Financial Plan

Provides with complete picture of how much & when funds are coming into the Organization- Where funds are going- How much cash is available & projected financial position of the firm

 Helps new venture with most common problem- lack of cash Explain to potential investor
Plans to meet financial obligations How would he pay off debt or provide good ROI

3 Years of projected financial data to satisfy any outside investors First year should reflect Monthly data

Operating and Capital Budgets (1 of 2)

Developed before the pro forma income statement. Sales budget: 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 or subcontracting are compared.

Budgets reflects seasonal demand or Marketing programs than can increase demand & inventory Ventures in which high level of inventory are necessary or where demand fluctuates significantly because of seasonality ----This Budget is valuable tool to asses cash needs

Example of a Manufacturing Budget

<<Insert Table 10.1>>

Operating and Capital Budgets (2 of 2)

Operating costs:
List of fixed expenses gained regardless of sales volume.
Rent, Utilities, Salaries, Interest, depreciation, insurance

Variable expenses which may change from month to month depending on sales volume, seasonality or opportunities for new businesses Advertising & selling expense

Capital budgets provide a basis for evaluating expenditures that will impact the business for more than one year. CB may project expenditure for new
Equipment, vehicles, computers etc

Example of an Operating Budget

<<Insert Table 10.2>>

Pro Forma Income Statements (1 of 2)

Pro forma income: projected net profit calculated from projected revenue minus projected costs and expenses. Sales by month is calculated first.
Basis of the figures: marketing research, industry sales, and some trial experience. Forecasting techniques may be used.

New ventures take time to build up sales. Projections of all operating expenses for each of the months during the first year should be made.

Pro Forma Income Statements (2 of 2)

Increasing selling expenses as sales increase should be taken into account. Changes in expenses during the first year can require month-by-month illustration. Projections should be made for years 2 and 3 as well.

Example of a Pro Forma Income Statement

<<Insert Table 10.3>>

Pro Forma Cash Flow (1 of 2)

Projected cash available calculated from projected cash accumulations minus projected cash disbursements.

Cash & profit are not the same(Difference

between a Companys total revenue & its total expense)

Cash is the money that is free & readily available to use in a business

Sales may not be regarded as cash. Use of profit as a measure of success for a new venture may be deceiving.

Pro Forma Cash Flow

If disbursements are greater than receipts in any time period the entrepreneur must either borrow funds or have cash in bank account to cover the higher disbursements Cash flow statement is based on best estimates.

Example of a Pro Forma Cash Flow

<<Insert Table 10.6>>

Pro Forma Balance Sheet

Pro forma balance sheet: summarizes the projected assets, liabilities, and net worth of the new venture.
A picture of the business at a certain moment in time. Does not cover a period of time.

Consists of:
Assets: items that are owned or available to be used in the venture operations. Liabilities: money that is owed to creditors. Owners equity: amount owners have invested and/or retained from the venture operations.

Example of a Balance Sheet

<<Insert table 10.7>>

Break-Even Analysis
Break-even: volume of sales where the venture neither makes a profit nor incurs a loss. Break-even sales point indicates the volume of sales needed to cover total variable and fixed expenses.
The break-even formula:
TFC

B/E(Q) =
SP VC/Unit (Marginal Contribution)

Major weakness in calculating the breakeven lies in determining if a cost is a fixed or variable.

Graphic Illustration of Breakeven

<<Insert Figure 10.1>>

Pro Forma Sources and Applications of Funds

Illustrates the disposition of earnings from operations and from other financing.
Use to show how net income and financing are used to increase assets or to pay off debt. Helps in understanding the effect of movement of cash through the business.

Software Packages
Financial software to track financial data and generate financial statements.
Use of spreadsheet in the start-up phase in the business planning for financial projections based on different scenarios and assess the impact of the same on the financial statements. These software packages vary in price and complexity; simple software include QuickBooks, Peachtree etc.