Financial Projection

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  • Last week tried to get you to think about who might want the product or service you provide -- and how you might serve them. This week, I will try to help you learn some concepts and tools that will help you think about the competitive context in which you will operate. I want to talk about the industry, the environment in which the industry operates, the structure of the industry itself, and your actual competitors… Next week, we will turn to strategy and business models...
  • We’re in the midst of working on the context of your business -- on the environment, industry, competition -- on what the world gives you to work with. Before this we looked a little at what you bring to the table: your vision, skills, idea, networks. The next step is to combine the two. To take stock of what the world offers and what you bring and to fit them together into a strategy in which you use your strengths to take advantage of opportunities, shore up weaknesses, stave off threats, etc. Your strategy is summarized as a business model -- the gist of your plan to take advantage of an opportunity. This is the heart of your plan. Once you have the model, it’s a matter of working out the details of how you will implement the model. And then reassuring the investors that you’ve thought through the risks.
  • Why three statements? Because cash is not always cash.
  • Allows one to test: Will the firm live long enough to turn a profit? To repay investors? To survive ebbs and flows?
  • Assets platform for growth Liabilities & equity source of capital A = L + E
  • Depreciation Spread expense over time Virtual layaway/savings]
  • Financial Projection

    1. 1. Financial Management for Entrepreneurs I Business Innovation Competition Workshops Innovation & Entrepreneurship Institute
    2. 2. Business plan workshops <ul><li>Idea Creation and Opportunity Assessment </li></ul><ul><ul><li>- February 2 </li></ul></ul><ul><li>Matching Products and Services with Markets </li></ul><ul><ul><li>February 9 </li></ul></ul><ul><li>Competitive Analysis </li></ul><ul><ul><li>February 16 </li></ul></ul><ul><li>Strategy & Business Model </li></ul><ul><ul><li>February 23 </li></ul></ul><ul><li>Marketing and Sales Strategies </li></ul><ul><ul><li>March 2 </li></ul></ul><ul><li>Management & Ownership </li></ul><ul><ul><li>March 16 </li></ul></ul><ul><li>Financial Projections and Funding Strategies </li></ul><ul><ul><li>March 23 </li></ul></ul><ul><li>Professional Presentations </li></ul><ul><ul><li>March 30 </li></ul></ul>
    3. 3. Business plan outline <ul><li>Executive Summary </li></ul><ul><li>Company Description </li></ul><ul><ul><li>Including product/service & technology/core knowledge </li></ul></ul><ul><li>Target Market </li></ul><ul><li>Industry Analysis & Trends </li></ul><ul><li>Competition </li></ul><ul><li>Strategy/Business Model </li></ul><ul><li>Marketing & Sales Sketch </li></ul><ul><li>Production & Operations Sketch </li></ul><ul><li>Development & Milestones </li></ul><ul><li>Basic Financials </li></ul><ul><ul><li>Revenue model </li></ul></ul><ul><ul><li>Rough costs </li></ul></ul><ul><ul><li>Break even </li></ul></ul><ul><li>Appendix </li></ul>
    4. 4. <ul><li>What a firm does, and how, to build and capture wealth for stakeholders. </li></ul><ul><li>Translates strategic position into a business structure and a set of functional strategies. </li></ul><ul><li>Includes a trajectory of growth: </li></ul><ul><ul><li>a timeline, milestones, infusions of capital, growing revenues, growing, changing expenses. </li></ul></ul>Business model
