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Post on 20-Oct-2014
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Financial Projections
Burrill CompetitionSpring 2007
A Brief Exercise…
• Take a few minutes and try to think of the various categories of expenses your venture will have for the first 12 months or so.
• Income Statement– Definition: Profit or loss of a business over time– Use: Project & monitor profit & so operating efficiency
• Cash Flow Statement– Definition: Tracks the inflows & outflows of cash– Use: Project & monitor the cash available for operations
& growth
• Balance Sheet– Definition: Snapshot of a firm’s wealth – and how it has
funded that wealth– Use: Project & monitor the growth or decline of a firm’s
value/capital - and so potential
Financial statements
+ Net Revenues
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Operating Profit
+/- Other Income/Expenses
= Profit before tax
- Tax
= Profit after tax
Income statement
• Income Statement– Definition: Profit or
loss of a business over time
– Use: Project & monitor profit & so operating efficiency
Income statement
Gross Profit
OperatingProfit
Net Profit
P.A.T.COGS
Op. Exp.
OtherExp. Tax
Revenues
Other Income
Div>CF
R/E>B/S
+ Net Revenues
- Cost of Goods Sold
= Gross Profit
Income statement
• Net Revenues– Sales after discount, less
returns
• Cost of Goods Sold– Direct goods + direct labor per unit sold
• Gross Profit– Amount left to cover operations
• COGS/Sales – Constant or improving as percentage– Perils and pleasures of volume
= Gross Profit
- Operating Expense
= Operating Profit
Income statement
• Operating Expenses– Salaries (benefits, taxes)– Sales & Marketing– General Administration (supplies, IT,
insurance)– Space (rent, maintenance, utilities)– Depreciation (spreading capital
expense over use/ time)– Professional fees
• Operating Profit– Basic measure of success
= Operating Profit
+/- Other Inc or Exp
= Profit before taxes
Income statement
• Other Income– Sidelines (can be very valuable and/or
indicate new businesses or products)– Interest
• Other Expense– Cost of financing, especially interest
on loans– Other miscellaneous expenses
• Profit before Taxes– Net income
= Profit before Taxes
- Income Taxes
= Profit after Taxes
Income statement
• Income Taxes– State and local– Don’t confuse tax management
with management• Profit after Taxes
– Captured wealth– Reinvest (retained earnings) >
B/S– Distribute (dividends) > CF
Account categories that matter
• Revenues– Major lines and/or channels– Other income sources
• COGS– Direct labor, raw materials, subcontracts
• Operating Expenses– Reflect business model: Marketing/Sales, GA– Subdivide important categories; lump together
unimportant ones
• Other Expenses
+ Net Revenues
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Operating Profit
+/- Other Income/Expenses
= Profit before tax
- Tax
= Profit after tax
Account categories exercise
• Planning: What categories should matter?
• Analysis: What categories has management chosen – and what do they tell you?
Cash flow projections
• Cash Flow Statement– Definition: Tracks the
inflows & outflows of cash
– Use: Project & monitor the cash available for operations & growth
+ Revenues- Cost of Goods- Operating Expenses (excluding
depreciation)= Cash flow from operations
+ Investment income- Acquisition of space, r&d,
equipment, etc = Cash flow from investment
+ Equity investment+ Loans- Repayments- Dividends / owner withdrawals= Cash flow from financingCash on Hand – End of Period
Building the cash flow statement
• Inflows– Operating: Adjust revenues for bad debt and timing– Financing: Capital inflows? Loans?
• Outflows– Operating: Inventory purchases– Operating: Operating expenses (without
depreciation), adjusted for timing– Investment: Capital purchases– Financing: Principal repayment, investor
repayment, owner withdrawals
Current AssetsLong-term Assets= Total Assets
Current LiabilitiesLong-term Liabilities= Total Liabilities
Capital InvestmentRetained Earnings= Total Equity
Balance sheet
• Balance Sheet– Definition: Snapshot
of a firm’s wealth – and how it has funded that wealth
– Use: Project & monitor the growth or decline of a firm’s value/ capital - and so potential
A = L + E
• Assets = Wealth = Use of Funds – Cash, loans to customers (A/R), buildings,
equipment, inventory, partnerships– Platform for growth
• Liabilities = LeveragedSource of Funds– Nervous claims on wealth secured by contracts &
collateral such as loans from vendors, banks, other sources, bonds
– Expand possibilities while increasing risk
• Equity = Capital = Invested Source of Funds– More patient claim on wealth secured by control,
especially owners’ capital plus retained profits