Financials: Creating Projections


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An overview of financial statements, how they are compiled, and how projections are prepared.

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Financials: Creating Projections

  1. 1. Creating/Understanding Financial Statements Elia Freedman
  2. 2. Overview <ul><li>Three core components </li></ul><ul><ul><li>Income Statement (Profit and Loss) </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Cash Flow Statement </li></ul></ul><ul><li>Constructing Financials </li></ul>
  3. 3. Income Statement (IS) <ul><li>Measures company performance over a time period </li></ul><ul><li>Includes Income and Expenses </li></ul><ul><li>Answers… </li></ul><ul><ul><li>Am I making money? </li></ul></ul><ul><ul><li>How are resources managed? </li></ul></ul>
  4. 4. Income Statement Sample Period From XXX to YYY ($ in thousands) $1,500 Research and Development $600 General and Administrative $1,900 Sales and Marketing Operating Expenses $480 Net Income $320 Other Expense $10 Other Income $800 EBITDA $4,000 Total Operating Expenses $4,800 Gross Margin $200 Cost of Goods Sold $5,000 Net Revenue
  5. 5. IS: Net Revenue <ul><li>Revenue recognized when goods are shipped or payment received </li></ul><ul><li>Net Revenue equals </li></ul><ul><ul><li>Gross Revenue </li></ul></ul><ul><ul><li>– Returns and Allowances </li></ul></ul><ul><ul><li>– Bad Debts </li></ul></ul><ul><ul><li>– Discounts </li></ul></ul>
  6. 6. IS: Cost of Goods Sold (COGS) <ul><li>COGS relate to revenues: the goods sold during that period </li></ul><ul><li>COGS equals </li></ul><ul><ul><li>Retailers/Wholesalers: price paid for goods sold </li></ul></ul><ul><ul><li>Manufacturers: cost to manufacture goods </li></ul></ul><ul><ul><li>Service/Professional Companies: none </li></ul></ul><ul><ul><li>Web services/Software download: none </li></ul></ul>
  7. 7. IS: Operating Expenses <ul><li>Operating Expenses equals </li></ul><ul><ul><li>Expenses from Sales/Marketing (S/M) </li></ul></ul><ul><ul><li>Expenses from Research/Development (R/D) </li></ul></ul><ul><ul><li>Expenses from General/Administrative (G/A) </li></ul></ul><ul><li>S/M: costs to sell and market </li></ul><ul><li>R/D: costs to create </li></ul><ul><li>G/A: other costs (overhead) </li></ul>
  8. 8. IS: Other Income/Expenses <ul><li>Other Income </li></ul><ul><ul><li>Income from outside of normal business </li></ul></ul><ul><ul><li>Examples: interest income, dividend income, capital gains </li></ul></ul><ul><li>Other Expenses </li></ul><ul><ul><li>Expenses from outside normal business </li></ul></ul><ul><ul><li>Examples: unexpected losses (write-downs), interest payments, taxes </li></ul></ul>
  9. 9. Balance Sheet (BS) <ul><li>Snapshot of company at a point in time </li></ul><ul><li>Includes Assets, Liabilities, Owner’s Equity </li></ul><ul><li>Answers: </li></ul><ul><ul><li>What are my assets? </li></ul></ul><ul><ul><li>Which assets are cash or nearly cash? </li></ul></ul><ul><ul><li>How much of the assets are owned by debtors (liabilities) v. (owner’s) equity holders? </li></ul></ul><ul><ul><li>What liabilities are due soon? </li></ul></ul><ul><li>ASSETS MUST EQUAL LIABILITIES + OWNER’S EQUITY </li></ul>
  10. 10. Balance Sheet Sample $6,550 Total Liabilities + Owner’s Equity As Of XXX ($ in thousands) $6,550 Total Assets $50 Long-Term Assets $250 Inventory $3,300 Owner’s Equity $1,750 Long-Term Debt $1,500 Payables Liabilities + Owner’s Equity $1,250 Receivables $5,000 Cash Assets
  11. 11. BS: Assets <ul><li>Assets have the ability to generate cash </li></ul><ul><li>Cash: actual cash on hand </li></ul><ul><li>Receivables: cash due to you for previous period sales </li></ul><ul><li>Inventory: inventory on-hand </li></ul><ul><li>Depreciable Assets: assets that are being depreciated (equipment, servers, etc.) </li></ul>
