1. Chapter 16 The Financial Plan

2. Copyright © Houghton Mifflin Company16-2 Overview Estimating sales and capital expenditures Preparing the pro forma income statement Preparing the pro forma cash flow statement Preparing the pro forma balance sheet Ratios to describe the business

3. Steps in Preparing the Financial Plan

4. Copyright © Houghton Mifflin Company16-4 Gather Some Basic Information Business goals for the next three to five years Business flowchart showing how the business works Business timeline with milestones: first customer, multiple customers, multiple products and services

5. Copyright © Houghton Mifflin Company16-5 Estimating Sales and Capital Expenditures What you need –Demand, cost, and operating figures –Forecast purchases and beginning and ending inventories based on sales forecast –For manufacturing, do a production budget –Calculate the fixed and variable operating expenses by month

6. Copyright © Houghton Mifflin Company16-6 Pro Forma Income Statement Reflects the profit and loss status of the business at the end of a specified period Revenues – COGS = Gross Profit – Expenses = Net Income before taxes Revenues and expenses recorded when the transaction occurs whether or not money was received or expended Prepare first to estimate tax liability

7. Copyright © Houghton Mifflin Company16-7 Pro Forma Cash Flow Statement The most important statement for the entrepreneur because cash pays the bills Records cash inflows and outflows: Inflows – Outflows = Net cash flow Compares forecasted and actual during the first year to adjust projections Shows initial capitalization

8. Copyright © Houghton Mifflin Company16-8 Pro Forma Balance Sheet Shows the condition of the business in terms of its assets, liabilities and the net worth of its owners at the end of a specified period Assets = Liabilities + Owner’s equity

9. Copyright © Houghton Mifflin Company16-9 Pro Forma Balance Sheet (cont.) Assets include cash, accounts receivables, inventory, and plant and equipment Liabilities include everything the business owes to creditors Owner’s equity is the excess after liabilities have been subtracted from assets

10. Copyright © Houghton Mifflin Company16-10 Ratios A way to interpret and compare the information contained in the financial statements Liquidity ratios provide information about company’s ability to meet short-term obligations Profitability ratios: profit margin ratio & return on assets Leverage ratio expresses the degree to which the company relies on debt Break-even analysis indicates the volume of sales required to make a profit

11. Financial Plan Outline

12. Copyright © Houghton Mifflin Company16-12 Take-Aways List what students took away from the discussion in real time