Entrepreneurship Topic 8- Financial Plan.pptx

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1. Financial Plan CHAPTER-08

2. Definition

3. Financial planning for startup of a business Your business plan will include three types of financial statements—a Cash Flow Statement, an Income Statement and a Balance Sheet. Preparing financial statements that accurately represent your business is critical to success. You will begin to prepare these statements by precisely estimating your start-up costs. If you do not project accurate start-up costs, your business could run into immediate financial difficulties.

4. Financial planning for startup of a business You will walk through the financial template step-by-step. Each step focuses on projecting key elements of the financial statements including operating expenses, sales, inventory, and other cash payments. You will use the financial assumptions you compiled earlier to complete each step. After completing all steps, the financial statements—Cash Flow, Income Statement and Balance Sheet—will be automatically generated.

5. Financial planning for startup of a business Understand key financial terms. Research financial information. Develop accurate start-up estimates. Understand the basic concepts of financial statements. N.B: Have you ever traveled to a foreign country only to find that your lack of understanding of the language prevented you from taking full advantage of the experience?

6. Why should we need to know the basic accounting and financial terms for new startup? Entrepreneurs without an understanding of basic accounting and financial concepts are like travelers in a foreign country who do not understand the language. Accounting is the language of business. An entrepreneur needs to understand the basic concepts represented by three key financial statements - the Income Statement, Cash Flow Statement, and Balance Sheet. They also need to understand the related terminology to effectively plan and manage the financial aspects of their business.

7. Financial Statements and Related Terminology Income Statement —This financial statement shows the net income or loss the business has experienced over a period of time—in other words, the company’s financial grade card. The Income Statement is sometimes referred to as the Profit and Loss (P&L) statement .

8. Income Statement • Sales or Revenues—Money or the promise of money received from providing a product/service • Cost of Goods Sold (COGS)—The cost of raw materials, purchased parts, and labor required to produce or provide a product/service, or the purchase price of the merchandise to be resold. Note that in the Income Statement on the next page, the COGS is expressed both as a dollar amount and as a percentage of the net sales. This percentage will be an important figure to have when completing your financials. See 11.1.3 Finding Financial Information as a guide to finding the industry standard COGS for your business

9. Income Statement • Operating Expenses—The costs incurred in operating the company and providing the product/service. This includes selling, administrative, and general overhead costs involved in the business’s operations. • Net income—The amount that remains from revenues when all expenses have been paid

10. EXAMPLE: Following is a simplified Income Statement for Backyard Solutions: Backyard Solutions—Year-End Income Statement (Projected) Current Year Net Sales $775,177 100% – Cost of goods sold $542,623 70% = Gross income $232,554 30% – Operating expenses $171,370 22.1% = Operating income $ 61,184 7.9% – Interest Expense $ 3,477 .4% = Net income $ 57,707 7.4%

11. Cash Flow Statement This financial statement reflects cash flowing into and out of the business, similar to a check register. Sources of cash are recorded under the Cash In category and cash expenditures are recorded under the Cash Out category

12. Cash Flow Statement • Beginning Cash Balance—Either start-up cash or cash balance remaining from the prior month. • Cash In—Sources of cash you expect to receive on a monthly basis. This list includes cash sales, collections from accounts receivable, equity contributions, and loans • Cash Out—Cash used to pay for both operating and non-operating expenses. Non-operating costs include items such as interest payments, loan payments, and owner’s draw.

13. Make the following assumptions: • Sales are $50,200 in month 1 and $56,224 in month 2 and half of all customers pay in cash each month; the rest are invoiced and given 30 day terms. • Inventory and raw materials are purchased on credit and paid for in 30 days; therefore, no payment for inventory is made in month 1 and $35,140 is paid in month 2. • Operating expenses are $11,680 in month 1 and $12,950 in month 2 and are paid in the month they occur. • The beginning cash balance for Month 1 is $10,000. EXAMPLE: The following is a simplified Cash Flow Statement for Backyard Solutions

14. EXAMPLE: The following is a simplified Cash Flow Statement for Backyard Solutions

15. Balance Sheet This financial statement reports what the company owns (assets), what it owes (liabilities), and the net worth that remains for the owners of the business (shareholders ‘equity). A balance sheet is a snapshot of the business at a specific point in time. The Accounting Equation is: A = L + E Key financial terms in the Balance Sheet include: • Asset—An item that has value and is owned by the business. • Liability—An amount owed or an obligation to perform a service to creditors, employees, government bodies, or others.

16. Balance Sheet Equity —Money invested in a company that is not intended to be repaid but represents an ownership interest. This may be called owner’s equity as it represents the actual dollar value of the total owners’ investment in a business, plus any net profits that have been retained in the business from year to year. This amount is determined by subtracting liabilities from assets.

17. EXAMPLE : Following is a simplified Balance Sheet for Backyard Solutions

18. FINANACIAL PLANNING OUTCOMES The financial plan focuses on three primary outcomes: • Profitability —Entrepreneurs must know that their ventures will be profitable. • Cash flow—Entrepreneurs must understand the cash needs of the ventures and have adequate sources to meet those needs. • Financial performance—Entrepreneurs want to know that their businesses are projected to perform financially as well as, or better than others in the industry. These three outcomes should be supported by written assumptions related to the basic components of each. To thoroughly plan for these, entrepreneurs need to project expectations in the following financial categories: • Start-up costs • Operating expenses

19. FINANACIAL PLANNING OUTCOMES • Sales • Inventory costs • Capital budget—money needed for purchases of assets and distributions to owners/investors • Equity and Debt—money sources When projecting financial information, entrepreneurs will develop the following financial statements. These financial statements will help answer questions about profitability, cash flow, and financial performance: • Monthly Cash Flow Statement • Year-End Income Statement • Year-End Balance Sheet • Financial Analysis/Ratios

20. FUNDING SOURCES

21. Angel I nvestors A ngel I nvestor : An affluent individual who provides initial capital for a business start-up. amount is generally smallish (~$10-30k) gets company off the ground to prototype stage often decided quickly and on a fairly informal proposal angels are accredited investors to comply with SEC regulations in US, many angels (≥40%) are in Silicon Valley other sources: NYC, Seattle, Austin, Boston, NC Research Triangle angels are compensated with: ownership equity (a percentage of ownership of the company) implies company's value (e.g. $10k for 5% stock => $200k value) convertible debt (options to buy stock in the company later)

22. Venture C apital V enture C apital ("VC"): Financial resources given to early-stage companies. given to startups by VC firms (groups) VC firm gets % of profits or equity (stock) different from bank loans; does not need to be paid back Stages of VC financing: seed funding: initial minimal funds; often given by angels start-up: early funds from VC firm for marketing/dev growth (" series A "): large investment ($1-2M) for preferred stock second round (" series B "): company is successful, but not profiting expansion (" mezzanine ") : $ given to a newly profitable company exit/bridge: VC firm sells stock once company matures

23. Other Funding Sources Friends and Family Funding (“FFF"): asking friends to borrow/donate money Grants or government funding Bank Loans : taking out a standard business loan to be repaid Public Equity : Selling stock in the company IPO (initial public offering) often comes after VC funding Crowd Funding : Asking the public for donations e.g. Kickstarter

24. Funding Timeline

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