1. How to Develop Financial Projections
Presented by Larry Davidson & Anthony Mangiarelli
in connection with the Rhode Island Business Plan Competition
January 14, 2010

2. The Business Plan The Business Plan establishes credibility:
of the plan
of the entrepreneurs

3. The Business Plan Demonstrates the following: Business Overview
Market Analysis
Team
Financial Projection

4. The Financial Projections
The Financial Projections must be:
Realistic
Consistent:
With the Business Plan
Internally
With Budgets
With Assumptions

5. Balance Sheet The Four Main Financial Statements
Shows the financial position at a certain point in time. It includes:
Assets: What the company owns and has title to
Liabilities: Obligations of the company
Stockholders’ Equity: The “book value” of a company. Shows the net amount invested in a company
Assets = Liabilities + Equity

6. The Four Main Financial Statements
Income Statement
Revenues
Expenses
Other income and expenses
Statement of Stockholders’ Equity
Shows changes in stockholder’s equity during year
Shows distribution made by company
Shows capital contributions made to company

7. Statement of Cash Flows
The Four Main Financial Statements
Statement of Cash Flows
Very important to overall understanding of company’s operations
Includes cash flows relating to:
Operating Activities
Investing Activities
Financing Activities
Reconciles cash at beginning of the year to cash at the end of the year
Provides information for the burn rate

8. Understanding the Footnotes
Roles of Footnotes in the Projected Financial Statements
Explains the major assumptions used in developing the Projected Financial Statements
Provide valuable insight and clarification into the amounts contained on the basic financial statements
Provides useful information related to the Company’s accounting policies

9. How to use and calculate Important financial ratios
Types of Ratios
Liquidity Ratios – Measures the enterprise’s short run ability to pay its maturing obligations
Activity Ratios – Measures how effectively the enterprise is using the assets employed
Profitability Ratios – Measures the degree of success of failure of a given enterprise or division for a given period of time
Coverage Ratios – Measures the degree of protection for long term creditors and investors

10. Translating the Balance Sheet
Current Assets - Cash and other assets that are expected to be converted to cash or sold or used up usually within one year or less, through the normal operations of the business
Property, Plant and Equipment - Equipment, machinery, buildings and land used to conduct business operations
Current Liabilities - Obligations that will be due within a year that will be satisfied with current assets
Long-Term Liabilities - Obligations that will become due more than one year from the balance sheet date
Stockholders’ Equity - The stockholders’ right to the assets of the business

11. Analyzing Liquidity and Solvency
After gaining an understanding of the balance sheet components, you can now combine that information with the following tools to analyze the Company’s
Liquidity; and
Solvency

12. Analyzing Liquidity and Solvency
Liquidity: Measures the Company’s ability to:
Pay obligations as they come due; and
Handle unexpected cash needs
Measured by a few common ratios:
Working capital
Current ratio
Quick ratio

13. Working Capital Current Ratio Analyzing Liquidity
The difference between the Company’s current assets and current liabilities
The goal for any company is to maintain positive working capital
Current Ratio
Measures the ratio of current assets to current liabilities

14. Analyzing Liquidity
An issue with using working capital and the current ratio as the sole measures of a Company’s liquidity is that it may be difficult to turn inventory into cash in order to fulfill current obligations as they come due
It may be necessary to calculate the quick ratio for the Company’s short-term liquidity
The quick ratio is also known as the acid test ratio

15. Quick Ratio Analyzing Liquidity
Calculated similarly to current ratio, with the exception that only cash, marketable securities, and receivables are included in the numerator

16. Translating the Income Statement and Statement of Stockholder’s Equity
What the Income Statement Shows:
Revenue - Increases in assets or decreases in liabilities from selling goods or providing services that constitute the primary activities of an organization
Cost of Goods Sold - Cost incurred by a Company to acquire or produce the inventory or the cost of services that was sold during a specific period
Gross Profit (Loss) - Difference between the selling price of goods or services and the cost

17. What the Income Statement Shows
Selling, General and Administrative Expenses - Expenses associated with the day to day operations of the business, but not attributable directly to the goods manufactured and sold
Operating Income (Loss) - The difference between the Gross Profit and the selling, general and administrative expenses
Other Income and Expenses - Income and expenses received or paid by the Company that is not part of their normal business operations
Provision for Income Tax - The estimate for income taxes to be accrued or refunded based on the Company’s earnings
Net Earnings - The total difference between revenues and expenses for the period being reported on

