Financial Planning

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 Outline for financial plan
 Bases for Financial Assumptions
 12 Month Projected Cash Flow Statement;
 3 Year Projected Cash Flow Statement;
 3 Year Projected Income Statement;
 3 Year Projected Balance Sheet;
 Break even analysis in units and sales.

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 Financial model
 A statement that sets short term
targets to keep you focused, track
costs, monitor cash and see if you
have a viable business.
 Simply, it tells you the story of your
business using mathematics.

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 As a startup, focus must
be on 4 things.
 1. Forecast Revenue
 TR = Price *volume(quantity)
 Considering the justification/assumptions for
both price and quantity.(market/competitors
data may help).
 Remember: You may not get the right
numbers, but think logically and rationally.

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 2.calculate your costs
 What are you spending to make
and market your product.
 Examples; employee, office
space, equipment or cost of
acquiring customers.

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 3. Solve for profit(loss)
 If you get the profit immediately, that
means you are in a good business
BUT if not, identify and analyze the
reasons behind.
 Why do you have to sell more at
less price? Or less at a higer price?
 Lower the costs

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 4. Know your Burn Rate
 How much cash you use each month.
What is your runway?
 Example: if you are spending 20k each
month and you have 160k in your
account, your run way is 8months.
 For the assets, bootstrapping can be
used.

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 The Financial Plan

A. The
financial plan provides a
complete picture of:
1. How much and when the funds are
coming into the organization.
2. Where the funds are going.
3. How much cash is available?
4. The projected financial position of
the firm.

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 The Financial Plan
B. The financial plan provides the short-term basis for
budgeting and helps prevent a common problem-
lack of cash.

C. The financial plan must explain how the

entrepreneur will meet all financial obligations and
maintain its liquidity.

D. In general, the financial plan will need three years of

projected financial data for outside investors.

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 Break-Even (Quantity)
Point
Break-Even Point -- The sales volume required
so that total revenues and total costs are
equal; may be in units or in sales dollars.

How to find the break-even point:

QBE = FC / (P - V)
SBE = (QBE )(V) + FC
P = Price per unit V = Variable costs per unit
FC = Fixed costs Q = Quantity (units)
10 produced and sold
 Break-Even Point
Example

Basket Wonders (BW) wants to

determine both the quantity and sales
break-even points when:
 Fixed costs are $100,000
 Baskets are sold for $43.75 each
 Variable costs are $18.75 per basket

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 Break-Even Point (s)
Breakeven occurs when:
QBE = FC / (P - V)
QBE = $100,000 / ($43.75 - $18.75)
$18.75
QBE = 4,000 Units

SBE = (QBE )(V) + FC

SBE = (4,000 )($18.75)
$18.75 + $100,000
SBE = $175,000

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 Break-Even Chart
Total Revenues
REVENUES AND COSTS

Profits
250
Total Costs
175
($ thousands)

Fixed Costs
100 Losses
Variable Costs
50

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

QUANTITY PRODUCED AND SOLD
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 Extra information

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 Cash Flow Forecasting
A Cash Budget is a forecast of a firm’s future
cash flows arising from collections and
disbursements, usually on a monthly basis.

The financial manager is better able to:

to
 Determine the future cash needs of the firm
 Plan for the financing of these needs
 Exercise control over cash and liquidity of
the firm
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 Demand Estimation: Marketing
Research Approaches

 Consumer Surveys
 Observational Research
 Consumer Clinics
 Market Experiments

 These approaches are usually covered extensively in marketing

courses, however the most important of these are consumer
surveys and market experiments.
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Kardan.edu.af
 BW’s Cash Flow Forecast
Lisa Miller has finalized a cash flow
forecast for the first six months of 2004.
Lisa is expecting 90% of monthly sales
will be credit sales with 80% of credit
sales collected in 30 days, 20% in 60 days,
and no “bad debts.”
Hint: The cash flow forecast will be used
in forecasting the financial statements
later in this chapter.
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 Collections and Other
Cash Receipts (Thousands)
SALES NOV DEC JAN FEB
Credit Sales, 90% $193 $212 $154 $135
Cash Sales, 10% 21 24 17 15
Total Sales, 100% $214 $236 $171 $150

CASH COLLECTIONS
Cash sales, current $ 17 $ 15
80% of last month’s 169 123
credit sales
20% of 2-month-old 39 42
credit sales
Total sales receipts $225 $180

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 Collections and Other
Cash Receipts (Thousands)
SALES MAR APR MAY JUN
Credit Sales, 90% $256 $205 $160 $190
Cash Sales, 10% 28 23 18 21
Total Sales, 100% $284 $228 $178 $211

CASH COLLECTIONS
Cash sales, current $ 28 $ 23 $ 18 $ 21
80% of last month’s 108 205 164 128
credit sales
20% of 2-month-old 31 27 51 41
credit sales
Total sales receipts $167 $255 $233 $190

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 Schedule of Projected Cash
Disbursements (Thousands)
DEC JAN FEB
Purchases $ 39 $ 35 $ 64
CASH DISBURSEMENTS FOR PURCHASES AND
OPERATING EXPENSES
100% of last month’s $ 39 $ 35
purchases
Wages paid 90 94
Other expenses paid 34 34
Total disbursements (purchases and
operating expenses) $163 $163
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 Schedule of Projected Cash
Disbursements (Thousands)
MAR APR MAY JUN
Purchases $ 53 $ 40 $ 48 $ 50
CASH DISBURSEMENTS FOR
PURCHASES AND OPERATING
EXPENSES

