EXAMPLE OF STATEMENT OF PROJECTED PROFITS
Purpose: The Statement of Projected Profits should show estimated sales revenue and expenses for the period of time that is necessary to demonstrate a profit (and no less than two (2) years). (Start-up expenses should be shown on a separate schedule and not as an expense of operations.)
Example: Amanda’s Dog Grooming Business.
The Story: Amanda has been given an opportunity to groom dogs as an independent contractor within a major pet store chain. She will be charged $900 per month for rent, which includes the use of the major equipment involved in dog grooming. However, she will need to bring her own grooming supplies, make arrangements for marketing, and carry her own insurance. In other words, Amanda is responsible for all aspects of the business. Her contract requires that she be open at least five (5) days a week for at least a half day and that she be open on Saturday.
Please note:
- The liberal use of footnotes and assumptions that are used to explain the numbers shown and cross-reference them to other financial statements, as well as strategies that would be described elsewhere in the plan.
- How the marketing expenses describe the costs of the marketing strategy that Amanda has planned.
- How Amanda has accounted for the idle time a groomer will need to be present despite the fact that the groomer is not busy with dogs that generate sales revenue.
Statement of Projected Profits: Amanda’s Dog Grooming Business
Year 1 / Year 2Sales Revenue[1] / $87,270 / 127.830
Less: Cost of Sales (Variable)[2] / 17,919 / 26,929
Contribution Margin / $69,351 / $100,901
Less: Other Expenses (Fixed)
Marketing:
Newspaper/flyer advertisements[3] / 1,500 / 500
Amortization of signage for grooming area[4] / 650 / 650
Business cards and stationary[5] / 75 / 77
Production
Rent[6] / 10,800 / 10,800
Amortization of grooming supplies[7] / 454 / 454
Attendant[8] / 10,202 / 11,595
Insurance[9] / 3,200 / 3,264
Management
Bookkeeping and Planning[10] / 4,680 / 4,680
Operating Income / $37,790 / $68,881
Less: Financing Expense (Optional)[11] / 0 / 0
Less: Taxes (Optional)[12] / 7,558 / 13,776
Net Income / $30,232 / $55,105
Assumptions:
- Cost of newspaper advertisement is about $250 for one 2-inch newspaper ad running 7 days. We want to run 4 times the first year. This totals $1,000.
Cost of making up the advertisement with logo and tag lines, using a qualified student, is $500.00. (This is a one time fee for the year.) After the 1st year, only two (2) advertisements will be run. - Rent is $900 per month and includes all utilities (but not the phone). For twelve months we will spend $10,800 ($900 X 12). It has been set by contract to remain at $900.00 for five (5) years.
- Insurance: Quote for general liability to include dog bites to workers runs $3,200 per year. It is anticipated that insurance will increase by 2% per year.
- Bookkeeping and planning may be performed, or not, by owner but has been included here at a fair wage for these services. Estimated at three (3) hours per week for 52 weeks at $30.00 per hour, or $4,680.00
Explanation of Sales Revenue
Purpose: The Explanation of Sales Revenue should explain the sales projections in terms of the projected number of customers, the average number of purchases per customer and the average amount of purchase. Where several lines of product are involved, estimates for each should be explained. It is important that your sales projections be consistent with your marketing strategy.
Example: Amanda’s Dog Grooming Business
The Story: The story is provided with the Statement of Projected Profits.
Please note:
- How Amanda’s estimated price she will charge is consistent with an overall strategy of building volume in her business in order to reduce the cost of the groomer’s idle time.
- Notice, that although newspaper advertising was needed to build sales the first year, Amanda’s strategy is to save on advertising costs in the second year and generate increased purchases from Pet Store traffic.
Estimated Average Amount of Purchase:
Year 1:
An estimated $25.00 per dog per groom has been used that represents the market rate charged for such service.[13] Nail clips will cost $15.00. Amanda summarizes the results as follows for 100 customers.
Dog groom / 100 / $25.00 / $2,500.00
Nail clip / 25 / $20.00 / 500.00
Total / 100 / $3,000.00
Thus, on the average, each customer will spend $30.00, ($3,000 / 100)
Year 2: Prices will not be increased in order to focus on building customer base. And, Amanda does not anticipate any change in the proportion of customers that buy nail clips.
Estimated Number of Purchases
Year 1: There are two potential sources of sales:
- Traffic generated from her newspaper advertising campaign.
- Traffic generated from the traffic in the pet store.
Newpaper Advertising
Amanda intends to advertise in a local paper four (4) times during her first year of operation. The newspaper reaches about 50,000 subscribers in a town of about 110,000 people. It is estimated that 1 in 5 people register their dogs. There have been 2,000 registrations in her town. This means that about 10,000 people own dogs, or 10% of the population. If we assume that the same percentage of subscribers own dogs, then about 5,000 of the subscribers will own dogs.
