Entrepreneurship (MGT-272)

BBA Program, Session 2k21

Spring’23

Lecture # 12
Financial Forecasting & Statements

1
 Recap: your startup so far

At this stage, while you should be continuing to research and develop this
information, you should be beginning to get a good handle on:

1. The nature of your product/service (seasonality, demand, extent of problem,

etc.)
2. Your target market (customers, size, potential growth, willingness to £)
3. Your core costs (resource-related, activity-related, start-up, ongoing)

You can now start to speculate about how this information *may* interact in a
financial sense – answering the question – “is this start-up idea financially
viable?”
 Where next?

The BMC can help, but it needs to be refined

1. Any new business must figure out the financial case for its business model…
2. This just means trying to create a model for “money out” and “money in” to the
business that works (i.e., one that provides for a profit and sustainably generates
cash).
3. It takes time and effort to identify a model that works.
4. Forecasting allows you to play around with the figures (Money in / money out)
5. You will be developing a FORECAST for your start-up’s business plan
 Financial Statements

Cost structures and revenue streams are not the extent of your start-up’s
discussion of ‘finances’…

To make a compelling financial case for your start-up, you will need to
provide three financial statements:

1. Profit and Loss Statement (Income St.)

2. Cash Flow (Cash Budget)
3. Balance Sheet (St. of Financial Position)
 1. Profit & Loss Statement

Shows sales and costs for the period

Shows profitability or loss for the period

Profit: excess sales revenue over costs incurred

generating that revenue
Gives information: are you going in the right
direction or do you need to take corrective action
(cut costs, increase sales, etc.)

Gross Profit: the profit your start-up makes after

deducting the costs associated with making and
selling its products, or the costs associated with
providing its services.

Net Profit: the actual profit after working expenses

not included in the calculation of gross profit have
been paid
 Key Terms: EBITA

Revenues – COGS = Gross Profit

Gross profit – Fixed Costs = Operating Profit/Net

profit

Another name for Operating Profit is EBITDA

(Earnings Before Interest, Taxes, Depreciation, &
Amortisation)

Interest: interest expenses from loans/borrowing

Depreciation: financial adjustment for spreading

tangible asset costs over lifetime use (e.g.,
vehicles)

Amortisation: financial adjustment for spreading

intangible asset costs over lifetime use (e.g.,
patents)
 1. Profit & Loss Statement

Scenario Planning
Expected Case Best Case Scenario Worst Case
Scenario (£’000s) (£’000s) Scenario (£’000s)
Revenues 100 200 50
Cost of Goods Sold 50 100 25
(Variable/Cogs)
Gross Profit (Revenues – Costs) 50 100 25
Fixed Costs 10 10 10
Total Sales & Marketing Costs
Total General and Admin. Costs 10 10 10
Total Personnel Costs 10 10 10
Total Product Dev. Costs 10 10 10
Total Fixed Costs 40 40 40
EBITDA 10 60 (15)
(Gross Profit- FC)
Interest, Depreciation, and 2 2 2
Amortisation
Net pre-tax Profit (loss) 8 58 (17)
 1. Profit & Loss Statement
3-year Projections
Y1 Y2 Y3
Price (of Units sold) 20 20 20
Volume (of Units sold) 15,000 30,000 45,000
Revenues 300,000 600,000 900,000
Costs
“Buying-in” Price 15 15 15
Cost of Goods Sold (COGS) 225,000 450,000 675,000
Gross Profits (Revenues – COGS) 75,000 150,000 225,000
Fixed Costs
Total Sales & Marketing 33,500 38,000 40,000
Total General Admin 20,000 20,000 20,000
Total Personnel 36,000 36,000 36,000
Total Product Dev. 40,500 10,000 30,000
Total Fixed Costs 130,000 104,000 126,000
EBITDA (55,000) 46,000 99,000
Interest, Depreciation, and Amortisation (4000) (4000) (4000)
Net pre-tax Profit (loss) (59,000) 42,000 95,000
 2. Cash Flow Statement

Cash is King…

Details *only* the economic activities relating to

your business which impact upon the flow of cash
(cash in – cash out)

Profit is not the same as cash – think of it like your

own bank account / a petrol gauge – how much
“cash is in the tank?

Reflects the timing of money in/out – have you

given credit/payment terms to customers?
If negative, things get dicey! Overdraft? Cease
trading?
 2. Cash Flow Statement

Month Month Month Month Month Month Month Month Month Month 10 Month Month Total
1 2 3 4 5 6 7 8 9 11 12

Cash in:
Capital 70,000 0 0 0 0 0 0 0 0 0 0 0 70,000
Revenues: 0 0 0 0 0 0 0 0 40,000 40,000 40,000 40,000 160,000

Total Cash Flow In 70,000 0 0 0 0 0 0 0 40,000 40,000 40,000 40,000 230,000

(a)
Cash out:
COGS 0 0 0 0 0 0 (10,000) (10,000) (10,000) (10,000) (10,000) (10,000) (60,000)
Fixed Costs
T. Sales and MK 0 0 0 0 0 0 0 (10,000) (5000) (5000) (5000) (5000) (30,000)
T. Gen. & Admin (5000) (1000) (1000) (1000) (1000) (1000) (1000) (1000) (1000) (1000) (1000) (1000) (28,000)
T. Personnel (2000) (2000) (2000) (2000) (2000) (2000) (2000) (2000) (2000) (2000) (2000) (2000) (24,000)
T. Product Dev. (3000) (4000) (4000) 0 0 0 0 0 0 0 0 0 (11,000)
Capital Expend. (10,000) 0 0 (15,000) 0 0 0 0 0 0 0 0 (25,000)

Total Cash Flow (20,000) (7000) (7000) (22,000) (3000) (3000) (17,000) (23,000) (18,000) (22,000) (18,000) (18,000 (178,000
out (b) ) )
Starting Cash Flow 70,000 50,000 43,000 36,000 14,000 11,000 8000 (9000) (32,000) (10,000) 8000 30,000 0
Balance

Monthly Net Cash 50,000 (7000) (7000) (22,000) (3000) (3000) (17000) (23,000) 22,000 18,000 22,000 22,000 52,000
Flow (a-b)

Ending Cash 50,000 43,000 36,000 14,000 11,000 8000 (9000) (32,000) (10,000) 8000 30,000 52,000 52,000
Balance
 3. Balance Sheet

Periodic Snapshot, usually yearly which summarises (forecasted) assets and

liabilities of your start-up at that time.

