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DWELL Business Plan
Ryan T. Rasmussen
Department of Business, UMass Global
BUSU 640: Capstone
Professor Ginger Silverman
February 18, 2023
Section 9
Financial Plan
The ADU industry is primed for explosive growth as California’s housing crisis continues to progress, while softening legislation measures are promoted to increase ADU growth. In areas such as Los Angeles, city representatives state that they “must produce 57,000 new units of housing each year for the next eight years to meet its goals” (Spencer, 2022, para. 8). Where single family lots were once blocked by city ordinances pertaining to ADU construction, new legislation now allows these units to be constructed on lots that have the necessary space. Dwell is eager to step into this market to help their communities approach the housing crisis head on with sustainable design. They plan to do so by providing additional space for growing families, multi-generational spaces for loved ones, and rental properties to alleviate and offset high mortgage payments which is common throughout Southern California.
Initial Funding
Dwells financial backing will be sourced by both owners of the company. The CEO (Frank Berry) has allocated $200,000 in cash while the President (Ryan Rasmussen) will be contributing $200,000 in cash along with two separate loans. Mr. Rasmussen will source a home equity line of credit of $250,000 through JP Morgan Chase Bank which will have a term of ten years and an interest rate of 6%. In addition to Mr. Rasmussen HELOC, he will also source another $100,000 loan through his 401(k) plan. This loan will have a repayment period of five years and an interest rate of 7%. Mr. Rasmussen’s primary residence will be utilized as collateral for the HELOC. With the combination of cash and loans, Dwell will have $750,000 in starting capital to help cover startup costs that include payroll, advertising, lease payments, material purchases, and other miscellaneous business costs prior to launching Dwell on January 1, 2024. With the bulk of their initial costs associated with payroll, advertising, and warehouse space, Dwells owners understand that additional capital will be necessary to cover their expenses through the first two years. As their business continues to grow by year three, they anticipate revenues to exceed expenses resulting in sustained profits. Dwells goal is to meet a minimum 25% net profit margin on all projects. As Dwell wraps up their first year of business, its owners will calculate their annual overhead or fixed costs in order to anticipate and adjust their model pricing in order to achieve their net profit margin. Overhead is an extremely important expense to track. It’s been said that “overhead expenses are an investment in your future in hopes of getting a return” (Hedley, 2011, para. 6).
Income Statement
In an effort to explain Dwells anticipated annual revenues, expenses, and profitability, a three-year income statement analysis has been provided. As a startup business, the primary goal of Dwells income statement is to understand anticipated revenues less costs of goods sold (variable costs) and overhead (fixed costs) to determine how long it will take to be profitable. Based on projections in year one, Dwell anticipates a net loss of $204,613. In order to properly operate a design build construction company, Dwell understands that upfront overhead costs will eventually exceed profits as their business grows in years two and three. During the launch phase of Dwell, sales will initially be slow where in year one, five completed ADU units are anticipated. With the understanding that startup companies take “3-4 years to be profitable, on average,” Dwells income statement suggests net profit by the 2nd quarter of year 2 (Kolmar, 2022, para. 2). These profits are contributed to an increase in advertising costs (8% of revenues) as Dwell begins to gain brand recognition headed into year three. By year three, Dwell anticipates nine units will have been completed resulting in a net profit of $439,590.
Dwells cost of goods sold (COGS) is accounted through the First-In-First-Out (FIFO) method. As inventory is purchased, it will be utilized first on each project that is currently under construction. With supply chain shortages that can result in fluctuations in material costs throughout the year, Dwell can add those supply chain increases in future bids to ensure they maintain a level profit margin.
Balance sheet
When looking at Dwells assets, current liabilities, long-term debt, and owner’s equity, we will look at its balance sheet. It’s important to evaluate Dwells balance sheet in order to verify its short-term financial status as it pertains to having enough funds to pay off its liabilities and debt obligations. The balance sheet below provides a snap shot of Dwells financial position at the beginning and end of 2024. By providing a glimpse of Dwells assets and liabilities, we see that initial cash reserves were spent to buy inventory along with prepaid expenses such as utility deposits, insurance, and office supplies. In addition, fixed assets were also purchased which includes office furniture, computers, printers, plotters, tools, and a reach fork. Each of these assets are required for Dwells employees to perform daily work obligations. Dwells current liabilities include interest payable on long-term debt which is amortized against Mr. Rasmussen’s 401(k) and HELOC loans. In addition, payroll taxes and wages are also payable and are included as a current liability. Lastly, Dwells balance sheet includes its long-term debt which is based upon $350,000 in loans to provide additional capital to meet its debt obligations. More importantly, by the end of 2024, Dwell has signed contracts and has submitted billing invoices in the form of accounts receivable totaling $214,000.
