1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 3 Developing the New Venture Business Plan The Financial Plan Part 1: Projecting Financial Requirements

2. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–2 Looking Ahead After studying this chapter, you should be able to: 1. Describe the purpose and content of the income statement, the balance sheet, and the cash flow statement. 2. Forecast a new venture’s profitability. 3. Determine asset requirements, evaluate financial sources, and estimate cash flows for a new venture. 4. Explain the importance of using good judgment when making projections.

3. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–3 Financial Statements An income statement presents the financial results of a firm’s operations over a given time period in selling the product or service, in producing or acquiring the goods or services, in running the firm, in financing the firm, and in paying taxes. A balance sheet provides a snapshot of a firm’s financial position at a specific point in time, showing the amount of assets the firm owns, the amount of outstanding debt, and the amount of ownership equity.

4. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–4 Financial Statements (cont’d.) The income statement cannot measure a firm’s cash flows, as it is calculated on an accrual basis rather than on a cash basis. Measuring cash flows involves calculating a firm’s after- tax cash flows from operations and then subtracting any investments and adding any additional financing received.

5. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–5 Forecasting Profitability The purpose of pro forma financial statements is to determine (1) future profitability based on projected sales levels, (2) how much and what type of financing will be used, and (3) whether the firm will have adequate cash flows. A firm’s net income is dependent on (1) amount of sales, (2) cost of goods sold and operating expenses, (3) interest expense, and (4) taxes. Estimates of fixed operating expenses and variable operating expenses, based on the projected level of sales, are deducted from gross sales profits to obtain a forecasted operating profit.

6. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–6 New Venture Requirements Funding for a new venture should cover its asset requirements and also the personal living expenses of the owner. A direct relationship exists between sales growth and asset needs; as sales increase, more assets are required. And, for every dollar of assets needed, there must be a corresponding dollar of financing. The two basic types of capital used in financing a company are debt financing and ownership equity. A firm’s cash flows involve three activities: operations, investments, and financing.

7. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–7 Making Projections It is important to develop realistic sales projections and profit margins to establish your credibility with investors. Be clear about the assumptions on which you are making your projections, and provide data to support those assumptions. Although risk is always involved in starting a new business, integrity requires that you honor your commitments.

8. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 10–8 Key Terms financial statements (accounting statements) income statement (profit and loss statement) cost of goods sold gross profit operating expenses operating income financing costs net income available to owners (net income) depreciation expense balance sheet current assets (gross working capital) accounts receivable inventory fixed assets depreciable assets gross fixed assets accumulated depreciation net fixed assets other assets debt current debt (short-term liabilities) accounts payable (trade credit) accrued expenses short-term notes long-term debt mortgage ownership equity retained earnings cash flow statement accrual-basis accounting cash-basis accounting cash flows from operations net working capital pro forma financial statements bootstrapping percentage-of-sales technique liquidity current ratio debt ratio spontaneous financing external equity profit retention internal equity