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Vishnu Parmar, IBA
University of Sindh, Jamshoro

 
 inancial Plan provides a complete picture of
how much and when funds are coming into the
organization?
 Where funds are going?
 How much cash is available?
 What is the projected financial position of the
firm
 It provides short term basis for budgeting and
helps to prevent lack of cash

 
 ahe financial plan must explains to meet all
financial obligations and maintains the
venture¶s liquidity in order to either pay off
debt of provide a good return on investment.
 P needs three years of projected finance data
to satisfy any outside investors
 irst year must reflect monthly data
 



 Pro orma Statements
 Are projections of a firm¶s financial position over
a future period (pro forma income statement) or on
a future date (pro forma balance sheet).
 Using beginning balance sheet balances, they
depict projected changes on the operating and
cash--flow budgets which are added to create
cash
projected balance sheet totals.
 


 

 Budget
 One of the most powerful tools the entrepreneur can use in
planning financial operations.
 Operating Budget
 A statement of estimated income and expenses over a
specified period of time.
 Cash Budget
 A statement of estimated cash receipts and expenditures
over a specified period of time.
 Capital Budget
 ahe plan for expenditures on assets with returns expected
to last beyond one year.
 

 Sales orecasting
 Creating an operating budget through preparation of the
sales forecast.
 orecasting
 Linear regression: a statistical forecasting technique.

 ð
  
 ð is a dependent variable²
variable²its value is dependent on the
values of , , and .
  is an independent variable that is not dependent on
any of the other variables
  is a constant.
  is the slope of the line of correlation (the change in ð
divided by the change in ).
 
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 Before pro forma income statement, the entrepreneur
should prepare operating & capital budget.
 Sole proprietor prepares total budget by himself as he
is the alone decision maker
 In partnership and Corporation other people also
involves, it depends upon the responsibilities like
sales budget may prepare by Sales Manager,
Production manager prepares manufacturing budget
etc




  




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Salaries 23.2 23.2 26.2
Rent 2 2 2
Utilities 0.9 0.9 0.9
Advertising 13.5 13.5 17
Selling Expenses 1 1 1
Insurance 2 2 2
Payroll taxes 2.1 2.1 2.5
Depreciation 1.2 1.2 1.2
Office expenses 1.5 1.5 1.5
aotal Expenses 47.5 47.4 54.3
 ,

 

 Income Statement
 Commonly referred to as the P&L (profit and loss)
statement from activities of the firm.
 Provides the results of the firm¶s operations.
 Income Statement Categories
 .(1 gross sales for the period
 '01 Costs of producing goods or services
 Î
 1 ahe excess (deficit) of revenues over
expenses (profit or loss)
 ,

 

 Proposed net profit calculated from projected
revenue minus projected cost and expenses
 It should be made for 3 years because investors
prefer to use three years of income projections
 aABLE 10.3
 
,|
 
2
 An analysis of the cash availability and cash needs of
the business that shows the effects of a company¶s
operating, investing, and financing activities on its
cash balance.
 How much cash did the firm generate from
operations?
 How did the firm finance fixed capital
expenditures?
 How much new debt did the firm add?
 
,|
 
2
 Was cash from operations sufficient to finance
fixed asset purchases?
 ahe use of a cash budget may be the best approach
for an entrepreneur starting up a venture.
 Cash flow can be determined for each month.
It assist the entrepreneur in determining how
much money he or she will need to raise to
meet the cash demands of the venture
 33,
|
 
2

 Projected cash available calculated from
projected cash accumulation minus projected
cash disbursement
 Cash flows only when actual payments are
received or made
 ahe most difficult problem with projecting
cash flows is determining the exact monthly
receipts and disbursements
 33,


  

Represents the financial condition of a company at a
certain date.
 It details the items the company owns (assets)
and the amount the company owes (liabilities).
 It also shows the net worth of the company and
its liquidity.
 Assets = Liabilities + Owners¶ Equity

 An asset is something of value the business

owns.
 Current and fixed assets
33,


  

 Liabilities are the claims creditors have
against the company.
 Short
Short-- and long
long--term debt
 Owners¶ equity is the residual interest of
the firm¶s owners in the company.
 aable 10.7
 
4(+
)
 Used to determine the level of activity a firm
must achieve to stay in business in the long run
 Shows the mix of fixed and variable cost and
the volume required for zero profit/loss
 Profit/loss generally measured by EBIa
 
433'(+
)

4
 Break-even occurs when the volume of sales is
Break-
sufficient to cover all fixed and variable costs.
 Break--even point (BEP) is the point at which
Break
revenue equals costs.
 At break-
break-even point sales revenues equals the
costs necessary to generate them.
 As long as forecasted sales are greater than the
break--even point, you must stay in business, if
break
they drop below it, you may decide against
starting or continuing it.
  
