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    1. 1. Chapter 10 The Financial Plan References: Hisrich, Peters and Shepherd, Entrepreneurship, 6 th Edition, McGraw-Hill, 2005. Cornwall, Vang and Hartman, Entrepreneurial Financial Management: An Applied Approach, Pearson Prentice-Hall, 2004.
    2. 2. Learning Objectives <ul><li>To understand financial statements </li></ul><ul><li>To understand why positive profits can still result in negative cash flows </li></ul><ul><li>To understand the role of budgets </li></ul><ul><li>To learn to prepare pro forma cash flow, income, balance sheet, and sources and uses of funds statements </li></ul><ul><li>To understand and calculate the breakeven point for new ventures </li></ul>
    3. 3. The Financial Plan <ul><li>Provides a complete picture of: </li></ul><ul><ul><li>How much and where the funds are coming into the organisation </li></ul></ul><ul><ul><li>Where the funds are going </li></ul></ul><ul><ul><li>How much cash is available </li></ul></ul><ul><ul><li>The projected financial position of the firm </li></ul></ul><ul><li>Provides short-term basis for budgeting and help prevent (negative) cash flow problems. </li></ul><ul><li>Explain how the entrepreneur will meet all financial obligations and maintain liquidity, especially in the first three years. </li></ul>
    4. 4. Before developing the pro forma financials: <ul><li>Prepare operating and capital budgets. </li></ul><ul><li>Develop a sales budget. </li></ul><ul><li>Production or manufac- turing budgets will provide a basis for projecting cash flows. Note that: </li></ul><ul><li>Operating budgets focus on operating costs </li></ul><ul><li>( Short term ). </li></ul><ul><li>Capital budgets evaluate expenditures that will impact the business for more than one year </li></ul><ul><li>( Long term ). </li></ul>9-2 McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
    5. 5. Sales Budget <ul><li>Calculate Sales Expectations In Units </li></ul><ul><li>Utilize </li></ul><ul><ul><li>Marketing Research </li></ul></ul><ul><ul><li>Industry Sales </li></ul></ul><ul><ul><li>Experience </li></ul></ul><ul><li>Forecasting Techniques </li></ul><ul><ul><li>Survey of Buyers </li></ul></ul><ul><ul><li>Sales Force Opinions </li></ul></ul><ul><ul><li>Expert Opinions </li></ul></ul><ul><ul><li>Time Series Analysis </li></ul></ul><ul><li>Estimates revenue and costs of these sales, and ending inventory </li></ul>
    6. 6. Production/Manufacturing Budget <ul><li>Basis for projecting cash flows for cost of goods produced </li></ul><ul><li>Includes actual production required each month and needed inventory to respond to changes in demand </li></ul><ul><li>reflects seasonal demand or marketing programs which increases demand and needed inventory </li></ul><ul><li>Important! Since pro forma income statement only reflect the actual costs of goods sold, but not timing of cash receipts or expenses. </li></ul>
    7. 7. Operating and Capital Budgets <ul><li>Operating Budget </li></ul><ul><ul><li>Fixed expenses (incurred regardless of sales volume) include rent, utilities, salaries, interest payments, depreciation and insurance. </li></ul></ul><ul><ul><li>Variable expenses (changes depending on sales volume) e.g. advertising and selling expenses </li></ul></ul><ul><li>Capital Budget </li></ul><ul><ul><li>Expenditures that impact the business long-term, e.g. for more than one year </li></ul></ul><ul><ul><li>Expenditures for new equipment, vehicles, new facilities </li></ul></ul><ul><ul><li>May include cost of capital and return on investments (using present value methods) </li></ul></ul>
    8. 8. Pro Forma Statements <ul><li>Pro Forma Income </li></ul><ul><ul><li>Sales Budget By Month </li></ul></ul><ul><ul><li>Expenses Are Function Of Sales Level </li></ul></ul><ul><li>Pro Forma Cash Flow </li></ul><ul><ul><li>Cash Receipts </li></ul></ul><ul><ul><li>Cash Payments </li></ul></ul><ul><li>Pro Forma Balance Sheet </li></ul><ul><li>Pro Forma Sources & Applications of Funds </li></ul>
