Janelle Higgins has decided to start her own event planning business (JH Events) in the upcoming year. She believes that she has an innovative business model and is seeking a business loan. Therefore, Janelle is in the process of putting together a business plan. As part of her business plan, Janelle must include forecasted financial statements for the first 5 years. The forecasted financial statements to be included are: Income Statement, Balance Sheet, and Statement of Cash Flows. Janelle must also include a set of calculated ratios along with an overall assessment on the projected health of the company.

Forecasting Assumptions

• First year sales are projected to be $150,000 and grow 3% for the next two years and 5% in year 4 and 5.
• Cost of sales are projected to be 45% of revenue in the first year and is expected to grow at the same rate as sales.
• Advertising expenses are projected to be 4% of each year's projected revenue.
• Janelle will need to rent equipment for the events she puts on. She has an agreement with a rental company for a flat rate of $500 per month and is sufficient to cover all of her estimated events. Starting in Year 3, she expects to be able to handle more events and the rental rate will increase to $750 per month.
• Janelle plans to start off by hiring 2 people to work the events with her. Each person will be paid $100 per event and is expected to work 4 events per month. After Year 3, Janelle plans to hire 2 additional people. (At this point, each person will be paid $100 per event and is expected to work 3 events per month).
• Office rent is estimated to be a flat rate of $1,200 per month.
• Utilities for the rented office space are estimated to be $300 per month.
• The office space Janelle plans to rent is unfurnished. She plans to purchase $15,000 worth of furniture and fixtures at the beginning of Year 1. The furniture and fixtures will have a useful life of 15 years. Janelle will also need to buy some computers and other office equipment that she will purchase for $10,000 also at the beginning of Year 1. The office equipment will have a useful life of 5 years. Both the furniture and fixtures as well as the equipment will be depreciated on a straight-line basis (Assume zero salvage value for calculations). HINT: Fixed Assets - Accumulated Depreciation = 'Net' Fixed Assets
• Janelle is asking for a 3-year bank loan for $60,000 to be funded on Day1 of Year 1. The estimated interest on the loan is 3% (assume simple interest). She will pay the loan back in $20,000 installments starting in Year 2. Interest is due at the end of each year and paid in January of the following year. (Assume interest is paid on the principal balance still outstanding at year-end).
• The tax rate for JH Events is 35%. Taxes for the year just ended are payed in the first quarter of the following year.
• Janelle will invest $30,000 of her own money and from family and friends, before the beginning of the year, to start the business. This $30,000 investment of capital is also the beginning bank balance of Year 1.
• Schedule of expected year-end balances of selected accounts:

	Year 1	Year 2	Year 3	Year 4	Year 5
Accounts Receivable	10,000	12,000	8,000	6,000	10,000
Accounts Payable	2,000	4,000	5,000	6,000	9,000
Customer Deposits	1,500	2,000	3,000	4,000	5,000

• At the end of Year 2, Janelle will purchase an insurance policy to help cover the business. The policy has a term of 3 years and coverage starts at the beginning of Year 3. The policy costs $12,000.
• During Year 3, Janelle plans to personally invest $10,000 of additional capital into the business.