    5. 5. <ul><li>A successful business organizes natural resources, human resources and sweat into product or service plus profit , </li></ul><ul><ul><li>Thus transforming human and natural capital into financial capital., </li></ul></ul><ul><li>One goal of business is to generate wealth and stores it as money, as capital, which can then be rented (lent) or invested to help build more wealth… </li></ul>Alchemy of wealth creation
    6. 6. <ul><li>Cash is not always cash: There is a difference between the cash needed to run a firm and the capital needed to develop it. </li></ul><ul><li>Operating cash is a lubricant that facilitates the exchange of goods and services. </li></ul><ul><ul><li>Successful firms are well lubricated: They cover operations from revenues. </li></ul></ul><ul><li>Capital is stored energy and is used to build capability. </li></ul><ul><ul><li>Capital (from investments and loans) is stored profit from past ventures. This energy from the past helps firms build more rapidly than would be possible with sweat and profit. </li></ul></ul>Capital vs cash
    7. 7. <ul><li>Track the alchemical transformation of labor, land and capital into financial capital. </li></ul><ul><li>Monitor flow of money through a business – as cash and capital. </li></ul><ul><li>Support planning and measure progress. </li></ul><ul><li>Support judgments about the coherence of a business plan. </li></ul><ul><li>Help sell business plans to others. </li></ul>Financial statements & projections
    8. 8. <ul><li>Use standard formats </li></ul><ul><ul><li>With account categories and formats that fit one’s business </li></ul></ul><ul><li>Support numbers with narrative and notes </li></ul><ul><ul><li>Narrative: “After three months of losses, firm A turns profitable; by the end of year, two, firm A should show steady profits of and settles into profits of 10% per year.” </li></ul></ul><ul><ul><li>Notes : Assumptions, caveats, what-ifs. </li></ul></ul><ul><li>Are checked by professionals </li></ul><ul><ul><li>Taxes and acceptability </li></ul></ul>Transparent financial statements
    9. 9. <ul><li>Income Statement </li></ul><ul><ul><li>Definition: Profit or loss of a business over time </li></ul></ul><ul><ul><li>Use: Project & monitor profit & so operating efficiency </li></ul></ul><ul><li>Cash Flow Statement </li></ul><ul><ul><li>Definition: Tracks the inflows & outflows of cash </li></ul></ul><ul><ul><li>Use: Project & monitor the cash available for operations & growth </li></ul></ul><ul><li>Balance Sheet </li></ul><ul><ul><li>Definition: Snapshot of a firm’s wealth – and how it has funded that wealth </li></ul></ul><ul><ul><li>Use: Project & monitor the growth or decline of a firm’s value/capital - and so potential </li></ul></ul>Financial statements
    10. 10. <ul><li>+ Net Revenues </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>= Gross Profit </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>= Operating Profit </li></ul><ul><li>+/- Other Income/Expenses </li></ul><ul><li>= Profit before tax </li></ul><ul><li>- Tax </li></ul><ul><li>= Profit after tax </li></ul>Income statement <ul><li>Income Statement </li></ul><ul><ul><li>Definition: Profit or loss of a business over time </li></ul></ul><ul><ul><li>Use: Project & monitor profit & so operating efficiency </li></ul></ul>
    11. 11. Income statement Gross Profit Operating Profit Net Profit P.A.T . COGS Op. Exp. Other Exp. Tax Revenues Other Income Div>CF R/E>B/S
    12. 12. <ul><li>+ Net Revenues </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>= Gross Profit </li></ul>Income statement <ul><li>Net Revenues </li></ul><ul><ul><li>Sales after discount, less returns </li></ul></ul><ul><li>Cost of Goods Sold </li></ul><ul><ul><li>Direct goods + direct labor per unit sold </li></ul></ul><ul><li>Gross Profit </li></ul><ul><ul><li>Amount left to cover operations </li></ul></ul><ul><li>COGS/Sales </li></ul><ul><ul><li>Constant or improving as percentage </li></ul></ul><ul><ul><li>Perils and pleasures of volume </li></ul></ul>
