10. the financial plan

7/30/2019 10. the Financial Plan

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Financial Plan

Provides with complete picture ofhow much &whenfunds are coming into the Organization- Where

funds are going- How much cash is available &projected financial position of the firm


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Helps new venture with most common problem- lack ofcash

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 anyoutside investors

First year should reflect Monthly data


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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 Marketingprograms than can increase demand & inventory

Ventures in which high level of inventory are necessaryor where demand fluctuates significantly because ofseasonality ----This Budget is valuable tool to asses cashneeds


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Example of a Manufacturing Budget


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Operating and Capital Budgets (2 of 2)

Operating costs: List of fixed expenses gained regardless of sales volume.

Variable expenses which may change from month tomonth depending on sales volume, seasonality oropportunities for new businesses

Capital budgets provide a basis for evaluatingexpenditures that will impact the business for morethan one year.

Rent, Utilities, Salaries, Interest, depreciation, insurance

Advertising & selling expense

CB may project expenditure for new

Equipment, vehicles, computers etc


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Example of an Operating Budget


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Pro Forma Income Statements (1 of 2)

Pro forma income: projected net profit calculated fromprojected 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 themonths during the first year should be made.


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Pro Forma Income Statements (2 of 2)

Increasing selling expenses as sales increase should betaken into account.

Changes in expenses during the first year can requiremonth-by-month illustration.

Projections should be made for years 2 and 3 as well.


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Example of a Pro Forma Income Statement


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Pro Forma Cash Flow (1 of 2)

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

Cash & profit are not the same(Differencebetween a Companys total revenue & its total expense)

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

Sales may not be regarded as cash.

Use of profit as a measure of success for anew venture may be deceiving.


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Pro Forma Cash Flow

Ifdisbursements are greater than receipts in any timeperiod the entrepreneur must either borrow funds orhave cash in bank account to cover the higherdisbursements

Cash flow statement is based on best estimates.


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Example of a Pro Forma Cash Flow


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Pro Forma Balance Sheet

Pro forma balance sheet: summarizes the projectedassets, 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 inthe venture operations.

Liabilities: money that is owed to creditors.

Owners equity: amount owners have invested and/orretained from the venture operations.


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Example of a Balance Sheet


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Break-Even Analysis

Break-even: volume of sales where the venture neithermakes a profit nor incurs a loss.

Break-even sales point indicates the volume of salesneeded 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.


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Graphic Illustration of Breakeven


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Pro Forma Sources and Applications of Funds

Illustrates the disposition of earnings from operationsand from other financing.

Use to show how net income and financing are used toincrease assets or to pay off debt.

Helps in understanding the effect of movement of cash

through the business.


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Software Packages

Financial software to track financial data and generatefinancial statements.

Use of spreadsheet in the start-up phase in thebusiness planning for financial projections based ondifferent scenarios and assess the impact of the sameon the financial statements.

These software packages vary in price and complexity;simple software include QuickBooks, Peachtree etc.

10. the financial plan

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