    9. 9. Daily Knowledge On Financial Position <ul><li>Cash Balance On Hand </li></ul><ul><li>Bank Balance </li></ul><ul><li>Daily Summaries Of Sales/Cash Receipts </li></ul><ul><li>Problems In Credit Collections </li></ul><ul><li>Record Of Money Paid Out </li></ul>
    10. 10. <ul><li>Slow-Paying Accounts Receivable </li></ul><ul><li>Discounts Offered On Accounts Payable </li></ul><ul><li>Payroll- Hours Worked & Payroll Owed </li></ul><ul><li>Taxes- When Taxes Due & Reports Required </li></ul>Weekly Knowledge On Financial Position
    11. 11. Monthly Knowledge On Financial Position <ul><li>Provide Records </li></ul><ul><ul><li>Receipts </li></ul></ul><ul><ul><li>Disbursements </li></ul></ul><ul><ul><li>Bank Accounts </li></ul></ul><ul><ul><li>Journals </li></ul></ul><ul><li>Review </li></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><li>Reconcile Checking Account </li></ul><ul><li>Balance Petty Cash Account </li></ul><ul><li>Review Tax Requirements & Make Deposits </li></ul><ul><li>Review/Age Accounts Receivable </li></ul>
    12. 12. To prepare a pro forma income statement: <ul><li>Calculate sales by month (main revenue source). </li></ul><ul><ul><ul><li>Based on market research, industry sales, forecasting by surveys, etc. </li></ul></ul></ul><ul><li>Project operating expenses for each month of the 1st year. </li></ul><ul><li>Reference unusual expenses (e.g. trade shows) with an explanation at the bottom. </li></ul><ul><li>Be conservative especially regarding sales. </li></ul><ul><li>Many Internet start-ups have not earned a profit! </li></ul>9-4 McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
    13. 13. MPP Plastics, Inc.: Pro Forma Income Statement, 1 st Year by Month ($000s) *Trade show 0.9 1.35 2.45 2.8 0.3 1.7 2.6 2.6 0.75 (2.4) (5.2) (5.8) Net profit (loss) 0.9 1.35 2.45 2.8 0.3 1.7 2.6 2.6 0.75 0.0 0.0 0.0 Taxes 1.8 2.7 4.9 5.6 0.6 3.4 5.2 5.2 1.5 (2.4) (5.2) (5.8) Profit (loss) before taxes 37.2 35.3 31.1 29.4 33.4 28.6 24.8 24.8 24.5 22.4 21.1 19.8 Total operating expenses 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 <ul><ul><li>Miscellaneous </li></ul></ul>3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 <ul><ul><li>Depreciation </li></ul></ul>1.5 1.5 1.5 1.5 1.5 1.2 1.2 1.2 1.2 1.2 1.2 1.2 <ul><ul><li>Interest </li></ul></ul>2.0 1.9 1.7 1.6 1.6 1.6 1.2 1.2 1.2 1.2 1.1 1.1 <ul><ul><li>Taxes </li></ul></ul>0.6 0.6 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 <ul><ul><li>Insurance </li></ul></ul>1.1 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.4 0.4 0.3 0.3 <ul><ul><li>Utilities </li></ul></ul>3.0 3.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 <ul><ul><li>Rent </li></ul></ul>1.5 1.4 1.2 1.0 1.0 0.9 0.8 0.8 0.8 0.7 0.6 0.6 <ul><ul><li>Office supplies </li></ul></ul>10.0 9.5 8.3 8.0 8.0 8.0 6.8 6.8 6.8 6.8 6.5 6.5 <ul><ul><li>Salaries and wages </li></ul></ul>4.5 4.0 3.5 3.0 7.0* 3.0 2.5 2.5 2.5 1.9 1.8 1.5 <ul><ul><li>Advertising </li></ul></ul>9.5 9.0 8.3 7.8 7.8 7.5 6.0 6.0 6.0 4.6 4.1 3.0 <ul><ul><li>Selling expenses </li></ul></ul>  Operating expenses 39.0 38.0 36.0 35.0 34.0 32.0 30.0 30.0 26.0 20.0 16.0 14.0 Gross profit 76.0 72.0 64.0 60.0 61.0 58.0 50.0 50.0 54.0 40.0 34.0 26.0 <ul><ul><li>Less: cost of goods sold </li></ul></ul>115.0 110.0 100.0 95.0 95.0 90.0 80.0 80.0 80.0 60.0 50.0 40.0 Sales June May Apr Mar Feb Jan Dec Nov Oct Sept Aug July  
