FINANCIAL PLAN

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 E-TRADE
Bill Porter (70) – Brokerage industry
Vision – invest online eliminating brokerage
Career path – Management Consultant
1992 – Trade plus (Online Trading Service)
1996 – www.e-trade.com
Started at $14.95(1996) $3.7 million(2001)
At present – International Securities Exchange

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 FINANCIAL PLAN
Provides complete picture of
• How much funds is required
• When funds are coming into organization
• Where funds are going
• How much cash is available
• Projected financial position of the firm

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 IMPORTANCE OF FINANCIAL
PLAN
To meet all financial obligations and maintain
its liquidity to pay debt or provide good ROI.
It provides short term basis for budgetary
control.
Financial plan must contain
• Three years of projected financial data
• First year data - monthly

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 CONTENTS OF FINANCIAL
PLAN
It includes
• Pro Forma Income statements
• Pro forma cash flow
• Pro Forma Balance sheet
• Break Even Analysis
• Pro forma Source and use of funds.

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 OPERATING & CAPITAL
BUDGET
Entrepreneur is responsible for budgeting
decisions.
Sales budget is the base for pro forma income
statement
Capital budget provide a basis for evaluating
expenditure that will impact the business for
more than one year
Cost of capital, Expected ROI, NPV
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 PRO FORMA INCOME
STATEMENT

Projected net profit calculated from

projected revenues minus projected cost and
expenses.

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 PRO FORMA INCOME
STATEMENT
Sales from the Marketing plan shows the
revenue of the business for the next 12
months.
Operational activities and expenses relate to
sales volume.
Helps to analyse the expenses that will
stable.

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 PRO FORMA INCOME
STATEMENT
Helps the firm to analyse the sales of the
firm and the monthly progress.
Helps to benchmark with other start-up
companies.
Make changes in the plan
Provides projections of all operating
expenses for each of the months during the
first year.
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 PRO FORMA INCOME
STATEMENT ANALYSIS
A new enterprise starts to earn profit after
some months based on the earning capacity
of the business and the market plan.

Cost of goods sold fluctuates because of the

higher costs incurred for materials and
labour inorder to meet the sales demand in a
particular month

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 PRO FORMA INCOME
STATEMENT ANALYSIS
Salaries and wages must reflect the increase
or decrease in the employees each month.

The entrepreneur should also consider the

need to increase insurance, attend special
trade shows or add space for warehousing.

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 Balance Sheet
 “Snapshot” of business’s financial position
 Provides owner’s with an estimate of its worth on a
given date
 Two major sections
 Assets
 Liabilities
 Fundamental accounting equation
 Assets = Liabilities + Owner’s Equity
 Pro Forma Balance Sheet

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 BALANCE SHEET
 The balance sheet reports a company’s assets,
liabilities, and stockholders’ equity at a particular
point in time.
 The heading should indicate:
Name of company
Name of statement (Balance sheet)
Balance sheet date (the date at which the
company’s “Balance Sheet” is being taken)
Measurement unit (e.g., in thousands of
dollars)

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 BALANCE SHEET ELEMENTS
1. Assets
a. Resources owned (or controlled) by the company
b. Assets can be acquired in the following ways:
1. Incurring a liability
2. Selling company stock
3. Earning money through profitable operations
c. Total Assets = Current Assets + Noncurrent Assets
Current assets – cash and other assets expected to be
converted into cash or used up within one year from the
balance sheet date
Noncurrent assets – also known as Long-term Assets

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 BALANCE SHEET ELEMENTS (cont)
2. Liabilities
a. Obligations to outside parties who have
provided resources to the company
b. Total Liabilities = Current Liabilities +
Noncurrent (or Long-term) Liabilities
Current liabilities – obligations that must be
paid within one year from the balance sheet
date
Long-term liabilities – obligations that will
be paid after one year from the balance sheet
date
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 BALANCE SHEET ELEMENTS
3. Equity

a. Owners’ investment in the company (e.g.,

stockholders’ equity)
b. Includes amount invested through the purchase of
stock (paid-in capital) and earnings reinvested in
the company (retained earnings)
c. Total Equity = Paid-in Capital + Retained
Earnings

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 BALANCE SHEET EQUATION
1. Assets = Liabilities + Equity (A = L + E)
a. This equation is fundamental – after accounting for each
transaction, the equation must remain in balance

2. Balance sheet equation can be rearranged as:

Assets – Liabilities = Equity
a. Creditors can sue the company if amounts due are
not paid
b. Equity investors have only a residual claim to
assets after liabilities have been paid
c. Assets – Liabilities also is referred to as net assets

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 CASH FLOW STATEMENT

A cash flow statement can be used to assess

• the timing
• amount and
• predictability of future cash flows.

