Chapter 9 Analyzing Start-up Financial Risks and Benefits.

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Presentation transcript:

Chapter 9 Analyzing Start-up Financial Risks and Benefits

Copyright © Houghton Mifflin Company9-2 Overview Finding the right numbers Estimating sales and expenditures Preparing the pro forma income statement How much start-up money is needed?

Copyright © Houghton Mifflin Company9-3 Triangulate to the Right Number Use your knowledge and experience Get the opinions of industry experts Talk to the customer

Copyright © Houghton Mifflin Company9-4 Estimating Sales and Expenditures Use the triangulation technique Identify events that could trigger a change in your estimate Calculate the impact of the change on your estimate Figure the probability that the event will occur

Copyright © Houghton Mifflin Company9-5 Expenditures Calculate cost of goods sold –Direct labor, cost of materials, and direct factory overhead General, selling, and administrative –Generally fixed expenses that do not vary with sales Taxes –Payroll, federal, state, and local income taxes

Copyright © Houghton Mifflin Company9-6 Pro Forma Income Statement Profit and loss statement Revenues – COGS = Gross profit Gross profit/sales = gross margin (the room a business has to make financial mistakes)

Copyright © Houghton Mifflin Company9-7 The Importance of Assumptions Assumptions are footnotes that provide supporting material for each line item The credibility of your pro forma financials is a function of the quality of your assumptions

Copyright © Houghton Mifflin Company9-8 How Much Start-up Capital Is Needed? Forecast cash flow: cash inflows – cash outflows = net cash flow Break out types of money –Hard costs (equipment) –Soft costs (deposits & training) –Working capital to smooth out cash flow Minimum start-up needs (highest negative on the cash flow statement) Safety factor

Copyright © Houghton Mifflin Company9-9 Now Ask Yourself Do the start-up capital requirements make sense? Is there enough money in this opportunity to make the effort worthwhile?

Copyright © Houghton Mifflin Company9-10 Take-Aways List what students took away from the discussion in real time