Introduction

Bill and Fiona Russell have always enjoyed craft beer, and in recent years have started making small batches at home. As they have experimented, they mastered several niche recipes including a key lime pie pilsner, peanut butter porter, mint chocolate stout, and a banana bread lager, among other traditional IPAs and ales. They amassed some equipment, but only enough for personal use. Over the years, a groundswell of support came from friends and family urging the pair to take their talents into a full-blown business. Bill and Fiona began entering local and regional homebrew contests, bringing home gold and silver medals in almost every category. At first, these acknowledgments were simply for fun, but over time the two started discussing the idea of starting a business.

Key Players

Bill Russell has a bachelors degree in management from a local public university. For the last 6 years he has worked as a sales manager for a local payroll and benefits firm, overseeing a sales staff of eight individuals. Prior to that, Bill worked as a sales manager for a regional distribution company for 8 years. Bill has some exposure to small business and substantial experience in management. However, his overall knowledge of finance, especially as it relates to owning a small business, is lacking.

Fiona Russell has a masters degree in education, and she has taught second grade at the same elementary school since finishing graduate school. Growing up, her family owned a restaurant specializing in Irish fare, so she has some experience working in and around small businesses.

The U.S. Small Business Administration defines a small business as an independent business having fewer than 500 employees (U.S. Small Business Administration, June 2016). As of 2013, there were 28.8 million small businesses and only 18,600 companies with 500 employees or more. While only 20% of these small businesses are employers, they accounted for 63% of net new jobs created between 1992 and 2013. In fact, U.S. small businesses make up 99.7% of U.S. employer firms and employ nearly half of the nations privatesector workforce (U.S. Small Business Administration, 2017).

Self-employment has surged in recent years as more individuals seek purpose in their careers and the rewarding feeling of owning a small business. However, opening a small business is risky. Approximately twothirds of businesses survive at least 2 years, only about half survive for at least 5 years, and only about onethird last more than 10 years (U.S. Small Business Administration, 2012). According to Jessie Hagen of U.S. Bank, 82% of small businesses fail because of poor cash flow management, while 79% fail due to insufficient initial funding. These rates have not changed much over the years and are consistent across industries.

Obtaining financing, however, has become easier in recent years. During 2015, bank loans to small businesses totaled almost USD 600 billion (U.S. Small Business Administration, July 2016). Overall, banks still cannot support the financing needs for all small businesses, so these entities typically seek funding from other sources during different stages of their life cycle. During 2015, U.S. small businesses borrowed an additional USD 593 billion from financing companies, angel and venture investors, mezzanine lending, and buyouts. Mezzanine lending represents financing that has seniority to a claim on capital assets of the company. Financing from buyouts occurs when an outside investor or management team purchases a controlling interest in a company.

Development Stage

Bill and Fiona began looking at local commercial properties available for rent or purchase. They also began pricing out the necessary operating equipment and envisioning the ideal venture. Assuming that they could obtain financing, they ultimately settled on developing a microbrewery with enough capacity to manufacture and distribute their beer to local bars/restaurants and retail stores in the forms of kegs and cans, respectively.

Family and friends have continued to be extremely supportive of the venture and have offered to provide some financing. Bill and Fiona have found a location available for rent that would suit all of their manufacturing and restaurant needs. In negotiating terms with the commercial property owner, the couple has agreed to a long-term lease deal at a reasonable rent that will also allow them to make necessary leasehold improvements to the facility.

The couple has met with their friend Madeline, a local business attorney, to discuss entity formation options. These options include a sole proprietorship, C Corporation, S Corporation, limited liability company (LLC), and others. After discussing the possibilities at length, they ultimately settled on an LLC with 50/50 ownership under the legal name Rusty Bucket Brewing Co. LLC. They chose the LLC entity structure based upon the limited liability protection for owners, avoidance of double taxation, and ownership and management flexibility.

Throughout the development stage, Bill and Fiona have done extensive research to estimate their costs. Many of their estimates resulted from their real-estate search while others came from a meeting with another local brewery owner. They have also spoken with a number of retail outlets to negotiate pricing and shelf space for product distribution.

These estimated costs are included on the first tab of the Excel Worksheet. In Phase I, you will calculate annual survival revenues (SR) at these current estimated variable and fixed costs. SR represent the breakeven point where revenues are equal to variable and cash fixed costs. This is also the point where earnings before depreciation, amortization, and taxes (EBDAT) is equal to zero. Please complete the tab labeled Phase ISurvival Revenues in Excel.

Startup Stage

Now that Rusty Bucket Brewing Co. LLC is established, the couple hopes to obtain initial commercial lending from a mid-size regional bank. The bank has requested projected income statements, balance sheets, and cash flow statements for the first six months of operations. To provide these projections, the couple must first prepare sales, purchase, and wage payment schedules, as well as a complete cash budget.