    13. 13. <ul><li>= Gross Profit </li></ul><ul><li>- Operating Expense </li></ul><ul><li>= Operating Profit </li></ul>Income statement <ul><li>Operating Expenses </li></ul><ul><ul><li>Salaries (benefits, taxes) </li></ul></ul><ul><ul><li>Sales & Marketing </li></ul></ul><ul><ul><li>General Administration (supplies, IT, insurance) </li></ul></ul><ul><ul><li>Space (rent, maintenance, utilities) </li></ul></ul><ul><ul><li>Depreciation (spreading capital expense over use/ time) </li></ul></ul><ul><ul><li>Professional fees </li></ul></ul><ul><li>Operating Profit </li></ul><ul><ul><li>Basic measure of success </li></ul></ul>
    14. 14. <ul><li>= Operating Profit </li></ul><ul><li>+/- Other Inc or Exp </li></ul><ul><li>= Profit before taxes </li></ul>Income statement <ul><li>Other Income </li></ul><ul><ul><li>Sidelines (can be very valuable and/or indicate new businesses or products) </li></ul></ul><ul><ul><li>Interest </li></ul></ul><ul><li>Other Expense </li></ul><ul><ul><li>Cost of financing, especially interest on loans </li></ul></ul><ul><ul><li>Other miscellaneous expenses </li></ul></ul><ul><li>Profit before Taxes </li></ul><ul><ul><li>Net income </li></ul></ul>
    15. 15. <ul><li>= Profit before Taxes </li></ul><ul><li>- Income Taxes </li></ul><ul><li>= Profit after Taxes </li></ul>Income statement <ul><li>Income Taxes </li></ul><ul><ul><li>State and local </li></ul></ul><ul><ul><li>Don’t confuse tax management with management </li></ul></ul><ul><li>Profit after Taxes </li></ul><ul><ul><li>Captured wealth </li></ul></ul><ul><ul><li>Reinvest (retained earnings) > B/S </li></ul></ul><ul><ul><li>Distribute (dividends) > CF </li></ul></ul>
    16. 16. Account categories that matter <ul><li>Revenues </li></ul><ul><ul><li>Major lines and/or channels </li></ul></ul><ul><ul><li>Other income sources </li></ul></ul><ul><li>COGS </li></ul><ul><ul><li>Direct labor, raw materials, subcontracts </li></ul></ul><ul><li>Operating Expenses </li></ul><ul><ul><li>Reflect business model: Marketing/Sales, GA </li></ul></ul><ul><ul><li>Subdivide important categories; lump together unimportant ones </li></ul></ul><ul><li>Other Expenses </li></ul>
    17. 17. <ul><li>+ Net Revenues </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>= Gross Profit </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>= Operating Profit </li></ul><ul><li>+/- Other Income/Expenses </li></ul><ul><li>= Profit before tax </li></ul><ul><li>- Tax </li></ul><ul><li>= Profit after tax </li></ul>Account categories exercise <ul><li>Planning: What categories should matter? </li></ul><ul><li>Analysis: What categories has management chosen – and what do they tell you? </li></ul>
    18. 18. Projections from the bottom up <ul><li>Revenues </li></ul><ul><ul><li>Unit X net price </li></ul></ul><ul><ul><li>Line by line, distribution channel by distribution channel </li></ul></ul><ul><ul><li>Month by month, quarter by quarter, year by year </li></ul></ul><ul><ul><li>Support with evidence and commitments </li></ul></ul><ul><ul><li>Compare: interviews, Morris, S&P, market size </li></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Get prices </li></ul></ul><ul><ul><li>Month by month, quarter by quarter, year by year </li></ul></ul><ul><ul><li>Support with evidence and contracts and price lists </li></ul></ul><ul><ul><li>Compare: interviews , Morris, S&P, source book </li></ul></ul>
