Financial Plan S a i n t - P e t e r s b u r g,

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1 Financial Plan Saint-Petersburg, 217

2 Table of Contents: Chapter 1. Financial Plan 1.1. Terms and Assumptions Accepted for Calculations 1.2. Nomenclature and Goods Prices 1.3. Production Capacity and Sales Plan 1.4. Number of Employees and Their Monthly Wages 1.5. Expenses Calculations 1.6. Capital Costs (Investments) and Depreciation 1.7. Profit Calculations 1.8. Calculation of Profit, Loss, and Cash Flow 1.9. Tax and Insurance Deductions 1.1. Evaluation of the Economic Efficiency of the Project Chapter 2. Risk Assessment 2.1. Sensitivity Analysis 2.2. Break-Even Level

3 List of Tables, Diagrams and Figures: Tables Table 1. Parameters of the Main Project Assumptions Table 2. Project Goods Prices, VAT not included Table 6. Macro indices Table 4. Implementation Plan, Units Table 5. Project s Wages Fund, thousand rubles Table 6. Taxes on Project s Wages Fund, thousand rubles Table 7. Expenses Calculations, thousand rubles, VAT not included Table 8. Capital Costs (Investments) Table 9. Useful Life, months Table 1. Depreciation Deductions Forecast, thousand rubles, VAT not included Table 11. Project s Profit Forecast, thousand rubles, VAT not included Table 12. Calculation of Project s Profit and Loss, thousand rubles, VAT not included Table 13. Cash Flow Statement, thousand rubles Table 14. Distribution of Taxes, thousand rubles Table 15. Calculation of the Discount Rate by the WACC Method Table 16. Indicators of Project s Efficiency Table 17. Break-Even Point Calculation, thousand rubles per year Diagrams Diagram 1. Capacity Dynamics, % of Planned Capacity (Maximum) Diagram 2. Project s Profit Dynamics, thousand rubles, VAT not included Graphs Graph 1. Break-Even Point, thousand rubles

4 Chapter 1. Financial Plan 1.1. Terms and Assumptions Accepted for Calculations Table 1. Parameters of the Main Project Assumptions Parameter Forecast period Cash flow currency Business continuity Sources and terms of financing Sequence in financial planning Assumptions The forecast period is 5 years: from February 218 to January 223 Performance indicators are calculated taking into account the forecast period. Forecast interval: 1 month. The financial model shows monthly values of cash flows and aggregated values by years. The annual values of cash flows are given in the business plan. Calculation of project performance indicators was based on annual values of cash flow. The cash flow can be presented in any currency, the applied discount rate should be calculated in the same currency as the cash flow. The forecast of the project's cash flow was carried out in rubles. The forecast was based on the assumption that the Project Initiator will continue to operate his specialization in the future. The forecast does not take into account the possibility of changing the specialization or technology, as well as the termination of activities in any period after the project's implementation. Investment funds in the amount of 58,146, rubles. Forecast of natural indicators (sales volume). Profit forecast. Expenses forecast: - production cost; - commercial expenses; - operating expenses. Taxes forecast. Capital investments forecast. Depreciation forecast. Income statement forecast. Discount rate calculation. Cash flow statement forecast. Performance indicators calculation. Sensitivity analysis. Break-even point calculation. 4 Table of Contents

5 1.2. Nomenclature and Goods Prices Table 2. Project Goods Prices, VAT not included Goods Unit Paintings, drawings and pastels rubles / unit 358, , , , , Original sculptures and statues rubles / unit 28, , , , , Antiques (furniture) over 1 years old rubles / unit 263, , , , , Antiques (other) over 1 years old rubles / unit 136, , , , ,471.9 Table 6. Macro indices Macro indices Average annual inflation 5.% 5.% 5.% 5.% 5.% Price index at the beginning of the project Production Capacity and Sales Plan It is assumed a gradual output to the planned production capacity. During the first year after the project's implementation the average annual capacity will be 8%, during the second year the capacity will increase to 71%. The company will reach the planned capacity during the third year after the project's implementation. Diagram 1. Capacity Dynamics, % of Planned Capacity (Maximum) 12% 1% 1% 1% 1% 8% 6% 63% 4% 2% 8% Table of Contents