Shows “where money has come from” (e.g., share capital, investment, profit so far)
…and where money went to (fixed assets, debtors, etc.)

Assets and Liabilities?

Fixed assets: Relatively long life and are usually used to produce your goods or
service, instead of being held for resale (e.g., van, warehouse, etc.)
Current assets: Cash or “close to conversion” (e.g., inventory for sale) – usually
forecast to be sold within the year.
Current liabilities: short-term obligations your start-up must meet (usually within 1
year)
Long-term liabilities: longer-term obligations your start-up must meet (mortgage,
etc.)
 3. Balance Sheet

Assets Liabilities
Cash-in-hand 52,000 Current Liabilities 0

Stock 0
Debtors 0 Long-term Liabilities 0
Total Current Assets 52,000 Total Liabilities 0

Fixed Assets 25,000 Owner’s Equity

Depreciation (2250) Capital Intro (Cash Flow) 70,000
Total Fixed Assets 22,750 Profits Retained (P&L) 4,750
Total Equity 74,750
Total Assets 74,750 Total Liabilities & Equity 74,750

Assets (what the start-up owns) = Liabilities (what the start-up owes) + Owner’s Equity
(What it’s worth)
 3. Balance Sheet

Assets Liabilities
Cash-in-hand 84,000 Current Liabilities 0
Stock 0
Debtors 0 Long-term Liabilities 32,000
Total Current Assets 84,000 Total Liabilities 32,000

Fixed Assets 25,000 Owner’s Equity

Depreciation (2250) Capital Intro (Cash Flow) 70,000
Total Fixed Assets 22,750 Profits Retained (P&L) 4,750
Total Equity 74,750
Total Assets 106,750 Total Liabilities & Equity 106,750

Good – the formula still works out ☺

Assets (what the start-up owns) = Liabilities (what the start-up owes) + Owner’s Equity
(What it’s worth)
 Feeling Overwhelmed

Please don’t be…

Think of this as a puzzle, as opposed to hard

mathematics.

All of the assumptions you have made around your

businesses launch and initial operations can be
translated into numerical values – so long as you
justify your decisions we can’t really argue…

Your forecasts will never be 100% accurate – that’s

not their purpose! The primary purpose of a
forecast is to look at possibilities.

After you’ve explored multiple possible futures,

you pick the projection you believe to be most
likely / defendable.
 Some Tips: Mark-up versus Margin

Q: What about Mark-up and/or Margin?

The MARK-UP is the profit made on a sale

relative to the cost price. So if you bought an
item for £9.99 and sold that to the consumer
for £12.99, your mark-up would be 30%.
(£12.99 – £9.99 = £3; so £3 / £9.99 = 30%
mark-up (expressed as a %))

The MARGIN is the profit relative to the

selling price. So if you sold an item to a
consumer for £12.99 and it cost you £9.99,
your profit margin would be 23%. (£12.99 –
£9.99 = £3; so £3 / £12.99 = 23% margin
(expressed as a %)).
 Some Tips: Pricing

Q: We’re struggling with pricing, any advice?

Pricing is a CRITICAL factor in business success or

failure

Often businesses UNDER price themselves, using it

as a competitive advantage.

Some prices can only really be set when you have

the cost information, and you work out what profit
% you want to make on top of that; you also need
to consider the competition – but not necessarily
to undercut, just to be aware (and maybe charge
more)?

Dependent on product/service/industry…
 Some Tips: Market factors

Your market research (whether primary,

secondary, or historical data) is great, but…

You will marry this with assumptions about the

future that you have identified relevant to your
start-up’s launch

A range of internal and external market factors will

be in play in the coming months and years that will
be different from prior periods.

The forecasting process is your chance to identify

them in advance and consider carefully how they
may impact your business.
 Some Tips: Guessing?

It’s very difficult to predict the future but

forecasting is far from PURE guesswork.

The value of a forecast is more than putting a

stake in the ground for how much profit you’ll
have made this time next year.

This process gives you insights into your business

and your strategy that is valuable in and of itself
whether your profit predictions may be true.

It helps you learn - a valuable commodity in

business. Ultimately forecasting isn’t meant to be
a prediction of the future. It’s a tool that informs
your decisions in the now.
 Some Tips: Realism?

Forecasts should be grounded in realistic

assumptions

A seasonal business selling Christmas trees? A

realistic assumption would be that sales increase
in early winter…

Target customers “NBS Students”? A reasonable

assumption would take enrolment #s into account
(e.g., 10k)

It’s up to you to identify these assumptions and

build them into your financial forecasts…
 Conclusion

Forecasts should be underpinned by your

research and group-work.

They should be informed estimates rather than

wild guesswork

For each point of interest in your statements,

explain your assumptions clearly as a preamble
to these statements

These should be part of your “Financials”

section of your business plan, complementing
the statements as a narration