    19. 19. <ul><li>+ Net Revenues </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><li>= Gross Profit </li></ul><ul><li>- Operating Expenses </li></ul><ul><li>= Operating Profit </li></ul><ul><li>+/- Other Income/Expenses </li></ul><ul><li>= Profit before tax </li></ul><ul><li>- Tax </li></ul><ul><li>= Profit after tax </li></ul>Revenues exercise <ul><li>Planning: Create structure (assump-tions and process) for your revenue projections. </li></ul><ul><li>Analysis: Critique revenue projections: On what are they based? Do you believe them? What would improve your confidence? </li></ul>
    20. 20. Cash flow projections <ul><li>+ Revenues </li></ul><ul><li>Cost of Goods </li></ul><ul><li>Operating Expenses (excluding depreciation) </li></ul><ul><li>= Cash flow from operations </li></ul><ul><li>+ Investment income </li></ul><ul><li>- Acquisition of space, r&d, equipment, etc </li></ul><ul><li>= Cash flow from investment </li></ul><ul><li>+ Equity investment </li></ul><ul><li>+ Loans </li></ul><ul><li>- Repayments </li></ul><ul><li>- Dividends / owner withdrawals </li></ul><ul><li>= Cash flow from financing </li></ul><ul><li>Cash on Hand – End of Period </li></ul><ul><li>Cash Flow Statement </li></ul><ul><ul><li>Definition: Tracks the inflows & outflows of cash </li></ul></ul><ul><ul><li>Use: Project & monitor the cash available for operations & growth </li></ul></ul>
    21. 21. Three sources of cash <ul><li>+ Revenues </li></ul><ul><li>Cost of Goods </li></ul><ul><li>Operating Expenses (excluding depreciation) </li></ul><ul><li>= Cash flow from operations </li></ul><ul><li>+ Investment income </li></ul><ul><li>- Acquisition of space, r&d, equipment, etc </li></ul><ul><li>= Cash flow from investment </li></ul><ul><li>+ Equity investment </li></ul><ul><li>+ Loans </li></ul><ul><li>- Repayments </li></ul><ul><li>- Dividends / owner withdrawals </li></ul><ul><li>= Cash flow from financing </li></ul><ul><li>Cash on Hand – End of Period </li></ul><ul><li>Operations </li></ul><ul><ul><li>Revenue less cash expenses (ultimately, retained earnings) </li></ul></ul><ul><li>Investments </li></ul><ul><li>Financing </li></ul><ul><ul><li>Loans, equity </li></ul></ul>
    22. 22. Three uses of cash <ul><li>+ Revenues </li></ul><ul><li>Cost of Goods </li></ul><ul><li>Operating Expenses (excluding depreciation) </li></ul><ul><li>= Cash flow from operations </li></ul><ul><li>+ Investment income </li></ul><ul><li>- Acquisition of space, r&d, equipment, etc </li></ul><ul><li>= Cash flow from investment </li></ul><ul><li>+ Equity investment </li></ul><ul><li>+ Loans </li></ul><ul><li>- Repayments </li></ul><ul><li>- Dividends / owner withdrawals </li></ul><ul><li>= Cash flow from financing </li></ul><ul><li>Cash on Hand – End of Period </li></ul><ul><li>Operations </li></ul><ul><ul><li>Cash necessary to operate </li></ul></ul><ul><li>Capacity building </li></ul><ul><ul><li>Cash necessary to build the platform </li></ul></ul><ul><li>Pay back </li></ul><ul><ul><li>Cash necessary to pay lenders, investors, owners </li></ul></ul>
    23. 23. Building the cash flow statement <ul><li>Inflows </li></ul><ul><ul><li>Operating: Adjust revenues for bad debt and timing </li></ul></ul><ul><ul><li>Investment: Any sales of hard assets? </li></ul></ul><ul><ul><li>Financing: Capital inflows? Loans? </li></ul></ul><ul><li>Outflows </li></ul><ul><ul><li>Operating: Inventory purchases </li></ul></ul><ul><ul><li>Operating: Operating expenses (without depreciation), adjusted for timing </li></ul></ul><ul><ul><li>Investment: Capital purchases </li></ul></ul><ul><ul><li>Financing: Principal repayment, investor repayment, owner withdrawals </li></ul></ul>
