Creating

Successful
Financial Plan
CHAPTER 11

Creating Projected Financial Statement

The

projected (pro forma)

statements are crucial component
of every business plan because

They estimate the profitability

The

overall financial condition of a

company in the future.

Convince

the potential investors and

lenders
Help

to plan the route to improve the

financial strength.

Forecasting Sales for a business startup

Prepare

three sales forecasts:

Most

Likely
Pessimistic
Optimistic
Sales
It

forecasts and work down

is possible by creativity and research

Talking

with owners of the industry

Published

aggregated financial statistics that

industry trade associations collect.

Interview

with potential customer and test

marketing

Forecasting Sales for a business startup

Example:
Number

24%

of cars in trading zone

x Percent of imports

Number

of imported cars in trading zone

x Average expenditure on repairs
Total import repair sales potential
x Estimated market share
9.9%
Sales estimate

84,000

x
20,160
x $485
$9,777,600
x
$967,982

Basic Financial Reports

Balance

Sheet - Estimates the firms

worth on a given date; built on the
accounting equation
Assets = Liabilities + Owners
Equity
Assets:

shows the total value of

everything the business owns
Current

Assets: Assets such as cash and other

items to be converted into cash within one year
or within the companies normal operating cycle.

Fixed

Assets: assets acquired for long term use

in a business.

Basic Financial Reports

Liability:

creditors claims against a

companies assets.
Current

Liability: those debt that must be

paid within one year or within the
companies normal operating cycle.

Long

term Liability: liabilities that come

due after one year

Owners

Equity: the value of the

owners investment in the business.

The Pro Forma Balance Sheet

Assets
How

much cash a small business have at its

inception
The

companys cash balance should cover

its operating expense for one inventory
turnover period.
Average inventory turnover ratio
Cost Of Good Sold
=
Average Inventory
=12,90,117/ {(805745+455455)/2}
=2.05 times a year

The Pro Forma Balance Sheet

Assets
How

much cash a small business have at its

inception

Operating expense

= 158630

- Depreciation (1.4%)
Cash expenses

5753
= 152877

Cash requirement = cash expense/ average

inventory turnover = 152877/2.05 times a
year
= 74574
The

smaller the number of inventory turns a

company generates, the higher is its cash
requirements.

The Pro Forma Balance Sheet

Assets
How

much inventory the business

should carry.
Average inventory turnover= cost of
goods sold/inventory level

Inventory level = 12,90,117 /2.05

= 6,29,325
Estimate

fixed assets

Fixtures

= 2,75,000
Office equipment
= 48,500
Computer
= 60,000
Miscellaneous
= 15,000
3,98,500

The Pro Forma Balance Sheet

Liability
The

bookstore owner is able to pay 50% of

the inventory and has a short term note
payable 34500. Long term liability is
30,0000

Owners

equity

Owners

equity= Total asset total liability

= 1102399 649163
= 4,53,236

Basic Financial Reports

Income

Statement - compares the firms

expenses against its revenue over a
period of time to show its net profit (or
loss):
Net Profit = Sales Revenue - Expenses
To

determine net sales owners subtract the

value of returned items and refunds from gross
revenue.
Cost of good sold represents the total cost,
including shipping of the merchandise sold
during the accounting period.
Net sales revenue minis cost of goods sold
results in a companies gross profit.
Dividing gross profit by net sales revenue is

The Pro forma Income Statement

Entrepreneurs
Sales

have two options

forecasts and work down

If

the bookstore project annual sales

$285000, cost of goods sold is 61.4% and
operating expense is 29.3%
Net sales

- Cost of good sold (61.4%)

Gross profit
-Operating expenses (29.3%)
83505
Net profit

= 285000
= 174990
= 110010
=
=

The Pro forma Income Statement

Entrepreneurs

have two options

Set a profit target and work up
Compare

the sales target against

the results of the marketing plan to
determine whether or not it is
realistic.
Estimate the expense
Annual profit must be large enough
to

produce a return for the time the

owners spend operating the business
A return on their investment in the
business.

The Pro forma Income Statement

Set

a profit target and work up

Target

income of a company is $29000

annually and net profit margin is 9.3%
Net

profit margin = Net profit/Net sales

9.3% =29000 / net sales
Net sales = 29000/0.093 = 311828
to

check whether it is reasonable we can

use break down into daily sales. The store
will be open six days a week (300 days)
average

daily sales = 311828/300= 1039 /day

Basic Financial Reports

Repairing

a poor gross profit

margin requires a company
To

raise prices

Cut

manufacturing and
purchasing cost

Refuse

order with low profit

margin
Add

new product with more

attractive profit margin.

Basic Financial Reports

Statement of Cash Flows - shows

the change in the firm's working
capital over a period of time by
listing the sources of funds and
the uses of these funds.

Breakeven Analysis
The

breakeven point is the level

of operation at which a business
neither earns a profit nor incurs
a loss.

It

is a useful planning tool

because it shows entrepreneurs
minimum level of activity
required to stay in business.

With

one change in the

breakeven calculation, an
entrepreneur can also determine

Calculating the Breakeven

Step 1. Determine the expenses the business can expect
Point
to incur.

Net Sales estimate is $950,000 with Cost of Goods

Sold of $646,000 and total expenses of $236,500.

Step 2. Categorize the expenses in step 1 into fixed

expenses and variable expenses.

Variable Expenses of $705,125; Fixed Expenses of

$177,375.

Step 3. Calculate the ratio of variable expenses to net

sales. Then compute the
contribution
margin
Variable
Expenses
1
Contribution Margin =
Net Sales Estimate
$705,125
1 = .26
$950,000

Total Fixed Costs

Breakeven
Step 4. Compute
the breakeven
point:
=Contribution
Margin
Sales $

$177,375
.26

= $682,212

Calculating the Breakeven

If the shop owner wants to earn 80000 profit then he will
Point
have to generate

Sales $=

Total Fixed Costs + desired net income

Contribution Margin
$177,375 + 80,000
.26

= $989904

Calculating the Breakeven

Point
Some small business may prefer to express the breakeven

point in units produced or sold.

Break even volume Total Fixed costs_______________________

=
Sales price per unit variable cost
per unit
390000_____
17.50 12.10
= 72,222 units

To convert this number of units to break even sales

Break-even sales = 72,222 units X 17.50 per unit =

12,63,889

Breakeven Chart
Breakeven Point
Sales = $682,212

Revenue
Line

Total Expense
Line

Income and Expenses

$682,212

s
Lo

o
Pr

rea
A
t
fi

rea
A
s

Fixed Expense
Line

$682,212

Sales Volume