Part III – Developing the

Entrepreneurial Plan
Chapter 7 – Environmental Assessment:
Preparation for a New Venture
Chapter 8 – Marketing Research for
New Ventures
Chapter 9 – Financial Preparation for
Entrepreneurial Ventures
Chapter 10 – Developing an Effective
Business Plan

Copyright (c) 2004 by South-Western, a division of Thomson Learning. All rights reserved.
Chapter 9 – Financial Preparation
For Entrepreneurial
Ventures
 The Importance of
Financial Information for
Entrepreneurs
 Significant Information for
Financial Management
• The importance of ratio analysis in planning
• Techniques and uses of projected financial
statements
• Techniques and approaches for designing a
cash-flow schedule
• Techniques and approaches for evaluating the
capital budget
 The Balance Sheet
Represents the financial condition of a
company at a certain date. It details the
items the company owns (assets) and the
amount the company owes (liabilities).
It also shows the net worth of the
company and its liquidity.

Assets = Liabilities + Owners Equity

 The Income Statement
Commonly referred to as the P & L
(profit and loss) statement, which
provides the owner/manager with
the results of operations.
Statement of Cash Flow
An analysis of the cash
availability and cash needs of
the business.
 Preparing Financial Statements
One of the most powerful tools the entrepreneur
can use in planning financial operations is a
budget. The operating budget is a statement
of estimated income and expenses over a
specified period of time. The cash budget is a
statement of estimated cash receipts and
expenditures over a specified period of time.
The capital budget is used to plan
expenditures on assets whose returns are
expected to last beyond one year.
 The Operating Budget
• Typically, the first step in creating an operating budget is the
preparation of the sales forecast. An entrepreneur can
prepare the sales forecast in several ways. One way is to
implement a statistical forecasting technique such as simple
linear regression.

Y = a + bx
• Y is a dependent variable (it is dependent on the values of a,
b, and x), x is an independent variable (it is not dependent on
any of the other variables), a is a constant (in regression
analysis, Y is dependent on the variable x, all other things
held constant), and b is the slope of the line (the change in Y
divided by the change in x).
 The Cash-Flow Budget
The first step in the preparation of the
cash-flow budget is the
identification and timing of the cash
inflows. For the typical business,
cash inflows will come from three
sources: (1) cash sales, (2) cash
payments received on account, and
(3) load proceeds.
 Pro Forma Statements
Pro forma statements are projections
of a firm’s financial position over a
future period (pro forma income
statement) or on a future date (pro
forma balance sheet).
 Capital Budgeting
The first step in capital budgeting is to identify the
cash flows and their timing. The inflows, or returns
as they are commonly called, are equal to net
operating income before deduction of payments to
the financing sources but after the deduction of
applicable taxes and with depreciation added back,
as represented by the following formula:

Expected Returns = X(1 – T) + Depreciation

Payback Method
In this method the length of time
required to “pay back” the original
investment is the determining
criterion.
 Net Present Value (NPV method)
The concept works on the premise that a
dollar today is worth more than a dollar
in the future. The cost of capital is the
rate used to adjust future cash flows to
determine their value in present period
terms. This procedure is referred to as
discounting the future cash flows, and
the discounted cash value is determined
by the present value of the cash flow.
 Internal Rate of Return (IRR method)
This method is similar to the net present
value method in that the future cash
flows are discounted. However, they are
discounted at a rate that makes the net
present value of the project equal
to zero.
Break-Even Analysis
 Contribution Margin Approach
• The difference between the selling price and the
variable cost per unit. It is the amount per unit that
is contributed to covering all other costs.

0 = (SP –VC)S – FC or FC = (SP – VC)S

where
SP = Unit selling price
VC = Variable cost per unit
S = Sales in units
FC = Fixed cost
 Graphic Approach
The entrepreneur needs to graph at least
two numbers: total revenue and total
costs. The intersection of these two lines
(that is, where total revenues are equal to
the total costs) is the firm’s break-even
point. Two additional
costs – variable costs and fixed
costs – also may be plotted.
 Goodman Industries: Graphic Break-Even
Projected
Costs/Profits
$000

8
7
Sales
6 Total
Cost
5
Variable
4
3
2
Fixed
1
0
100 200 300 400 500
Unit Sales
Balance Sheet Ratios
Current Assets
Current
Current Liabilities

Cash + Accounts
Quick Receivable
Current Liabilities
Income Statement Ratios
Gross Margin
Gross Margin
Sales

Net Profit
Net Margin before Tax
Sales
 Overall Efficiency Ratios
Sales
Sales-to-Assets
Total Assets

Net Profit
Return on Assets before Tax
Total Assets

Net Profit
Return on Investment before Tax
Net Worth
 Specific Efficiency Ratios
Cost of Goods Sold
Inventory Turnover
Inventory

360
Inventory turn-days
Inventory Turnover

Accounts Receivable Sales

Turnover Accounts Receivable
 Specific Efficiency Ratios
Average Collection 360
Period Accounts Receivable
Turnover

Accounts Payable Cost of Goods Sold

Turnover Accounts Payable

Accounts Receivable 360

Turnover Accounts Receivable
Turnover