    24. 24. Avoiding the cash wall <ul><li>Detailed projections </li></ul><ul><ul><li>Routine and extraordinary expenses </li></ul></ul><ul><ul><li>Monthly, even weekly (once operating) </li></ul></ul><ul><li>Careful monitoring </li></ul><ul><li>Calculate burn rate </li></ul><ul><ul><li>Cash outflow per month </li></ul></ul><ul><li>Play with timing </li></ul><ul><ul><li>Delay outflow or accelerate inflow </li></ul></ul><ul><li>Manage expectations </li></ul><ul><li>Negotiate </li></ul>
    25. 25. Cash flow projections exercise <ul><li>+ Revenues </li></ul><ul><li>Cost of Goods </li></ul><ul><li>Operating Expenses (excluding depreciation) </li></ul><ul><li>= Cash flow from operations </li></ul><ul><li>+ Investment income </li></ul><ul><li>- Acquisition of space, r&d, equipment, etc </li></ul><ul><li>= Cash flow from investment </li></ul><ul><li>+ Equity investment </li></ul><ul><li>+ Loans </li></ul><ul><li>- Repayments </li></ul><ul><li>- Dividends / owner withdrawals </li></ul><ul><li>= Cash flow from financing </li></ul><ul><li>Cash on Hand – End of Period </li></ul><ul><li>Planning: List one-time and recurring cash inflows and outflows. Juggle the timing to remain cash positive while growing. </li></ul><ul><li>Analysis: Calculate the cash available for to finance investment, new initiatives, etc. </li></ul>
    26. 26. <ul><li>Current Assets </li></ul><ul><li>Long-term Assets </li></ul><ul><li>= Total Assets </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Long-term Liabilities </li></ul><ul><li>= Total Liabilities </li></ul><ul><li>Capital Investment </li></ul><ul><li>Retained Earnings </li></ul><ul><li>= Total Equity </li></ul>Balance sheet <ul><li>Balance Sheet </li></ul><ul><ul><li>Definition: Snapshot of a firm’s wealth – and how it has funded that wealth </li></ul></ul><ul><ul><li>Use: Project & monitor the growth or decline of a firm’s value/ capital - and so potential </li></ul></ul>
    27. 27. A = L + E <ul><li>Assets = Wealth = Use of Funds </li></ul><ul><ul><li>Cash, loans to customers (A/R), buildings, equipment, inventory, partnerships </li></ul></ul><ul><ul><li>Platform for growth </li></ul></ul><ul><li>Liabilities = Leveraged Source of Funds </li></ul><ul><ul><li>Nervous claims on wealth secured by contracts & collateral such as loans from vendors, banks, other sources, bonds </li></ul></ul><ul><ul><li>Expand possibilities while increasing risk </li></ul></ul><ul><li>Equity = Capital = Invested Source of Funds </li></ul><ul><ul><li>More patient claim on wealth secured by control, especially owners’ capital plus retained profits </li></ul></ul>
    28. 28. <ul><li>Current Assets </li></ul><ul><li>Long-term Assets </li></ul><ul><li>= Total Assets </li></ul>Balance sheet <ul><li>Current Assets </li></ul><ul><ul><li>Cash & similar </li></ul></ul><ul><ul><li>Accounts receivable </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><li>Long-term Assets </li></ul><ul><ul><li>Equipment </li></ul></ul><ul><ul><li>Leasehold Improvements </li></ul></ul><ul><ul><li>Net of depreciation </li></ul></ul>
    29. 29. Uses of cash <ul><li>Payments </li></ul><ul><li>Supporting customers by offering terms </li></ul><ul><li>Inventory </li></ul><ul><li>Investing in capacity: machinery, know-how, new products, partnerships </li></ul><ul><li>Investing in financial instruments </li></ul>
    30. 30. <ul><li>Current Liabilities </li></ul><ul><li>Long-term Liabilities </li></ul><ul><li>= Total Liabilities </li></ul>Balance sheet <ul><li>Current Liabilities </li></ul><ul><ul><li>Accounts payable </li></ul></ul><ul><ul><li>Deposits </li></ul></ul><ul><ul><li>Line of credit </li></ul></ul><ul><ul><li>Current portion of long-term debt </li></ul></ul><ul><li>Long-term Liabilities </li></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Bonds </li></ul></ul>
