The Financial Plan Part 1: Projecting Financial Requirements

Part 3 Developing the New Venture Business Plan

PowerPoint Presentation by Charlie Cook The University of West Alabama
Copyright 2006 Thomson Business & Professional Publishing. All rights reserved.

Understanding Financial Statements

Income Statement
A report showing the profit or loss from a firms operations over a given period of time. How profitable is the business? Sales Expenses = Profits
Revenue from product or service sales
Costs of producing product or service (cost of goods sold) Operating expenses (marketing, selling, general and administrative expenses, and depreciation)

Financing costs (interest paid)

Tax payments

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The Balance Sheet

Balance Sheet
A report showing a firms assets, liabilities, and owners equity at a specific point in time Total Assets = Outstanding debt + Owners equity

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Balance Sheets for Petri & Associates Leasing, Inc., for December 31, 2004 and 2005

Exhibit 10.4
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Profits Versus Cash Flows

Accrual-Basis Accounting
A method of accounting that matches revenues when they are earned against the expenses associated with those revenues
Sales reflect both cash and credit (noncash) sales Inventory purchased on credit is a noncash expense Depreciation is a noncash expense Income tax is accrued and may not be entirely expensed

Cash-Basis Accounting
A method of accounting that reports transactions only when cash is received or a payment is made
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The Fit of the Income Statement and the Balance Sheet

Exhibit 10.5
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The Cash Flow Statement

Cash Flow Statement
A financial report showing a firms income (cash) when it is received and expenses when they are paid.
Cash flows from normal operations (operating activities) Cash flows related to the investment in or sale of assets (investment activities) Cash flows related to financing the firm (financing activities)

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Financial Forecasting
Pro Forma Financial Statements
Statements that project a firms financial performance and condition Purposes of pro forma statements:
How profitable can the firm be expected to be, given the projected sales levels and the expected sales expense relationships? What will determine the amount and type of financing (debt or equity) to be used? Will the firm have adequate cash flows? If so, how will they be used; if not, where will the additional cash come from?

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Assets-to-Sales-Financing Relationships

Exhibit 10.9
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Good Forecasting Requires Good Judgment

Practical Suggestions
Develop realistic sales projections. Build projections from clear assumptions about marketing and pricing plans. Do not use unrealistic profit margins. Dont limit your projections to an income statement. Provide monthly data for the upcoming year and annual data for succeeding years. Avoid providing too much financial information. Be certain that the numbers reconcileand not by simply plugging in a figure. Follow the plan.
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