1. FINANCIAL PROJECTIONS MKTG 241 Dr. Dawne Martin March 27, 2012 Powerpoints adapted from : Kathleen R. Allen, Launching New Ventures, Houghton-Mifflin Successful Business Planning from Entrepreneurs, Southwestern Thomas SCORE.org

2. Due Dates and Learning Objectives Paper 4 – Marketing Strategy & Tactics, April 3 Quiz 4 – April 5 Learning Objectives Explain the process of determining the capitalization needs of a new business. Describe how to put together the various financial statements that comprise a financial plan. Discuss the financial records every entrepreneur should maintain.

3. Identifying Start-up Resource Requirements Start-up resources include: People (founding team, employees, advisors, independent contractors) Physical assets (equipment, inventory, office or plant space) Financial (cash, equity, debt) Constructing a Business Process Map Questions to answer… Who does the work in this business? Where do these people work? What do they need to do the work? What information is being generated? Where does that information go?

4. Common Start-up Pricing Strategies Product pricing is a part of marketing strategy and financial strategy How a product or service is priced is a function of a company’s goals Customer goals also influence entrepreneurs’ pricing strategies Some types… Premium Pricing Price Skimming Demand-based Pricing Captive Product Pricing Psychological Pricing Product Bundle Pricing Geographical Pricing

5. First Year Timeline, Milestones and Triggers

6. Finding the Right Numbers- Triangulation Entrepreneur’s knowledge The Market/Customer The Industry Venture Numbers

7. Develop Estimates for Financials Start with narrative assumptions Estimate new product/service demand Talk to customers Interview prospective end-users and intermediaries Use the entrepreneur’s knowledge and experience Go into limited production

8. Estimating Sales and Expenditures (continued) Percentage increase in sales (a quick and easy method to use for estimating…) Influenced by: Growth rates in the product/service market segment Innovations that make the product/service more attractive to the consumer Technological innovations that results in lower cost of products/services to the consumer

9. Estimating Sales and Expenditures (continued) Forecasting expenses-items to consider: Cost of goods sold (COGS) (how much does it cost to make) Selling, general and administrative expenses - (S, G, & A) Taxes And more…

10. Preparing the Pro Forma Financial Statements The Income Statement revenues from all sources operating expenses The Balance Sheet Assets Liabilities and Owners Equity Forecasting Cash Needs… The Cash Flow Statement cash receipts cash disbursements

11. Cash Flow Projections and Initial Capital Needs A cash flow projection can be used to help determine the initial capital reserve for a start-up operation. Chapter 15 Slide 11

12. One-Time-Only Capital Needs Chapter 15 Slide 12

13. Chapter 15Slide 13 Monthly Operating Expenses In addition to start-up costs, entrepreneurs must also estimate the average monthly cost of operating the business. It will take time to generate sufficient sales to cover all expenses. It is generally recommended that you keep three months of operating expense capital in an operating reserves account.

14. Chapter 15Slide 14 Initial Operating Expenses

15. Income Statements An income statement shows the revenues and the expenses of a business over a specified period of time. It also shows the business’s profits. New business owners should make pro forma income statements for the first year of operation as well as for future years (usually the first three). Chapter 15 Slide 15

16. Simplified Pro Forma Income Statement Chapter 15 Slide 16

17. Balance Sheets A balance sheet is a financial statement that shows the worth, or value, of a business. A pro forma balance sheet projects the growth of a business in terms of how much capital value the business will have at a particular date in the future. Chapter 15 Slide 17

18. Balance Sheets (continued) The assets side shows all property and capital to which the business claims ownership. The liabilities side shows all the debts of the business. The net worth of a business is determined by adding all the value of what is owned and subtracting from this the total debt of the business. Chapter 15 Slide 18

19. Assets Current assets include cash and assets that are easily converted into cash, such as inventory and accounts receivable. Fixed assets are those capital purchases that generally take a longer time to convert or liquidate into cash, such as property, equipment, and fixtures that require a special buyer. Chapter 15 Slide 19

20. Liabilities Current liabilities are debts that are to be paid within 12 months of the date of the balance sheet. Longterm liabilities are usually debts that come due more than 12 months after the date of the balance sheet. Chapter 15 Slide 20

21. Determining a Business’s Liquidity Two common methods of determining a business’s liquidity are current ratio tests and acid-test ratios. Chapter 15 Slide 21

22. Current Ratio Test The current ratio test compares cash, as well as any assets that can be converted into cash within a year, with the debt (liabilities) that will become due and payable within the year. The ratio is expressed as: current ratio = current assets ÷ current liabilities A favorable current ratio would be 2:1. A minimum acceptable ratio would be 1:1. Chapter 15 Slide 22

23. Acid-Test Ratio The acid-test ratio is more restrictive as it eliminates inventory, the least liquid of current assets, from the numerator. The ratio is expressed as: Chapter 15 Slide 23 acid-test ratio = (current assets – inventory) ÷ current liabilities