Sample Business Plan for a Technology Business

1.0 Executive Summary

American Management Technology (AMT) sells computers, software, and service to local small businesses.
This business plan is part of our regular business planning process. We revise this plan every quarter.

1.1 Objectives

Sales increasing to more than $10 million by the third year.
Bring gross margin back up to above 25%, and maintain that level.
Sell $2 million of service, support, and training by 1997.
Improve inventory turnover to 6 turns next year, 7 in 1996, and 8 in 1997.

1.2 Mission

AMT is built on the assumption that the management of information technology for business is like legal advice, accounting, graphic arts, and other bodies of knowledge, in that it is not inherently a do-it-yourself prospect. Smart business people who aren't computer hobbyists need to find quality vendors of reliable hardware, software, service, and support. They need to use these quality vendors as they use their other professional service suppliers, as trusted allies.

AMT is such a vendor. It serves its clients as a trusted ally, providing them with the loyalty of a business partner and the economics of an outside vendor. We make sure that our clients have what they need to run their businesses as well as possible, with maximum efficiency and reliability. Many of our information applications are mission critical, so we give our clients the assurance that we will be there when they need us.

1.3 Keys to Success

Differentiate from box-pushing, price-oriented businesses by offering and delivering service and support -- and charging for it.
Increase gross margin to more than 25%.
Increase our non-hardware sales to 20% of the total sales by the third year.

2.0 Company Summary

AMT is a 10 year-old computer reseller with sales of $7 million per year, declining margins, and market pressure. It has a good reputation, excellent people, and a steady position in the local market, but has been having trouble maintaining healthy financials.

2.1 Company Ownership

AMT is a privately-held corporation owned in majority by its founder and president, Ralph Jones. There are six part owners, including four investors and two past employees. The largest of these (in percent of ownership) are Frank Dudley, our attorney, and Paul Jones, our public relations consultant. Neither owns more than 15%, but both are active participants in management decisions.

2.2 Company History

AMT has been caught in the vise grip of margin squeezes that have affected computer resellers worldwide. Although the chart titled Past Financial Performance shows that we have had healthy growth in sales and it also shows declining gross margin and declining profits.

The more detailed numbers in the past performance table that follows include other indicators of some concern:

The gross margin % has been declining steadily, as we see in the chart.

Inventory turnover is getting steadily worse.

All of these concerns are part of the general trend affecting computer resellers. The margin squeeze is happening throughout the computer industry worldwide.

	1992	1993	1994
Sales	$3,773,889	$4,661,902	$5,301,059
Gross	$1,189,495	$1,269,261	$1,127,568
Gross % (calculated)	31.52%	27.23%	21.27%
Operating Expenses	$752,083	$902,500	$1,052,917
Collection period (days)	35	40	45
Inventory turnover	7	6	5

Short-term Assets
Cash	$55,432
Accounts receivable	$395,107
Inventory	$651,012
Other Short-term Assets	$25,000
Total Short-term Assets	$1,126,551

Long-term Assets
Capital Assets	$350,000
Accumulated Depreciation	$50,000
Total Long-term Assets	$300,000
Total Assets	$1,426,551

Debt and Equity
Accounts Payable	$223,897
Short-term Notes	$90,000
Other ST Liabilities	$15,000
Subtotal Short-term Liabilities	$328,897
Long-term Liabilities	$285,000
Total Liabilities	$613,897
Paid in Capital	$500,000
Retained Earnings	$238,002
Earnings	$437,411	$366,761	$74,652
Total Equity	$812,654
Total Debt and Equity	$1,426,551

Other Inputs	1994
Payment days	30
Sales on credit	$3,445,688
Receivables turnover	8.72

2.3 Products and Services

AMT sells personal computer technology for small business including personal computer hardware, peripherals, networks, software, support, service, and training.

2.4 Company locations and facilities

We have one location-- a 7,000 square foot store in a suburban shopping center located conveniently close to the downtown area. It includes a training area, service department, offices, and showroom area.

3.0 Products and Services

AMT sells personal computer technology for small business including personal computer hardware, peripherals, networks, software, support, service, and training.

Ultimately, we are really selling information technology. We sell reliability, and confidence. We sell the assurance to small business people to know that their business will not suffer an information technology disaster.

