ENTREPRENEURIAL FINANCE 9 INAN C IA L S

FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER

CHAPTER 9: LEARNING OBJECTIVES Explain the differences in forecasting sales for seasoned firms versus

SEASONED FIRM FORECASTING FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH

FOUR-STEP PROCESS TYPICALLY USED TO FORECAST SALES FOR SEASONED FIRMS. 1. forecast future growth

EARLY-STAGE FORECASTING FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH &

KNOCKING BACK THOSE GROWTH RATES FI H FT E T DI IO N ENTREPRENEURIAL

THREE STEPS TYPICALLY USED TO FORECAST SALES FOR EARLY-STAGE VENTURES 1. An estimate is

SUSTAINABLE SALES GROWTH RATES Internally Generated Funds: Net income or profits after taxes earned

SUSTAINABLE SALES GROWTH RATES FI H FT E T DI IO N ENTREPRENEURIAL FINANCE:

ADDITIONAL FINANCING NEEDED Financing Capital Needed (FCN): financial funds needed to acquire assets necessary

ADDITIONAL FUNDS NEEDED Additional Funds Needed (AFN): gap remaining between the financial capital needed

AFN EQUATION FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH &

AFN CALCULATION EXAMPLE Sales last year = $1, 600, 000 Fixed Assets = $480,

PROJECTING FINANCIAL STATEMENTS Financial Forecasting Process To Project Financial Statements 1. Forecast sales 2.

PROJECTED INCOME STATEMENTS FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH

PROJECTED BALANCE SHEETS FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH

PROJECTED STATEMENTS OF CASH FLOW FI H FT E T DI IO N ENTREPRENEURIAL

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FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER

CHAPTER 9: LEARNING OBJECTIVES Explain the differences in forecasting sales for seasoned firms versus early-stage firms Understand the concept of sustainable sales growth rate Connect sales growth rates to the amount and timing of additional funds needed Describe the percent-of-sales method for preparing financial plans Understand the process of identifying the quantity and timing of additional funds needed to support the venture’s sales forecasts FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 3

SEASONED FIRM FORECASTING FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 4

FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER

FOUR-STEP PROCESS TYPICALLY USED TO FORECAST SALES FOR SEASONED FIRMS. 1. forecast future growth rates based upon multiple scenarios and their likelihoods 2. check the results of the first step with industry growth rates and expected market shares – the “top-down” or “market-sharedriven” approach to projecting growth rates 3. refine the sales forecast using direct contact with existing and potential customers – the “bottom-up” or “customer-driven” approach to projecting growth rates 4. consider the likely impact of major strategic changes including changes in pricing policy, credit policies, marketing approach and R&D developments and strategy. FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 6

EARLY-STAGE FORECASTING FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 7

KNOCKING BACK THOSE GROWTH RATES FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 8

FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER

THREE STEPS TYPICALLY USED TO FORECAST SALES FOR EARLY-STAGE VENTURES 1. An estimate is made of what the overall industry or market demand is likely to be next year and over the following four years. 1. The second step is to estimate a market share that the venture believes it could attain. 2. The third step should be an attempt to further refine the sales forecast by working with existing and potential customers. FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 10

SUSTAINABLE SALES GROWTH RATES Internally Generated Funds: Net income or profits after taxes earned over an accounting period Sustainable Sales Growth Rate: Rate at which a firm can grow sales based on the retention of profits in the business FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 11

SUSTAINABLE SALES GROWTH RATES FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 12

SUSTAINABLE SALES GROWTH RATES FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 13

FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER

ADDITIONAL FINANCING NEEDED Financing Capital Needed (FCN): financial funds needed to acquire assets necessary to support a firm’s sales growth Spontaneously Generated Funds: increases in accounts payables and accruals (wages and taxes) that occur with a sales increase FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 15

ADDITIONAL FUNDS NEEDED Additional Funds Needed (AFN): gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings, or, AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 16

AFN EQUATION FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 17

AFN CALCULATION EXAMPLE Sales last year = $1, 600, 000 Fixed Assets = $480, 000 Asset investment = $1, 000 Accounts Payable = $48, 000 Net Income = $160, 000 Projected next year sales = $2, 080, 000 Current Assets = $520, 000 FI H FT E T DI IO Accrued Liabilities = $32, 000 N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 18

FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER

PROJECTING FINANCIAL STATEMENTS Financial Forecasting Process To Project Financial Statements 1. Forecast sales 2. Project income statement 3. Project balance sheet 4. Project statement of cash flows FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 21

PROJECTED INCOME STATEMENTS FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 22

PROJECTED BALANCE SHEETS FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 23

PROJECTED STATEMENTS OF CASH FLOW FI H FT E T DI IO N ENTREPRENEURIAL FINANCE: LEACH & MELICHER 24