1st Time Advertising
Of the 5,000 dog owners that are subscribers, it is estimated that 1 in 15 of these owners will respond to the 1st advertisement.[14] Thus, it is estimated that 334 people will respond and come to get their dog groomed. Many of these people will come back to get their dogs groomed in the future. The following table describes the number of times it is estimated that those people who respond to the advertisement will purchase during the first year of operation.
Number of times the Customer is likely to purchase within a year. / Number of Customers / Number or PurchasesOne time only 10% / 33 / 33
Purchase on the average twice (2) in a year 70% / 234 / 468
Purchase on the average three (3) times in a year 15% / 50 / 150
Purchase on the average four (4) times in a year. 3% / 10 / 40
Purchase on the average twelve (12) times in a year 2% / 7 / 84
Total customers / 334 / 775
2ndTime Advertising
It is estimated that 167 new customers will respond to the 2nd newspaper advertising. (New customers are those customers who did not respond to the 1stadvertising.) This represents a 50% reduction.
Number of times the Customer is likely to purchase within a year. / Number of Customers / Number or PurchasesOne time only 10% / 16 / 16
Purchase on the average twice (2) in a year 70% / 117 / 234
Purchase on the average three (3) times in a year 15% / 25 / 75
Purchase on the average four (4) times in a year. 3% / 5 / 20
Purchase on the average twelve (12) times in a year 2% / 4 / 48
Total customers / 167 / 393
3rdTime Advertising
It is estimated that 84 new customers will respond to the 3rd newspaper advertising. (New customers are those customers who did not respond to the 1st and 2nd advertising.) This represents a 25% reduction.
Number of times the Customer is likely to purchase within a year. / Number of Customers / Number or PurchasesOne time only 10% / 8 / 8
Purchase on the average twice (2) in a year 70% / 58 / 116
Purchase on the average three (3) times in a year 15% / 13 / 39
Purchase on the average four (4) times in a year. 3% / 3 / 12
Purchase on the average twelve (12) times in a year 2% / 2 / 24
Total customers / 84 / 199
4thTime Advertising
It is estimated that 35 new customers will respond to the 4th newspaper advertising. (New customers are those customers who did not respond to the 1st, 2nd and 3rd advertising.) This represents a reduction to 10% of the rate of response for the 1st advertising.
Number of times the Customer is likely to purchase within a year. / Number of Customers / Number or PurchasesOne time only 10% / 3 / 3
Purchase on the average twice (2) in a year 70% / 24 / 48
Purchase on the average three (3) times in a year 15% / 5 / 15
Purchase on the average four (4) times in a year. 3% / 2 / 8
Purchase on the average twelve (12) times in a year 2% / 1 / 12
Total customers / 35 / 86
Total Purchases in a Year 1 from the Advertising
AdvertisingCampaign / Number of Customers / Number of Purchases
1st / 334 / 775
2nd / 167 / 393
3rd / 84 / 199
4th / 35 / 86
Total / 620 / 1,453
Pet Store Traffic
It is estimated that there will be 4 purchases, each 4 hours that the store is open that are from customers not responding to the newspaper advertisements.[15]
The store is estimated to be open 28 hours as follows.
Day of Week / Times Open / Total Hours Open / Store TrafficGrooms
Morning / Afternoon / Evening
Monday
Tuesday
Wednesday / x / 4 / 4
Thursday / x / 4 / 4
Friday / x / 4 / 4
Saturday / x / x / x / 12 / 12
Sunday / x / 4 / 4
TOTALS / 28 / 28
Thus, an additional 28 dogs will be groomed each week due to store traffic of 1,456 grooms, (52 X 28).
Total purchases (Year 1)
Purchases generated from advertising / 1,453Purchases from pet store traffic / 1,456
Total number of purchases per year / 2,909
Year 2:
Newspaper Advertising
In year two, advertising will be conducted twice in order to maintain sales from existing customers who responded to the advertisement. It is anticipated that some additional customers will be found but that these will replace those customers who did not like the service and did not return. Thus, 1,453 purchases can be expected from existing customers in year three.
Pet Store Traffic
However, it is estimated that the pet store will increase significantly and generate six (6) grooms for each four (4) hours that the store is open.[16] The grooming station plans to be open an additional afternoon and evening as follows.
Day of Week / Times Open / Total Hours Open / Store TrafficGrooms
Morning / Afternoon / Evening
Monday / x / 4 / 6
Tuesday / x / 4 / 6
Wednesday / x / 4 / 6
Thursday / x / 4 / 6
Friday / x / 4 / 6
Saturday / x / x / x / 12 / 18
Sunday / x / 4 / 6
TOTALS / 36 / 54
Thus, an additional 54 dogs will be groomed each week due to store traffic of 2,808 grooms, (52 X 54).