AMT serves its clients as a trusted ally, providing them with the loyalty of a business partner and the economics of an outside vendor. We make sure that our clients have what they need to run their business as well as possible, with maximum efficiency and reliability. Since many of our information applications are mission critical, we give our clients the confidence that we will be there when they need us.

3.1 Product and Service Description

In personal computers, we support three main lines:

The Super Home is our smallest and least expensive, initially positioned by its manufacturer as a home computer. We use it mainly as a cheap workstation for small business installations. Its specifications include ...[truncated because this plan is provided for purposes of illustration only]

The Power User is our main upscale line. It is our most important system for high-end home and small business main workstations, because of .... Its key strengths are .... [truncated because this plan is provided for purposes of illustration only] Its specifications include ...[truncated because this plan is provided for purposes of illustration only]

The Business Special is an intermediate system, used to fill the gap in the positioning. Its specifications include ... [truncated because this plan is provided for purposes of illustration only]

In peripherals, accessories and other hardware, we carry a complete line of necessary items from cables to forms to mousepads ... [truncated because this plan is provided for purposes of illustration only]

In service and support, we offer a range of walk-in or depot service, maintenance contracts and on-site guarantees. We have not had much success selling service contracts. Our networking capabilities are important to our overall mix, because small business needs networking and needs to buy networking.

In software, we sell a complete line of ... [truncated because this plan is provided for purposes of illustration only].

In training, we offer ...[truncated because this plan is provided for purposes of illustration only].

3.2 Competitive Comparison

The only way we can hope to differentiate well is to define the vision of the company to be an information technology ally to our clients. We will not be able to compete in any effective way with the chains using boxes or products as appliances. We need to offer a real alliance.

The benefits we sell include many intangibles: confidence, reliability, knowing that somebody will be there to answer questions and help at the important times.

These are complex products, products that require serious knowledge and experience to use, and our competitors sell only the products themselves.

Unfortunately, we cannot sell the products at a higher price just because we offer services; the market has shown that it will not support that concept. We have to also sell the service and charge for it separately.

3.3 Sales Literature

Copies of our brochure and advertisements are attached as appendices. Of course one of our first tasks will be to change the message of our literature to make sure we are selling the company, rather than the product.

3.4 Sourcing

Our costs are part of the margin squeeze. As competition on price increases, the squeeze between manufacturer's price into channels and end-users ultimate buying price continues.

With the hardware lines, our margins are declining steadily. We generally buy at ... Our margins are thus being squeezed from the 25% of five years ago to more like 13-15% at present. In the mainline peripherals a similar trend shows, with prices for printers and monitors declining steadily. We are also starting to see that same trend with software ....

In order to hold costs down as much as possible, we concentrate our purchasing with Hauser, which offers 30-day net terms and overnight shipping from the warehouse in Dayton. We need to concentrate on making sure our volume gives us negotiating strength.

In accessories and add-ons we can still get decent margins, 25% to 40%.

For software, margins are ..[truncated because this plan is provided for purposes of illustration only].

3.5 Technology

We have for years supported both Windows and Macintosh technology for CPUs, although we've switched vendors many times for the Windows (and previously DOS) lines. We are also supporting Novell, Banyon, and Microsoft networking, Xbase database software, and Claris application products.

3.6 Future Products and Services

We must remain on top of the new technologies, because this is our bread and butter. For networking, we need to provide better knowledge of cross platform technologies. Also, we are under pressure to improve our understanding of direct-connect internet and related communications. Finally, although we have a good command of desktop publishing, we are concerned about getting better at the integration of technologies that creates fax, copier, printer, and voice mail as part of the computer system.

4.0 Market Analysis

AMT focuses on local markets, small business and home office, with special focus on the high-end home office and the 5-20 unit small business office.

4.1 Market Segmentation

The segmentation allows some room for estimates and nonspecific definitions. We focus on a small-medium level of small business, and it is hard to find information to make an exact classification. Our target companies are large enough to need the high-quality information technology management we offer, but too small to have a separate computer management staff such as an MIS department. We say that our target market has 10-50 employees, and needs 5-20 workstations tied together in a local area network; the definition is flexible.