Cash Flow Statement
Next, it’s important to verify Dwells anticipated liquidity as we look at its cash receipts versus its cash paid out. As pointed out earlier, starting a business like Dwells requires a significant amount of capital upfront which includes inventory, office space lease, and wages. A 12-month cash flow statement is extremely important to understanding how much cash is in Dwells account each month. According to one article, we use a “cash flow projection to anticipate your working capital needs and plan ahead for upcoming expenses so you don’t run out of money” (Score, 2023, para. 7). Prior to its first cash receipt in January 2024, Dwell will utilize $196,856 in order to cover its variable and fixed costs. This initial upfront cash investment is critical to having infrastructure in place for operation purposes. Without this cash outflow, Dwell would not be able to market its product or build its product at the time of sale. Being able to bill for work performed is important to Dwells cash inflow in an effort to offset monthly wages and infrastructure costs that are fixed month to month. With its climate controlled warehouse, Dwell projects that it will sell, build, and turnover two model 1’s, 2 model 2’s, and 1 model 3 ADU during 2024. Each unit will be built and billed out entirely during the year equating to $805,000 in cash receipts. Even though cash receipts are incurred during the year, Dwell understands that during the introduction phase of its ADU, cash outflows will exceed cash inflow. By investing in inventory, Dwell will bolster its production capacity leading into years two and three. By the time Dwell enters the growth phase, net income will begin to turn positive through sales growth. It’s important to note that “firms often must pay for the goods it acquires before it collects for the goods it sells” (Weil et al., 2014, p. 633). The 12-month cash flow below provides a comprehensive breakdown of Dwells cash receipts and cash paid out during its first year of operation.
Year 1 Profit and Loss Statement
Much like the income statement, Dwells one-year Profit and Loss Statement (P&L) provides a month by month summary of the company revenues, cost of goods sold (COGS), and expenses to arrive at monthly net income. The P&L is an important financial statement that allows Dwells owners to manage its expenses in order to drive profits. Similar to Dwells 2024 income statement and 12-month cash flow statement, initial expenses are anticipated to exceed revenues. These initial fixed expenses and overhead are required as an investment in order to produce more units in the future. Based on first year projections, Dwell will have negative net income of $204,613. With negative net income projected, it is important for Dwell to secure enough capital to cover its excessive cash outflows during its introductory phase. As a multi-member LLC, Dwells owners will calculate their business losses in year one where they anticipate passing these losses through their personal tax returns. Based on the Tax Cuts and Jobs Act of 2017, a business loss of $204,613 can be completely deducted on Dwells owners personal tax return where up to $250,000 can be deducted (Demian & Company, 2023). The below P&L report provides further analysis of Dwells monthly net income throughout 2024.
Years 1-3 Profit/Loss Statement (Summary)
When looking at Dwells three-year profit and loss statement (P&L) its gross profit continues to climb 7-8% each year. Based upon California’s limited housing shortage, Dwell anticipates a growth rate that exceeds the national average of 3.7% according to Jenson (2021). More importantly, with the right team and office space, Dwell will have relatively stable operating costs associated with salaries, payroll taxes, benefits, and rental fees through the first 3 years in operation. With increased revenues, Dwell will continue increasing its 8% advertising budget in an effort to grow its customer base through direct mailers, social media marketing, search engine marketing (SEM), and search engine optimization (SEO). Based upon Dwells anticipated net income in year three, they can begin to create budgets for goals with positive working capital. Overall, Dwell will have positive net income by the 2nd quarter of year two and anticipates $347,276 in net income by year three. Dwells positive net operating income is trending in the right direction which is crucial to its growth and capabilities of increasing sales well into the future. The following profit and loss projection exhibit provides further clarification associated with Dwells gross profit, total expenses, and net operating income during its first 3 years as a business.
Breakeven Analysis
A breakeven analysis is a critical financial tool to develop a pricing strategy to ensure businesses determine how many sales are necessary to make a profit after variable and fixed costs are paid. In most cases, fixed costs remain constant and are generally more stable whether or not a product is sold or not. In Dwells case, costs associated with rent, wages, and loan repayments will remain fixed over a specific period of time. Dwell anticipates that they will remain in their current facility for a minimum of three years and will be supported by the same team throughout this same duration. Variable costs on the other hand can vary based upon supplier or manufacturer price fluctuations or labor variations from one model to the next. Ultimately, “a breakeven analysis determines the sales volume your business needs to start making a profit, based on your fixed costs, variable costs, and selling price” (Ward, 2022, para. 1). Initially, Dwells owners are striving for a 25% profit margin after all fixed and variable costs are paid for each ADU model. Based on the following break-even analysis graphs below, Dwells smallest model (Cabin) will require three total units to be sold before making a profit. With a lower purchase price in comparison to Dwells larger models, the Cabin model incurs relatively the same fixed costs with less revenue to drive profit.