Total purchases (Year 2)
Purchases generated from advertising / 1,453Purchases from pet store traffic / 2,808
Total number of purchases per year / 4,261
Estimated Sales Revenue
Year 1: $30.00 purchase price X 2,909 total purchases = $87,270
Year 2: $30.00 purchase price X 4,261 total purchases = $127,830
Cost of Sales and Projected Margins
Purpose: The Cost of Sales and Projected Margins should describe relationship of your variable costs to sales and the contribution margins that will be generated from sales that will cover fixed costs.
Example: Amanda’s Dog Grooming Business
The Story: The story is provided with the Statement of Projected Profits.
Please note:
- The liberal use of footnotes and assumptions that are used to explain the numbers shown and cross-reference them to other financial statements as well as strategies that would be described elsewhere in the plan.
- The way in which Amanda took into consideration the “idle time” of the groomer. Idle time occurs because there will be times that Amanda must be open, and have a groomer present, but when there is no dog to groom. The cost of the groomer’s time spent grooming dogs is accounted for under the variable cost of sales. However, Amanda needed to include in her fixed costs an estimate for the time that the groomer would be idle and not generating sales by grooming dogs. To the extent that projected sales turn out to be more or less, this “idle” time will need to be adjusted as well. But, it will decrease as sales increase and increase as sales decrease. (It behaves exactly opposite to a variable expense.) To show the entire cost of the groomer as a fixed expense obscures the relationship between sales, variable costs, and, more importantly, margins.
Variable Cost of Sales Computation:
The variable cost of sales includes both supplies and a cost of labor. These can be summarized as follows
Year 1 / Per-Unit Cost
Year 2[17]
Shampoo[18] / $.80 / $.82
Conditioner[19] / .52 / .53
Red Bandana[20] / 1.34 / 1.37
Total Supply Costs / $2.66 / $2.72
Labor[21] / 3.50 / 3.60
Total Per-Unit Variable Cost of Sales / $6.16 / $6.32
Total Cost of Sales
Year 1: 2,909[22] total purchases X $6.16 = $17,919
Year 2: 4,261[23] total purchases X $6.32 = $26,929
Computation of Idle Time:
Year 1
It is planned that the grooming booth will be open in Year 1 for the following days for the number of hours indicated in the chart below. Thus, the booth is open 28 hours per week, or 1,456 hours per year. At $14.00[24] per hour (which includes all payroll and related expenses), that will cost $20,384 per year.
However, according to sales projections, 2,909 dogs will be groomed at a cost of $3.50 labor for each or a total cost of $10,181.50. Thus, $10,181.50 of the total $20,384 has already been accounted for in the cost of sales. That leaves only $10,202.50, ($20,384.00 - $10,181.50), of idle time on the part of the groomer that the groomer will spend in attending the booth.
Day of Week / Times Open / Total Hours Open / Available GroomingSlots[25]
Morning / Afternoon / Evening
Monday
Tuesday
Wednesday / x / 4 / 16
Thursday / x / 4 / 16
Friday / x / 4 / 16
Saturday / x / x / x / 12 / 48
Sunday / x / 4 / 16
TOTALS / 28 / 112
Year 2
It is planned that the grooming booth will be open in Year 2 for the following days for the number of hours as indicated in the chart below. Thus, the booth is open 36 hours per week, or 1,872 hours per year. At $14.42 per hour (which includes all payroll and related expenses), that will cost $26,994.24 per year.
However, according to sales projections, 4,261 dogs will be groomed at a cost of $3.60 labor for each or a total cost of $15,339.60. Thus, $15,339.60of the total $26.994.24 has already been accounted for in the cost of sales. That leaves only $11,594.64 ($26.994.24 - $15,339.60), of idle time on the part of the groomer that the groomer will spend in attending the booth.
Day of Week / Times Open / Hours Open / Available GroomingSlots[26]
Morning / Afternoon / Evening
Monday / x / 4 / 16
Tuesday / x / 4 / 16
Wednesday / x / 4 / 16
Thursday / x / 4 / 16
Friday / x / 4 / 16
Saturday / x / x / x / 12 / 48
Sunday / x / 4 / 16
TOTALS / 36 / 144
Assumptions
- Per-Unit Cost of Shampoo (Year 1)
1 bottle of shampoo costs $20.00 and will provide 25 dogs with shampoo, which means that it costs $0.80 per dog. ($20/25 = $0.80)
- Per-Unit Cost of Conditioner (Year 1)
1 bottle of shampoo costs $13.00 and will provide 25 dogs with shampoo, which means that it costs $0.52 per dog. ($13/25 = $0.52)
- Per-Unit Cost of Bandana (Year 1)
1 package of 30 bandanas costs $4.00. Each bandana costs about 1.34 (rounded up to the penny.)