    31. 31. <ul><li>Capital Investment </li></ul><ul><li>Retained Earnings </li></ul><ul><li>= Total Equity </li></ul>Balance sheet <ul><li>Equity </li></ul><ul><ul><li>Capital Investment </li></ul></ul><ul><ul><li>Additional Paid-in Capital </li></ul></ul><ul><ul><li>Retained Earnings </li></ul></ul>
    32. 32. Sources of cash <ul><li>Initial equity </li></ul><ul><ul><li>owners, family, friends </li></ul></ul><ul><li>Other equity: </li></ul><ul><ul><li>angels, venture firms, partners, public markets </li></ul></ul><ul><li>Informal loans: </li></ul><ul><ul><li>terms from suppliers, customers, landlords, partners </li></ul></ul><ul><li>Traditional loans: </li></ul><ul><ul><li>credit cards, banks, leases, bonds </li></ul></ul><ul><li>Revenues </li></ul><ul><li>Related business income </li></ul><ul><li>Investment income </li></ul>
    33. 33. Matching sources & uses of funds <ul><li>Short-term sources of cash to fund short-term needs </li></ul><ul><ul><li>A/P <> A/R </li></ul></ul><ul><ul><li>Deposits <> inventory </li></ul></ul><ul><li>Long-term sources of cash to fund long-term needs </li></ul><ul><ul><li>Loans for hard assets with collateral </li></ul></ul><ul><ul><ul><li>Mortgage <> building </li></ul></ul></ul><ul><ul><ul><li>Lease <> equipment </li></ul></ul></ul><ul><ul><li>Investments for softer assets like r&d </li></ul></ul><ul><ul><ul><li>Angel <> r&d </li></ul></ul></ul><ul><ul><ul><li>Strategic investor <> new product </li></ul></ul></ul>
    34. 34. Matching sources & uses of funds <ul><li>Farm Example </li></ul><ul><ul><li>Seasonal cash flow – revolving line of credit </li></ul></ul><ul><ul><li>Equipment – leases </li></ul></ul><ul><ul><li>Buildings - mortgages </li></ul></ul><ul><li>Software Application Example </li></ul><ul><ul><li>Personal & angel investment for proof of concept </li></ul></ul><ul><ul><li>Stock options (personal investment) for building core staff </li></ul></ul><ul><ul><li>Venture capital for commercialization and marketing roll out </li></ul></ul><ul><ul><li>Short-term loans for equipment </li></ul></ul><ul><ul><li>Mid-term loans for leasehold improvements </li></ul></ul>
    35. 35. Balance sheet projections: Assets <ul><li>Identify uses of capital: What asset-based capabilities must be built? By when? </li></ul><ul><ul><li>Some -- equipment, initial space, r&d time -- might be necessary just to start </li></ul></ul><ul><ul><li>Some -- inventory, accounts receivable, permanent working capital, expanded space -- might grow in proportion to sales </li></ul></ul><ul><li>Support with evidence </li></ul><ul><li>Compare with others </li></ul><ul><ul><li>Interviews, Morris, S&P </li></ul></ul>
    36. 36. Balance sheet projections: Liabilities & equity <ul><li>Identify sources of capital </li></ul><ul><ul><li>Initial Equity </li></ul></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><ul><li>Eligibility: Credit history, 30% down, collateral (co-sign), unencumbered cash flow. </li></ul></ul></ul><ul><ul><ul><li>Availability: Eligibility, types of businesses. </li></ul></ul></ul><ul><ul><ul><li>Terms, especially cost - interest and collateral - and covenants </li></ul></ul></ul><ul><ul><li>Other equity </li></ul></ul><ul><ul><ul><li>Availability </li></ul></ul></ul><ul><ul><ul><li>Terms, especially control and cash out plans </li></ul></ul></ul><ul><ul><li>Profit </li></ul></ul><ul><ul><ul><li>Retained earnings vs dividends </li></ul></ul></ul>
    37. 37. Balance sheet projections <ul><li>Start with simple Balance Sheet for day 1 </li></ul><ul><ul><li>Assets = cash </li></ul></ul><ul><ul><li>Liabilities & Equity = initial loans and investment </li></ul></ul><ul><li>Sketch changes to get a sense of the end of period balance sheet </li></ul><ul><ul><li>Investments reduce cash but increase fixed assets </li></ul></ul><ul><ul><li>Inventory purchases reduce cash but increase inventory </li></ul></ul><ul><ul><li>Sales increase cash but reduce inventory </li></ul></ul><ul><ul><li>Loan repayments reduce cash and loan balance </li></ul></ul><ul><ul><li>Profit increases retained earnings, losses reduce retained earnings </li></ul></ul>