    14. 14. Revenue Forecasting <ul><li>Important since many key decisions based on revenue forecasts </li></ul><ul><ul><li>Bank loans, inventory and production decisions, staffing and space requirements, venture capitalists </li></ul></ul><ul><li>Important to link revenue forecasts to marketing plan </li></ul><ul><ul><li>Sales of innovative and/or Internet products may be difficult to project </li></ul></ul><ul><li>Revenue Forecast and Cash Flow Forecast </li></ul><ul><ul><li>Determine if credit is to be extended to customers </li></ul></ul><ul><ul><li>Estimate the percentage of the sales that will be on credit </li></ul></ul><ul><ul><li>Determine how long it will take to collect credit sales </li></ul></ul>
    15. 15. Marketing Plan and Revenue Forecasting <ul><li>Identifying industry and market trends </li></ul><ul><li>Market research </li></ul><ul><li>Competitive analysis </li></ul>Marketing Plan Revenue Forecasts Backbone
    16. 16. Figure 4.3 Sample Competitive Grid Moderate The Largest 7:00 – 9:00 Excellent Your Own Business Low Limited 9:00 – 4:00 Fair Sally & Jim’s Shop High Large 8:00 – 8:00 Excellent Jane’s Inc. Moderate Moderate 8:00 – 6:00 Good Joe’s Inc. Price Selection Hours of Operation Cleanliness of Facilities
    17. 17. Common Forecasting Mistakes <ul><li>The linear forecast mistake </li></ul><ul><li>The hockey stick forecast mistake </li></ul><ul><li>The 20/80 vs. 80/20 mistake </li></ul>
    18. 18. Basic Guidelines for Revenue Forecasts <ul><li>Revenue/Sales estimated using market research, industry sales, trial experience, survey of buyers’ intention or expert opinion </li></ul><ul><li>Market research to assure the quality of the assumptions behind the revenue forecasts </li></ul><ul><li>Validate assumptions with more than one source of data </li></ul><ul><li>Plan based on more conservative assumptions </li></ul><ul><li>Creating scenarios </li></ul><ul><ul><li>Make Three Forecasts </li></ul></ul><ul><ul><li>Best-case </li></ul></ul><ul><ul><li>Worst-case </li></ul></ul><ul><ul><li>Most likely case </li></ul></ul><ul><ul><li>Track Key Assumptions </li></ul></ul>
    19. 19. Impact of Business Type on Revenues <ul><li>Manufacturing firms </li></ul><ul><ul><li>Revenues limited by production capacities </li></ul></ul><ul><ul><li>Time lag between expenses for raw materials and production and cash receivable from goods sold </li></ul></ul><ul><li>Service firms </li></ul><ul><ul><li>Specialist service often billed by the hour or by job </li></ul></ul><ul><ul><li>No employee can physically be 100% involved in billable time </li></ul></ul><ul><ul><li>Specialised skills not easily transferable, thus limiting “capacity” expansion </li></ul></ul><ul><li>Recurring Revenue firms </li></ul><ul><ul><li>Provides service that is used repeatedly, e.g. paging service, Internet access. </li></ul></ul><ul><ul><li>Customer usually signs a term contract, but customer can renege, so full-contract revenues may not be collected ( Disconnect rate) </li></ul></ul><ul><li>Commission-based Selling firms </li></ul><ul><ul><li>Salesperson required to sell a minimum (base) number of units, and receives commission on units sold above the base </li></ul></ul><ul><li>Cyclical/seasonal sales means revenue not sustainable during months with no or low sales! </li></ul>
    20. 20. Cost behavior <ul><li>Variable Costs </li></ul><ul><li>Type of Expense Activity Base </li></ul><ul><li>Sales commissions Sales </li></ul><ul><li>Materials cost Units produced </li></ul><ul><li>Health insurance No. of employees </li></ul><ul><li>Wages expense No. of hours worked </li></ul><ul><li>Payroll tax expense Dollars of wages paid </li></ul><ul><li>Fixed Costs </li></ul>Total Variable Cost Line Total Units Produced $ Total Fixed Costs Total Units Produced $
