Chapter 16 The Financial Plan Copyright Houghton Mifflin

Chapter 16 The Financial Plan Copyright © Houghton Mifflin Company

Overview • Estimating sales and capital expenditures • Preparing the pro forma income statement • Preparing the pro forma cash flow statement • Preparing the pro forma balance sheet • Ratios to describe the business Copyright © Houghton Mifflin Company 2

Steps in Preparing the Financial Plan Copyright © Houghton Mifflin Company 3

Gather Some Basic Information • Business goals for the next three to five years • Business flowchart showing how the business works • Business timeline with milestones: first customer, multiple customers, multiple products and services Copyright © Houghton Mifflin Company 4

Estimating Sales and Capital Expenditures • What you need – Demand, cost, and operating figures – Forecast purchases and beginning and ending inventories based on sales forecast – For manufacturing, do a production budget – Calculate the fixed and variable operating expenses by month Copyright © Houghton Mifflin Company 5

Pro Forma Income Statement • Reflects the profit and loss status of the business at the end of a specified period • Revenues – COGS = Gross Profit – Expenses = Net Income before taxes • Revenues and expenses recorded when the transaction occurs whether or not money was received or expended • Prepare first to estimate tax liability Copyright © Houghton Mifflin Company 6

Pro Forma Cash Flow Statement • The most important statement for the entrepreneur because cash pays the bills • Records cash inflows and outflows: Inflows – Outflows = Net cash flow • Compares forecasted and actual during the first year to adjust projections • Shows initial capitalization Copyright © Houghton Mifflin Company 7

Pro Forma Balance Sheet • Shows the condition of the business in terms of its assets, liabilities and the net worth of its owners at the end of a specified period • Assets = Liabilities + Owner’s equity Copyright © Houghton Mifflin Company 8

Pro Forma Balance Sheet (cont. ) • Assets include cash, accounts receivables, inventory, and plant and equipment • Liabilities include everything the business owes to creditors • Owner’s equity is the excess after liabilities have been subtracted from assets Copyright © Houghton Mifflin Company 9

Ratios • A way to interpret and compare the information contained in the financial statements • Liquidity ratios provide information about company’s ability to meet short-term obligations • Profitability ratios: profit margin ratio & return on assets • Leverage ratio expresses the degree to which the company relies on debt • Break-even analysis indicates the volume of sales required to make a profit Copyright © Houghton Mifflin Company 10

Financial Plan Outline

Take-Aways • List what students took away from the discussion in real time Copyright © Houghton Mifflin Company 12