Ch 7 Outline

Ch 7 Outline
1. Introduction
2. Financial Planning
- The Sales Forecast
- The Profit and Loss Statement
- The Cash Flow Statement
- The Balance Sheet
In order to control the operations of a business, the entrepreneur requires a well-designed
financial plan.
 
This can help the entrepreneur stay focused and on track despite the lack of profits
during this critical phase of the venture’s life cycle.
 
The goal is to determine the funds needed to launch and sustain the venture as it
 
The financing needed to launch a venture depends on many factors, including the
industry, experience of the entrepreneur, location of the venture, and inventory
 
In addition to these expenses, the entrepreneur must obtain sufficient seed capital
to sustain the venture to the point at which its revenues exceed its expenses (it becomes
 
Creating a financial plan helps the entrepreneur transform business goals into
reality. In the start-up stage, the entrepreneur should estimate the costs for entry into an
accounting system.
 
This estimate is achieved through pro forma financial statements; the three
primary financial statements that businesses use to forecast and record operating results:
The profit and loss statement,
The cash flow statement, and
The balance sheet.
o At minimum, it is essential that the pro forma projections encompass the periods that include:
- The cash breakeven point: The point in the venture’s growth at which revenues exceed costs on a
routine (monthly) basis.
- The profit breakeven point: The point in the venture’s development at which the accumulated
negative profits are less than the accumulated positive profits.
The challenge in developing pro forma financial statements lies in building them on a foundation of
reasonable and reality-based assumptions.
- These assumptions provide a set of starting numbers such as price per unit and sales volume, that are
reasonable guesses.
- Once the assumptions have been set, they are used to develop the pro forma spreadsheet.
- Using a spreadsheet enables the entrepreneur to develop a number of what-if scenarios.
- In general, investors and lenders look at four criteria when evaluating the assumptions that underlie
financial statements:
Clarity of expression
Consistency with knowledge of commercial practices
Internal consistency
7-2a The Sales Forecast
• The sales forecast, or revenue estimate, is
necessary for an entrepreneur to produce the three
basic financial statements.
– It is easier for the entrepreneur to think in terms of unit
volume than total revenue to be generated.
– Once pricing has been set, the number of units sold will
determine revenue, as indicated in this equation:
P × V = R (price × volume = revenue)
– To account for different operating results, many
entrepreneurs develop more than one sales forecast,
often distinguished as worst case, base case, and best
7-2b The Profit and Loss
• The profit and loss statement (P&L) states
accurately and fairly the profit or loss of the
operations for a given accounting period using
GAAP rules.
– GAAP rules governing the P&L statement include:
• Revenue of any accounting period should have the appropriate
costs of acquiring that revenue attributed in the same
accounting period.
• Revenue spent on any item that has a useful life of more than
one year—a so-called capital good—is considered a capital
– Spreading the cost of a capital good over the period of
its useful life is called depreciation.
• Depreciation is called a non-cash expense.
7-2b The Profit and Loss
Statement (cont.)
– All the operating costs of the company must be
included in one of the three cost categories:
• Cost of goods
• Selling costs
• General and administrative (G&A) costs
– The other categories are:
Gross profit
Gross margin
Sales and marketing expenses
Profit, or net income

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