As they develop these schedules, Bill and Fiona have made several assumptions. First, they have decided to open the brewery on May 1. Next, they forecasted sales for the first seven months, as given in Table 1.

They expect most of the sales to come from distribution to local grocery and convenience stores, as well as local restaurants and bars. The brewery will also have its own bar for patrons to buy and consume beverages on-site or take some home in glass bottles called growlers. As such, the LLC estimates that 90% of each months sales will be credit sales from distribution and 10% cash sales from their on-site bar. The company expects to collect 100% of credit sales in the following month.

For purchases, the couple has decided that target ending inventory for a given month should equal 75% of next months sales. Additionally, based on industry benchmarks, cost of goods sold is approximately 40% of the current months sales. Since payment terms with suppliers average 15 days, the company expects cash disbursements to result in 50% of the current months purchases being paid in the current month, with the remaining 50% to be paid in the following month. Additionally, the company has forecasted monthly wages as shown in Table 2.

Table 2. Monthly Wage Forecast for Rusty Bucket Brewing Co.

Payroll taxes and benefits are estimated to equal 18% of salaries and wages. Based on the companys payroll schedule, they expect to pay 75% of the salaries earned in any given month, with the remaining 25% paid in the following month as an accrued liability. Additional monthly expenses for cash budgeting purposes are as follows:

Rent: USD 16,500, paid monthly on the first of every month.

Real-estate taxes: USD 20,000 paid in two separate payments of USD 10,000 due and paid in October and USD 10,000 due and paid in January.

Professional fees: USD 5,000 paid in each of the first three months (May, June, and July) for services rendered for various startup costs.

Utilities: USD 1,500 paid monthly on the 15th of every month

Insurance: USD 4,800 paid May 1 for a six-month policy beginning May 1, 2018 and ending October 31, 2018.

Maintenance: USD 625 monthly.

Supplies: USD 750 monthly.

Licenses: USD 250 monthly.

Advertising: USD 1,650 monthly.

Bill and Fiona have decided that they must maintain a minimum monthly cash balance of USD 25,000, representing approximately one month of payroll expenses. Thus, they have obtained a small line of credit from a family friend who also happens to be an angel investor. The line of credit has a maximum borrowing limit of USD 100,000 with an annual interest rate of 19% paid on any outstanding balance. Interest is due and paid each month following any month with an outstanding balance. In addition, if there is cash in excess of USD 25,000 at the end of any month, the outstanding balance on the line of credit will be paid until either the company has hit the USD 25,000 minimum or the loan is paid in full.

The couple has estimated the total cost of opening the brewery at USD 1,000,000. Of this total, USD 150,000 will be used for opening-day working capital or beginning cash balance, with the remaining USD 850,000 used for leasehold improvements, machinery, equipment, and other capital expenditures. Including certain state incentives, Rusty Bucket Brewing Co. LLC believes they will be able to obtain an SBA-guaranteed loan from the bank for USD 750,000. The estimated terms of the note indicate that the monthly payment will be approximately USD 7,300 each month, split between principal payments and interest expense at approximately USD 5,000 and USD 2,300 each month, respectively. In addition, Bill and Fiona have gathered USD 250,000 of their own money from savings, friends, and family, which will be contributed to the business as their beginning owners equity. In the remaining tabs of Phase I, you will complete the sales, purchases, and wages schedules as well as the corresponding cash budget. Please complete the tabs labeled Phase ISchedules and Phase ICash Budget in Excel.

In meeting with local bankers to discuss a possible loan of USD 750,000 for initial business operations, each bank has requested short-term projected financial statements. The banks require monthly projected income statements, balance sheets, and cash flow statements for the first six months of operations beginning May 1, 2018. For the purposes of these projections, assume that monthly depreciation expense is USD 8,645.

In Phase II, you will prepare the monthly projected income statements, balance sheets, and statements of cash flows for May through October 2018. Please complete the three tabs labeled Phase IIProjected I.S., Phase IIProjected B.S., and Phase IIProjected Cash Flow in Excel.

How do I figure out the numbers for the projected balance sheet?

