Consider the following situation:You and two of your very best friends have star
ID: 2791943 • Letter: C
Question
Consider the following situation:You and two of your very best friends have started an engineering consulting firm. Being confident people you name your firm “We’re Right and You Need Us.” This firm studies advanced principles and makes recommendations to clients. You have established a monthly revenue stream of $150,000 per month for the first year from six customers (two per partner) located in the southwestern US. In other words, your total revenue is $150,000 per month and you pay all your costs out of that revenue. Your headquarters is Las Cruces, NM but you spend a lot of time traveling. You actually make about 30 trips per partner a year at an average cost of $2,500 per trip to make sales and attend conferences besides consulting. Every year you each buy a new computer and update software at $5,000 per year per partner. You hope to expand to four customers per partner by year 3. Assume revenue per customer is $15,000 per month.Create and explain a financial model that governs a five-year planning horizon for your firm. The three of you consult, travel, market, make sales calls, attend professional conferences and use computers and Internet access to do your jobs. Do not consider inflation, taxes or interest in any part of this analysis.
Explanation / Answer
Firm's Name : “We’re Right and You Need Us.”
Financial Model for the five-year planning of the firm :
The total yearly revenues for the first two years is $1.80 m and the same is extended to $2.88 m per year for the period Year3 to Year5. This is due to increase of the customer from 2 customers per partner to 4 customers per partner.
The Trip expenses per year for the 5 years is $0.225m of the firm.
The Computer & Software expenses per year for the 5 years is $0.015m of the firm.
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Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Number of Partners 3 3 3 3 3 Number of Customers per partner 2 2 4 4 4 Revenue per customer month $15000 $15000 $15000 $15000 $15000 Consulting Revenue $1.08m $1.08m $2.16m $2.16m $2.16m Other Revenue $0.72m $0.72m $0.72m $0.72m $0.72m Total Revenues $1.80m $1.80m $2.88m $2.88m $2.88m Less: Expenses : Trip expenses : Number of trips per partner year 30 30 30 30 30 Average cost per trip $2500 $2500 $2500 $2500 $2500 Total Trip expenses $0.225 $0.225 $0.225 $0.225 $0.225 Computer & Software expenses : Average expenses per partner year $5000 $5000 $5000 $5000 $5000 Total Computer & Software expenses $0.015 $0.015 $0.015 $0.015 $0.015 Total Expenses = $0.240 $0.240 $0.240 $0.240 $0.240