Entrepreneurship Chapter 10 - The Financial Plan

Textbook Reference: Entrepreneurship, 8th edition by R.H. Hisrich, M.P. Peters and D.A. Shepherd, Mc Graw Hill Irwin, Copyright 2010. Chapter 10: The Financial Plan Operating & Capital Budgets  Complete a sales budget.  Then focus on the operating costs. List of fixed expenses; 1. Rent 2. Utilities 3. Salaries 4. Advertising 5. Depreciation 6. Insurance  Capital Budgets are intended to provide a basis for evaluating expenditures that will impact the business for more than one. Examples; 1. New Equipment. 2. Vehicles. 3. Computers. 4. A new facility. 5. It should also consider the cost of purchasing v. leasing. 6. Enlist the advice of an accountant in planning long term expense. Pro Forma Income Statements  Projected net profit calculated from projected revenue minus projected costs and expenses.  The Marketing Plan provides an estimate of sales.  First, calculate sales monthly.  Understand that sales are higher some months due to market needs.  Project all the operating expenses for each of the months during the first year understanding that they change during different times of the year.  Salaries and wages should reflect the number needed at different phases of the start up during the first year. Remember there are two months a year with three payrolls.  Increase selling expenses as revenues increase.  Forecast years 2 & 3 next.  Some items will remain stable and others will fluctuate with the market.  For internet companies most expenses will be consumed by equipment. Revenues will be delayed until the site is found. Pro Forma Cash Flow  Cash flow is not profit!  Profit is the result of subtracting expenses from revenue.  Cash flows only when actual payments are received or made.  Sales are not cash flow until payment is receiving.  Cash payments to reduce debt does not constitute a business expense but does reduce cash.  Profitable firms fail due to lack of cash.  The entrepreneur must make monthly estimation of cash as well as sales so you know if you have enough to meet your obligations.

Pro Forma Balance Sheet  Summarizes the projected assets, liabilities and net worth of the new venture.  Assets are items owned or available to be used in the venture operations.  Liabilities are money owed to creditors.  Owner Equity is the amount the owners have invested and/or retained from the venture operation. Breakeven Analysis  Volume of sales where the venture neither makes a profit nor incurs a loss.  Software packages are essential in all money matters.