It can be used as the basis for budgeting.

It basically answers two questions

• “Where did the money come from?”.
• “Where did the money go?”.
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 SIGNIFICANCE

A loan officer will use cash-flow analysis techniques to

evaluate the firm's ability to generate cash to repay a loan.
It act as a key for understanding the investment and
financing philosophy of a borrower.
It will be used by the banker to answer the question, "Does
this company have enough cash to make payments on a
loan?"

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 HOW TO PREPARE

Accounting experts recommend using three categories to

organize cash flow data:

 Operating Activities

 Investing Activities

 Financing Activities

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 OPERATING ACTIVITIES
Cash flow from operating activities is any cash transaction
related to the company's ongoing business.
• Cash Flow From Operating Activities:
• (+) Cash Received From Customers
• (+) Other Operating Cash Receipts (if Any)
• (-) Cash Paid To Suppliers (including Suppliers Of Inventory,
Insurance, Advertising, Etc.)
• (-) Cash Paid To Employees
• (-) Interest Paid
• (-) Income Taxes Paid
• (-) Other Operating Payments, If Any
• (=) Total Net Cash Provided (used) By Operating Activities

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 INVESTING ACTIVITIES

Investing activities can also include the purchase or sale of

stock, bonds, and securities.

Cash Flows From Investing Activities:

 (+) Proceeds From Sale Of Assets
 (-) Purchases Of Property And Equipment
 (=) Total Net Cash Provided (used) By Investing
Activities

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 FINANCING ACTIVITIES

Financing activities on a cash flow statement reflect

borrowing money and repaying money, issuing stock, and
paying dividends.

Cash flow from financing activities:

Cash received from issues of debt and capital stock
- Cash paid for dividend & debt & capital stock.

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 CASH FLOW STATEMENT
ABC COMPANY
FOR THE YEAR ENDED 200X
Cash Flow From Operations
Net Income* $ 200
Additions Sources of cash)
Depreciation $ 100
Increase in accounts payable $ 30
Increases in accrued income taxes $ 10
Subtractions (Uses of cash)
Increase in Accounts Receivable $ (150)
Increase in Inventory $ (25)
Net cash flow from operations $ 165
Cash Flows from Investing Activities
Equipment $ (400)
Cash Flows Associated with Financing
Activities Notes payable $ 30
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Net change in Cash $ (205)
 ANALYSIS OF CASH FLOW

Operating Activities
 It tells whether the firm has generated sufficient cash or
whether it needs a cash infusion.
Investing Activities
 A lack of investing activities, that is few purchases of new
equipment or other assets, may indicate stagnant growth or
a diversion of funds away from the company.
Financing Activities
 It will tell outsiders how the company has grown and the
financial strategies of management.
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 FUND FLOW STATEMENT

FUNDS
 All of the firm’s investments and claims against those
investments.

 Extends beyond just transactions involving cash.

cash

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 SOURCES AND USES
STATEMENT
SOURCES
 Primarily through net profit from operations and long-term
debt increases.

USES
 Primarily through an increase in inventories and
expenditures on capital assets

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 Current assets
Cash in hand and bank Fixed assets
Marketable investments Goodwill
Accounts receivables Land and building
Stock Plant and machinery
Prepaid exp. Long term investment

Fixed liabilities
Current liabilities Share capital
Bank overdraft Reserve and surplus
Outstanding expenses Debentures
Accounts payable Long term loans

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Flow in fund Not flow in funds
 FUNDS FLOW STATEMENT

SOURCES AMOUNT APPLICATION AMOUNT

ISSUE OF CAPITAL 49 Increase In WC 3005.02

FUNDS FROM OPERATION 220.07 Investments 486

SALE OF FIXED ASSET 2.56

LONG TERM LOANS 2253.02

BORROWINGS 966.37

TOTAL 3491.02 3491.02

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 FUND FLOW ANALYSIS
This statement is based on the ‘working Capital’ concept of
funds.

It measures the inflows and outflows of working capital

resulting from different transactions.

Funds flow statement measures and presents in an

analytical manner the summarized version of the numerous
flows of funds for a specific period.

‘Funds Flow’ is the change in ‘Working Capital’

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 CASH FLOW Vs FUND FLOW

Unlike funds flow Cash Flow does not has non-cash items.

It comprises only those entries in which cash has come in

or gone out.

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