Defining the high-end home office is even more difficult. We generally know the characteristics of our target market, but we can't find easy classifications that fit into available demographics. The high-end home office business is a business, not a hobby. It generates enough money to merit the owner's paying real attention to the quality of information technology management, meaning that there is both budget and concerns that warrant working with our level of quality service and support. We can assume that we aren't talking about home offices used only part-time by people who work elsewhere during the day, and that our target market home office wants to have powerful technology and a lot of links between computing, telecommunications, and video.

4.2 Industry Analysis

We are part of the computer reselling business, which includes several kinds of businesses:

Computer dealers: storefront computer resellers, usually less than 5,000 square feet, often focused on a few main brands of hardware, usually offering only a minimum of software, and variable amounts of service and support. These are usually old-fashioned (1980s-style) computer stores and they usually offer relatively few reasons for buyers to shop with them. Their service and support is not usually very good and their prices are usually higher than the larger stores.
Chain stores and computer superstores: these include major chains such as CompUSA, Computer City, Future Shop, etc. They are almost always more than 10,000 square feet of space, usually offer decent walk-in service, and are often warehouse-like locations where people go to find products in boxes with very aggressive pricing, and little support.
Mail order: the market is served increasingly by mail order businesses that offer aggressive pricing of boxed product. For the purely price-driven buyer, who buys boxes and expects no service, these are very good options.
Others: there are many other channels through which people buy their computers, usually variations of the main three types above.

4.2.1 Industry Participants

The national chains are a growing presence. CompUSA, Computer City, Incredible Universe, Babbages, Egghead, and others. They benefit from national advertising, economies of scale, volume buying, and a general trend toward name-brand loyalty for buying in the channels as well as for products.
Local computer stores are threatened. These tend to be small businesses, owned by people who started them because they liked computers. They are under-capitalized and under-managed. Margins are squeezed as they compete against the chains, in a competition based on price more than on service and support.

4.2.2 Distribution Patterns

Small Business buyers are accustomed to buying from vendors who visit their offices. They expect the copy machine vendors, office products vendors, and office furniture vendors, as well as the local graphic artists, freelance writers, or whomever, to visit their office to make their sales.

There is usually a lot of leakage in ad-hoc purchasing through local chain stores and mail order. Often the administrators try to discourage this, but are only partially successful.

Unfortunately our Home Office target buyers may not expect to buy from us. Many of them turn immediately to the superstores (office equipment, office supplies, and electronics) and mail order to look for the best price, without realizing that there is a better option for them at only a little bit more.

4.2.3 Competition and Buying Patterns

The small business buyers understand the concept of service and support, and are much more likely to pay for it when the offering is clearly stated.

There is no doubt that we compete much more against all the box pushers than against other service providers. We need to effectively compete against the idea that businesses should buy computers as plug-in appliances that don't need ongoing service, support, and training.

Our focus group sessions indicated that our target Home Offices think about price but would buy based on quality service if the offering were properly presented. They think about price because that's all they ever see. We have very good indications that many would rather pay 10-20% more for a relationship with a long-term vendor providing back-up and quality service and support; they end up in the box-pusher channels because they aren't aware of the alternatives.

Availability is also very important. The Home Office buyers tend to want immediate, local solutions to problems.

4.2.4 Main Competitors

Chain stores:

We have Store 1 and Store 2 already within the valley, and Store 3 is expected by the end of next year. If our strategy works, we will have differentiated ourselves sufficiently to not have to compete against these stores.

Strengths: national image, high volume, aggressive pricing, economies of scale.

Weaknesses: lack of product, service and support knowledge, lack of personal attention.

Other local computer stores:

Store 4 and Store 5 are both in the downtown area. They are both competing against the chains in an attempt to match prices. When asked, the owners will complain that margins are squeezed by the chains and customers buy on price only. They say they tried offering services and that buyers didn't care, instead preferring lower prices. We think the problem is also that they didn't really offer good service, and also that they didn't differentiate from the chains.

4.3 Market Analysis

The home offices in Tintown are an important growing market segment. Nationally, there are approximately 30 million home offices, and the number is growing at 10% per year. Our estimate in this plan for the home offices in our market service area is based on an analysis published four months ago in the local newspaper.

Home offices include several types. The most important, for our plan's focus, are the home offices that are the only offices of real businesses, from which people make their primary living. These are likely to be professional services such as graphic artists, writers, and consultants, some accountants and the occasional lawyer, doctor, or dentist. There are also part-time home offices with people who are employed during the day but work at home at night, people who work at home to provide themselves with a part-time income, or people who maintain home offices relating to their hobbies; we will not be focusing on this segment.

