Entrepreneurship financial plan

1. Financial plan
financial plan
“Projections of key financial data that determine economic feasibility and necessary financial investment
commitment”.
Generally, three financial areas are discussed in this section of the business plan. First, the entrepreneur should
summarize the forecasted sales and the appropriate expenses for at least the first three years, with the first year’s
projections provided monthly. The form for displaying this information is illustrated in Chapter 10. It includes the
forecasted sales, cost of goods sold, and the general and administrative expenses. Net profit after taxes can then be
projected by estimating income taxes.
The second major area of financial information needed is cash flow figures for at least three years, although
sometimes investors may want to see five-year projections. The first year of projections, however, should be on a
monthly basis. Since bills have to be paid at different times of the year, it is important to determine the demands on
cash on a monthly basis, especially in the first year. Remember that sales may be irregular, and receipts from
customers also may be spread out, thus necessitating the borrowing of short-term capital to meet fixed expenses
such as salaries and utilities.
The last financial item needed in this section of the business plan is the projected balance sheet. This shows the
financial condition of the business at a specific time. It summarizes the assets of a business, its liabilities (what is
owed), the investment of the entrepreneur and any partners, and retained earnings (or cumulative losses).

2. • OPERATING AND CAPITAL BUDGETS
Before developing the pro forma income statement, the entrepreneur should prepare
operating and capital budgets. If the entrepreneur is a sole proprietor, then he or she is
responsible for the budgeting decisions. In the case of a partnership, or where employees exist,
the initial budgeting process may begin with one of these individuals, depending on his or her
role in the venture. For example, a sales budget may be prepared by a sales manager, a
manufacturing budget by the production manager, and so on. Final determination of these
budgets will ultimately rest with the owners or entrepreneurs.
• FORECASTING SALES
As stated earlier, there are many different methods for projecting sales, some very quantitative
and some more qualitative. Most start-ups would not likely use any of the quantitative
techniques but would rely on more qualitative methods. Our focus here will be to try to
understand how to project sales simply and reasonably using more qualitative methods.
To begin with, the entrepreneur should research everything he or she can find about other
start-ups in the same industry. Reviewing their experience can often provide reasonable
expectations for early sales. Local chambers of commerce, or any other business organization,
may provide contacts and information on what might be expected in first year sales. No matter
what approach entrepreneurs use, they must be aware that sales estimates may be wrong. As a
result, it is sometimes beneficial for the entrepreneur to provide sales estimates at different
levels of activity.

3. • PRO FORMA INCOME
“Projected net profit calculated from projected revenue minus projected costs and expenses”.
In preparation of the pro forma income statement, sales by month must be calculated first. The pro forma
income statements also provide projections of all operating expenses for each of the months during the year.
• PRO FORMA CASH FLOW
“Projected cash available calculated from projected cash accumulations minus projected cash disbursements”
Cash flow is not the same as profit. Profit is the result of subtracting expenses from sales, whereas cash flow
results from the difference between actual cash receipts and cash payments. Cash flows only when actual
payments are received or made. For example, if someone owes you $100 for work you completed you have
earned that amount as income. If you wanted to spend this $100 at the supermarket you would have to get
them to let you buy on credit (you would owe them the amount of the groceries) or you would pay with a
credit card. The fact is that at that point you have income of $100 (no cash yet) and expenses of $100 (not yet
paid in cash). Similarly, for a business, sales may not be regarded as cash since it is common for buyers to have
at least 30 days to make the payment.
• PRO FORMA BALANCE SHEET
Summarizes the projected assets, liabilities, and net worth of the new venture. The pro forma balance sheet
reflects the position of the business at the end of the first year. It summarizes the assets, liabilities, and net
worth of the entrepreneurs. In other words, it tells the entrepreneur a measure of the company’s solvency.

4. Each of the categories is explained here:
Assets
“Items that are owned or available to be used in the venture operations”
These represent everything of value that is owned by the business. Value is not necessarily
meant to imply the cost of replacement or what its market value would be but is the actual
cost or amount expended for the asset. The assets are categorized as current or fixed.
Current assets include cash and anything else that is expected to be converted into cash or
consumed in the operation of the business during a period of one year or less. Fixed assets
are those that are tangible and will be used over a long period of time.
Liabilities
“Money that is owed to creditors”
These accounts represent everything owed to creditors. Some of these amounts may be
due within a year (current liabilities), and others may be long-term debts.
Owner equity
“The amount owners have invested and/or retained from the venture operations”
This amount represents the excess of all assets over all liabilities. It represents the net
worth of the business.

5. • PRO FORMA SOURCES AND APPLICATIONS OF FUNDS
Summarizes all the projected sources of funds available to the venture
and how these funds will be disbursed. Its purpose is to show how net
income and financing were used to increase assets or to pay off debt. It
is often difficult for the entrepreneur to understand how the net
income for the year was disposed of and the effect of the movement of
cash through the business.

6. Source Of Capital
• Debt or Equity Financing
There are two general types of financing available: debt financing and equity financing.
debt financing
“Obtaining borrowed funds for the company”
Debt financing is a financing method involving an interest-bearing instrument, usually
a loan, the payment of which is only indirectly related to the sales and profits of the
venture. Typically, debt financing (also called asset-based financing) requires that some
asset (such as a car, house, inventory, plant, machine, or land) be used as collateral.
Debt financing requires the entrepreneur to pay back the amount of funds borrowed
as well as a fee usually expressed in terms of the interest rate. There can also be an
additional fee, sometimes referred to as points, for using or being able to borrow the
money. If the financing is short term (less than one year), the money is usually used to
provide working capital to finance inventory, accounts receivable, or the operation of
the business.