18. Income Statement Components in Detail: Gross Profit
Commonly indicated as a percentage and used as a comparison to measure a Company’s ability to increase their sales prices and produce goods and services at lower costs
For every dollar of sales, how much profit the Company earns to cover selling, general and administrative expenses and generate a net profit

19. The Statement of Stockholder’s Equity
What the Statement of Stockholder’s Equity Shows:
Common Stock
Additional Paid in Capital
Retained Earnings (Accumulated Deficit)
Treasury Stock
Accumulated Other Comprehensive Income

20. What exactly does a Cash Flow Statement Show?
Provides a description of the events that resulted in the receipt or payment of cash during a fiscal period
Provides information about the company’s operating, investing, and financing activities
The statement reconciles the net change in cash and cash equivalents for the accounting period from the prior reporting period
Cash burn rate - equal to the cash used in operations plus the cash used in investing

21. Usefulness of the Statement of Cash Flows
The Statement of Cash Flows is one of the most important statements because it helps investors, creditors, and others to assess:
The entity’s ability to generate future cash flows
The entity’s ability to pay dividends and meet current and future obligations
The reasons for the differences between net income and net cash flows
The entity’s cash and non-cash investing and financing activities

22. Classifications of Cash Receipts and Cash Payments
Operating Activities
Involve the cash effects of transactions that enter into the determinations of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisitions of inventory and expenses
Also included in the operating section are certain items that affect net income, but are non-cash items (income/expense), and therefore need to be included in the reconciliation of net cash flows from operating activities.
Non-cash items often include, but are not limited to, depreciation and amortization expense, gain/loss on sale of fixed assts, bad debt expense, etc.

23. Classifications of Cash Receipts and Cash Payments
Investing Activities
Generally involve long-term assets and include:
Making and collecting loans (notes receivable)
Purchase and sales of investments
Acquiring and disposing of fixed assets and long-lived assets

24. Classifications of Cash Receipts and Cash Payments
Financing Activities
Involve liability and stockholders’ equity items and include
Obtaining cash from lenders and repaying the amounts borrowed
Obtaining capital from owners and providing them with a return on, and a return of, their investment

25. (ldavidson@kahnlitwin.com) 401-274-2001 Anthony Mangiarelli, CPA, MST
Larry Davidson, CPA
Anthony Mangiarelli, CPA, MST

26. Appendix

27. How to use and calculate Important financial ratios
Other Types of Analytical Analysis
Trend Analysis (Fluctuation) – Using historical data and budgeted data to determine trends and compare expectations to the actual financial statements
Budget Versus Actual – Comparing budgets to actual results and investigating statements
Industry Comparison – Benchmarking against the performance of companies in the same industry

28. How to use and calculate Important financial ratios
Continued…
Historical Analysis – Comparing actual results to historical performance or interim results
Reasonableness Analysis – Reviewing account balances for reasonableness
Predictive Analysis – Comparing what the outcome should be based on information you know (12 months of a set expense)

29. Additional Balance Sheet Analysis
Accounts Receivable (A/R)
Inventory
Notes Payable and Long-term debt
Accounts Payable and Accruals

30. Additional Balance Sheet Analysis
Typical ratios and analytical procedures used to analyze accounts receivable:
Receivables turnover
Net sales/Average accounts receivable
Days sales in accounts receivable
A/R / (Sales/365)
Allowance for doubtful accounts as a % of A/R
Bad debt expense as a % of net credit sales
Aging analysis

31. Additional Balance Sheet Analysis
Typical ratios and analytical procedures used to analyze inventory:
Inventory turnover
COGS/Average inventory
Days inventory on hand
Inventory/ (COGS/365)
Gross profit margin

32. Additional Balance Sheet Analysis
Typical ratios and analytical procedures used to analyze notes payable and long term debt:
Time interest earned
EBIT/Interest Expense
Cash debt coverage ratio
Cash from operations/Average total liabilities
Interest expense as a % of debt

33. Additional Balance Sheet Analysis
Typical ratios and analytical procedures used to analyze accounts payable and accruals
Days payable outstanding
A/P /(COGS/365)
A/P Aging Analysis