The business plan: simplifying the numbers

Frame and Wheel reads that the sale of smart phones surged in 2010 and is likely to increase yet again in 2011. This article in the Wall Street Journal reckons that one in five mobile phones sold in 2011 will be a smart phone, or one that can connect to the Internet and run various applications. Frame and Wheel believes that many consumers will begin their shopping for a bike on line and that they will have their smartphone with them while they are doing a fit or a demonstration ride. This means that the idea of a bike sale "originating" with an IBS is misguided, and perhaps too complex. Consequently, Farme and Wheel reworks the numbers below to simplify things: the consumer orders a frameset from his desktop or from his smartphone (because he his at the location where the demonstration model is located) and he has it shipped to his favorite IBS. The IBS receives the commission and the frameset and builds up the bike for the consumer. Frame and Wheel also eliminated the working capital loan primarily because to have a self financing arrangement is preferable than borrowing money: the idea here is that potential buyers bid for their order six months before delivery. The longer the lead up time, the less they pay: this is the structure of a futures contract. This is one way that Frame and Wheel believes existing infrastructure and resources can be used to more efficiently match supply with demand.  This idea needs more elaboration and will have to be a subject of a future post. Frame and Wheel changed order sizes in 2012 and 2013, assumes some overhead and that there are part time staff working for the company.

Year end 31 Dec	2011	2012	2013
Selling prices
Frameset price	2,000	2,000	2,000
Build kit	2,000	2,000	2,000
Wheels	1,700	1,700	1,700
Per unit costs
Framesets	700	700	600
Build kits	1,600	1,600	1,600
Wheels	1,300	1,300	1,300
IBS commission ($)	400	400	400
Volume
Framesets	10	20	50
Build kit	2	4	10
Wheels	2	4	10
Value
Framesets	20,000	40,000	100,000
Build kits	4,000	8,000	20,000
Wheels	3,400	6,800	17,000
Total	27,400	54,800	137,000
Cost of goods
Frame set	7,000	14,000	30,000
Build kits	3,200	6,400	16,000
Wheels	3,400	6,800	17,000
IBS commission ($)	4,000	8,000	20,000
Total	17,600	35,200	83,000
Gross income	9,800	19,600	54,000
Operating expenses
Rent	0	0	10,000
Staff	5,000	12,000	25,000
Insurance	1,750	2,000	4,000
Marketing	100	200	300
Accounting	100	400	600
Supplies	100	200	300
Legal fees	300	400	500
IT support	300	400	500
Total	7,650	15,600	41,200
Operating income	2,150	4,000	12,800
Interest expense	0	0	0
Income before tax	2,150	4,000	12,800
Tax	753	1,400	4,480
Net profit	1,398	2,600	8,320
Dividend	0	0	0
Gross margin (%)	35.8%	35.8%	39.4%
Operating margin (%)	7.8%	7.3%	9.3%
Net income margin (%)	5.1%	4.7%	6.1%
Dividend payout ratio (%)	0.00%	0.00%	0.00%
Cash Flow Statement
Operating cash flow
Operating income	2,150	4,000	12,800
Interest expense	0	0	0
Tax	(753)	(1,400)	(4,480)
Total	1,398	2,600	8,320
Investing cash flow
Capital expenditure	0	0	0
Financing cash flow
Borrowing	0	0	0
Dividends	0	0	0
Equity	0	0	0
Total	0	0	0
Net operating cash flow	1,398	2,600	8,320
Cash BOY	20,000	21,398	23,998
Cash in flow / (out flow)	1,398	2,600	8,320
Cash EOY	21,398	23,998	32,318
Balance sheet
Assets	21,398	23,998	32,318
Liabilities	0	0	0
Equity
Paid up capital	20,000	20,000	20,000
Net profit	1,398	3,998	12,318
Dividends	0	0	0
Total shareholder’s equity	21,398	23,998	32,318
Total shareholder’s equity and liabilities	21,398	23,998	32,318