would like to increase the production scale, which will need more money to produce more productions.

Table 4 shows the cash flow analysis on third year; the production and sale projection are shown. The company estimates the production per month is 16,000 sets, 16,000 sets and 16,000 kg to WDIRC, WDIRC+G and WFR, respectively. The end of total cash inflows estimate to be had $96,788,250, and the cash outflows totally estimate to be had $83,813,524, the net cash flow is about $12,974,726. Till the end of third year, the function and reputation of WDIRC, WDIRC+G and WFR products are gradually accepted by people and markets, the sale volume and income will increase more at the same time. Since this year, the company could need to prepare the budget for enlarging the production scale if the company’s products are selling well. Moreover the strategy of operation needs to think whether the factory need to have or not by the company, due to the quality control and cost down, perhaps to own a factory for producing products is a good policy to the company development at this time.

3. Income statement analysis

The purpose of income statement is to show how much profit of less the company generated during a reporting period of one year. The revenue and expense can be viewed and examined. The gross margin is derived by total revenues and the total cost of goods sold together, and provides an indicator of the ability of the company to set price points that customers will accept. The income is the gross margin minus all operating expenses and payroll, this subtotal reveals the ability of the company to generate a profit before the effects of financing activities are factored into the final profit figure.

3.1 Income statement analysis on the first year

Table 5 shows the income statement on the first year. The revenue includes the sale of WDIRC, WDIRC+G and WFR. The subtotal of revenue is $661,800 (2,400 sets WDIRC and WDIRC+G to be sold), it (total cost of goods sold) will cost $541,140 to produce, and the gross margin is about $120,360. The fixed costs include payroll and operating expenses, so the income is equal to total revenue minus fixed costs. Till the end of first year, the income is -$69,029, the revenues are less than costs. Because at the first year, the products aren’t listed in time, and it needs time to design and finalize, so the revenue doesn’t match the requirement of expenses. If the expenses include startup expenses and depreciation, the totally net loss is $176,149 till the end of first year. If the product can list in markets early, the loss expects to be lowered. This estimation doesn’t include other finance or invest activities, if the company adapts other finance tools or enlarges investments, perhaps that can reduce the loss caused by products with late listed. The first year is a key point for products to test markets whether WDIRC series products are acceptable or not, so the issues of advertising and public relation need to be concerned by the company.

3.2 Income statement analysis during the first to third year

Table 6 shows the income statement from first to third year. According to the marketing plan, the ratio of product selling is 45.3%, 54.4% and 0.3% to WDIRC, WDIRC+G, and WFR, respectively. That will be adjusted according to the actual quota in market sale and operating expenses. The analysis of employee wages, the sale forecast of markets from first to third year, and the operating expense could refer the proposal of startup. By this assumption, the second and third year will create net incomes being as $411,403, $14,522,556, respectively. If the market plan doesn’t change with this plan, the percentage of net income (net income/total revenue) to second and third year is 6.2% and 13.7%. Most ratios of operating expenses and payroll are decreased with time, and the profits are increased, it will be a high profit business and will be with high growth rate in markets.

4. Balance sheet after three year operation

The purpose of the balance sheet is to reveal the financial status of the company after one to three years that we started. The statement shows what assets and how much it liabilities, as well as the amount invested in the business. Table 7 shows the change of balance sheet, the assets will increase with time from $883,567 to $23,560,118; it grows up to 26.66 times. Total assets include current and fixed assets, the current assets expects to have $829,225, $1,550,677 and $23,530,290 in the first, second and third year, the sales of WDIRC series product is the major revenue, and the cash and accounts receivable share the biggest ratio. What are the fixed assets, it includes equipment, furniture, vehicle, and others, the estimation are $66,600 for each year. Moreover the depreciation also needs to be added into the fixed assets. Regarding the liabilities, no loans, no debts, and no credits, the liability estimates to be $198,528, $496,320 and $7,941,120. The owner’s equity is total assets minus total liabilities, so the equity of owner is $685,040, $1,096,442, $15,618,998, respectively. The equity of owner grows up to 22.80 times, if the expectation of marketing plan can be done well and the finance projection doesn’t have other factors to be intervened.