  12. 12. BS: Liabilities <ul><li>Liabilities are debt claims against assets </li></ul><ul><li>Payables: cash owed to others near-term </li></ul><ul><ul><li>Accounts Payable </li></ul></ul><ul><ul><li>Payroll Taxes Payable </li></ul></ul><ul><ul><li>Taxes Payable </li></ul></ul><ul><li>Long-Term Debt: loan amounts outstanding </li></ul>
  13. 13. BS: Owner’s Equity <ul><li>O.E. is owner’s interest in the assets </li></ul><ul><li>Owner’s Equity equals </li></ul><ul><ul><li>Begin Retained Earnings </li></ul></ul><ul><ul><li>+ Net Income: from the income statement </li></ul></ul><ul><ul><li>– Dividends: paid during the period </li></ul></ul><ul><ul><li>= End Retained Earnings </li></ul></ul><ul><ul><li>+ Capital Stock: from previous periods </li></ul></ul><ul><ul><li>+ Paid-In Capital: new capital sold </li></ul></ul>
  14. 14. Cash Flows (CF) <ul><li>Tracks cash changes from one period to another (CASH IS KING!) </li></ul><ul><li>Includes cash from operations, investment and financing </li></ul><ul><li>Answers: </li></ul><ul><ul><li>Where did cash come from? </li></ul></ul><ul><ul><li>Where did cash go? </li></ul></ul>
  15. 15. Cash Flow Sample Operations ($1,200) Inventory ($50) Depreciation ($2,300) Payables $5,000 Ending Cash Period From XXX to YYY ($ in thousands) $300 Cash from Operations ($1,750) Long-Term Debt $0 Cash from Investing $200 Cash from Financing $800 Receivables $4,800 Net Income $4,500 Beginning Cash
  16. 16. CF: Operations <ul><li>Cash from operating the business </li></ul><ul><li>Calculate difference in each account </li></ul><ul><ul><li>(Current Period – Last Period) </li></ul></ul><ul><li>Calculate Cash Flow from Operations </li></ul><ul><ul><li>Net Income </li></ul></ul><ul><ul><li>– Asset Accounts (excluding cash) </li></ul></ul><ul><ul><li>+ Liability Accounts </li></ul></ul>
  17. 17. CF: Financing <ul><li>Cash from debt, equity and dividends </li></ul><ul><ul><li>Add inflows of cash </li></ul></ul><ul><ul><li>Subtract outflows of cash </li></ul></ul><ul><li>Examples: </li></ul><ul><ul><li>Borrow or payback money </li></ul></ul><ul><ul><li>Issue or buy company stock </li></ul></ul><ul><ul><li>Pay dividends </li></ul></ul>
  18. 18. CF: Investing <ul><li>Cash from buying, selling or paying for assets </li></ul><ul><ul><li>Add inflows of cash </li></ul></ul><ul><ul><li>Subtract outflows of cash </li></ul></ul><ul><li>Examples </li></ul><ul><ul><li>Sell or buy equipment, land or buildings </li></ul></ul><ul><ul><li>Lend money, receive loan payments </li></ul></ul><ul><ul><li>Buy, sell cash equivalents </li></ul></ul>
  19. 19. Tying It All Together Income Statement Net Income Cash Flows Beg Cash Net Income Operations End Cash Balance Sheet Cash Assets Liabilities Owner’s Equity
  20. 20. Building the Projections
  21. 21. Assumptions $100 $500 $100 $40 $2,000 $.30 Dollars … Employee Taxes , % gross pay Entertainment , per employee/month Travel , per employee/month Telephones , per employees/month Web site , per month x customers Rents , per month x employees Support personnel , 1 per Credit card fees 2.5% 10,000 11% 11 7,500 % Units
  22. 22. Payroll Q1…Q20 Mnth 1 M2… Total Headcount Total Net Payroll Taxes and Benefits Total Gross Payroll General & Administrative Research & Development Director, Marcom VP Sales and Marketing Sales and Marketing Y1…Y5 M60
  23. 23. Non-Payroll Expenses Q1…Q20 Mnth 1 M2… Total Web Site Telephone General & Administrative Research & Development Professional Fees Travel Advertising Sales and Marketing Y1…Y5 M60
  24. 24. Revenue <ul><li>Assumptions </li></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Market Data </li></ul></ul><ul><ul><li>Adoption </li></ul></ul><ul><li>Revenue Projections </li></ul><ul><ul><li>Same layout as expense projections </li></ul></ul>
  25. 25. Financials Q1…Q20 Mnth 1 M2… Balance Sheet Cash Flow Statement Income Statement Y1…Y5 M60
  26. 26. Questions/Next Session/Contact <ul><li>Elia Freedman </li></ul><ul><li> </li></ul>