6 Table 4. Implementation Plan, units Items Paintings, drawings and pastels ,123 Original sculptures and statues ,123 Antiques (furniture) over 1 years old Antiques (other) over 1 years old Total: 19 1, ,64 3,746 The financial model represents the monthly dynamics of the abovementioned indicators Number of Employees and Their Monthly Wages The number of employees and their wages are presented in the financial model. While planning real wage growth was taken into account. Table 5. Project s Wages Fund, thousand rubles Payroll Production personnel 7,8. 7,434. 7,85.7 8,196. 8,65.8 Project Manager 2,4. 2,142. 2, , ,479.6 Specialist 5,4. 5,292. 5, , ,126.2 Commercial personnel Administrative personnel 3,78. 3,969. 4, , ,594.6 CEO 2,16. 2,268. 2, ,5.5 2,625.5 Accountant 1,62. 1,71. 1, , ,969.1 Total 1,86. 11,43. 11, , ,2.4 6 Table of Contents

7 Table 6. Taxes on Project s Wages Fund, thousand rubles Payroll Production personnel 2,124. 2,23.2 2, , ,581.7 Project Manager Specialist 1,512. 1, ,667. 1,75.3 1,837.8 Commercial personnel Administrative personnel 1,134. 1,19.7 1,25.2 1, ,378.4 CEO Accountant Total 3,258. 3,42.9 3, , ,96.1 The financial model represents the monthly dynamics of the abovementioned indicators. 7 Table of Contents

8 1.5. Expenses Calculations Table 7. Expenses Calculations, thousand rubles, VAT not included Production cost Wages 7,8. 7,434. 7,85.7 8,196. 8,65.8 Tax deductions for wages fund 2,124. 2,23.2 2, , ,581.7 Net cost abroad (Paintings, drawings and pastels) 1,92. 98, , , ,177.6 Net cost abroad (Original sculptures and statues) 9,1. 82, , , ,814.7 Net cost abroad (Antiques (furniture) over 1 years old) 5,7. 44, , , ,511.9 Net cost abroad (Antiques (other) over 1 years old) 2, , , , ,255.9 Shipping cost (Paintings, drawings and pastels) 2, , , , ,682.8 Shipping cost (Original sculptures and statues) , , , ,979. Shipping cost (Antiques (furniture) over 1 years old) 2, , , , ,899.2 Shipping cost (Antiques (other) over 1 years old) 1, , , , ,812.4 Warehouse rent 1, , , , ,96. Content processing and translating 14, ,2.1 16,3.8 16, ,596. Depreciation Banking services ,29.7 3, , ,181.2 Other expenses Total 6, , , , ,7.2 Commercial expenses Wages..... Tax deductions for wages fund..... Yandex.Direct 8, , , , ,877.8 Google AdWords 4,67.8 4, , ,79. 4,944.4 Instagram 3, , , ,12.4 4,326.4 VK 2,44.7 2, ,69.8 2, ,966.7 Facebook 4,67.8 4, , ,79. 4, Table of Contents

9 SEO 4, , , , ,438.9 Other expenses Total 28, ,516. 3, , ,168.5 Operating expenses Wages 3,78. 3,969. 4, , ,594.6 Tax deductions for wages fund 1,134. 1,19.7 1,25.2 1, ,378.4 Office rent ,9.1 1,59.5 1,112.5 Servers Other expenses Total 6, , , ,63.5 7,983.7 Total: 95, , , , ,222.4 The financial model represents the monthly dynamics of the abovementioned indicators Capital Costs (Investments) and Depreciation Table 8. Capital Costs (Investments) Items of capital costs Cost per item, VAT included Quantity Total, rubles, VAT included Furniture, equipment and inventory Desk 25, 8 2, Chair 1, 12 12, Stationery 3, 1 3, Computer 97, 6 582, Multifunction printer 75, 2 15, Other inventory 5, 1 5, Total 1,582, 9 Table of Contents