Small business within our market includes virtually any business with a retail, office, professional, or industrial location outside of someone's home, and fewer than 30 employees. We estimate 45,000 such businesses in our market area.

The 30-employee cutoff is arbitrary. We find that the larger companies turn to other vendors, but we can sell to departments of larger companies, and we shouldn't be giving up leads when we get them.

Market Analysis

Potential Customers	Total Customers	Growth rate
Consumer	12,000	2%
Small Business	15,000	5%
Large Business	33,000	8%
Government	36,000	-2%
Other	19,000	0%
Total	115,000	n.a.

5.0 Strategy and Implementation Summary

Emphasize service and support. We must differentiate ourselves from the box pushers. We need to establish our business offering as a clear and viable alternative for our target market, to the price-only kind of buying.
Build a relationship-oriented business. Build long-term relationships with clients, not single-transaction deals with customers. Become their computer department, not just a vendor. Make them understand the value of the relationship.
Focus on target markets. We need to focus our offerings on small business as the key market segment we should own. This means the 5-20 unit system, tied together in a local area network, in a company with 5-50 employees. Our values -- training, installation, service, support, knowledge -- are more cleanly differentiated in this segment. As a corollary, the high end of the home office market is also appropriate. We do not want to compete for the buyers who go to the chain stores or mail order, but we definitely want to be able to sell individual systems to the smart home office buyers who want a reliable, full-service vendor.
Differentiate and fulfill the promise. We can't just market and sell service and support, we must actually deliver as well. We need to make sure we have the knowledge-intensive business and service-intensive business we claim to have.

5.1 Marketing Strategy

The marketing strategy is the core of the main strategy:

Emphasize service and support
Build a relationship business
Focus on small business and high-end home office as key target markets

5.1.1 Target Markets and Market Segments

AMT focuses on local markets, small business and home office, with special focus on the high-end home office and the 5-20 unit small business office.

5.1.2 Pricing Strategy

We must charge appropriately for the high-end, high-quality service and support we offer. Our revenue structure has to match our cost structure, so the salaries we pay to assure good service and support must be balanced by the revenue we charge.

We cannot build the service and support revenue into the price of products. The market can't bear the higher prices and the buyer feels ill-used when they see the same product priced lower at the chains. Despite the logic behind this, the market doesn't support this concept. Therefore, we must make sure that we deliver and charge for service and support. Training, service, installation, networking support-- all of this must be readily available and priced to sell and deliver revenue.

5.1.3 Promotion Strategy

As always, we depend on newspaper advertising as our main way to reach new buyers. As we change strategies, however, we need to change the way we promote ourselves:

All advertising has to emphasize the differentiation point rather than price or straight-on price-only competition with the chains. We'll be developing a "now what do you do" message to build up the target market's need for an information technology ally as opposed to the large chains reputation as box pushers without support or service behind the products.
Our collaterals have to sell the company, not the product. Why work with AMT?
We must radically improve our direct mail efforts, reaching our established customers with training, support services, upgrades, and seminars.
It's time to work more closely with the local media. We could offer the local radio a regular talk show on technology for small business, as one example.

5.2 Sales Strategy

We need to sell the company, not the product. We sell AMT, not Apple, IBM, Hewlett-Packard, or Compaq, or any of our software brand names.
We have to sell our service and support. The hardware is like the razor, and the support, service, software services, training, and seminars are the razor blades. We need to serve our customers with what they really need.
The Yearly Total Sales chart summarizes our ambitious sales forecast. We expect sales to increase from $5.3 million last year to more than $7 million next year and to more than $10 million in the last year of this plan.

5.2.1 Sales Forecast

The important elements of the sales forecast are shown in the Total Sales by Month in Year 1 table. The non-hardware sales increase to about $2 million total in the third year.