As Dwell achieves sales of their larger models, fixed and variable costs are offset more quickly than their smallest Cabin model. Economies of scale play a critical role in Dwells profitability when comparing the break-even analysis of each model. An increased profit margin in Dwells larger units are attributed to productivity measures surrounding its utility and foundation costs. The larger models present cost advantages when “costs can be spread over a larger amount of goods” which results in better efficiencies (Kenton, 2022, para. 2). Dwells break-even analysis below suggest that their model 2 (Bungalow), model 3 (Lodge), and model 4 (Ranch), will begin making a profit once two units are built and sold.
Based upon a projection that (2) model 1’s, (2) model 2’s, and (1) model 3 will be sold in 2024, Dwells overall break-even analysis shown below indicates that it will need to sell enough ADU units totaling $1,173,814 to begin making a profit. With only $805,000 in projected revenue in year one, Dwell’s profit and loss statement in year two indicates they will achieve their break-even point within eighteen months of starting their business. With a workforce that can successfully build nine ADU units a year, Dwell anticipates relatively stable fixed costs for their first three years as a business. Variable costs may fluctuate based on escalating building materials costs that were strained during the COVID-19 pandemic. As Dwell continues to market its products, the break-even analysis for each model indicates that greater profit margin can be obtained when selling their largest model. By having a better understanding where the break-even points exist with each model type, Dwells owners have an opportunity to strategize unique marketing opportunities for each of their products.
References
Demian & Company. (2023). Will you have to pay taxes if your business shows a loss this year?, retrieved from
https://taxprocpa.com/blog/will-you-pay-taxes-if-business-shows-loss-this-year/
Hedley, G. (2011, November 2). 9 numbers you need to keep your company profitable,
Construction Business Owner, retrieved from
https://www.constructionbusinessowner.com/business-management/9-numbers-you-need-keep-your-company-profitable
Kenton, W. (2022, June 11). Economies of scale: what are they and how are they used?
Investopedia, retrieved from
https://www.investopedia.com/terms/e/economiesofscale.asp
Kolmar, C. (2022, September 21). 20+ must-know startup statistics [2023]: average time to reach profitability at a startup,
Zippa, retrieved from
https://www.zippia.com/advice/start-up-profitability-statistics/
Score. (2023, January 30). 12 month cash flow statement,
Score, retrieved from
https://www.score.org/resource/template/12-month-cash-flow-statement
Spencer, C. (2022, September 20). New housing in Los Angeles leans heavily on ADUs,
Crosstown, retrieved from
Ward, S. (2022, November 30). Breakeven analysis – fixed cost, variable cost, & profit,
The Balance, retrieved from
https://www.thebalancemoney.com/breakeven-analysis-2947266
Weil, R.L., Schipper, K., & Francis, J. (2014).
Financial Accounting: An Introduction to Concepts, Methods, and Uses (14th ed.) Mason, OH: South-Western
MODEL 1 BREAK EVEN ANALYSIS
Units 1 2 3 4 5 6 7 Revenue 125000 250000 375000 500000 625000 750000 875000 Fixed 210778 210778 210778 210778 210778 210778 210778 Total Expenses 259438 308098 356758 405418 454078 502738 551398
PROFIT
MODEL 2 BREAKEVEN ANALYSIS
Units 1 2 3 4 5 6 7 Revenue 180000 360000 540000 720000 900000 1080000 1260000 Fixed 210778 210778 210778 210778 210778 210778 210778 Total Expenses 276778 342778 408778 474778 540778 606778 672778
PROFIT
MODEL 3 BREAK EVEN ANALYSIS
Units 1 2 3 4 5 6 7 Revenue 265000 530000 795000 1060000 1325000 1590000 1855000 Fixed 210778 210778 210778 210778 210778 210778 210778 Total Expenses 340778 470778 600778 730778 860778 990778 1120778
PROFIT
MODEL 4 BREAK EVEN ANALYSIS
Units 1 2 3 4 5 6 7 Revenue 325000 650000 975000 1300000 1625000 1950000 2275000 Fixed 210778 210778 210778 210778 210778 210778 210778 Total Expenses 344778 478778 612778 746778 880778 1014778 1148778
PROFIT
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