10 Other preparatory costs Website development 3,, 1 3,, Legal assistance 3,8, 1 3,8, Total 6 8 Total project's capital costs: Depreciation deductions reduce the taxable base for income tax (accepted as expenses), but do not cause a real outflow of funds. In this regard, when calculating net profit and preparing a profit and loss account, depreciation deductions are taken as a cost component, and then, while forecasting cash flow, they are added to net profit When calculating the depreciation of fixed assets, the linear depreciation method was used. When calculating depreciation, it was assumed that fixed assets are introduced in the middle of the period. The depreciation ceases at the end of the equipment useful life. The calculation of the planned capital investments was carried out according to depreciation rates calculated based on the useful lives given below. Table 9. Useful Life, months Useful life (month) Furniture, equipment and inventory 6 Other preparatory costs 6 Table 1. Depreciation Deductions Forecast, thousand rubles, VAT not included Depreciation deductions Furniture, equipment and inventory Total The financial model represents the monthly dynamics of the abovementioned indicators. 1 Table of Contents

11 1.7. Profit Calculations Table 11. Project s Profit Forecast, thousand rubles, VAT not included Items Paintings, drawings and pastels 2,7 181,1 297, , ,221 Original sculptures and statues 15, , , ,55 382,428 Antiques (furniture) over 1 years old 1,288 89, , ,193 24,481 Antiques (other) over 1 years old 5,39 46,17 75,644 96,64 124,13 Total: 51, , , ,139 1,236,234 Diagram 2. Project s Profit Dynamics, thousand rubles, VAT not included Table of Contents

12 1.8. Calculation of Profit, Loss, and Cash Flow Table 12. Calculation of Project s Profit and Loss, thousand rubles, VAT not included Profit and loss statement Total Profit 51, , , ,139 1,236,234 3,461,219 Net cost -6, , , , ,7-2,457,884 Gross profit (loss) -9,68 124,482 22, ,14 378,163 1,3,335 Commercial expenses -28,111-29,516-3,992-32,541-34, ,328 Operating expenses -6,568-6,897-7,241-7,64-7,984-36,294 Sales profit (loss) -43,747 88,7 182, , ,11 811,713 Sales profit / Revenue, % -85% 19% 24% 26% 27% 23% Percentage pay Profit (loss) before tax -43,747 88,7 182, , ,11 811,713 Taxes -8,865-36,477-49,799-67,22-162,343 Net profit (loss) -43,747 79,25 145,97 199, ,89 649,37 Net profit / Revenue,% -85% 17% 19% 21% 22% 19% Depreciation ,341 EBITDA -43,479 88, , , , ,54 EBITDA/ Revenue, % -85% 19% 24% 26% 27% 23% The financial model represents the monthly dynamics of the abovementioned indicators. Gross profit (loss) is the difference between revenue and the net cost of manufacturing a product or providing a service. Sales profit (loss) is the gross profit a company makes after deducting the costs (in this case commercial and operating expenses). Profit (loss) before tax = sales revenue ± operating income and expenses (in this case they are absent) ± nonoperating income and expenses (in this case they are absent). Net profit (loss) is the company s profit left over after paying all the expenses of an endeavor, taxes, payroll, fees, deductions and other mandatory payments to the budget. Net profit is a measure of the fundamental profitability of the venture. It is used to increase the company's working capital, the formation of reserve funds, and reinvestment in production capacity. EBITDA (Earnings before interest, tax, depreciation and amortization) is an accounting measure indicating the company's profit before taxes, depreciation and interest payments. It is widely used when assessing the performance of a company and the ability to meet its obligations. 12 Table of Contents

13 EBITDA value demonstrates how much money the company could earn in the reporting period and, thereafter, how much it can spend in the future. The cash flow statement traces the sources and the flow of cash in and out of the project. Table 13. Cash Flow Statement, thousand rubles Cash flow Total EBITDA -43,479 88, , , , ,54 Income tax -8,865-36,477-49,799-67,22-162,343 Capital investment -7,13-7,13 VAT obtained from contractors 9,244 82, , , , ,19 VAT paid to contractors -15,88-63,896-99, , ,93-463,96 VAT paid to the budget -12,6-35,679-47,89-63, ,113 FCFE -57,146 86,37 146, , ,77 643,68 Cash at the beginning of the period 86,37 232, ,677 Investors' funds 57,146 57,146 Cash at the end of the period 86,37 232, ,677 7,754 The financial model represents the monthly dynamics of the abovementioned indicators Tax and Insurance Deductions The tax assumptions accepted in the report assume the application of the tax legislation of the Russian Federation. The project is not tax-exempt, therefore the company pays the following taxes: Income tax 2%. Tax base is the company s income. Value-added tax (VAT) 18%. Salary tax 3%. 13 Table of Contents