Table 1. Forecasted Sales for the First Seven Months for Rusty Bucket Brewing Co. LLC Month Sales (USD) May 97,500 June 105,000 July 116,500 August 117,500 September 115,000 October 119,750 November 112.000 Month USD May 18,000 June 20,000 July 21,000 August 21,500 September 20,500 October 21,500 Rusty Bucket Brewing Co. LLC Estimated Costs to Open Data obtained from local breweries in our similar size shows that variable costs revenue ratio (VCRR) is estimated to be.40 Annual fixed costs currently are estimated as follows: Rent Real Estate Taxes Professional Fees Utilities Insurance Maintenance Payroll Taxes and Benefits Supplies Licenses Advertising Interest Expense 198,000 20,000 15,000 18,000 9,600 7,500 245,000 40,000 9,000 3,000 19,800 30,000 $ 614,900 Calculate annual survival revenues (SR) at these current estimated variable and fixed costs $1,024,833 Rusty Bucket Brewing Co. LLC Sales, Purchases and Wages Schedule Sales Schedule May June July August September October Schedule 1: Sales Forecast Credit Sales (90%) Cash Sales (10%) 97,500 87,750 9,750 105,000 94,500 10,500 116,500 104,850 11,650 117,500 105,750 11,750 115,000 103,500 11,500 119,750 107,775 11,975 9,750 Schedule 2: Cash Collections Cash sales this month Prior month's credit sales Total cash collections 10,500 87,750 98,250 11,650 94,500 106,150 11,750 104,850 116,600 11,500 105,750 117,250 11,975 103,500 115,475 9,750 Purchases Schedule May June July August September October Schedule 3: Purchases Ending inventory Cost of Goods sold Total Needed Less: beginning inventory Purchases 78,750 39,000 117,750 26,250 91,500 87,375 42,000 129,375 29,125 100,250 88,125 46,600 134,725 29,375 105,350 86,250 47,000 133,250 28,750 104,500 89,813 46,000 135,813 29,938 105,875 84,000 47,900 131,900 28,000 103,900 Schedule 4: Cash Payments 50% of last month's purchases 50% of this month's purchases Total purchase payments 45,750 45,750 45,750 50,125 95,875 50,125 52,675 102,800 52,675 52,250 104,925 52,250 52,938 105,188 52,938 51,950 104,888 Wages Schedule May June July August September October Schedule 5: Salaries and Wages Wages Payroll Taxes and Benefits 18,000 3,240 21,240 20,000 3,600 23,600 21,000 3,780 24,780 21,500 3,870 25,370 20,500 3,690 24,190 21,500 3,870 25,370 Total Schedule 6: Cash Payments 25% of last month's payroll 75% of this month's payroll Total payroll payments 15,930 15,930 4,500 17,700 22,200 5,000 18,585 23,585 5,250 19,028 24, 278 5,375 18,143 23,518 5,125 19,028 24,153 Rusty Bucket Brewery LLC Projected Income Statements May June July August September October $ $ $ $ $ $ 97,500 39,000 58,500 105,000 42,000 63,000 116,500 46,600 69,900 117,500 47,000 70,500 115,000 46,000 69,000 119,750 47,900 71,850 $ $ $ $ $ $ 18,000 3,240 16,500 20,000 3,600 16,500 21,000 3,780 16,500 21,500 3,870 16,500 20,500 3,690 16,500 21,500 3,870 16,500 10,000 5,000 1,500 5,000 1,500 1,500 1,500 1,500 Sales Costs of goods sold Gross margin Operating expenses Wages Payroll taxes and benefits Rent Real Estate Taxes Professional Fees Utilities Insurance Maintenance Supplies Licenses Advertising Depreciation Total operating expenses Income from operations Interest expense Net income 625 625 750 5,000 1,500 4,800 625 750 250 1,650 8,645 60,960 2,460 625 750 250 750 250 250 625 750 250 1,650 8,645 58,520 (4,480) 625 750 250 1,650 8,645 59,700 (10,200) 664 (10,864) 1,650 8,645 55,290 (15,210) 1,583 (16,793) 1,650 8,645 54,110 (14,890) 1,583 (16,473) 1,650 8,645 65,290 (6,560) 1,583 (8,143) $ 2,460 $ (4,480) $ $ $ $ Rusty Bucket Brewery LLC Projected Balance Sheets May June July August September October $ $ $ $ $ $ ASSETS Current assets Cash Accounts Receivable Inventories Prepaid Expenses Total current assets Property and Equipment Accumulated Depreciation Net Property, Plant and Equipment Total Assets $ $ $ $ $ $ LIABILITIES AND SHAREHOLDER'S EQUITY $ $ $ $ $ CURRENT LIABILITIES: Accounts Payable Accrued wages, payroll taxes and benefits Line of Credit Total current liabilities Long-term debt Total liabilities Owners' equity Total Liabilities and Equity $ $ $ $ S