Entrepreneurship 1: Lecture - PowerPoint Presentation

Slide1

Entrepreneurship 1: Lecture 8Projecting your Financial Status for the first years

Avimanyu

(

Avi

)

Datta

, Ph.D.Slide2

Profit Planning: Conducting Cost-Volume Profit Analysis

Estimate expected profit for your first year based on your projected levels of sales.

If

projected levels of year1 sales = $250,000And, cost of goods sold = 50% that is 125,000Gross Margin = 50% Break even point in sales = = break even in sales = = $250,000 in sales

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Profit Planning: Conducting Cost-Volume Profit AnalysisBreak even sales can be reflected in the following simplified table

Items

Figures

PercentageSales$250,000100%

Cost of Goods Sold

-$125,000

50%

Gross Margin$125,00050%Profit or Loss Before Taxes-$125,00050%$00%

Your Business will not be making profits unless you sales exceed $250,000Slide4

Profit Planning: Conducting Cost-Volume Profit AnalysisPermits you to calculate the level of sales required to generate a certain level of profit, e.g., $10,000

Sales to generate certain level of profit=

= = $270,000 in sales

 Slide5

Profit Planning: Conducting Cost-Volume Profit AnalysisThe above estimate can be reflected in the following income statement

Items

Figures

PercentageSales$270,000100%

Cost of Goods Sold

-$135,000

50%

Gross Margin$135,00050%Profit or Loss Before Taxes-$125,00044.44%$10,0005.556%Slide6

Cash flow ProjectionsAs good as your assumptions of reality. Some of the assumptions are: (page 154)

The projections in table 8-1a, 8-1b, 8-1c indicate a high rate of profit. The level of the profit will reduce substantially when:

The business cannot generate estimated levels of sales.

The gross margin is less than 50% of salesOperating expenses are underestimatedSales of the overall market did not grow as much as anticipated. The business did not get the anticipated market share. Slide7

Preparing your Proforma financial statementsA

balance sheet

is a financial statement that shows the worth, or value, of a business.

A pro forma balance sheet projects the growth of a business in terms of how much capital value the business will have at a particular date in the futureSlide8

Preparing your Proforma financial statementsPrior to the creation of the balance sheet you need

Your First year sales

Your Breakeven point

Your initial capital requirementWhether you have enough money to start the businessYour cash flow statementsSlide9

Preparing your Proforma financial statementsYou still need to prepare

Your opening day balance sheet

Your projected income statement for the first year

The closing balance sheet for the first yearThe income statement for the second through fifth yearSlide10

Preparing your Proforma financial statementsEvery Dollar assets you have must be balanced by the dollar of liabilities of equity.

Assets = liabilities + equity

The

assets side shows all property and capital to which the business claims ownership. The liabilities side shows all the debts of the business. The net worth of a business is determined by adding all the value of what is owned and subtracting from this the total debt of the business. Slide11

Preparing your Proforma financial statementsAssets

Current assets

include cash and assets that are easily converted into cash, such as inventory and accounts receivable.

Fixed assets are those capital purchases that generally take a longer time to convert or liquidate into cash, such as property, equipment, and fixtures that require a special buyer.Slide12

Preparing your Proforma financial statementsLiabilities

Current liabilities

are debts that are to be paid within 12 months of the date of the balance sheet.

Longterm liabilities are usually debts that come due more than 12 months after the date of the balance sheet. Slide13

Preparing your Proforma financial statements

Simplified

Pro Forma

Balance SheetSlide14

Preparing your Proforma financial statementsLiquidityA balance sheet allows entrepreneurs, bankers, and investors to quickly determine the liquidity of a business operation.

Liquidity

is defined as a business’s ability to meet its debt obligations as they become due. Slide15

Preparing your Proforma financial statementsDetermining a Business’s Liquidity

Two

common methods of determining a business’s liquidity are current ratio tests and acid-test ratios.Slide16

Preparing your Proforma financial statementsCurrent Ratio Test

The

current ratio

test compares cash, as well as any assets that can be converted into cash within a year, with the debt (liabilities) that will become due and payable within the year. The ratio is expressed as: current ratio = current assets ÷ current liabilitiesA favorable current ratio would be 2:1. A minimum acceptable ratio would be 1:1.Slide17

Preparing your Proforma financial statementsAcid-Test Ratio

The

acid-test ratio

is more restrictive as it eliminates inventory, the least liquid of current assets, from the numerator.The ratio is expressed as:acid-test ratio = (current assets – inventory) ÷ current liabilitiesSlide18

Preparing your Proforma financial statementsCash FlowA

cash flow statement

is a month-by-month projection of financial activities.

This analysis allows you to prepare for potential cash flow problems. A cash flow statement tells you what your business’s cash position really isA cash flow projection can be used to help determine the initial capital reserve for a start-up operationSlide19

Preparing your Proforma financial statementsFinancial Records

Entrepreneurs should maintain their own daily and monthly accounting records and use accountants for preparing tax returns and formal financial statements. Slide20

Preparing your Proforma financial statementsSmall business owners should have access to

Income and expense register

Accounts payable ledger

Accounts receivable ledgerFurniture, fixture, and equipment ledgerNotes payable ledgerPayroll records