The document provides guidance on creating financial projections for a business called Area48. It recommends creating projections for 3-5 years, with the first 2 years projected monthly and subsequent years quarterly or annually. The document reviews terminology used in projections, accounting concepts, and the standard income statement format used to organize projections in a spreadsheet. It also lists common line items to include in projections such as revenues, costs, operating expenses like wages, rent, and marketing.

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