Tip Sheet – 3rd Progress Report (Cost and Profitability)

Further to the step-by-step guide (worksheet file) and spreadsheets provided, you need only to input
your numbers in the blue cells (the cells in black are calculated for you). Do not change formulas as that
will only make it more difficult to find mistakes and correct as you try to balance. Common mistakes and
“difficult balancing’ tips are provided in the worksheet file. Please complete the Excel worksheets in the
order suggested.

For Schedule 1, bring forward your final sales estimated (be conservative in this number), and you can
calculate most expenses using the SME benchmark report. Download the SME report of the business
type closest to yours to estimate items such as insurance, utilities, etc. as a percentage of sales
calculation. Do not copy numbers, but rather pull the report as percentage (%) and calculate these
projected expenses as a percentage of your sales.

The exceptions to the above are your rent/location costs which will be based on your location choice
(which you selected in your last progress report), marketing budget (which you set last progress report),
and wages/salaries (base this on the employees your business needs and utilize the wage report found
under the research tools for the positions you require. As recommended, use the median number.
When these were set it was recommended you check SME benchmark numbers so you are not a way off
on your budget.

If you received feedback on adjusting any of the above (sales, marketing budget, or location),
adjustments will be looked for in your 3rd progress report.

Be sure to review the student example, especially for recording assumptions. Do not just input numbers,
as these will be judged against your assumptions. A simple example: if your wages are $XXX dollars per
month, it will be checked against assumptions of how many of what positions and at what wage (next
phase you’ll have to identify and create a chart of these positions).

A common mistake is to try to create a job or title for all team members. This is not necessary, all team
members are shareholders, so only identify the positions (by position, names not needed) that your
business requires. Later, you will create a job description, and as is common in small or medium sized
businesses the manager may have duties including marketing, purchasing, H.R. management, etc. – so
don’t create more positions than your business needs or can afford.

When estimating capital costs, it will be OK if your team assumed a minimum of $5,000 for leasehold
improvements, minimum of $5,000 for office furniture and equipment/computers - more depending on
your businesses. You don’t need to look up the price of a chair! But for key items that cost say $3,000 to
$5000 or more (vehicles, manufacturing equipment, etc.) please search on-line for sample costs to
include in your assumptions in support of your start-up funds and opening balance sheet.

For the opening balance sheet, remember all teams are to assume 85% financing of fixed assets under a
sample loan program. Equity (common shares) up to your maximum $500,000 will fund the difference (If
start up financing requirement is for example $300,000, and you calculated loans of $150,000 – then
your equity will be the other $150,000). You must use the debt first, then fund remaining balance with
equity. You cannot fund the entire amount with equity as per course requirements.
Likewise, all businesses need an inventory component even if very small. So, if you are a service business
like a fitness centre, you need to plan some sort of complimentary inventory like say tee shirts.
Breakdown sales in your assumptions, even if 99% of revenue is from services and 1% or less is from tee
shirts.

For businesses outside of the service sector, inventory numbers should be planned from SME
benchmarking. If you are planning a retail store, check if inventory levels average 14 days or 60 days, or
some where in between. A convenience store and clothing store will vary, as does a used car dealer and
new car dealership. Meanwhile, a contracting (construction) company may only have bought inventory
for the job(s) on hand and average 5 days or less.

As you move on and complete the income statement, don’t worry if you are not profitable at first – but I
would hope to see a monthly profit by the end of year one (even though for the year, it accumulates an
over-all loss). Despite the common rumour that new businesses lose money for several years, no
“Butcher, baker, or candlestick maker” would last if they didn’t find a profit on a monthly basis in early
stages – like most other small/medium businesses. And on cashflow, I’d expect a positive one in the first
several months. It is OK if your cashflow is negative initially, which is why we started with enough cash
to cover several months of expenses. Again, a small/medium business start-up cannot normally sustain a
negative cashflow very long. Remain realistic, being conservative and reasonable with your numbers.

Calculate your benchmark comparisons (liquidity, leverage and profitability ratios) based on your closing
balance sheet/end of year-one numbers. If the first two are largely out of line, adjust your opening
numbers (you don’t want to be carrying a significantly lower working capital or significantly higher
amount of debt compared to your average competitors. The CA:CL of a trucking company varies
significantly from a Tool & Mould business due to the nature of the business. Likewise, certain
businesses can support more debt than others due to the amount and variability of cashflow, etc. And if
your net profit margin is 20% while the industry average is under 5% you are in all likelihood very off in
your projections/assumptions. Any variations, and justification thereof, should be able to be explained
by you in your report.