MGT 465 Week 4 The Financial Plan and Capital Needs Example

$1.47 Million to Open 10 Courts: The Financial Plan and Capital Needs of Scioto Courts Pickleball Club

[Student Name]

University of Phoenix

MGT/465: Small Business and Entrepreneurial Planning

Week 4 Assignment

[Instructor Name]

[Date]

Scioto Courts Pickleball Club and all projections are composites written for a model paper; loan terms are illustrative.

The founders of the composite club Scioto Courts now have a concept, a marketing plan targeting 600 members in year one and an operations plan with 14 positions. Megan Kessler and Tom Albrecht now need to know how much money they need, whether the club can repay it and where it should come from. A financial plan is where a business idea meets arithmetic, and the arithmetic usually shows that the hardest period is the first year, after the money is spent and before the members arrive. This paper presents the financial plan.

Startup Costs

Startup costs total about $1.47 million: $650,000 for warehouse buildout including heating and cooling, $250,000 for courts, nets, divider netting and lighting, $70,000 for the café and pro shop, $60,000 for furniture, sound and technology, $60,000 for lease deposits, $80,000 for preopening marketing and staff training and $300,000 in working capital.

Why So Much Working Capital

Cassar (2010) reported that founders of new ventures usually expect more revenue than they achieve, so plans should include a cushion. The $300,000 working capital reserve covers first-year losses, loan payments and slower-than-planned membership growth.

Revenue Assumptions

Average membership revenue is $85 a month after the mix of tiers and founding rates. Members average 600 in year one, 780 in year two and 900 in year three. Other revenue from open play fees, leagues, lessons, youth programs, events, the pro shop and café totals $480,000 in year one, $560,000 in year two and $620,000 in year three.

Revenue Projections

Total revenue is projected at about $1.09 million in year one, $1.36 million in year two and $1.54 million in year three.

Operating Cost Assumptions

Annual operating costs are about $1.14 million: rent and building charges of $352,000, labor of $430,000, utilities of $90,000, insurance of $30,000, marketing of $72,000, maintenance and supplies of $40,000, café and pro shop goods and coaches' lesson shares of $78,000, software of $15,000 and other expenses of $36,000. Costs are held roughly flat for simplicity, though wages and rent will rise.

Projected Operating Results

Earnings before interest, depreciation and taxes are projected at a loss of about $51,000 in year one, then about $213,000 in year two and $395,000 in year three. The club needs time to fill its courts.

Break-Even

With other revenue at year-one levels, the club covers operating costs at about 650 members. Covering loan payments as well requires about 840 members, a level the plan reaches during year two. These figures show how important membership growth is.

Funding Sources

In data on thousands of U.S. startups, Robb and Robinson (2014) showed owner money and bank loans doing most of the financing. Scioto Courts follows that pattern with a twist: founders' equity of $250,000, prepaid founding memberships of about $140,000 from 150 members paying a year in advance, an SBA 7(a) loan of $880,000 over 10 years and $200,000 in equipment financing over five years for courts and lighting.

Sources and Uses

Uses total $1.47 million as listed above. Sources total $1.47 million: $250,000 equity, $140,000 prepaid memberships, $880,000 SBA loan and $200,000 equipment financing. Prepaid memberships are a liability, since the club owes members a year of play, but they provide cash when it is most needed.

Debt Service

Annual payments are about $142,000 on the SBA loan at 10.5 percent and $52,000 on equipment financing at 11 percent, about $195,000 in total. Debt service coverage is negative in year one, about 1.1 in year two and about 2.0 in year three. Lenders usually want at least 1.25, so the working capital reserve and a strong year-two performance are essential.

Monthly Cash Flow in Year One

Monthly projections show cash falling from the $300,000 reserve plus prepayments to a low point of about $70,000 in month eight, during summer, before recovering as fall leagues begin. The founders will not draw salaries above $3,000 a month each until cash stays above $100,000.

Downside Case

If membership in year three reaches only 720, 20 percent below plan, revenue falls to about $1.35 million and operating earnings to about $211,000, giving debt coverage of about 1.1. The club would survive but need cost cuts, such as reducing staff hours or renegotiating the lease's escalations.

Depreciation, Taxes and Net Income

After depreciation of about $120,000 a year on the buildout, courts and equipment and interest of about $105,000 in year two, the club shows a net loss in years one and two and a small profit in year three. Because the LLC is a pass-through entity, early losses flow to the founders' personal returns, which can offset other income. Lenders focus on cash flow rather than net income, which is why the plan emphasizes debt coverage.

Capital Expenditures Ahead

The plan should also anticipate replacements. Court surfaces need resurfacing about every five to seven years, at roughly $8,000 per court, and the climate control system will need major service within ten years. Setting aside $3,000 a month from year three builds a reserve so these costs do not require new borrowing.

Key Ratios to Watch

Beyond debt coverage, the founders will track labor cost as a share of revenue, targeted below 32 percent by year three; rent as a share of revenue, targeted below 25 percent; and revenue per court per month. These ratios allow comparison with other clubs and show early whether costs are drifting.

What the Plan Asks of the Founders

Brinckmann et al. (2010) found that planning is most useful when it supports learning rather than serving as a fixed forecast. The founders will compare actual results with these projections monthly and revise them, especially membership growth and summer revenue.

Conclusion

Scioto Courts needs about $1.47 million, funded by founders' equity, prepaid founding memberships, an SBA loan and equipment financing. The club loses money in year one, roughly breaks even after debt in year two and earns a solid margin by year three. Working capital, founder salary limits and monthly review protect it if growth is slower than planned.

References

Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning-performance relationship in small firms. Journal of Business Venturing, 25(1), 24-40. https://doi.org/10.1016/j.jbusvent.2008.10.007

Cassar, G. (2010). Are individuals entering self-employment overly optimistic? An empirical test of plans and projections on nascent entrepreneur expectations. Strategic Management Journal, 31(8), 822-840. https://doi.org/10.1002/smj.833

Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 27(1), 153-179. https://doi.org/10.1093/rfs/hhs072