Financial ProjectionsFinancial Projections

Financial StatementsFinancial Statements

►Numerical representations of what the Numerical representations of what the business is physically doing.business is physically doing.

► In the case of a start-up business, the In the case of a start-up business, the are projections of what the owners are projections of what the owners anticipate the business will do over the anticipate the business will do over the period of a year or two.period of a year or two.

Pro Forma StatementsPro Forma Statements

►Financial statements for a start up Financial statements for a start up businessbusiness

►Anticipated financial performanceAnticipated financial performance

Income StatementIncome Statement

►Shows how much money the Shows how much money the organization has earned during the organization has earned during the accounting period.accounting period.

►A pro forma income statement shows A pro forma income statement shows how much money the company how much money the company expects to earn over the next year.expects to earn over the next year.

Sample Income StatementSample Income Statement

► SalesSales $10,000$10,000► Costs of Goods SoldCosts of Goods Sold 70007000►Gross MarginGross Margin $3000 $3000► Expenses Expenses 2400 2400► Earnings Before Interest & Taxes Earnings Before Interest & Taxes

$600$600► Interest ExpenseInterest Expense 7070► Earnings Before TaxEarnings Before Tax $530 $530► TaxTax 170 170►Net IncomeNet Income $360 $360

Income Does Not Equal Income Does Not Equal ProfitsProfits

► Income (sales) is the amount of money Income (sales) is the amount of money that comes into the businessthat comes into the business

► It is reduced by such things as It is reduced by such things as accounts receivable and depreciationaccounts receivable and depreciation

►A positive number here is no A positive number here is no guarantee that you will have enough guarantee that you will have enough money to meet your monthly money to meet your monthly expenses.expenses.

The Balance SheetThe Balance Sheet

►Lists everything the business owns Lists everything the business owns and everything it owes at a given and everything it owes at a given moment in time.moment in time.

►Divided into two columns: On one side Divided into two columns: On one side is Assets and on the other is Liabilitiesis Assets and on the other is Liabilities

►Assets= Liabilities + EquityAssets= Liabilities + Equity

Cash Flow StatementCash Flow Statement

►Analyzes where money has come from Analyzes where money has come from and gone to.and gone to.

►Shows cash flow from: operating, Shows cash flow from: operating, investing, and financinginvesting, and financing

Break Even AnalysisBreak Even Analysis

►Looks at costs to determine the Looks at costs to determine the volume of business necessary to break volume of business necessary to break even in terms of profit and losseven in terms of profit and loss

►Will also consider the amount of sales Will also consider the amount of sales dollars needed to break even dollars needed to break even

Break Even CalculationBreak Even Calculation

►Determine the number of sales that Determine the number of sales that will be made during the fiscal yearwill be made during the fiscal year

►Estimate the average dollars per saleEstimate the average dollars per sale►Multiply the # of sales by the price per Multiply the # of sales by the price per

sale to arrive at a sales volumesale to arrive at a sales volume

Fixed CostsFixed Costs

►Also called “overhead”Also called “overhead”►A cost that doesn’t change as the level A cost that doesn’t change as the level

of sales changeof sales change►Examples: Rent, utilities, phone bills, Examples: Rent, utilities, phone bills,

insurance, loan payments, and insurance, loan payments, and sometimes payrollsometimes payroll

►Most of your expenses will be fixedMost of your expenses will be fixed

Variable CostsVariable Costs

►Costs that do change as the level of Costs that do change as the level of sales changesales change

►For example, in a restaurant: food, For example, in a restaurant: food, liquorliquor

ExceptionsExceptions

►Some items don’t fit readily into one Some items don’t fit readily into one category. category.

►For example. Full time management For example. Full time management salaries will be fixed costs but part-salaries will be fixed costs but part-timers may work only as needed, a timers may work only as needed, a variable cost.variable cost.

►Regardless, all costs must be separated Regardless, all costs must be separated into the fixed or variable categoryinto the fixed or variable category

Interest ExpenseInterest Expense

►Determine the amount of money Determine the amount of money borrowed and the interest rate borrowed and the interest rate

►Multiply the amount of the loan by the Multiply the amount of the loan by the interest rate to get the amount of interest rate to get the amount of interest paid during the first year in interest paid during the first year in business.business.

DepreciationDepreciation

►The full purchase price of capital The full purchase price of capital equipment cannot be deducted from equipment cannot be deducted from taxes in the year the purchase was taxes in the year the purchase was made. The value must be made. The value must be “depreciated” over a number of years “depreciated” over a number of years until the “capital asset” is deemed to until the “capital asset” is deemed to be of no value.be of no value.

Cash Flow AnalysisCash Flow Analysis

►Depreciation, owner contribution , Depreciation, owner contribution , amount borrowed and interest paid amount borrowed and interest paid will be factored together with sales, will be factored together with sales, fixed costs and variable costs the fixed costs and variable costs the arrive at a cash flow projectionarrive at a cash flow projection

Don’t write in the Gray Space Don’t write in the Gray Space

►Gray spaces contain formulasGray spaces contain formulas►Simply fill in the data in the white Simply fill in the data in the white

spaces and the calculations will be spaces and the calculations will be made automatically.made automatically.

Financing the BusinessFinancing the Business

►Equity fundingEquity funding► Money invested by ownersMoney invested by owners►Debt fundingDebt funding

Money that is borrowed and must be Money that is borrowed and must be repaidrepaid

Equity FundingEquity Funding

►Management TeamManagement Team

CashCash

PropertyProperty

Other OwnersOther Owners

People who buy into the People who buy into the partnershippartnership

People who buy stockPeople who buy stock

Debt FundingDebt Funding

► Borrowed and must be repaid with interestBorrowed and must be repaid with interest Loans from banksLoans from banks Loans from family and friendsLoans from family and friends Loans from government agenciesLoans from government agencies Credit cardsCredit cards Loans from owners that must be repaid with Loans from owners that must be repaid with

interestDid you have to raise or lower your interestDid you have to raise or lower your original price estimates based on the break-even original price estimates based on the break-even analysis? Did you have to reduce expenses? Did analysis? Did you have to reduce expenses? Did you have to borrow more or less money?you have to borrow more or less money?