    21. 21. Impact of Business Type on Expenses <ul><li>Manufacturing firms </li></ul><ul><ul><li>Typical expenses include raw materials, direct labour, overhead, selling and distribution costs (Fixed vs. variable?) </li></ul></ul><ul><ul><li>Selling expenses for achieving sales may be high at start-up </li></ul></ul><ul><li>Service firms </li></ul><ul><ul><li>Salaries and wages one of the most significant expenses </li></ul></ul><ul><ul><li>Standard practice is to pay a fixed salary plus a annual bonus (based on profit!) </li></ul></ul><ul><li>Recurring Revenue firms </li></ul><ul><ul><li>Usually have relatively large expenses at the initialisation of service and somewhat lower recurring expenses as service is provided </li></ul></ul><ul><ul><li>When pursuing growth of customer base, company may experience negative cash flow! High disconnect rate may lead to losses. </li></ul></ul><ul><li>Commission-based Selling firms </li></ul><ul><ul><li>Commission must be set carefully to attract salespersons but still be profitable for company </li></ul></ul>
    22. 22. Cash flow is not the same as profit. Cash flow results from the difference between the actual cash receipts and cash payments. Cash flows only when actual pay- ments are received or made. Sales may or may not result in immediate cash. 9-1 McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
    23. 23. Pro forma cash flow <ul><li>Profit is the result of subtracting expenses from sales </li></ul><ul><li>For credit card sales, a percentage would be paid as fees to credit card company </li></ul><ul><li>Two standard methods for projecting cash flow: </li></ul><ul><li>Indirect method – adjustments made to net income (based on sales) to reflect that actual cash may not have been received or disbursed. </li></ul><ul><li>Direct method – simple determination of cash in less cash out; gives fast indication of the cash position at a point in time </li></ul><ul><li>Important to make monthly projections of cash </li></ul><ul><li>Usually the first few months of start-up will require external cash in order to cover cash outlays. </li></ul>
    24. 24. Cash Flow: (Cash Flow From Operating Activities) <ul><li>Net Income XXX </li></ul><ul><li>Adjustments to NI </li></ul><ul><li>Noncash/Nonoperating Items </li></ul><ul><li>+Depreciation XXX </li></ul><ul><li>Cash Changes in Current Assets/Liabilities </li></ul><ul><li>+/- Accounts Receivable XXX </li></ul><ul><li>+/- Inventory XXX </li></ul><ul><li>+/- Prepaid Expenses XXX </li></ul><ul><li>+/- Accounts Payable XXX </li></ul><ul><li>Net Cash From Operations XX,XXX </li></ul>
    25. 25. Cash Flow: (Cash Flow From Other Activities) <ul><li>Capital Expenditures (-) (XXX) </li></ul><ul><li>Payments of Debt (-) (XXX) </li></ul><ul><li>Dividends Paid (-) (XXX) </li></ul><ul><li>Sale of Stock XXX </li></ul><ul><li>Net Cash From Other Activities (XXX) </li></ul><ul><li>Net Cash From Operations XXX </li></ul><ul><li>Net Cash From Other Activities (XXX) </li></ul><ul><li>Increase/(Decrease) in Cash XXX </li></ul>
    26. 26. MPP Plastics, Inc.: Pro forma cash flow, 1 st Year by Month ($000s) 50.5 46.4 42.45 36.6 28.5 27.9 23.4 15.6 9.0 10.4 56.55 161.9 <ul><ul><li>Ending balance </li></ul></ul>46.4 42.45 36.6 28.5 27.9 23.4 15.6 9.0 10.35 56.55 161.9 275.0 <ul><ul><li>Beginning balance </li></ul></ul>4.0 4.0 5.9 8.1 0.6 4.5 7.8 6.6 (1.35) (46.2) (105.35) (113.1) <ul><ul><li>Cash flow </li></ul></ul>109.0 102.05 92.15 86.9 92.4 81.5 72.2 73.4 73.4 112.2 151.4 137.1 Total disbursements 2.9 2.9 2.9 2.9 2.9 2.6 2.6 2.6 2.6 2.6 2.6 2.6 Loan principal and interest 1.6 1.5 2.3 1.3 1.3 2.2 0.9 0.9 1.8 0.9 0.8 0.8 <ul><ul><li>Taxes </li></ul></ul>0.0 0.0 0.0 0.0 0.5 0.0 0.0 0.4 0.0 0.8 0.8 0.8 <ul><ul><li>Insurance </li></ul></ul>1.1 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.4 0.4 0.3 0.3 <ul><ul><li>Utilities </li></ul></ul>3.0 3.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 <ul><ul><li>Rent </li></ul></ul>1.45 1.3 1.1 1.0 0.95 0.85 0.8 0.8 0.75 0.65 0.6 0.3 <ul><ul><li>Office supplies </li></ul></ul>4.5 4.0 3.5 3.0 7.0 3.0 2.5 2.5 2.5 1.9 1.8 1.5 <ul><ul><li>Advertising </li></ul></ul>10.0 9.5 8.3 8.0 8.0 8.0 6.8 6.8 6.8 6.8 6.5 6.5 <ul><ul><li>Salaries </li></ul></ul>9.25 8.55 8.05 7.8 7.65 6.75 6.0 6.0 5.3 5.35 3.55 1.5 <ul><ul><li>Selling expenses </li></ul></ul>75.2 70.4 63.2 60.2 61.4 55.4 50.0 50.8 51.2 40.8 32.4 20.8 <ul><ul><li>Cost of goods </li></ul></ul>0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40.0 100.0 100.0 <ul><ul><li>Equipment </li></ul></ul>  Disbursements 113.0 106.0 98.0 95.0 93.0 86.0 80.0 80.0 72.0 56.0 46.0 24.0 <ul><ul><li>Sales </li></ul></ul>  Receipts June May Apr Mar Feb Jan Dec Nov Oct Sept Aug July  
