2. The Financial Plan
It provides the entrepreneur with a complete picture of:
The amount funds and when they are coming into the organization.
Where funds are going and how much cash is available.
The projected financial position of the firm.
The plan explains how the entrepreneur intends to meet
financial obligations and maintain the venture’s liquidity.
3. Operating and Capital Budgets
These are developed before developing the pro forma income
statement.
Sales budget – An estimate of the expected volume of sales by month.
Cost of sales can be determined from the sales forecasts.
In manufacturing ventures, costs of internal production and
subcontracting are compared.
Includes estimated ending inventory required as a buffer.
4. Table 10.1 - A Sample Manufacturing Budget for First
Three Months
5. Operating and Capital Budgets
Operating costs
Includes fixed expenses incurred regardless of sales volume.
Variable expenses must be linked to strategy in the business
plan.
Capital budgets provide a basis for evaluating
expenditures that will impact the business for more
than one year.
6. Table 10.2 - A Sample Operating Budget for First
Three Months ($000s)
7. Pro Forma Income Statements
Pro forma income - Projected net profit calculated from projected
revenue minus projected costs and expenses.
Sales by month is calculated first.
Basis of the figures - Marketing research, industry sales, trial
experience, forecasting, and financial data on similar start-ups.
Projections of all operating expenses for each of the months during
the first year should be made.
8. Pro Forma Income Statements (cont.)
Increasing selling expenses as sales increase should be taken into
account.
Changes in expenses during the first year can necessitate month-
by-month illustration.
Increase in individual expenses need to be reflected in the first
year’s pro forma income statement.
Projections should be made for years 2 and 3 as well; consider
expenses that are likely to remain stable over time.
9. Table 10.3 - MPP Plastics Inc., Pro Forma Income
Statement, First Year by Month ($000s)
10. Pro Forma Cash Flow
Projected cash available calculated from projected cash
accumulations minus projected 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 be deceiving if there is
significant negative cash flow.
Cash flow can be projected using the indirect or direct method.
11. Table 10.5 - Statement of Cash Flows: The
Indirect Method
12. Pro Forma Cash Flow (cont.)
Entrepreneurs must make monthly projections of cash.
If disbursements are greater than receipts - entrepreneur must either
borrow funds or have cash in a bank.
Large positive cash flows need to be invested or deposited in a bank for
periods when disbursements are greater than receipts.
Determining the exact monthly receipts and disbursements is difficult.
Pro forma cash flow is based on best estimates.
13. Table 10.6 - MPP Plastics Inc., Pro Forma
Cash Flow, First Year by Month ($000s)
14. Pro Forma Balance Sheet
Summarizes the projected assets, liabilities, and net worth of the new
venture.
It is a picture of the business at a certain moment in time and does not
cover a period of time.
Consists of:
Assets - Items that are owned or available to be used in the venture
operations; can be current or fixed.
Liabilities - Money that is owed to creditors; can be current or long-term
debt.
Owner’s equity - Amount owners have invested and/or retained from
the venture operations.
15. Table 10.7 - MPP Plastics Inc., Pro Forma
Balance Sheet, End of First Year ($000s)
16.
17. Break-Even Analysis
Break-even analysis allows an entrepreneur to know how
much profit he can earn at different sales volumes. Any sales
volume or number of units sold exceeding the break
even point will result to a profit.
18. Formula of breakeven point
The break-even formula:
B/E(Q) = __________TFC______________
SP-VC/unit (marginal contribution)
Major weakness in calculating the breakeven lies in determining if a
cost is a fixed or variable.
20. Pro Forma Sources and 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.
21. Software Packages
A spreadsheet program (Microsoft Excel) is most suitable for
completing pro forma statements.
Helps present different scenarios and assess their impact on the pro forma
statements.
A simple and easy to use software is useful in the start-up stage.
Software packages vary in price and complexity.
22. Break even analysis for decision
making
Breakeven (or CVP) analysis is about understanding the
relationship between price, volume and costs.
23. Break even analysis for decision making
price is how much we sell our goods and services for
volume is the quantity that we sell
costs are what it costs to do that.
We can make more effective financial decisions if we understand how they
change in relation to one another.
24. Break even analysis for decision making
There are three simple steps to use breakeven analysis to
understand your financials.
The first is to classify your costs according to how they
behave (are they fixed or variable).
The second is to calculate what your breakeven is,
The third is to use this information as a tool to make better
business decisions whether you are setting sales prices,
managing costs or planning for profit.
26. Break even analysis for decision making
Fixed costs are those that occur regardless of whether you
make a sale. They are things that are needed in order to
operate the business. Examples of fixed costs are insurance,
wages & salaries, rent or advertising costs.
Variable costs are those that occur in making a sale, and they
rise in proportion to our sales. Examples of variable costs
include the direct labour and materials used in providing the
goods or services, commissions, packaging, royalties, or
merchant fees.
27. Break even analysis for decision making
Once you understand your costs – you can
work out your breakeven point.
Your breakeven represents the point at which you have no net loss or
profit. It’s the point at which you will start making a profit once your sales exceed
your breakeven.
28. Break even analysis for decision making
Calculate your variable cost percentage. Variable cost percentage is the
% of each sale that goes to covering your variable costs. Variable Cost
Percentage = Variable Costs / Sales
Use this to calculate your contribution margin. This is how much you
have left over from each dollar of sales to cover your fixed costs and
generate a profit. Contribution Margin = 100% – Variable Cost
Percentage
Calculate your breakeven point by dividing your fixed costs by your
contribution margin. Breakeven Point = Fixed Costs / Contribution
Margin
29. Break even analysis for decision making
Example
If you are a business with a turnover of $500,000 of which you
have fixed costs of $250,000 and variable costs of $100,000 –
Variable Cost Percentage = $100,000 / $500,000 = 20%
Contribution Margin = 100% – 20% = 80%
Breakeven Point = $250,000 / 80% = $312,500
30. Break even analysis for decision making
The third step is to use this information as a tool to make
better business decisions whether you are setting sales prices,
managing costs or planning for profit.
From here you can start looking at modelling how changes affect your bottom line. We will use the
figures in our example earlier to look at a few different scenarios you might want to use breakeven
analysis for!
31. Break even analysis for decision making
What if I want to work out the sales required to meet a profit target?
To calculate the total sales required given a profit target you can use the
following formula –
Target Sales = Fixed Costs + Target Profit / Contribution Margin
For instance, if you want to make a profit of $250,000 –
Target Sales = ($250,000 + $250,000) / 80% = $625,000