YR3 YR4 YR5 35,203 37,841 40,610 35,203 37,841 40,610 35,203 37,841 40,610 4 Assets YR1 YR2 5 Cash 34,125 35,617 6 Accounts Receivable 7 Prepaid Insurance 8 Current Assets 34,125 35,617 9 Furniture & Fixtures (net) 10 Equipment (net) 11 Total Assets 34,125 35,617 12 13 Liabilities 14 Accounts payable 15 Customer deposits 16 Interest payable 17 Taxes payable 18,375 19,178 18 Current Liabilities 18,375 19,178 19 Bank loan 20 Total Liabilities 18,375 19,178 21 22 Stockholder's Equity 23 Capital 24 Retained Earnings 34,125 35,617 25 Total Stockholder's Equity 34,125 35,617 26 Total Liabilities & Stockholder's Equity 52,500 54,795 Income Statement Balance Sheet Cashflow Statement 18,956 18,956 20,376 20,376 21,867 21,867 18,956 20,376 21,867 35,203 35,203 54,159 Ratios 37,841 37,841 58,217 40,610 40,610 62,478 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 34,125 35,617 35,203 37,841 40,610 34,125 35,617 35,203 37,841 40,610 3 4 5 Net Income 6 Add back depreciation 7 Changes in working capital 8 Accounts Receivable 9 Prepaid Expenses 10 Accounts Payable 11 Customer Deposits 12 Interest payable 13 Taxes Payable 14 Cash flows from operating activities 15 16 17 Amount paid for equipment 18 Amount paid for furniture & fixtures 19 Cash flow from investing activities 20 21 22 Proceeds from bank loan 23 Proceeds from issuing capital 24 Repayment of bank loan 25 Cash flow from financing activities 26 27 Net increase (decrease) in cash 28 Add: Beginning cash balance 29 Ending Cash balance 34,125 35,617 35,203 37,841 40,610 1 2 RATIOS Fc YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 3 4 *ROUND TO TWO DECIMAL PLACES 5 CURRENT RATIO 6 AVERAGE COLLECTION PERIOD 7 PAYABLES TURNOVER 8 TOTAL ASSET TURNOVER 9 DEBT RATIO 10 TIMES INTEREST EARNED 11 GROSS PROFIT MARGIN 12 NET PROFIT MARGIN 13 RETURN ON EQUITY 14 15 16 17 Comment on the projected health of the company (Years 1-5) in terms of liquidity, activity, and profitability. As a financial 18 analyst, what suggestions would you make to Janelle to improve certain ratios. If you were the bank would you give Janelle 19 the business loan? 20 21 22 23 YR3 YR4 YR5 35,203 37,841 40,610 35,203 37,841 40,610 35,203 37,841 40,610 4 Assets YR1 YR2 5 Cash 34,125 35,617 6 Accounts Receivable 7 Prepaid Insurance 8 Current Assets 34,125 35,617 9 Furniture & Fixtures (net) 10 Equipment (net) 11 Total Assets 34,125 35,617 12 13 Liabilities 14 Accounts payable 15 Customer deposits 16 Interest payable 17 Taxes payable 18,375 19,178 18 Current Liabilities 18,375 19,178 19 Bank loan 20 Total Liabilities 18,375 19,178 21 22 Stockholder's Equity 23 Capital 24 Retained Earnings 34,125 35,617 25 Total Stockholder's Equity 34,125 35,617 26 Total Liabilities & Stockholder's Equity 52,500 54,795 Income Statement Balance Sheet Cashflow Statement 18,956 18,956 20,376 20,376 21,867 21,867 18,956 20,376 21,867 35,203 35,203 54,159 Ratios 37,841 37,841 58,217 40,610 40,610 62,478 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 34,125 35,617 35,203 37,841 40,610 34,125 35,617 35,203 37,841 40,610 3 4 5 Net Income 6 Add back depreciation 7 Changes in working capital 8 Accounts Receivable 9 Prepaid Expenses 10 Accounts Payable 11 Customer Deposits 12 Interest payable 13 Taxes Payable 14 Cash flows from operating activities 15 16 17 Amount paid for equipment 18 Amount paid for furniture & fixtures 19 Cash flow from investing activities 20 21 22 Proceeds from bank loan 23 Proceeds from issuing capital 24 Repayment of bank loan 25 Cash flow from financing activities 26 27 Net increase (decrease) in cash 28 Add: Beginning cash balance 29 Ending Cash balance 34,125 35,617 35,203 37,841 40,610 1 2 RATIOS Fc YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 3 4 *ROUND TO TWO DECIMAL PLACES 5 CURRENT RATIO 6 AVERAGE COLLECTION PERIOD 7 PAYABLES TURNOVER 8 TOTAL ASSET TURNOVER 9 DEBT RATIO 10 TIMES INTEREST EARNED 11 GROSS PROFIT MARGIN 12 NET PROFIT MARGIN 13 RETURN ON EQUITY 14 15 16 17 Comment on the projected health of the company (Years 1-5) in terms of liquidity, activity, and profitability. As a financial 18 analyst, what suggestions would you make to Janelle to improve certain ratios. If you were the bank would you give Janelle 19 the business loan? 20 21 22 23