14 Table 14. Distribution of Taxes, thousand rubles Distribution of taxes Amount VAT 159,113 12,6 35,679 47,89 63,619 Income tax 162,343 8,865 36,477 49,799 67,22 Salary tax 18,3 3,258 3,421 3,592 3,772 3,96 The financial model represents the monthly dynamics of the abovementioned indicators Evaluation of the Economic Efficiency of the Project To calculate the economic efficiency of the project we assessed a cash flow of borrowed capital; the weighted average cost of capital (WACC) was used as the discount rate. The weighted average cost of capital takes into account all the risks associated with financing investments in the company s business, both from own sources of financing, and from borrowed funds. The cost of financing investments in the project from own capital (cost of equity) determines all the risks peculiar to investing in it, while the cost of financing from borrowed funds (cost of debt) is expressed in the interest rate at which the project is provided with loans. The weighted average cost of capital is calculated with the following formula: WACC = Dd Wd (1 t) + De We where Dd the cost of debt; Wd the share of debt; t income tax rate; De the cost of equity; We the share of equity. The weighted average cost of capital is calculated for a typical year of project operating. The components of the calculation are given in the table below. 14 Table of Contents

15 Table 15. Calculation of the Discount Rate by the WACC Method Component Component description Value Risk-free rate, (Rf), % 3-year US Treasury bonds yield at the valuation date 2,91% Equity risk premium, (Rm-Rf), % ERP (equity risk premium) 5,13% Adjusted beta coefficient Brl=Bmu (1+(1-t) (D/E)) 1,2 Corporate tax rate (USA), % 34% Bmu=Unlevered BETA 1,13 Beta coefficient D= share of debt 9% D/E 9,63% E=share of equity 91% Country risk premium (S1), % The premium for the risk of income shortfall (based on Russia's credit rating and the difference in bond yields) 3,55% Small cap premium (S2), % 3,58% Specific risk premium (S3), % Additional risk associated with investing in an enterprise 1,5% Cost of equity, % 17,71% Weighted average interest rates on long-term loans in USD, % Weighted average interest rates on long-term loans in RUB, % Bank of Russia Statistical Bulletin 5 (288) 217 Table Bank of Russia Statistical Bulletin 5 (288) 217 Table ,86% 12,85% Transition coefficient Currency spread 13,67% Cost of equity, % Exchange rate diffrences 22,2% Cost of debt, % Bank of Russia Statistical Bulletin 5 (288) 217 Table ,85% Income tax rate, % 2% Cost of debt (after tax), % 1,28% WACC, % 2,99% As the result there was obtained an annual target discount rate of 2.99%. 15 Table of Contents

16 Table 16. Indicators of Project s Efficiency Indicators for the company Measure Value Required investments thousand rubles 57,146 NPV thousand rubles 313,474 IRR % 195% Payback period month 22 Discounted payback period month 23 Net present value Net present value is the most important measurement of company s profit, describing the feasibility of project investment. NPV was determined by calculating the project s annual cash flow led to a common denominator to be compared over time. If according to calculations NPV >, the investment would add value to the company, so the project may be accepted. It is obvious that NPV value is a sufficient margin of safety, designed to compensate for a possible mistake in cash flows forecast. Internal rate of return Internal rate of return (IRR) is the discount rate at which the net present value of future cash flows is equal to the initial investments. Internal rate of return determines the maximum cost of debt and the profitability of the investment project in terms of rate of return. Equivalently, it is the average return on invested capital provided by this investment project, i.e. the efficiency of investment in this project is equal to the efficiency of investing at IRR interest rate in any financial instrument with a uniform income. IRR is calculated as the discount rate at which NPV =. However, IRR cannot always be correctly obtained from the equation NPV =, as the given equation may have no solutions or have several solutions for certain values of cash flows. In this case IRR of the project is considered to be uncertain. The economic meaning of the internal rate of return is that it is a rate of return of investments at which an enterprise can equally effectively invests its capital at IRR interest rate in any financial instruments or makes real investments that generate a cash flow, each element of which in turn is invested at IRR interest rate. Payback period Payback period (PP) is the period of time required to recoup the initial investments due to the net profit. As a method of analysis payback period is usually calculated in two ways. The companies usually calculate two types of payback period. The first of them is statistical one, for the calculation of which the absolute value of cash flows is used, without taking into account the time value of money. The second type is discounted payback period. The statistical payback period determines a simple recoup of the funds invested in the project by the net profit. 16 Table of Contents

