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Chapter 6 - Financial Planning: Long-Term and Short-Term

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Chapter 6 - Financial Planning: Long-Term and Short-Term

  1. 1. Chapter 6 FINANCIAL PLANNING: LONG-TERM AND SHORT-TERM © 2003 South-Western College Publishing ENTREPRENEURIAL FINANCE Leach & Melicher
  2. 2. CHAPTER 6: LEARNING OBJECTIVES <ul><li>Understand the concept of a sustainable sales growth rate </li></ul><ul><li>Understand the process of identifying when and how much additional funds will be needed to support the venture’s sales forecasts </li></ul><ul><li>Develop an understanding of the impact of varying sales growth rates on the amount and timing of additional funds needed </li></ul>
  3. 3. CHAPTER 6: LEARNING OBJECTIVES <ul><li>Describe the percent of sales method for preparing long-term financial plans </li></ul><ul><li>Explain why projected statements of cash flows are important to the entrepreneur </li></ul><ul><li>Describe how projected statements of cash flow relate to cash budgets </li></ul>
  4. 4. VENTURE LIFE CYCLE DEVELOPMENT STAGE STARTUP STAGE SURVIVAL STAGE LIQUIDATE RESTRUCTURE RAPID GROWTH STAGE GO PUBLIC SELL OR MERGE MATURITY STAGE
  5. 5. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS <ul><li>Development Stage: </li></ul><ul><li>Screen Business Ideas </li></ul><ul><li>Prepare Business Plan </li></ul><ul><li>Obtain Seed Financing </li></ul><ul><li>Startup Stage: </li></ul><ul><li>Choose Organizational Form </li></ul><ul><li>Prepare Initial Financial Statements </li></ul><ul><li>Obtain First Round Financing </li></ul>
  6. 6. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS <ul><li>Survival Stage: </li></ul><ul><li>Monitor Financial Performance </li></ul><ul><li>Project Cash Needs </li></ul><ul><li>Obtain First Round Financing </li></ul><ul><li>>Possible Actions: Liquidate v. Restructure </li></ul><ul><li>Rapid Growth Stage: </li></ul><ul><li>Create and Build Value </li></ul><ul><li>Obtain Additional Financing </li></ul><ul><li>Examine Exit Opportunities </li></ul><ul><li>>Possible Actions: Go Public v. Sell/Merge </li></ul>
  7. 7. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS <ul><li>Maturity Stage: </li></ul><ul><li>Manage Ongoing Operations </li></ul><ul><li>Maintain and Add Value </li></ul><ul><li>Obtain Seasoned Financing </li></ul>
  8. 8. FORECASTING SALES OR REVENUES <ul><ul><ul><li>Forecasting for Early Stage Ventures: Firms that are in either </li></ul></ul></ul><ul><ul><ul><li>their development, startup, or survival stage, or just entering </li></ul></ul></ul><ul><ul><ul><li>into their rapid growth stage of their life cycle. </li></ul></ul></ul><ul><ul><ul><li>Industry Probability of Sales Component </li></ul></ul></ul><ul><ul><ul><li>Sales Scenario Occurrence Growth Rate Weight </li></ul></ul></ul><ul><ul><ul><li>Optimistic forecast .30 X 60% = 18.0% </li></ul></ul></ul><ul><ul><ul><li>Most likely forecast .40 X 50% = 20.0% </li></ul></ul></ul><ul><ul><ul><li>Pessimistic forecast .30 X 40% = 12.0% </li></ul></ul></ul><ul><ul><ul><li> 1.00 Expected Value = 50.0% </li></ul></ul></ul>
  9. 9. ESTIMATING SUSTAINABLE SALES GROWTH RATES <ul><li>Internally Generated Funds: Net income or profits after taxes earned over an accounting period </li></ul><ul><li>Sustainable Sales Growth Rate: Rate at which a firm can grow sales based on the retention of profits in the business </li></ul>
  10. 10. ESTIMATING SUSTAINABLE SALES GROWTH RATES
  11. 11. ESTIMATING SUSTAINABLE SALES GROWTH RATES
  12. 12. ESTIMATING SUSTAINABLE SALES GROWTH RATES
  13. 13. ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH <ul><li>Financing Capital Needed (FCN): financial funds needed to acquire assets necessary to support a firm’s sales growth </li></ul><ul><li>Spontaneously Generated Funds: increases in accounts payables and accruals (wages and taxes) that occur with a sales increase </li></ul>
  14. 14. ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH <ul><li>Additional Funds Needed (AFN): financial funds still needed to finance asset growth after spontaneously generated funds and any increase in retained earnings have been used </li></ul><ul><li>AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings </li></ul>
  15. 15. AFN EQUATION
  16. 16. AFN CALCULATIONS <ul><li>Sales last year = $1,600,000 </li></ul><ul><li>Asset investment = $1,000,000 </li></ul><ul><li>Net Income = $160,000 </li></ul><ul><li>Current Assets = $520,000 </li></ul><ul><li>Fixed Assets = $480,000 </li></ul><ul><li>Accounts Payable = $48,000 </li></ul><ul><li>Accrued Liabilities = $32,000 </li></ul><ul><li>Projected next year sales = $2,080,000 </li></ul>
  17. 17. AFN CALCULATIONS
  18. 18. PROJECTING OR FORECASTING FINANCIAL STATEMENTS <ul><li>Percent of Sales Method: make projections based on the assumption that certain costs and selected balance sheet items are best expressed as a percentage of sales </li></ul><ul><li>Constant Ratio Method: variant of the percent of sales method that projects selected cost and balance items at the same growth rate as sales </li></ul>
  19. 19. PROJECTING OR FORECASTING FINANCIAL STATEMENTS <ul><li>FINANCIAL FORECASTING PROCESS TO PROJECT FINANCIAL STATEMENTS </li></ul><ul><li>1. Forecast sales </li></ul><ul><li>2. Project income statement </li></ul><ul><li>3. Project balance sheet </li></ul><ul><li>4. Project statement of cash flows </li></ul>
  20. 20. GAME TOY INCOME STATEMENTS (2001 Actual, 2002 Projected)
  21. 21. GAME TOY BALANCE SHEETS (2001 Actual, 2002 Projected)
  22. 22. SHORT-TERM CASH PLANNING TOOLS <ul><li>Sales Schedule </li></ul><ul><li>Purchase Schedule </li></ul><ul><li>Wages and Commission Schedule </li></ul><ul><li>Cash Budget </li></ul>
  23. 23. PDC COMPANY OPERATING & CASH BUDGET
  24. 24. PDC COMPANY OPERATING & CASH BUDGET
  25. 25. PDC COMPANY OPERATING & CASH BUDGET
  26. 26. PDC COMPANY OPERATING & CASH BUDGET
  27. 27. PDC COMPANY OPERATING & CASH BUDGET

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