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Entrepreneurship Chap 10

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Entrepreneurship Chap 10

  1. 1. HisrichPetersShepherdChapter 10The Financial PlanCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
  2. 2. 10-2The Financial Plan It provides the entrepreneur with acomplete picture of: The amount funds and when they are cominginto the organization. Where funds are going and how much cash isavailable. The projected financial position of the firm. The plan explains how the entrepreneurintends to meet financial obligations andmaintain the venture’s liquidity.
  3. 3. 10-3Operating and Capital Budgets These are developed before developing thepro forma income statement. Sales budget – An estimate of the expectedvolume of sales by month. Cost of sales can be determined from the salesforecasts. In manufacturing ventures, costs of internalproduction and subcontracting are compared. Includes estimated ending inventory required asa buffer.
  4. 4. 10-4Table 10.1 - A Sample ManufacturingBudget for First Three Months
  5. 5. 10-5 Operating costs: Includes fixed expenses incurred regardless ofsales volume. Variable expenses must be linked to strategy inthe business plan. Capital budgets provide a basis forevaluating expenditures that will impact thebusiness for more than one year.Operating and Capital Budgets
  6. 6. 10-6Table 10.2 - A Sample OperatingBudget for First Three Months ($000s)
  7. 7. 10-7Pro Forma Income Statements Pro forma income - Projected net profitcalculated from projected revenue minusprojected costs and expenses. Sales by month is calculated first. Basis of the figures - Marketing research, industrysales, trial experience, forecasting, and financial dataon similar start-ups. Projections of all operating expenses for each ofthe months during the first year should bemade.
  8. 8. 10-8 Increasing selling expenses as sales increaseshould be taken into account. Changes in expenses during the first year cannecessitate month-by-month illustration. Increase in individual expenses need to bereflected in the first year’s pro forma incomestatement. Projections should be made for years 2 and 3 aswell; consider expenses that are likely to remainstable over time.Pro Forma Income Statements (cont.)
  9. 9. 10-9Table 10.3 - MPP Plastics Inc., Pro Forma IncomeStatement, First Year by Month ($000s)
  10. 10. 10-10Pro Forma Cash Flow Projected cash available calculated fromprojected cash accumulations minusprojected cash disbursements. It is not the same as profit. Sales may not be regarded as cash. Use of profit as a measure of success may bedeceiving if there is significant negative cashflow. Cash flow can be projected using the indirect ordirect method.
  11. 11. 10-11Table 10.5 - Statement of CashFlows: The Indirect Method
  12. 12. 10-12 Entrepreneurs must make monthlyprojections of cash. If disbursements are greater than receipts -entrepreneur must either borrow funds or havecash in a bank. Large positive cash flows need to be invested ordeposited in a bank for periods whendisbursements are greater than receipts. Determining the exact monthly receipts anddisbursements is difficult. Pro forma cash flow is based on bestestimates.Pro Forma Cash Flow (cont.)
  13. 13. 10-13Table 10.6 - MPP Plastics Inc., Pro FormaCash Flow, First Year by Month ($000s)
  14. 14. 10-14Pro Forma Balance Sheet Summarizes the projected assets, liabilities,and net worth of the new venture. It is a picture of the business at a certainmoment in time and does not cover a period oftime. Consists of: Assets - Items that are owned or available to be usedin the venture operations; can be current or fixed. Liabilities - Money that is owed to creditors; can becurrent or long-term debt. Owner’s equity - Amount owners have invested and/orretained from the venture operations.
  15. 15. 10-15Table 10.7 - MPP Plastics Inc., Pro FormaBalance Sheet, End of First Year ($000s)
  16. 16. 10-16 Breakeven - Volume of sales where theventure neither makes a profit nor incurs aloss. The break-even formula:B/E(Q) = __________TFC______________SP-VC/unit (marginal contribution) Major weakness in calculating thebreakeven lies in determining if a cost is afixed or variable.Break-Even Analysis
  17. 17. 10-17Figure 10.1 - Graphic Illustration ofBreakeven
  18. 18. 10-18Pro Forma Sourcesand Applications of Funds Sources: Operations. New investments. Long-term borrowing. Sale of assets. Uses/ Applications: Increase assets. Retire long-term liabilities. Reduce owner or stockholders’ equity. Pay dividends.
  19. 19. 10-19Software Packages A spreadsheet program (Microsoft Excel) ismost suitable for completing pro formastatements. Helps present different scenarios and assesstheir impact on the pro forma statements. A simple and easy to use software is usefulin the start-up stage. Software packages vary in price andcomplexity.