17 Discounted payback period Discounted payback period (DPP) eliminates the drawbacks of the statistical method of the payback period and takes into account the time value of money. Discounted payback period determines recoup of investments in the project and the project s profitability while taking into account the time value of money. 17 Table of Contents

18 Chapter 2. Risk Assessment 2.1. Sensitivity Analysis As part of the developed project the company conducted the sensitivity analysis of its financial result to the changes in the main data: the service costs, the cost level, and the discount rate. Sensitivity Analysis to Changes in Services Costs Average service cost, % Required investments 44,495 44,495 47,852 51,735 57,146 65,667 81,351 NPV 756,57 756,57 68, ,32 313, ,289 15,235 IRR annual 546% 546% 41% 288% 195% 114% 31% Payback period Discounted payback period Dynamics of Required Investments at Changing Services Costs, thousand rubles Table of Contents

19 NPV Dynamics at Services Costs Changing, thousand rubles IRR Dynamics at Services Costs Changing, % 6% 546% 5% 4% 41% 3% 2% 288% 195% 114% 1% % % % Dynamics of Payback Period at Services Costs Changing, month Table of Contents

20 Dynamics of Discounted Payback Period at Services Costs Changing, month Sensitivity Analysis to Changes in Cost Level Expenses, % Required investments 116,291 89,128 7,66 57,146 46,659 38,15 3,746 NPV, thousand rubles -43,881 78, , ,474 43,12 546, ,813 IRR annual 2% 6% 122% 195% 297% 457% 763% Payback period, month Discounted payback period, month n/a Table of Contents

21 Dynamics of Required Investments at Cost Changing, thousand rubles NPV Dynamics at Cost Changing, thousand rubles IRR Dynamics at Cost Changing, % 9% 8% 763% 7% 6% 5% 4% 3% 2% 1% % 457% 297% 195% 122% 6% 2% Table of Contents

22 Dynamics of Payback Period at Cost Changing, month Dynamics of Discounted Payback Period at Cost Changing, month Table of Contents

23 Sensitivity Analysis to Changes in Discount Rate Discount rate, % NPV, thousand rubles 258, , , , , , ,627 Discounted payback period, month NPV Dynamics at Discount Rate Changing, thousand rubles Dynamics of Discounted Payback Period at Discount Rate Changing, month Table of Contents

24 2.2. Break-Even Level Break-even analysis is an key financial analysis of the possible results of the proposed business on the basis of a mathematical model, often presented in the form of a graph that allows to determine the amount of income and costs at various levels of business activity, depending on the volume of production and sales; allows to calculate, show in the graph break-even point as the minimum volume of production. The break-even point represents the sales amount that is required to cover total costs, consisting of both fixed and variable costs to the company, i.e. it is the point at which total cost and total revenue are equal. The break-even point is the minimum level of production or other type of economic activity, in which the total revenue realized from the sales of the manufactured goods or services is equal to the costs of production and circulation of these goods. To make a profit, a company or an entrepreneur must produce the quantity of goods, have the volume of production and activity level that exceeds the value corresponding to the break-even point. If the volume is below that corresponding to this point, the company s activity becomes unprofitable. The break-even analysis carried out for the given project is presented in the table below. Table 17. Break-Even Point Calculation, thousand rubles per year Capacity percentage 1% 15% 2% 25% 3% 35% 4% 45% Revenue 31,466 47,198 62,931 78,664 94,397 11,13 125, ,595 Variable costs 22,911 34,367 45,822 57,278 68,734 8,189 91,645 13,11 Fixed costs 18,65 18,65 18,65 18,65 18,65 18,65 18,65 18,65 Total costs 4,976 52,432 63,888 75,343 86,799 98,254 19,71 121,166 Profit / Loss -9,511-5, ,321 7,598 11,875 16,152 2,43 As it can be seen from the graph, the break-even point is the intersection of total costs and revenue. In this project it is equal to 2% of the maximum revenue. 24 Table of Contents

25 Graph 1. Break-Even Point, thousand rubles Revenue Total costs 2 1% 15% 2% 25% 3% 35% 4% 45% 25 Table of Contents

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