    27. 27. Because many of the businesses that fail run out of cash, it is important for the entrepreneur to develop a realistic, pro forma cash flow statement. <ul><li>If disbursements exceed receipts, plan to either borrow funds or tap cash reserves. </li></ul><ul><li>Invest positive cash flows in short term sources. </li></ul><ul><li>Provide different scenarios based on different levels of success. </li></ul>9-3 McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
    28. 28. Pro forma balance sheet <ul><li>Summarizes the assets, liabilities and net worth of the enterprise ---“Snap-shot” view </li></ul><ul><li>Assets: </li></ul><ul><li>Liabilities: </li></ul><ul><li>Owners’ equity : </li></ul><ul><ul><li>Represents the excess of all assets over all liabilities </li></ul></ul><ul><ul><li>Represents the net worth of the company </li></ul></ul><ul><ul><li>Any profit from the business will also be included in the net worth of the company as retained earnings </li></ul></ul><ul><li>The entrepreneur should prepare a projected balance sheet depicting the condition of the business at the end of the first year. </li></ul>
    29. 29. Assets <ul><li>Represents everything of value owned by the business </li></ul><ul><li>Value is not necessarily replacement costs, but actual cost expended for the asset </li></ul><ul><li>Current assets include cash and anything that will be converted into cash within one year (e.g. marketable securities maturing within 90 days) </li></ul><ul><li>Fixed assets are those to be used over a long period of time </li></ul><ul><ul><li>Depreciation is a systematic method of allocating the original cost of a long-term asset to expense over the asset’s expected life. </li></ul></ul><ul><li>Inventory is recorded as an asset until sold </li></ul><ul><ul><li>Upon a sale, inventory account is reduced and expense account (cost of goods sold) is increased. ( FIFO, LIFO and average cost) </li></ul></ul><ul><li>Management of receivables (money owed by customers) is important to cash flow </li></ul>
    30. 30. Pro Forma Balance Sheet <ul><li>Assets </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash $50,400 </li></ul><ul><li>Accounts Receivable 46,000 </li></ul><ul><li>Merchandise Inventory 10,450 </li></ul><ul><li>Supplies 1,200 </li></ul><ul><li>Total Current Assets $108,050 </li></ul><ul><li>Fixed Assets </li></ul><ul><li>Equipment $240,000 </li></ul><ul><li>Less Depreciation 39,600 </li></ul><ul><li>Total Fixed Assets $200,400 </li></ul><ul><li>Total Assets $308,450 </li></ul><ul><li> ======= </li></ul>
    31. 31. Liabilities <ul><li>Represent everything owed to creditors </li></ul><ul><li>Current liabilities are due within one year </li></ul><ul><ul><li>working capital loan to finance inventory build-up in a seasonal business </li></ul></ul><ul><ul><li>Current maturities of long-term debt represent principal payment due within the next year </li></ul></ul><ul><ul><li>Accounts payable are amounts owed to suppliers for goods and services </li></ul></ul><ul><ul><li>Deferred revenues occur when customers pay in advance (products or services are owed the customer) </li></ul></ul><ul><li>Long-term liabilities include long-term bank loans or other debts, bond issues, etc. </li></ul><ul><li>May need to delay payment of bills to effectively manage cash flow </li></ul><ul><li>Working capital refers to the difference between current assets and current liabilities. </li></ul>
