Businesses exist to make sales and at the end of it to make a profit. The four students who are best friends founded We Guess and You’re Wrong business to support other businesses. They would benefit by making profits.
Overview of the Firm
YWG and YW is a consultation firm under the ownership of four partners who are best friends. The firm utilizes computing know-how and data mining software to assist in foretelling the future of investor’s ventures (Richard 182). The headquarters of the firm are at Lucas Cruces, NM. The firm’s customers come from the South Western part of the USA. The four partners of the business use computers and internet access to do their work.
Scope of the Plan
A financial plan identifies the current financial condition of a business and what the entity wants to achieve in the future (Siegel and Shim 320). The business owners have to provide sufficient information for them to get true results. There are about three categories of potential clients. There are those who would want to start. It means that the business has not yet started (Richard 182).
The second group comprises of those who have been in the business and want to keep updating their strategic plans every year. Lastly, there are those who are in business but are looking forward to selling their ventures (Richard 182). It is the kind of group that only focuses on validation of the business and valuing its assets.
The scope of the financial plan
Income-expenses analysis, goal analysis, asset acquisition analysis, and the cash flows are among the financial plan (Greenwood 125). The income-expense analysis focuses on the different sources of revenue for the business and the various expenses. The balance between the two can help to come up with the analysis report and recommendations for the business success. The kind of recommendations varies from increasing the revenue and revenue sources and or managing the expenses to increase profitable level (Siegel and Shim 320).
The goal analysis gives a report on the company’s goals. Every business must have the long term and short term goals. They help the business to know how to channel its resources to the right projects. The report analysis helps to identify if the business is achieving its goals or advises on how best to realize them (Greenwood 125).
When it comes to asset acquisition analysis, the report indicates the types of assets meant for acquisition. It gives them value based on the competitive market values. It provides for depreciation of the assets. The cash flow analysis provides information on how cash flows into and out of the business.
In the preparation of the financial plan, there were several assumptions that would help in the formulation of the analysis. One of the assumptions is that all the four partners in the business should consult. They should also travel, market, make calls, and attend professional conferences (Siegel and Shim 320). They would use computers and internet access to do their jobs. Another axiom was that they would not consider using inflation or interest rate in any part of the analysis. They should also have an office or some rented space from where they operate by or before the fifth year of operation. If they are making 30 trips for the current number of customers, then when the number doubles, they would make about 60 trips.
From the fifth year, the partners would also consider raising the number of customers by two for each one of them. Towards the beginning of the fifth year, they would have to employ two staffs for office work. One staff would take care of the marketing and human resource while the other staff would be responsible for updating the business system with all reports (Greenwood 125). Lastly, the other reasonable assumption would be that they would make the decision on the price at which they would dispose the firm to an entrepreneurship Professor in the fifth year.
Details of the partners
|Name of the Goal||Target year to achieve the goal||Value of the goal||Goal priority|
|Number of customers||1||8 (2 per partner)||1|
|Number of customers||3||16(4 per partner)||3|
|Monthly revenue||3||$ 6,000||4|
The assumption is that the present values of the goals are to be the future values due to the assumption that there is no inflation or interest to consider.
This part analyses the major sources of the income for the firm and how the partnership should spend such generated income (Greenwood 125). The firm has only one source of income namely receipts from clients. It also has two main expenditure components namely travelling and computer/ software. Travelling expenses contribute the highest percentage of the total costs. Other considerations involve the necessity to have an office space and the inclusion of two employees in the partnership (Caplan 190).
|Source of Income||Period||Monthly||Yearly||Yearly Total|
|Receipts from customers||Year 1||$48,000||$576,000||$ 576,000|
|Receipts from customers||Year 2||$48,000||$576,000||$ 576,000|
|Receipts from customers||Year 3||$96,000 (all 16 customers)||1,152,000||$1,152,000|
|Receipts from customers||Year 4||$96,000 (all 16 customers)||1,152,000||$1,152,000|
|Receipts from customers||Year 5||$144,000 (all 24 customers)||1,728,000||$1,728,000|
|Travelling||For the first 2 years||30trips*4=120trips |
120trips/12 months= 10 trips
10 trips*$3,000= $30,000
|$30,000 * 12 trips= $360,000 |
For the 2 years $360,000*2 years = $720,000
|For the third and fourth year||60 trips*4= 240 trips |
240 trips/12 months= 20 trips
20 trips *$3,000= $60,000
|$60,000 *12 trips= $720, 000|
|For the fifth year||90 trips*4= 360 trips |
360 trips/12 months=30 trips
30 trips*$3,000= $90,000
|$90,000*12 trips = $1,080,000|
|Computer & Software||1,2,3,4,& 5||4 partners*5, 000= $20,000 $20,000/12 months = $1,667||$5,000*4=$20,000|
|2 New part time employees||Fifth year||$ 5,000||$5,000*12 months = $60,000|
|Office Rent||Fifth year||$ 2,000||$ 2,000* 12 months = $24,000|
The assumption is that the partners do not dispose of the computers they buy in each year. Another assumption is that the same computers do not lose value through depreciation according to the partnership agreement (Stovall and Maurer 45).
|Particulars||At end of 1styear||At the end of 2ndyear||At the end of 3rdyear||At the end of 4thyear||At the end of 5thyear|
|Computer & software||$20,000||$40,000||$60,000||$80,000||$100,000|
Since the Information provided does not indicate any short term or long term liabilities for the business, the firm is solvent with the assets value at the end of the year being the net worth of the firm (Anandarajah, Aseervatham, and Reid 350). Recall, it is assumed no provision for depreciation and the assets records are at cost.
WG & YG Pro forma Income Statement
|Particulars||For the Period ending end of 1styear||For the Period ending end of 2ndyear||For the Period ending end of 3rdyear||For the Period ending end of |
|For the Period ending end of 5thyear|
|Computer & software||$20,000||$20,000||$20,000||$20,000||$20,000|
Yearly Cash flows
|Total Outflow||$ 380,000||$ 380,000||$ 380,000||$ 740,000||$ 1,160,000|
The firm at the end of the fifth year will have operated for five years. The professor will be acquiring an existing business. There are many methods available for valuing business. They include the income approach, assets approach or the market value method. The best method depends on the agreement amongst the partners (Anandarajah, Aseervatham, and Reid 350). The income approach validates the business regarding its revenues and profitability. The assets approach requires the agreement to base on the number of assets available and their value at the time of selling. The market value approach requires that the sellers and the buyer value the business according to the prevailing market standards (Stovall and Maurer 45).
Assuming the interest or inflation rates are to be used in the calculation the price of the firm (value of the firm) will be as below;
Price (value) = Value of the assets+ assumed goodwill
The goodwill will be calculated as the simple average of the yearly revenues of the firm
Price= $100,000+ (4,608,000/5) = $1,021,600
Anandarajah, Ana, Al Aseervatham, and Howard Reid. Manage Budgets and Financial Plans. Frenchs Forest: Pearson Education Australia, 2008. Print.
Caplan, Suzanne. Streetwise Finance and Accounting for Entrepreneurs. Avon: Adams Media, 2006. Print.
Greenwood, Robert P. Handbook of Financial Planning and Control. Aldershot: Gower, 2002. Print.
Richard, Carl. The One-page Financial Plan: A Simple Way to be Smart about your Money. New York: Penguins, 2015. Print.
Siegel, Joel G, and Jae K Shim. Accounting Handbook. Islip: Barron’s Educational Series, 2010. Print.
Stovall, Jim, and Tim Maurer. The Ultimate Financial Plan. Hoboken: John Wiley, 2011. Print.