7. Equity financing
“Obtaining funds for the company in exchange for ownership”
Equity financing does not require collateral and offers the investor some form of ownership position in
the venture. The investor shares in the profits of the venture, as well as any disposition of its assets on a
pro rata basis based on the percentage of the business owned. Key factors favoring the use of one type
of financing over another are the availability of funds, the assets of the venture, and the prevailing
interest rates. Frequently, an entrepreneur meets financial needs by employing a combination of debt
and equity finance.
• Internal or External Funds
Financing also can come from both internal and external funds.
The funds most frequently employed are internally generated funds. Internally generated funds can
come from several sources within the company: profits, sale of assets, reduction in working capital,
extended payment terms, and accounts receivable. In every new venture, the start-up years usually
involve putting all, or at least most of the profits back into the venture; even outside equity investors do
not expect any payback in these early years.
The other general source of funds is external to the venture. Alternative sources of external financing
need to be evaluated on three bases: the length of time the funds are available, the costs involved, and
the amount of company control lost. The more frequently used sources of funds (self, family and friends,
commercial banks, private investors (angels), R&D limited partnerships, government loan programs and
grants, venture capital, and private placement).

8. • PERSONAL FUNDS
Few, if any, new ventures are started without the personal funds of the entrepreneur. Not
only are these the least expensive funds in terms of cost and control, but they are
absolutely essential in attracting outside funding, particularly from banks, private investors,
and venture capitalists. Often referred to as blood equity, the typical sources of personal
funds include savings, life insurance, or mortgage on a house or car. These outside
providers of capital feel that the entrepreneur may not be sufficiently committed to the
venture if he or she does not have money invested.
• COMMERCIAL BANKS
Commercial banks are by far the source of short-term funds most frequently used by the
entrepreneur when collateral is available. The funds provided are in the form of debt
financing and, as such, require some tangible guaranty or collateral—some asset with
value. This collateral can be in the form of business assets (land, equipment, or the building
of the venture), personal assets (the entrepreneur’s house, car, land, stock, or bonds), or
the assets of the cosigner of the note.
• Types of Bank Loans
There are many types of bank loans available. To help ensure repayment, these loans are
based on the assets or the cash flow of the venture. The asset base for loans is usually
accounts receivable, inventory, equipment, or real estate. Sometimes the assets of the
entrepreneur or an investor are used when the venture does not have enough.

9. Accounts Receivable Loans
“Tangible collateral valued at more than the amount of money borrowed”
Accounts receivable provide a good basis for a loan, especially if the customer base is
well known and creditworthy. For those creditworthy customers, a bank may finance
up to 80 percent of the value of their accounts receivable.
Inventory Loans
Inventory is another of the firm’s assets that can often be the basis for a loan,
particularly when the inventory is more liquid and can be easily sold. Usually, the
finished goods inventory can be financed for up to 50 percent of its value
Equipment Loans
Equipment can be used to secure longer-term financing, usually on a 3- to 10-year
basis. Equipment financing can fall into any of several categories: financing the
purchase of new equipment, financing used equipment already owned by the
company, sale-leaseback financing, or lease financing. When new equipment is being
purchased or presently owned equipment is used as collateral, usually 50 to 80
percent of the value of the equipment can be financed depending on its salability.

10. Real Estate Loans
Real estate is also frequently used in asset-based financing. This
mortgage financing is usually easily obtained to finance a company’s
land, plant, or another building, often up to 75 percent of its value.
conventional bank loan
Standard way banks lend money to companies

11. GROWTH STRATEGIES
These growth strategies are
(1) penetration strategies,
(2) market development strategies,
(3) product development strategies,
(4) diversification strategies.
Penetration Strategies
“A strategy to grow by encouraging existing customers to buy more of the firm’s current
products”
A penetration strategy focuses on the firm’s existing product in its existing market. The
entrepreneur attempts to penetrate this product or market further by encouraging
existing customers to buy more of the firm’s current products. Marketing can be effective
in encouraging more frequent repeat purchases. For example, a pizza company engages in
an extensive marketing campaign to encourage its existing customer base of university
students to eat its pizza three nights a week rather than only twice a week.

12. Market Development Strategies
“Strategy to grow by selling the firm’s existing products to new groups
of customers”
Growth also can occur through market development strategies. Market
development strategies involve selling the firm’s existing products to
new groups of customers. New groups of customers can be categorized
in terms of geographic or demographics and/or on the basis of new
product use.
1) New Geographical Market
This simply refers to selling the existing product in new locations.
2)New Demographic Market
Demographics are used to characterize (potential) customers based
upon their income, location, education, age, sex, and so on.

13. Product Development Strategies
“A strategy to grow by developing and selling new products to people who
are already purchasing the firm’s existing products”
Product development strategies for growth involve developing and selling
new products to people who are already purchasing the firm’s existing
products. Experience with a particular customer group is a source of
knowledge on the problems customers have with existing technology and
ways in which customers can be better served. This knowledge is an
important resource in coming up with a new product.
Diversification Strategies
“A strategy to grow by selling a new product to a new market”
Diversification strategies involve selling a new product to a new market.
Even though both knowledge bases appear to be new, some diversification
strategies are related to the entrepreneur’s (and the firm’s) knowledge. In
fact, there are three types of related diversification that are best explained
through a discussion of the value-added chain.

14. 1. backward integration
A step back (up) in the value-added chain toward the raw materials
2. forward integration
A step forward (down) on the value-added chain toward the customers