    32. 32. <ul><li>Total Liabilities & Owners’ Equity </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Accounts Payable $23,700 </li></ul><ul><li>Current Portion of Long Term Debt 16,800 </li></ul><ul><li>Total Current Liabilities $40,500 </li></ul><ul><li>Long-Term Liabilities </li></ul><ul><li>Notes Payable $209,200 </li></ul><ul><li>Total Liabilities $249,700 </li></ul>Pro Forma Balance Sheet (cont’d)
    33. 33. <ul><li>Owners’ Equity </li></ul><ul><li>C. Peters, Capital $25,000 </li></ul><ul><li>K. Peters, Capital 25,000 </li></ul><ul><li>Retained Earnings 8,700 </li></ul><ul><li>Total Owners’ Equity $58,750 </li></ul><ul><li>Total Liabilities & Owners’ Equity $308,450 </li></ul><ul><li> ======= </li></ul>Pro Forma Balance Sheet (cont’d)
    34. 34. MPP Plastics, Inc.: Pro forma balance sheet, End of 1 st year
    35. 35. Accounting methods <ul><li>Cash basis accounting </li></ul><ul><ul><li>Recognises revenue for goods/services in period when cash is received </li></ul></ul><ul><ul><li>Reports expenses in periods when paid </li></ul></ul><ul><ul><li>Does not adequately match the costs of effort in generating revenues with revenues so generated </li></ul></ul><ul><ul><li>May postpone time when sales recognised </li></ul></ul><ul><li>Accrual basis accounting </li></ul><ul><ul><li>Recognises revenue when goods/services sold, and costs incurred in generating the goods/services expensed in period when revenue recognised </li></ul></ul><ul><ul><li>Better measure of operating performance, since revenues more accurately reflect sales in the period and expenses more closely match revenues generated </li></ul></ul>
    36. 36. Pro forma sources and uses of funds statement <ul><li>Illustrates the disposition of earnings from operations and from financing </li></ul><ul><li>Purpose is to show how income was used </li></ul><ul><li>Typical sources of funds are from operations, new investments, long-term borrowing and sale of assets </li></ul><ul><li>Major use of funds are to increase assets, retire long-term liabilities, reduce owner equity and pay dividends. </li></ul>
    37. 37. Pro Forma Sources & Applications of Funds <ul><li>Sources of Funds </li></ul><ul><li>Mortgage Loan $150,000 </li></ul><ul><li>Term Loan 75,000 </li></ul><ul><li>Personal Funds 50,000 </li></ul><ul><li>Net Income From Operations 8,750 </li></ul><ul><li>Add Depreciation 39,600 </li></ul><ul><li>Total Funds Provided $323,350 </li></ul>
    38. 38. <ul><li>Applications of Funds </li></ul><ul><li>Purchase of Equipment $240,000 </li></ul><ul><li>Inventory 10,450 </li></ul><ul><li>Loan Repayment 16,800 </li></ul><ul><li>Total Funds Expended $267,250 </li></ul><ul><li>Total Funds Provided $323,350 </li></ul><ul><li>Total Funds Expended 267,250 </li></ul><ul><li>Net Increase in Working Capital $56,100 </li></ul><ul><li> ====== </li></ul>Pro Forma Sources & Applications of Funds(cont’d)
    39. 39. Break-even analysis is a technique for determining how many units must be sold in order to break-even. <ul><li>The break-even formula is: </li></ul><ul><li>Break-even is the volume of sales needed to cover total variable and fixed expenses. </li></ul>9-5 McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. B/E(Q) = Total Fixed Cost . Selling Price per Unit – Variable Cost per Unit
    40. 40. Break-Even Graph Break-Even TR = TC
    41. 41. Spreadsheet programs can be used for break-even analysis, constructing pro form financial statements, check writing, payroll, invoicing, inventory management, bill paying, credit management and taxes. <ul><li>Popular packages include “ Quickbooks,” “Peachtree First Accounting,” “MS Financial Manager” and “ Managing Your Money .” </li></ul>9-6 McGraw-Hill/Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

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