chapter 10-The Financial Plan.ppt by Donald Kuratko

Entrepreneurship chapter 10 The financial plan

1. 10-1
Financial Plan
Provides ‘E’ with complete picture of how much &
whenfunds are coming into the Org-Wherefunds
are going-How much cash is available & projected
financial position of the firm

2. 10-2
Helps new venture with most common problem-lack of
cash
Explain to potential investor
‘E’ 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

3. 10-3
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

4. 10-4
Example of a Manufacturing Budget
<<Insert Table 10.1>>

5. 10-5
Operating and Capital Budgets (2 of 2)
Operating costs:
List of fixed expenses incurred regardless of sales
volume.
Variable expenses which may change from month to
month depending on sales volume, seasonality or
opportunities for new businesses
Capital budgets provide a basis for evaluating
expenditures that will impact the business for more
than one year.
Rent, Utilities, Salaries, Interest, depreciation, insurance
Advertising & selling expense
CB may project expenditure for new
Equipment, vehicles, computers etc

6. 10-6
Example of an Operating Budget
<<Insert Table 10.2>>

7. 10-7
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.

8. 10-8
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
necessitate month-by-month illustration.
Increase in individual expenses need to be reflected in
the first year’s pro forma income statement.
Projections should be made for years 2 and 3 as well.

9. 10-9
Example of a Pro Forma Income Statement
<<Insert Table 10.3>>

10. 10-10
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 Company’s 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.

11. 10-11
Pro Forma Cash Flow
If disbursementsare greater than receiptsin 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.

12. 10-12
Example of a Pro Forma Cash Flow
<<Insert Table 10.6>>

13. 10-13
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.
Owner’s equity: amount owners have invested and/or
retained from the venture operations.

14. 10-14
Example of a Balance Sheet
<<Insert table 10.7>>

15. 10-15
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.

16. 10-16
Graphic Illustration of Breakeven
<<Insert Figure 10.1>>