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  1. 1. Financial Projections
  2. 2. Financial Statements <ul><li>Numerical representations of what the business is physically doing. </li></ul><ul><li>In the case of a start-up business, the are projections of what the owners anticipate the business will do over the period of a year or two. </li></ul>
  3. 3. Pro Forma Statements <ul><li>Financial statements for a start up business </li></ul><ul><li>Anticipated financial performance </li></ul>
  4. 4. Income Statement <ul><li>Shows how much money the organization has earned during the accounting period. </li></ul><ul><li>A pro forma income statement shows how much money the company expects to earn over the next year. </li></ul>
  5. 5. Sample Income Statement <ul><li>Sales $10,000 </li></ul><ul><li>Costs of Goods Sold 7000 </li></ul><ul><li>Gross Margin $3000 </li></ul><ul><li>Expenses 2400 </li></ul><ul><li>Earnings Before Interest & Taxes $600 </li></ul><ul><li>Interest Expense 70 </li></ul><ul><li>Earnings Before Tax $530 </li></ul><ul><li>Tax 170 </li></ul><ul><li>Net Income $360 </li></ul>
  6. 6. Income Does Not Equal Profits <ul><li>Income (sales) is the amount of money that comes into the business </li></ul><ul><li>It is reduced by such things as accounts receivable and depreciation </li></ul><ul><li>A positive number here is no guarantee that you will have enough money to meet your monthly expenses. </li></ul>
  7. 7. The Balance Sheet <ul><li>Lists everything the business owns and everything it owes at a given moment in time. </li></ul><ul><li>Divided into two columns: On one side is Assets and on the other is Liabilities </li></ul><ul><li>Assets= Liabilities + Equity </li></ul>
  8. 8. Cash Flow Statement <ul><li>Analyzes where money has come from and gone to. </li></ul><ul><li>Shows cash flow from: operating, investing, and financing </li></ul>
  9. 9. Break Even Analysis <ul><li>Looks at costs to determine the volume of business necessary to break even in terms of profit and loss </li></ul><ul><li>Will also consider the amount of sales dollars needed to break even </li></ul>
  10. 10. Break Even Calculation <ul><li>Determine the number of sales that will be made during the fiscal year </li></ul><ul><li>Estimate the average dollars per sale </li></ul><ul><li>Multiply the # of sales by the price per sale to arrive at a sales volume </li></ul>
  11. 11. Fixed Costs <ul><li>Also called “overhead” </li></ul><ul><li>A cost that doesn’t change as the level of sales change </li></ul><ul><li>Examples: Rent, utilities, phone bills, insurance, loan payments, and sometimes payroll </li></ul><ul><li>Most of your expenses will be fixed </li></ul>
  12. 12. Variable Costs <ul><li>Costs that do change as the level of sales change </li></ul><ul><li>For example, in a restaurant: food, liquor </li></ul>
  13. 13. Exceptions <ul><li>Some items don’t fit readily into one category. </li></ul><ul><li>For example. Full time management salaries will be fixed costs but part-timers may work only as needed, a variable cost. </li></ul><ul><li>Regardless, all costs must be separated into the fixed or variable category </li></ul>
  14. 14. Interest Expense <ul><li>Determine the amount of money borrowed and the interest rate </li></ul><ul><li>Multiply the amount of the loan by the interest rate to get the amount of interest paid during the first year in business. </li></ul>
  15. 15. Depreciation <ul><li>The full purchase price of capital equipment cannot be deducted from taxes in the year the purchase was made. The value must be “depreciated” over a number of years until the “capital asset” is deemed to be of no value. </li></ul>
  16. 16. Cash Flow Analysis <ul><li>Depreciation, owner contribution , amount borrowed and interest paid will be factored together with sales, fixed costs and variable costs the arrive at a cash flow projection </li></ul>
  17. 17. Don’t write in the Gray Space <ul><li>Gray spaces contain formulas </li></ul><ul><li>Simply fill in the data in the white spaces and the calculations will be made automatically. </li></ul>
  18. 18. Financing the Business <ul><li>Equity funding </li></ul><ul><li>Money invested by owners </li></ul><ul><li>Debt funding </li></ul><ul><ul><li>Money that is borrowed and must be repaid </li></ul></ul>
  19. 19. Equity Funding <ul><li>Management Team </li></ul><ul><li>Cash </li></ul><ul><li>Property </li></ul><ul><li>Other Owners </li></ul><ul><li>People who buy into the partnership </li></ul><ul><li>People who buy stock </li></ul>
  20. 20. Debt Funding <ul><li>Borrowed and must be repaid with interest </li></ul><ul><ul><li>Loans from banks </li></ul></ul><ul><ul><li>Loans from family and friends </li></ul></ul><ul><ul><li>Loans from government agencies </li></ul></ul><ul><ul><li>Credit cards </li></ul></ul><ul><ul><li>Loans from owners that must be repaid with interestDid you have to raise or lower your original price estimates based on the break-even analysis? Did you have to reduce expenses? Did you have to borrow more or less money? </li></ul></ul>