43

43'(

 BEP shows the relationship between cost and
volume.
 ahe components of break-
break-even analysis are:
 Revenue
 Determined by multiplying unit sales by unit
price
 ixed costs
 Expenses that do not vary with the level of
production or sales
 Variable costs
 
433 '(+
)

4
Break-even analysis identifies that point where revenues
Break-
exactly cover costs.

 


 


 


ixed Costs-
Costs- ahose that remain constant over a
reasonable range of sales, or do not vary appreciably
with sales volume.
‡ Rent ‡ Office Supplies ‡ Advertising
‡ Salaries ‡ Payroll aaxes ‡ Utilities
‡ Depreciation ‡ Interest Expense ‡ Insurance
22
 
433 '(+
)

4
Variable Costs-
Costs- Are those that vary
directly±
directly ± or proportionally±
proportionally± to sales.
If you can¶t decide what to call an expense,
be conservative, and call it ,0
,055 thus
making your break-
break-even point higher.
 
4(


 aR = SP x Q
 aC = aC + aVC

 SP x Q = aC+aVC

 aVC = VC/units x Q

 ahus SP x Q = aC + (VC/Units x Q)

 (SP x Q) ± (VC/Units x Q) = aC

 Q(SP ± VC/Unit) = aC


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4
Break-even
aheaotal
As
ahe output
total iscosts
revenue is
Costs/Revenue aR ahe lower the
aR aC point occursa by
generated,
Initially
determined
therefore
price, the
where
the
firm
less the
VC totalprice
firm
will will
revenue incur
incur fixed
charged
(assuming and
steep
thecosts, the
variable total
costs
these
quantity do± ±±
sold
equals total
accurate
these vary costs
revenue
not depend
again this curve.
willonbe
thedetermined
firm,
outputin
forecasts!)
directly this
with
or byisthe
sales. the
sum
example
amount
expected ofwould
C+VC
produced
forecast
have
salesto initially.
sell Q1 to
generate sufficient
revenue to cover its
costs.

C

Q1 Output/Sales

, , 
 
Costs/Revenue

433'(+
)

4  
:&
aR (p = £3) aR (p = £2) aC 
):*  .
VC (2
5  )
2
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4
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C

Q2 Q1 Output/Sales
 
433'(+
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4
aR (p = £1)
Costs/Revenue If the firm
aR (p = £2)
aC
VC chose to set
prices lower
(say £1) it
would need to
sell more units
before
covering its
costs
C

Q1 Q3 Output/Sales
 
433'(+
)

4
aR (p = £2)
Costs/Revenue aC
Profit VC

Loss
C

Q1 Output/Sales
 +  

433'(+
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4  2
aR (p = £3) aR (p = £2)
aC
Costs/Revenue 2 
VC 
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,
,)
22

Margin of Safety
C

Q3 Q1 Q2 Output/Sales
 
433'(+
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4
 Remember:
 A higher price or lower price does not mean
that break even will ( be reached!
 ahe BE point depends on the number of sales
needed to generate revenue to cover costs ± the
BE chart is NOa time related!
 
433'(+
)

4
 Importance of  '
 ),

 '
 ),
::
    might mean fewer sales to
break--even but those sales may take a longer
break
time to achieve.
 -2  might encourage more
customers but higher volume needed before
sufficient revenue generated to break-
break-even
 
433'(+
)

4
 -4,' 


 )
 Penetration pricing ± µhigh¶ volume, µlow¶ price ±
more sales to break even
 Market Skimming ± µhigh¶ price µlow¶ volumes ±
fewer sales to break even
 Elasticity ± what is likely to happen to sales when
prices are increased or decreased?