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Financial Projections

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  • 1. FINANCIAL PROJECTIONS  AREA48  July 16, 2013  Sam Buffington, CPA ◦ sambuff@cox.net
  • 2.  Takeaways ◦ Able to do a 3-5 year financial plan – basic version ◦ Years 1 and 2 by month, years 3 thru 5 – quarterly or annually ◦ Keep it simple – just do it – get some help ◦ It makes sense to you
  • 3.  Excel – electronic spreadsheet  Accounting – terms, etc  Review finished product – Excel files ◦ Area48 - example 1.xls ◦ Area48 - example 2.xlsx
  • 4.  Why do we do projections / forecasts? ◦ Need to know where we are headed  Long term – one year  Short term – 6-8 weeks for cash forecast ◦ Need to know how much money we need  “capital required”  “burn rate”  Where are we spending our money (investment)? ◦ It’s important part of business administration – fundamental
  • 5.  Why do we do projections / forecasts? ◦ Must do – startup, early stage, mature businesses ◦ Flows with the record-keeping requirement  Where have we been – historical financial statements  Required to do – no choice  Where are we now – current financial statements  Where will we be in the future ◦ Helpful (necessary) for valuation of your business
  • 6.  Terminology ◦ Budget ◦ Forecast (projections) ◦ Plan (model)
  • 7.  Terminology ◦ Budget  Fixed – doesn’t change  One year period  Measurement tool for management – expected by:  Board  Investors  Bank  Etc.
  • 8.  Terminology ◦ Forecasts  Most current best estimate  Moving periods –  “rolling 12 months”  one year or multi year  Monthly – quarterly – annually  Must have to manage resources, cash, etc.
  • 9.  Terminology ◦ Plans  Business plan  All encompassing  Development, sales and marketing, operations, financial  Financial plan  Part of the “Business Plan”
  • 10.  Accounting Terminology ◦ Accrual basis – use this ◦ Cash basis ◦ Revenues (sales) ◦ Cost of sales ( cost of goods – COG’s) ◦ Gross margin (gross profit) ◦ Operating expenses ◦ Operating income (EBITDA)
  • 11.  Accounting Terminology ◦ Other income and expense  Interest – depreciation - taxes ◦ Net income (bottom line)
  • 12.  Accounting Terminology ◦ Financial statements  Balance sheet - point in time  Income statement – period of time  Statement of cash flows – period of time
  • 13.  Format for forecasting /budgeting ◦ Use “income statement” format ◦ Periods across the top (columns)  Monthly – quarterly - annual ◦ Items down the side (rows) ◦ Use electronic spreadsheet – Excel ◦ This is standard format - do not vary
  • 14. 2013 Revenues: License fees 270,000 Sales 190,000 Total revenue 460,000 Direct costs 75,000 Gross margin 385,000 Operating expenses: Wages and burden 129,790 Travel & lodging 53,000 Trade shows 12,000 Marketing 50,000 Server farms 24,000 Rent 36,000 Other - Misc 30,000 Total operating expenses 334,790 Operating income 50,210 Interest expense 3,500 Depreciation expense 10,000 Net income 36,710
  • 15. Line items to forecast  Revenues ◦ What we sell, when, for how much (to who?)  Cost of revenues ◦ Tied directly to what we sold ◦ “direct costs” – can be goods, services, wages
  • 16. Line items to forecast Operating Expenses  Think through where you are going to spend your money to operate your business  Look at other income statements, forecasts, etc.
  • 17. Line items to forecast Operating Expenses  People costs - salaries and wages – yourself ◦ Remember “payroll burden” – payroll taxes ◦ Benefits? ◦ Commissions?  Rent  Insurance  Professional fees  Marketing
  • 18. Line items to forecast Operating Expenses  T&E  Office supplies  IT costs  Communications