Table 1. Forecasted Sales for the First Seven Months for Rusty Bucket Brewing Co. LLC Month Sales (USD) May 97,500 June 105,000 July 116,500 August 117,500 September 115,000 October 119,750 November 112.000 Month USD May 18,000 June 20,000 July 21,000 August 21,500 September 20,500 October 21,500 Rusty Bucket Brewing Co. LLC Estimated Costs to Open Data obtained from local breweries in our similar size shows that variable costs revenue ratio (VCRR) is estimated to be.40 Annual fixed costs currently are estimated as follows: Rent Real Estate Taxes Professional Fees Utilities Insurance Maintenance Payroll Taxes and Benefits Supplies Licenses Advertising Interest Expense 198,000 20,000 15,000 18,000 9,600 7,500 245,000 40,000 9,000 3,000 19,800 30,000 $ 614,900 Calculate annual survival revenues (SR) at these current estimated variable and fixed costs $1,024,833 Rusty Bucket Brewing Co. LLC Sales, Purchases and Wages Schedule Sales Schedule May June July August September October Schedule 1: Sales Forecast Credit Sales (90%) Cash Sales (10%) 97,500 87,750 9,750 105,000 94,500 10,500 116,500 104,850 11,650 117,500 105,750 11,750 115,000 103,500 11,500 119,750 107,775 11,975 9,750 Schedule 2: Cash Collections Cash sales this month Prior month's credit sales Total cash collections 10,500 87,750 98,250 11,650 94,500 106,150 11,750 104,850 116,600 11,500 105,750 117,250 11,975 103,500 115,475 9,750 Purchases Schedule May June July August September October Schedule 3: Purchases Ending inventory Cost of Goods sold Total Needed Less: beginning inventory Purchases 78,750 39,000 117,750 26,250 91,500 87,375 42,000 129,375 29,125 100,250 88,125 46,600 134,725 29,375 105,350 86,250 47,000 133,250 28,750 104,500 89,813 46,000 135,813 29,938 105,875 84,000 47,900 131,900 28,000 103,900 Schedule 4: Cash Payments 50% of last month's purchases 50% of this month's purchases Total purchase payments 45,750 45,750 45,750 50,125 95,875 50,125 52,675 102,800 52,675 52,250 104,925 52,250 52,938 105,188 52,938 51,950 104,888 Wages Schedule May June July August September October Schedule 5: Salaries and Wages Wages Payroll Taxes and Benefits 18,000 3,240 21,240 20,000 3,600 23,600 21,000 3,780 24,780 21,500 3,870 25,370 20,500 3,690 24,190 21,500 3,870 25,370 Total Schedule 6: Cash Payments 25% of last month's payroll 75% of this month's payroll Total payroll payments 15,930 15,930 4,500 17,700 22,200 5,000 18,585 23,585 5,250 19,028 24, 278 5,375 18,143 23,518 5,125 19,028 24,153 Rusty Bucket Brewery LLC Projected Income Statements May June July August September October $ $ $ $ $ $ 97,500 39,000 58,500 105,000 42,000 63,000 116,500 46,600 69,900 117,500 47,000 70,500 115,000 46,000 69,000 119,750 47,900 71,850 $ $ $ $ $ $ 18,000 3,240 16,500 20,000 3,600 16,500 21,000 3,780 16,500 21,500 3,870 16,500 20,500 3,690 16,500 21,500 3,870 16,500 10,000 5,000 1,500 5,000 1,500 1,500 1,500 1,500 Sales Costs of goods sold Gross margin Operating expenses Wages Payroll taxes and benefits Rent Real Estate Taxes Professional Fees Utilities Insurance Maintenance Supplies Licenses Advertising Depreciation Total operating expenses Income from operations Interest expense Net income 625 625 750 5,000 1,500 4,800 625 750 250 1,650 8,645 60,960 2,460 625 750 250 750 250 250 625 750 250 1,650 8,645 58,520 (4,480) 625 750 250 1,650 8,645 59,700 (10,200) 664 (10,864) 1,650 8,645 55,290 (15,210) 1,583 (16,793) 1,650 8,645 54,110 (14,890) 1,583 (16,473) 1,650 8,645 65,290 (6,560) 1,583 (8,143) $ 2,460 $ (4,480) $ $ $ $ Rusty Bucket Brewery LLC Projected Balance Sheets May June July August September October $ $ $ $ $ $ ASSETS Current assets Cash Accounts Receivable Inventories Prepaid Expenses Total current assets Property and Equipment Accumulated Depreciation Net Property, Plant and Equipment Total Assets $ $ $ $ $ $ LIABILITIES AND SHAREHOLDER'S EQUITY $ $ $ $ $ CURRENT LIABILITIES: Accounts Payable Accrued wages, payroll taxes and benefits Line of Credit Total current liabilities Long-term debt Total liabilities Owners' equity Total Liabilities and Equity $ $ $ $ S