- Per-Unit Labor Costs (Year 1)
It takes, on the average, 15 minutes to check in a dog, bathe them, dry them and get them out the door. Short hair dogs take a little less time and long hair dogs take more. But, we have found that these dogs come in to be groomed at a standard price and each groom averages 15 minutes per dog. Charging more or less depending on the type of dog does not impact sales. Groomers expect to be paid $14.00 an hour. Thus, it costs $3.50 per dog ($14.00/4)
Start-up Expenses and Amortization
Purpose: The schedule of Start-up Expenses and Amortization should describe anticipated start-up costs. These are the things that must be purchased in advance of making your first sale. These costs tend to be large in amount (the purchase of a piece of equipment for example), and must be amortized over their useful life.[27] Start-up expenses also include the funds that you will need to cover losses in the first few years of operation until you have built up a customer base and sales that can cover all your expenses.
Example: Amanda’s Dog Grooming Business
The Story: The story is provided with the Statement of Projected Profit.
Please note:
- That the cost of many start-up items must be amortized over their useful lives.
- Funding for start-up expenses needs to come from sources other than sales. This can include external sources of financing or (as is often the case) donations of time and property from the owners.
Grooming Supplies
Description of the Item / 3 years / 5 years / Total ExpenseClippers / 120.00 / $120.00
Deluxe comb set / 64.00 / 64.00
Shears / 1,210.00 / 1,210.00
Combs / 34.00 / 34.00
Brushes / 48.00 / 48.00
Nail Clippers / 12.00 / 12.00
Cages / 103.00 / 103.00
Blow dryer / 214.00 / 214.00
Aprons / 142.00 / 142.00
Total Expense / $480.00 / $1,467.00 / $1,947.00
Amortization per year[28] / $160.00 / $294.00 / $454.00
Signage for grooming area
Initial signage for the grooming area will cost $1,800 and can be used for about 4 years, or $450 per year. Additional signs costing about $200.00 a year are estimated as a yearly recurring cost (including Year 1).
Total Start-Up Expenses
It is estimated that six (6) months of operating expense (exclusive of amortized costs) will be needed to fund the business until sales can be generated to cover costs.
Description of Item / Prior to Start of Business / Year 1 / Year 2Grooming supplies / $1,947
Signage for grooming area / 1,800
Expenses that must be pre-paid
Newspaper/flyer advertisements[29] / 1,000
Business cards and stationary / 75
Insurance / 3,200
Rent[30] / 5,400
Attendant[31]
6 months of expense
Attendant[32] / 0
Bookkeeping and Planning[33] / 0
Net Operating Losses (Cash flows) / N/A / N/A
Total Funding Requirements / $13,422
1
[1] See Explanation of Sales Revenuefor an explanation of sales estimates.
[2] See Costs of Sales and Projected Margins for an explanation of the variable cost of sales projections.
[3] See Assumption # 1.
[4] See Start-up Expenses and Amortization for an explanation of how signage was amortized
[5] Estimated to increase at 3% per year.
[6] See Assumption #2
[7] See Start-up Expenses and Amortization for an explanation of how grooming supplies were amortized
[8] See Costs of Sales and Projected Margins for an explanation of how the groomers idle time was calculated.
[9] See Assumption #3
[10] See Assumption #4
[11] Amanda anticipates borrowing the money from family and friends who will expect to be repaid from a share of the profits.
[12] Taxes have been estimated at 20% of net income. This does not reflect the taxes that will be paid by Amanda on her own tax return when she performs grooming services herself.
[13] A market rate of $30.00 was determined by surveying the prices charged by existing groomers in the area.
[14] The rate of response is based on a survey of 50 dog owners who subscribe to the newspaper.
[15] This estimate reflects in-store survey and results of conversations with Pet Store owners.
[16] This estimated increase is based on the experiences of other pet stores offering similar services.
[17] A 2% inflation rate is projected in supplies. A 3% rate of increase is projected for labor.
[18] See Assumption #1
[19] See Assumption #2
[20] See Assumption #3
[21] See Assumption #4
[22] See the Explanation of Sales Revenue
[23] See the Explanation of Sales Revenue
[24] If workers are paid $13.00 an hour approximately, an estimated additional 8% will be required for payroll taxes.
[25] It takes 15 minutes to groom a dog. Thus, 4 dogs can be groomed each hour.
[26] It takes 15 minutes to groom a dog. Thus, 4 dogs can be groomed each hour.