Financial Projections: They Dont Suck That Bad

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Financial Projections They Dont Suck That Bad

• Entrepreneurship 348
• Chapter 6 Portable MBA in Entrepreneurship

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Why Do Projections

• To understand the financial and economic
  implications of proposed venture
• To aid in decision making
• Communicate to potential investors/stakeholders
  the financial rewards of your business

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The Right Way

• Create assumption page first
• Everything relates back to that assumption page
• Understand interrelationships between
  assumptions, sales, income projection, balance
  sheet, and cash flow
• Understand relationship between specific line
  items within and across different statements

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The Practical Way

• Build revenue model first
• From revenue model build income statement
• From income statement build cash flow statement
• From income and cash flow build balance sheet
• Build assumption statement as you go

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Why Connect Statements

• Creates a more accurate and user friendly model
• Helps YOU understand specific relationships of
  YOUR business
• Impress your friends with your cool excel skills

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Advice on Financial Data

• 1. You provide the ideas and insights. Get your
  accountant to put the numbers together.
• 2. Understand how the financial statements
  provide operating information.
• 3. Use the model to perform sensitivity and
  scenario analysis.
• 4. If you only use one statement use a MONTHLY
  CASH FLOW statement.

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Specific Statements

• Revenue Statement or Sales Forecast
• Optimistic, Pessimistic, Likely
• Derivation
• Income Statement
• Balance Sheet
• Time zero affect
• Snapshot of financial position
• Cash Flow - the most important

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What do you really need?

• Bare Bones Reasonable Optimal

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Revenue Model

• Identify various revenue streams and price points
• Estimate volume
• Determine cyclicity or seasonality
• Determine appropriate/reasonable growth rate
• Include this information in the assumptions page
• REQUIRES EDUCATED GUESSING

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Profit Loss

• Total Sales
• minus
• Total Expenses
• equals
• Profit (Loss)

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Short Form PL

• Total Sales
• Less Cost of Goods Sold
• Gross Margin
• Operating expenses
• salaries
• space costs (rent, utilities)
• advertising/PR
• Other expenses
• Less Total Expenses
• Net Profit (Loss) pre-tax

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Expense Projections

• Salaries, FICA, benefits
• Rent Utilities
• Legal Accounting
• Insurance
• Postage, Phone etc.
• Advertising/Promotion
• Travel and Entertainment
• Debt service
• Office expense
• Miscellaneous
• Taxes

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Managing Cash

• Cash comes in
• net from operations
• new debt
• sale of fixed asset
• new investment

• Cash goes out
• debt retired
• new fixed assets
• dividends
• stock redemption

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Cash From Operations

• Operations Cash Collected (cash sales,
  receivables collected)
• Less Cash Paid
• (suppliers, salaries, advertising)
• Operations net

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Cash Flow Statements

• Direct method
• Cash in minus cash out
• Indirect method
• Net income plus non-cash expenses
• Direct method is preferable for our purposes

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Balance Sheet

• Assets and Liabilities Net Worth are always in
  balance -- by definition.

Liabilities Net Worth
Assets
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Assets (What You Own)

• Current Assets
• Highly liquid cash and near-cash, notes,
  accounts receivable
• Less liquid but current inventories
• Fixed Assets
• Illiquid real estate, equipment
• Other Assets
• Good will and other intangibles

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Liabilities (What You Owe)

• Current Liabilities (come due within one year)
• Taxes, Accounts and notes payable, accrued
  expenses
• Current portion of long-term debt
• Long Term Liabilities
• Mortgages, trust deeds, long-term loans
  (equipment or other) net of current portion of LTD

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Net Worth (Owners Equity)

• Net Worth Assets minus Liabilities
• 1. Paid-in or invested capital
• 2. Retained Earnings
• 3. Other equity

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Break-even Analysis

• S FC GM
• Where S Sales at which you make neither a
  profit nor a loss
• GM Gross Margin expressed as a percent of Sales
• FC Fixed costs in

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Break-even Plus Profit

• S (FC P) GM
• Where S gross sales to make desired profit
• P desired profit
• GM gross margin expressed as a percentage of
  sales
• FC Fixed costs in

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Fixed versus Variable Costs

• Fixed Costs
• Any cost which is independent of the sales level.
• Examples
• rent
• salaries
• insurance

• Variable Costs
• Any cost which rises or falls with the level of
  sales.
• Examples
• cost of goods sold
• sales commissions
• delivery expense

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Where Do We Get Info For Pro Forma Financial
Statements?

• Personal contacts
• Talk to people in similar businesses
• SIC and NAICS code information
• Trade magazines and journals
• Annual reports of publicly traded companies
• RMA, Moodys, and SP data