ch 06 financial planning short term and long term

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FINANCIAL PLANNING: SHORT TERM AND LONG TERM

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2012 South-Western Cengage Learning

ENTREPRENEURIAL FINANCE Leach & Melicher


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Construct a cash budget Describe how projected

statements of cash flowrelate to cash budgets

Explain why projectedstatements of cash flow areimportant to theentrepreneur

Understand the concept of a

sustainable sales growth

Understand the process of

identifying the quantity and

timing of additional funds

needed to support theventures sales forecasts

Connect sales growth rates to

the amount and timing of

additional funds needed

Describe the percent-of-salesmethod for preparing

financial plans

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Development Stage: Screen Business Ideas

Prepare Business Plan

Obtain Seed Financing

Startup Stage: Choose Organizational Form

Prepare Initial Financial Statements

Obtain First Round Financing

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Survival Stage: Monitor Financial Performance

Project Cash Needs Obtain First Round Financing

Possible Actions: Liquidate v. Restructure

Rapid Growth Stage: Create and Build Value

Obtain Additional Financing

Examine Exit Opportunities

Possible Actions: Go Public v. Sell/Merge

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Early-Maturity Stage: Manage Ongoing Operations Maintain and Add Value

Obtain Seasoned Financing

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Sales Schedule

Purchase Schedule Wages and Commission Schedule Cash Budget

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As a check on the cash budget, you can getthe exact same cash balance by constructing

a full set of financial statements. See Exhibits6.3 6.5 in the textbook.

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Forecasting for Early Stage Ventures (firms that are in either

their development, startup, or survival stage, or just entering

into their rapid growth stage of their life cycle)

Industry Probability of Sales Components

Sales Scenario Occurrence Growth Rate to Sum

Optimistic forecast .30 X 60% = 18.0%Most likely forecast .40 X 50% = 20.0%

Pessimistic forecast .30 X 40% = 12.0%

1.00 Expected Value = 50.0%

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Internally Generated Funds:Net income or profits after taxes earned over an accounting

period

Sustainable Sales Growth Rate:Rate at which a firm can grow sales based on the retention ofprofits in the business

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EquityBeginning

EquityInChangeg

EquityBeginning

EquityBeginningEquityEnding g

EquityBeginning

Equityg


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RRx)(NI/Eg

RRx)(NI/EE/E

RateRetentionxIncomeNetE

beg

beg beg

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MultiplierEquityTurnover xAssetMargin xProfitNetROE

FPROA xg

PoliciesFinancialxePerformancOperatingg

RRxCE

TAx

TA

NSx

NS

NIg

CETAx

TANSx

NSNI

CENIROE

beg


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Financing Capital Needed (FCN):financial funds needed to acquire assets necessary tosupport a firms sales growth

Spontaneously Generated Funds:increases in accounts payables and accruals (wages andtaxes) that occur with a sales increase

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Additional Funds Needed (AFN):gap remaining between the financial capital needed and thatfunded by spontaneously generated funds and retained

earnings, or,

AFN =Required Increase in AssetsSpontaneously Generated Funds

Increase in Retained Earnings

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RateRetentionRR

IncomeNetNI

sliabilitieAccruedAL

payableAccountsAP

yearcurrentandyearnextbetweensalesnetinChangeNS

salesNetNSassetsTotalTA:where

)(RRNS

NI)(NS-NS)(

NS

ALAP-NS)(

NS

TAAFN o

o

o1

o

oo

o

o

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Sales last year = $1,600,000 Asset investment = $1,000,000

Net Income = $160,000 Current Assets = $520,000 Fixed Assets = $480,000 Accounts Payable = $48,000

Accrued Liabilities = $32,000 Projected next year sales = $2,080,000

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$68,000

)(.10)(1.00$2,080,000-00).05($480,0-00)625($480,0.

(1.00)$1,600,000

$160,000

0)($2,080,00-($480,000)$1,600,000

$80,000

-($480,000)$1,600,000

$1,000,000

AFN


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Percent of Sales Method:make projections based on the assumption that certain costsand selected balance sheet items are best expressed as a

percentage of sales

Constant Ratio Method:variant of the percent of sales method that projects selectedcost and balance items at the same growth rate as sales

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Financial Forecasting Process To ProjectFinancial Statements

1. Forecast sales2. Project income statement3. Project balance sheet4. Project statement of cash flows

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ch 06 financial planning short term and long term

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