10-2The Financial Plan It provides the entrepreneur with acomplete picture of: The amount funds and when they are cominginto the organization. Where funds are going and how much cash isavailable. The projected financial position of the firm. The plan explains how the entrepreneurintends to meet financial obligations andmaintain the venture’s liquidity.
10-3Operating and Capital Budgets These are developed before developing thepro forma income statement. Sales budget – An estimate of the expectedvolume of sales by month. Cost of sales can be determined from the salesforecasts. In manufacturing ventures, costs of internalproduction and subcontracting are compared. Includes estimated ending inventory required asa buffer.
10-4Table 10.1 - A Sample ManufacturingBudget for First Three Months
10-5 Operating costs: Includes fixed expenses incurred regardless ofsales volume. Variable expenses must be linked to strategy inthe business plan. Capital budgets provide a basis forevaluating expenditures that will impact thebusiness for more than one year.Operating and Capital Budgets
10-6Table 10.2 - A Sample OperatingBudget for First Three Months ($000s)
10-7Pro Forma Income Statements Pro forma income - Projected net profitcalculated from projected revenue minusprojected costs and expenses. Sales by month is calculated first. Basis of the figures - Marketing research, industrysales, trial experience, forecasting, and financial dataon similar start-ups. Projections of all operating expenses for each ofthe months during the first year should bemade.
10-8 Increasing selling expenses as sales increaseshould be taken into account. Changes in expenses during the first year cannecessitate month-by-month illustration. Increase in individual expenses need to bereflected in the first year’s pro forma incomestatement. Projections should be made for years 2 and 3 aswell; consider expenses that are likely to remainstable over time.Pro Forma Income Statements (cont.)
10-9Table 10.3 - MPP Plastics Inc., Pro Forma IncomeStatement, First Year by Month ($000s)
10-10Pro Forma Cash Flow Projected cash available calculated fromprojected cash accumulations minusprojected cash disbursements. It is not the same as profit. Sales may not be regarded as cash. Use of profit as a measure of success may bedeceiving if there is significant negative cashflow. Cash flow can be projected using the indirect ordirect method.
10-11Table 10.5 - Statement of CashFlows: The Indirect Method
10-12 Entrepreneurs must make monthlyprojections of cash. If disbursements are greater than receipts -entrepreneur must either borrow funds or havecash in a bank. Large positive cash flows need to be invested ordeposited in a bank for periods whendisbursements are greater than receipts. Determining the exact monthly receipts anddisbursements is difficult. Pro forma cash flow is based on bestestimates.Pro Forma Cash Flow (cont.)
10-13Table 10.6 - MPP Plastics Inc., Pro FormaCash Flow, First Year by Month ($000s)
10-14Pro Forma Balance Sheet Summarizes the projected assets, liabilities,and net worth of the new venture. It is a picture of the business at a certainmoment in time and does not cover a period oftime. Consists of: Assets - Items that are owned or available to be usedin the venture operations; can be current or fixed. Liabilities - Money that is owed to creditors; can becurrent or long-term debt. Owner’s equity - Amount owners have invested and/orretained from the venture operations.
10-15Table 10.7 - MPP Plastics Inc., Pro FormaBalance Sheet, End of First Year ($000s)
10-16 Breakeven - Volume of sales where theventure neither makes a profit nor incurs aloss. The break-even formula:B/E(Q) = __________TFC______________SP-VC/unit (marginal contribution) Major weakness in calculating thebreakeven lies in determining if a cost is afixed or variable.Break-Even Analysis
10-18Pro Forma Sourcesand Applications of Funds Sources: Operations. New investments. Long-term borrowing. Sale of assets. Uses/ Applications: Increase assets. Retire long-term liabilities. Reduce owner or stockholders’ equity. Pay dividends.
10-19Software Packages A spreadsheet program (Microsoft Excel) ismost suitable for completing pro formastatements. Helps present different scenarios and assesstheir impact on the pro forma statements. A simple and easy to use software is usefulin the start-up stage. Software packages vary in price andcomplexity.