100% of last month’s $ 64 $ 53 $ 40 $ 48

purchases
Wages paid 111 107 92 92
Other expenses paid 34 34 34 34
Total disbursements $209 $194 $166 $174
(purchases and
operating expenses)
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 Schedule of Net Cash
Disbursements (Thousands)
JAN FEB MAR

Total disbursements for $163 $163 $209

purchases and operating
expenses
Capital expenditures 70 40 0
Dividend payments 0 0 9
Income taxes 25 0 0
Total cash disbursements $258 $203 $218

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 Schedule of Net Cash
Disbursements (Thousands)
APR MAY JUN

Total disbursements for $194 $166 $174

purchases and operating
expenses
Capital expenditures 0 0 0
Dividend payments 0 0 10
Income taxes 25 0 0
Total cash disbursements $219 $166 $184

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 Projected Net Cash
Flows and Cash Balances
JAN FEB MAR
Beginning cash balance $ 90 $ 57 $ 34
Total cash receipts 225 180 167
Total cash disbursements 258 203 218
Net cash flow $( 33) $( 23) $( 51)
Ending cash balance
without additional financing $ 57 $ 34 $( 17)

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 Projected Net Cash
Flows and Cash Balances
APR MAY JUN
Beginning cash balance $( 17) $ 19 $ 86
Total cash receipts 255 233 190
Total cash disbursements 219 166 184
Net cash flow $ 36 $ 67 $ 6
Ending cash balance
without additional financing $ 19 $ 86 $ 92

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 Forecasting
Financial Statements
Expected future financial statements
based on conditions that management
expects to exist and actions it expects
to take.
Considerations

(1)Forecasted Income Statement

(2) Forecasted Balance Sheet

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 Forecasting BW’s
Income Statement
Lisa Miller is forecasting the income
statement for 2004. She estimates that sales
for the 6 months ended June 30 will be
$1,222,000.
$1,222,000 COGS are estimated from the
average of years 2001 through 2003.
2003 Selling,
general, and administrative costs are
forecasted at $34,000 per month,
month while the
income tax rate is assumed equal to 40%.
Cash dividends and interest expenses are
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expected to remain constant.
constant
 Basket Wonders’ Forecasted
Income Statement
Basket Wonders Forecasted Statement of Earnings (in
thousands) for Six Months Ending June 30, 2004
Net Salesa $ 1,222
Cost of Goods Sold b 865 a. From sales budget.
Gross Profit $ 357 b. Average of 68.7, 71.3,
SG&A Expenses c 204 and 72.3% multiplied by
EBIT $ net sales.
153 Interest Expensed c. $34,000 x 6 months.
29 EBT $ d. Assumed to be $29,000.
124 Income Taxes 50 e. Did not change. Six (6)
EAT $ 74 months of dividends =
Cash Dividendse 19 (.5)($38,000) = $19,000.
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Increase in RE $ 55
 Basket Wonders’ Balance
Sheet (Asset Side)
Forecasted Balance Sheet (thousands) June 30, 2004
Cash and C.E.a $ 92 a. From Cash Flow
Acct. Rec.b 222 Forecast.
Inventoriesc 692 Prepaid Exp b. 100% June, 20% May.
5 Accum Tax Prepay c. Inv Turnover = 2.5.
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Current Assets
$1,021 Fixed Assets (@Cost) d. Capital expenditure of
1,140 Less: Acc. Depr. $110,000 and
(386) Net Fix. Assetsd $ 742 depreciation of
Investment, LT 50 Other $69,000.
Assets, LT 223 Total
Assets $2,036 ASSUMPTIONS
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 Basket Wonders’ Balance
Sheet (Liability Side)
Forecasted Balance Sheet (thousands) June 30, 2004
Notes Payablea $ 226 a. Previous balance less
Acct. Payableb 50 amount paid down.
Accrued Taxes c 16 Other b. 100% of June
Accrued Liab. d 20 purchases.
Current Liab. $ 312 c. No net change in
Long-Term Debt 530 accruals.
Shareholders’ Equity d. Decrease in unpaid
Com. Stock ($1 par) 200 wages, salaries, etc.
Add Pd in Capital 729 e. Increase in retained
Retained Earnings e
265 earnings (See 7-56).
Total Equity $1,194
ASSUMPTIONS
30 Total Liab/Equity $2,036
 Cash flow statement:

 Specifically, the information in a statement of cash flows, if used

with information in the other financial statements, helps external
users to assess:
1. A company’s ability to generate positive future net cash
flows,
2. A company’s ability to meet its obligations and pay
dividends,
3. A company’s need for external financing,
4. The reasons for differences between a company’s net income
and associated cash receipts and payments, and
5. Both the cash and noncash aspects of a company’s financing
and investing transactions.

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 The Indirect Method:
Operating Activities
Positive Items
Net income
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current assets other than cash
Increases in current liabilities
Negative Items
Net loss
Gain on sale of long-term assets
Increases in current assets other than cash
Decreases in current liabilities
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 The Indirect Method:
Investing Activities
Positive Items
Sale of plant assets
Sale of investments that are not cash equivalents
Collections of loans receivable

Negative Items
Acquisition of plant assets
Purchase of investments that are not cash
equivalents
Making loans to others
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 The Indirect Method:
Financing Activities
Positive Items
Issuing stock
Selling treasury stock
Borrowing money

Negative Items
Payment of dividends
Purchase of treasury stock
Payment of principal amounts of debts

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