    38. 38. <ul><li>Current Assets </li></ul><ul><li>Long-term Assets </li></ul><ul><li>= Total Assets </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Long-term Liabilities </li></ul><ul><li>= Total Liabilities </li></ul><ul><li>Capital Investment </li></ul><ul><li>Retained Earnings </li></ul><ul><li>= Total Equity </li></ul>Balance sheet exercise <ul><li>Planning: List necessary assets & timing. Brainstorm possible sources of funds and timing. Match them up. </li></ul><ul><li>Analysis: Are sources and uses of funds well matched? </li></ul>
    39. 39. Tying the statements together <ul><li>Income Statement > Balance Sheet </li></ul><ul><ul><li>Net income less dividends = additional retained earnings on B/S </li></ul></ul><ul><li>Incomes Statement > Cash Flow </li></ul><ul><ul><li>Direct method: All income (adjusted for timing) - all expenses (adjusted for timing) + depreciation = operating cash flow </li></ul></ul><ul><ul><ul><li>(Remember other income/expense and taxes) </li></ul></ul></ul><ul><ul><li>Interest payments provide clues about the loan situation </li></ul></ul>
    40. 40. Tying the statements together <ul><li>Cash Flow > Balance Sheet </li></ul><ul><ul><li>New capital, new loan principal, repaid capital, repaid loan principal, purchases or sales of equipment </li></ul></ul><ul><ul><li>Dividends (which reduce net income’s contribution to retained earnings) </li></ul></ul><ul><li>Cash Flow > Income Statement </li></ul><ul><ul><li>Changes in loans should be reflected in changes in interest </li></ul></ul>
    41. 41. Tying the statements together <ul><li>Balance Sheet > Income Statement </li></ul><ul><ul><li>Change in retained earnings = Net income less dividends </li></ul></ul><ul><li>Balance Sheet > Cash Flow </li></ul><ul><ul><li>Indirect method: Changes in balances (eg., Accounts receivable, accounts payable, etc) are used to calculate changes in cash </li></ul></ul><ul><ul><li>Similarly with changes in investing (equipment, equity) and financing categories (loans) </li></ul></ul>
    42. 42. <ul><li>Don’t Panic! </li></ul><ul><ul><li>Start with a clear picture of your model – of how your business will work in detail </li></ul></ul><ul><ul><li>Collect relevant data: expenses, sources of income, possible investors </li></ul></ul><ul><li>Get help! This is confusing. </li></ul><ul><ul><li>Spreadsheet in lab </li></ul></ul><ul><ul><li>Sample financials on website </li></ul></ul><ul><ul><li>SBDC: 215-204-7282 and www.sbm.temple.edu/%7Esbdc/ </li></ul></ul><ul><ul><li>Accountants, accounting students </li></ul></ul>Building financial statements
    43. 43. <ul><li>Richard A Brealey and Stewart C. Myers, Principles of Corporate Finance (McGraw-Hill, 1996) </li></ul><ul><li>Corporation for Enterprise Development: Financial Management for Entrepreneurs (1995) </li></ul><ul><li>Craig Fleisher & Babetter E. Bensoussan, Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition (Prentice-Hall, 2003) </li></ul><ul><li>TL Hill lectures, 2002 </li></ul><ul><li>Nick Rowling, Commodities: How the World Was Taken to Market (Free Association Books, 1987) </li></ul><ul><li>Clyde Stickney & Roman Weil, Financial Accounting: An Introduction to Concepts, Methods and Uses (Dryden Press/Harcourt Brace College Publishers, 1994) </li></ul><ul><li>G. Straughn & C. Chickadel, Building a Profitable Business (B Adams, 1994) </li></ul>Bibliography

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