Sales Forecast

Unit Sales	1995	1996	1997
Super home	1,253	1,378	1,516
Power User	1,313	1,444	1,588
Business Special	1,312	1,443	1,587
Service	2,006	2,206	2,427
Software	8,006	8,807	9,688
Other	7,219	7,941	8,735
Total Unit Sales	21,108	23,219	25,541

Unit Prices	1995	1996	1997
Super home	$1,000	$1,100	$1,210
Power User	$2,000	$2,200	$2,420
Business Special	$1,500	$1,650	$1,815
Service	$75	$83	$91
Software	$65	$72	$79
Other	$100	$110	$121

Total Sales	1995	1996	1997
Super home	$1,252,875	$1,515,800	$1,834,360
Power User	$2,625,000	$3,176,800	$3,842,960
Business Special	$1,968,188	$2,380,950	$2,880,405
Service	$150,413	$183,098	$220,857
Software	$520,406	$634,104	$765,352
Other	$721,875	$873,510	$1,056,935
Total Sales	$7,238,756	$8,764,262	$10,600,869

Unit costs	1995	1996	1997
Super home	$850	$935	$1,029
Power User	$1,600	$1,760	$1,936
Business Special	$1,125	$1,238	$1,362
Service	$15	$17	$19
Software	$39	$43	$47
Other	$35	$39	$43

Total cost of Sales	1995	1996	1997
Super home	$1,064,944	$1,288,430	$1,559,964
Power User	$2,100,000	$2,541,440	$3,074,368
Business Special	$1,476,141	$1,786,434	$2,161,494
Service	$30,083	$37,502	$46,113
Software	$312,244	$378,701	$455,336
Other	$252,656	$309,699	$375,605
Total Cost of Unit Sales	$5,236,067	$6,342,206	$7,672,880

5.2.2 Sales Programs

Direct mail: Use great detail to describe your company's programs here.
Seminars: Use great detail to describe your company's programs here.

5.3 Service and Support

Our strategy hinges on providing excellent service and support. This is critical. We need to differentiate on service and support, and to therefore deliver as well.

Training: details would be essential in a real business plan, but not in this sample plan.
Upgrade offers: details would be essential in a real business plan, but not in this sample plan.
Our own internal training: details would be essential in a real business plan, but not in this sample plan.
Installation services: details would be essential in a real business plan, but not in this sample plan.
Custom software services: details would be essential in a real business plan, but not in this sample plan.
Network configuration services: details would be essential in a real business plan, but not in this sample plan.

5.4 Milestones

Business Plan Milestones

Milestone	Mngr	Date	Dept.	Budget
Corporate Identity	TJ	12/17/94	Marketing	$10,000
Business Plan Review	RJ	1/10/95	GM	$0
Mailing system	SD	7/26/94	Service	$5,000
Seminar implementation	IR	1/10/95	Sales	$1,000
New corporate brochure	TJ	1/16/95	Marketing	$5,000
Upgrade mailer	IR	1/16/95	Sales	$5,000
Delivery vans	SD	1/25/95	Service	$12,500
Advertising	RJ	2/16/95	GM	$0
Direct mail	IR	2/16/95	Marketing	$3,500
Service revamp	SD	2/25/95	Product	$2,500
X4 Prototype	SG	2/25/95	Product	$2,500

6. 0 Management Summary

Our management philosophy is based on responsibility and mutual respect. People who work at AMT want to work at AMT because we have an environment that encourages creativity and achievement.

6.1 Organizational Structure

6.2 Management Team

Ralph Jones, President: 46 years old, founded AMT in 1984 to focus on reselling high-powered personal computers to small business. Degree in computer science, 15 years with Large Computer Company, Inc. in positions ending with project manager. Ralph has been attending courses at the local Small Business Development Center for more than six years now, steadily adding business skills and business training to his technical background.

Sabrina Benson, VP Marketing: 36 years old, joined us last year following a very successful career with Continental Computers. Her hiring was the culmination of a long recruiting search. With Continental she managed the VAR marketing division. She is committed to re-engineering AMT to be a service and support business that sells computers, not vice-versa. MBA, undergraduate degree in history.

Gary Andrews, VP Service and Support: 48 years old, 18 years with Large Computers, Inc. in programming and service-related positions, 7 years with AMT. MS in computer science and BS in electrical engineering.

Laura Dannis, VP Sales: 32, former teacher, joined AMT part-time in 1991 and went full-time in 1992. Very high people skills, BA in elementary education. She has taken several sales management courses at the local SBDC.

John Peters, Director of Administration: 43, started with AMT as a part-time bookkeeper in 1987, and has become full-time administrative and financial backbone of the company.

6.3 Management Team Gaps

At present we believe we have a good team for covering the main points of the business plan. The addition of Sabrina Benson was important as a way to cement our fundamental re-positioning and re- engineering.

