Chapter 10 The Financial Plan McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Entrepreneur’s Adage #31 “You always have less money and time than you think you do. So actively conserve money and time.” - Jordan

The Financial Plan Provides the entrepreneur with a complete picture of: Projected profits. Sources and uses of cash as well as cash available. The projected financial position of the firm. How financial obligations will be met and the venture’s liquidity and solvency will be maintained over time.

Pro-forma Financial Statements Income Statement Balance Sheet Cash Budget Break-even Analysis

Sales, COGS & Production Budgets Developed for the pro forma income statement. Sales budget – An estimate of the expected volume of sales by month. Cost of sales can be determined from the sales forecasts. In manufacturing ventures, costs of internal production and subcontracting are compared. Includes estimated ending inventory required as a buffer.

Sample Production Budget for First Three Months

Operating Expenses Developed for the pro forma income statement. Fixed Variable

Sample Operating Expenses for First Three Months ($000s)

Pro Forma Income Statements Pro forma net income Projected revenue minus projected expenses. Sales by month is calculated first. Basis of the figures - Marketing research, industry sales, trial experience, forecasting, and financial data on similar start-ups, best educated-guesses. See Sales Forecasting Guide (course website) The most important (and frequently inaccurate estimate) Projections of all operating expenses for each of the months during the first year should be made. Years 2 and 3 can be shown as annual data (but still best to have monthly figures to support annual numbers) Use year 1 as basis – then make assumptions about changes between year 1 and years 2 and 3.

Pro Forma Income Statement, First Year by Month ($000s)

Pro Forma Cash Budget Projected cash available calculated from projected cash inflows minus projected cash disbursements. Not the same as profit. Sales may not be in cash. Use of profit as a measure of success may be deceiving if there is significant negative cash flow. Use the DIRECT METHOD.

Pro Forma Cash Budget (cont.) Entrepreneurs must make monthly projections of cash. If disbursements are greater than receipts - entrepreneur must either borrow funds or have cash in a bank. Establish lines of credit to borrow against and be sure maximums are not exceeded. Large excess positive cash flows need to be invested in liquid investments with higher yields.

Pro Forma Cash Flow, First Year by Month ($000s)

Pro Forma Balance Sheet Summarizes the projected assets, liabilities, and net worth of the new venture. Useful for calculating many ratios. Consists of: Assets - Items that are owned or available to be used in the venture operations; can be current or fixed. Liabilities - Money that is owed to creditors; can be current or long-term debt. Owner’s equity - Amount owners have invested and/or retained from the venture operations.

Pro Forma Balance Sheet, End of First Year ($000s)

Break-Even Analysis Breakeven - Volume of sales where the venture neither makes a profit nor incurs a loss. The break-even formula: B/E(Q) = __________TFC______________ SP-VC/unit (marginal contribution) Major problems with calculating breakeven: determining whether a cost is a fixed or variable. much more complex for multi-product companies

Software Packages Quickbooks: Most widely used package for small businesses Dare to only use Microsoft Excel! Use for creating statements Use for analyzing “what-if” scenarios Use for accounting and bookkeeping Software packages vary in price and complexity. Upgrade to a better package as business grows.