At present, we are weakest in the area of technical capabilities to manage the database marketing programs and upgraded service and support, particularly with cross-platform networks. We also need to find a training manager.

6.4 Personnel Plan

The Personnel Plan reflects the need to bolster our capabilities to match our positioning. Our total headcount should increase to 22 this first year, and to 30 by the third year. Detailed monthly projections are included in the appendices.

Personnel Plan

Production	1995	1996	1997
Manager	$12,000	$13,000	$14,000
Assistant	$36,000	$40,000	$40,000
Technical	$12,500	$35,000	$35,000
Technical	$12,500	$35,000	$35,000
Technical	$24,000	$27,500	$27,500
Fulfillment	$24,000	$30,000	$60,000
Fulfillment	$18,000	$22,000	$50,000
Other	$0	$0
Subtotal	$139,000	$202,500	$261,500

Sales and Marketing	1995	1996	1997
Manager	$72,000	$76,000	$80,000
Technical sales	$60,000	$63,000	$85,000
Technical sales	$45,500	$46,000	$46,000
Salesperson	$40,500	$55,000	$64,000
Salesperson	$40,500	$50,000	$55,000
Salesperson	$33,500	$34,000	$45,000
Salesperson	$31,000	$38,000	$45,000
Salesperson	$21,000	$30,000	$33,00
Salesperson	$0	$30,000	$33,000
Other	$0	$0	$0
Subtotal	$344,000	$422,000	$486,000

Administration	1995	1996	1997
President	$66,000	$69,000	$95,000
Finance	$28,000	$29,000	$30,000
Admin Assistant	$24,000	$26,000	$28,000
Bookkeeping	$18,000	$25,000	$30,000
Clerical	$12,000	$15,000	$18,000
Clerical	$7,000	$15,000	$18,000
Clerical	$0	$0	$15,000
Other	$0	$0	$0
Subtotal	$155,000	$179,000	$234,000

Other	1995	1996	1997
Programming	$36,000	$40,000	$44,000
Other technical	$0	$30,000	$33,000
Other	$0	$0	$0
Subtotal	$36,000	$70,000	$77,000
Total Headcount	22	25	30
Total Payroll	$674,000	$873,500	$1,058,500
Payroll Burden	$60,660	$78,615	$95,265
Total Payroll Expenditures	$734,660	$952,115	$1,153,765

6.5 Other Management Considerations

Our attorney, Frank Dudley, is also a co-founder. He invested significantly in the company over a period of time during the 1980s. He remains a good friend of Ralph and has been a steady source of excellent legal and business advice.

Paul Jones, public relations consultant, is also a co-founder and co- owner. Like Dudley, he invested in the early stages and remains a trusted confidant and vendor of public relations and advertising services.

7.0 Financial Plan

The most important element in the financial plan is the critical need for improving several of the key factors that impact cash flow:

We must at any cost stop the slide in inventory turnover and develop better inventory management to bring the turnover back up to 8 turns by the third year. This should also be a function of the shift in focus towards service revenues to add to the hardware revenues.
We must also bring the gross margin back up to 25%. This too is related to improving the mix between hardware and service revenues, because the service revenues offer much better margins.
We plan to borrow another $150,000 long-term this year. The amount seems in line with the balance sheet capabilities.

7.1 Important Assumptions

On our General Assumptions table, the most ambitious and also the most questionable assumption is our projected improvement in inventory turnover, from 5 turns last year to 6, 7, and then 8. This is critical to healthy cash flow, but will also be difficult.

General Assumptions

	1994	1995	1996	1997
Collection days	45	45	45	42
Payment Days	30	35	37	40
Inventory turnover	5.00	6.0	7.0	8.0

	1995	1996	1997
Short Term Interest Rate	8.00%	8.00%	8.00%
Long Term Interest Rate	8.50%	8.50%	8.50%
Payment days	35	37	40
Tax Rate Percent	25.00%	25.00%	25.00%
Expenses in cash%	20.00%	20.00%	20.00%
Sales on credit	65.00%	75.00%	80.00%
Personnel Burden %	9.00%	9.00%	9.00%

7.2 Key Financial Indicators

The Benchmark Comparison chart highlights our ambitious plans to correct declining gross margin and inventory turnover. The chart illustrates why we think the ambitious sales increases we plan are reasonable: we have had similar increases in the recent past.

7.3 Break-even Analysis

For our break-even analysis, we assume running costs of approximately $94,000 per month, which includes our full payroll, rent, and utilities, and an estimation of other running costs. Payroll alone, at our present run rate, is only about $55,000.

Margins are harder to assume. Our overall average of $343/248 is based on past sales. We hope to attain a margin that high in the future.

The chart shows that we need to sell about $340,000 per month to break even, according to these assumptions. This is about half of our planned 1995 sales level, and significantly below our last year's sales level, so we believe we can maintain it.

Break Even Analysis:

Assumptions:
Monthly Units Break-even	989
Monthly Sales Break-even	$339,199
Average Unit Sale	$342.94
Average Per-Unit Cost	$248.06
Fixed Cost	$93,843

7.4 Projected Profit and Loss

The most important assumption in the Projected Profit and Loss statement is the gross margin, which is supposed to increase to 25%. This is up from barely 21% in the last year. The increase in gross margin is based on changing our sales mix, and it is critical. Month-by-month assumptions for profit and loss are included in the appendices.

Pro-forma Income Statement

	1995	1996	1997
Sales	$7,238,756	$8,764,262	$10,600,869
Cost of Sales	$5,236,067	$6,342,206	$7,672,880
Production payroll	$139,000	$202,500	$261,500
Other	$6,000	$6,600	$7,260
Total Cost of Sales	$5,381,067	$6,551,306	$7,941,640

Gross margin	$1,857,689	$2,212,956	$2,659,229
Gross margin percent	25.66%	25.25%	25.09%

Operating expenses:

Sales and marketing expenses
Sales/Marketing Salaries	$344,000	$422,000	$486,000
Advertising/Promotion	$301,675	$316,733	$332,570
Miscellaneous	$18,132	$19,039	$19,991
Commissions	$46,442	$56,624	$69,231
Other	$1,200	$1,260	$1,323
Total Sales and Marketing Exp	$711,449	$815,656	$909,115
Sales and Marketing Percent	9.83%	9.31%	8.58%

General and Administrative Expenses
G and A Salaries	$155,000	$179,000	$234,000
Leased Equipment	$30,000	$31,500	$33,075
Utilities	$9,000	$9,450	$9,923
Insurance	$6,000	6,300	$6,615
Rent	$84,000	$88,200	$92,610
Depreciation	$12,681	$13,315	$13,981
Payroll Burden	$60,660	$78,615	$95,265
Other	$6,331	$6,648	$6,980
Total Gen.Admin. Expense	$363,672	$413,028	$492,449
Gen. Administrative Percent	5.02%	4.71%	4.65%

Other Operating Expenses
Other Salaries	$36,000	$70,000	$77,000
Contract/Consultants	$12,000	$30,000	$30,000
Other	$3,000	$3,150	$3,308
Total Other Operating Exp	$51,000	$103,150	$110,308
Percent of Sales	0.70%	1.18%	1.04%
Total Operating Expenses	$1,126,121	$1,331,834	$1,511,872
Profit Before Interest and Taxes	$731,568	$881,122	$1,147,357
Interest Expense ST	$7,200	$7,200	$7,200
Interest Expense LT	$16,433	$7,225	$7,225
Taxes Incurred	$176,984	$216,674	$283,233
Net Profit	$530,951	$650,023	$849,699
Net Profit/Sales	7.33%	7.42%	8.02%

7.5 Projected Cash Flow

The cash flow depends on assumptions for inventory turnover, payment days, and accounts receivable management. Our projected 45-day collection days is critical, and it is also reasonable. We need $150,000 in new financing in March to get through a cash flow dip as we build up for mid-year sales.

Pro-Forma Cash Flow

	1995	1996	1997
Net Profit:	$530,951	$650,023	$849,699

Plus:
Depreciation	$12,681	$13,315	$13,981
Change in Accounts Payable	$395,536	$147,338	$15,743
Current Borrowing (repayment)	$0	$0	$0
Increase (decrease) Other Liabilities	$0	$0	$0
Long-term Borrowing (repayment)	($100,000)	($100,000)	$0
Capital Input	$0	$0	$0
Subtotal	$839,168	$710,677	$879,423

Less:	1995	1996	1997
Change in Accounts Receivable	$392,114	$68,857	$266,673
Change in Inventory	$632,494	$695,211	$808,819
Change in Other ST Assets	$0	$0	$0
Capital Expenditure	$50,000	$200,000	$300,000
Dividends	$0	$0	$0
Subtotal	$1,074,608	$426,354	$1,375,492
Net Cash Flow	$235,440	$1,137,030	$496,069
Cash balance	$180,008	$957,022	$460,953

7.6 Projected Balance Sheet

The Projected Balance Sheet is quite solid. We do not project any real trouble meeting our debt obligations -- as long as we can achieve our specific objectives.

Pro-forma Balance Sheet

Short-term Assets	Starting Balances	1995	1996	1997
Cash	$55,432	$180,008	$957,022	$460,953
Accounts receivable	$395,107	$787,221	$856,078	$1,122,751
Inventory	$651,012	$1,283,506	$588,295	$1,397,115
Other Short-term Assets	$25,000	$25,000	$25,000	$25,000
Total Short-term Assets	$1,126,551	$1,915,719	$2,426,396	$3,005,819

Long-term Assets		1995	1996	1997
Capital Assets	$350,000	$400,000	$600,000	$900,000
Accumulated Depreciation	$50,000	$62,681	$75,996	$89,977
Total Long-term Assets	$300,000	$337,319	$524,004	$810,023
Total Assets	$1,426,551	$2,253,038	$2,950,400	$3,815,842

Debt and Equity		1995	1996	1997
Accounts Payable	$223,897	$619,433	$766,772	$782,514
Short-term Notes	$90,000	$90,000	$90,000	$90,000
Other ST Liabilities	$15,000	$15,000	$15,000	$15,000

Subtotal Short-term		1995	1996	1997
Liabilities	$328,897	$724,433	$871,772	$887,515
Long-term Liabilities	$285,000	$185,000	$85,000	$85,000
Total Liabilities	$613,897	$909,433	$956,772	$972,515
Paid in Capital	$500,000	$500,000	$500,000	$500,000
Retained Earnings	$238,002	$312,654	$843,605	$1,493,628
Earnings	$74,652	$530,951	$650,023	$849,699
Total Equity	$812,654	$1,343,605	$1,993,628	$2,843,327
Total Debt and Equity	$1,426,551	$2,253,038	$2,950,400	$3,815,842
Net Worth	$812,654	$1,343,605	$1,993,628	$2,843,327

7.7 Business Ratios

The gross margin % has been declining steadily, as we see in the chart.

Inventory turnover is getting steadily worse.

All of these concerns are part of the general trend affecting computer resellers. The margin squeeze is happening throughout the computer industry worldwide.

Ratio Analysis

Profitability Ratios:	1995	1996	1997
Gross margin	25.66%	25.25%	25.09%
Net profit margin	7.33%	7.42%	8.02%
Return on Assets	23.57%	22.03%	22.27%
Return on Equity	39.52%	32.61%	29.88%

Activity Ratios	1995	1996	1997
AR Turnover	5.98	7.68	7.55
Collection days	46	45	42
Inventory Turnover	5.41	7.00	8.00
Accts payable turnover	7.46	7.23	8.49
Total asset turnover	3.21	2.97	2.78

Debt Ratios:	1995	1996	1997
Debt to net Worth	0.68	0.48	0.34
Short-term Debt to Liab.	0.80	0.91	0.91

Liquidity ratios	1995	1996	1997
Current Ratio	2.64	2.78	3.39
Quick Ratio	0.87	2.11	1.81
Net Working Capital	$1,191,286	$1,554,624	$2,118,304
Interest Coverage	30.95	61.08	79.54

Additional ratios	1995	1996	1997
Assets to sales	0.31	0.34	0.36
Debt/Assets	40%	32%	25%
Current debt/Total Assets	32%	30%	23%
Acid Test	-0.21	1.13	0.55
Asset Turnover	3.21	2.97	2.78
Sales/Net Worth	5.39	4.40	3.73

Appendices

The appendices to this plan include:

Complete financial results including accountants' statement and copies of tax forms for past years.
Complete set of sales literature, brochures, catalogs, etc.
Resumes from key managers
Detailed monthly pro forma sales forecast, personnel plan, profit and loss, cash flow, and balance sheet.