Business Plan Financials II

Celina Peña

March 2, 2009

Agenda

Personal Finances Understanding & Creating your Price Building a budget Cash Flow Profit & Loss

Your Credit Score

FICO Credit Score, is named after the company that developed it Fair Isaac & Company.

Is a number between 300 and 850. The higher the number the better your financial situation.

This is a snapshot of your credit and reduces decision making for lenders.

FICO Score a/k/a Credit Score

Amount Owed30%

Payment History35%

Types of Credit in Use

10%New Credit

10%

Length of Credit History15%

Personal Financial Statement

Commonly referred to as a personal balance sheet or statement of net worth. It is a complete listing of all assets owned and liabilities owed.

Itemizes Assets and Liabilities (obligations and resources of $)

Personal Financial StatementAssets Dollar AmountCash: Checking $5,200Cash: Savings $300,000Notes & Contracts $7,500Life Insurance $10,000Personal Property $35,000Real Estate $0Other $0Total Assets $357,700

Liabilites Dollar AmountCurrent Debt $90,000Notes Payable $5,000Taxes PayableReal Estate Mortgages $120,000Total Liabilities $215,000

Net Worth $142,700

Creating an Expense Sheet

Inventory Items Supplies Office Supplies Equipment Furniture Rent/Building/Purchasing Monthly Fixed Costs: Rent and utilities

Resources for Pricing

Trade Associations Business to Business Inquiries Rent investigation – asking potential

neighbors searching online

Price Creation

Competitive AnalysisSecret ShoppingOnline Shopping

Industry Trends Documentation of demand for product &

service

Price Creation

Direct Labor: labor used to produce products and services. These are directly attributed to customer activity

Indirect Labor: labor used to provide supporting services to the business. These support business functions that are not directly chargeable to the customer.

Direct Materials: Materials used in the final product or service purchased by customers. These materials are charged directly to the customer’s account.

Price Creation

Overhead Expenses: OE are absorbed by the business and factored into

the selling price as a percentage of direct labor costs. They include indirect costs such as accounting, advertising, depreciation, legal fees, utilities, rent, repairs, taxes, telephone, interest, etc.

Overhead Rate Equation: Yearly Overhead Expenses/Yearly Billable Direct

Labor Dollars $3,500/ (800x$8)= 55%

Breakeven Analysis

A breakeven analysis is used to determine how much sales volume your business needs to start making a profit.

The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan.

Break Even Analysis

Fixed Costs/(Rev. per unit – Variable costs per unit)

Fixed Costs are costs that must be paid whether or not any units are produced. These costs are fixed over a period of time.

Variable Costs are costs that vary directly with the number of products produced. For instance, the cost of the materials needed to produce the units isn’t always the same.

Break Even Example

EXAMPLE:Fixed costs for producing 100,000 widgets is $30,000 a year. Your variable costs are $2.20 materials, $4.00 labor, and $.80 overhead for a total of $7.00Say you sell the widget for $12.00 each. This is the equation:$30,000/($12-$7) =6,000 units.

This is the number of widgets that have to be sold at $12.00 before your business will start to make a profit.

Example of Costs ListedSales

Factor

$120 Product 1$85 Service 1

Cost of Goods Sold$30 Product 1$22 Service 1

Fixed costs$2,000 /month Rent

$600 /month Utilities$1,200 /year Insurance$1,000 /month Advertising

8% /year Interest on loan(s)$100,000 Loan(s)

Variable Costs$2,000 /month Employees

$0 /month Owner's draw30% EmplBenefits

Financial Documents

Start up Cash Flow Profit & Loss Balance Sheet

Startup & Project CostsDescription Amount

Building $75,000

Land $20,000

Remodeling $30,000

Fixtures & Equipment $8,500

Inventory $25,000

Advertising $1,800

Loan Fees $6,000

Working Capital $25,000

Total $191,300

How much willit take to open your doors?

Sources of Revenue

Description Loan Owner $ Total

Inventory $15,000 $10,000 $25,000

Furniture & Equipment

$8,500 $8,500

Land & Building $95,000 $95,000

Remodeling $30,000 $30,000

Working Capital $25,000 $25,000

Organizational Cost

$7,800 $7,800

Total 156,300 35,000 $191,300

Balance Sheet – Present

The value of a company at a certain point in time.

Statement of Assets and Liabilities.

Profit and Loss Statement – History

Measures and reports Profit generated during a certain period.

Profit/Loss is an opinion, based on Accounting Principles.

Cash Flow – Future

Statement showing cash generation (inflow)

and cash usage (outflow)

Profit and Loss, Balance Sheet and Cash Flow Statements

Cash Flow

Cash inflow and outflow from operations

Use assumptions from market research and industry averages

Realistic seasonal sales by the month Method of payment for services Inventory purchasing Use several different ways to project sales Can the business sustain in slow periods

Cash Flow

Month 1 Month 2 Month 3

Cash on Hand $25,000 $23,000 $24,000

Plus Revenues $12,000 $19,000 $22,000

Available Cash $37,000 $42,000 $46,000

Less Expenses $14,000 $18,000 $20,000

End of Month $23,000 $24,000 $26,000

Must Consider: reasonable assumptions, seasonality, aging ofAccounts receivable.

Profit & Loss Statement

measures a company's sales and expenses during a specified period of time. The function of a P & L statement is to total all sources of revenue and subtract all expenses related to the revenue. It shows a company's financial progress during the time period being examined.

Profit & Loss Statement (income)

Year 1

Gross Sales $300,000

Less COGS $218,000

Gross Profit $82,000

Less Operating Exp. $58,000

Profit before Tax $24,000

COGs= Cost of Good Sold

Balance Sheet

Purpose to provide a snapshot of a business’s financial position at a given point in time.

Illustrates what the business owns, what it owes and what the business’s net worth is at a given time.

Total assets should equal the sum of the total liabilities an the net worth.

Key elements: current assets (cash accounts receivable, inventory), fixed assets (property, plant and equipment), intangible assets (patents), liabilities and owners equity, current liabilities (accounts payable & long term debt)

Total Assets + Total Liabilities + Total Capital & Liabilities

Assets Fixed Assets + Inventory + Accounts Receivable + Cash and Cash equivalent = Total Assets

Shareholder’s Equity and Liabilities Equity Share Capital + Other Restricted Equity + Net Profit for the Year + Retained Earnings = Total Equity

Liabilities Long Term Loans + Short Term Loans + Accounts Payable = Total Shareholder’s Equity and

Liabilities

Total Assets = Total Shareholder’s equity and liabilities

Balance Sheet

Balance Sheet ExampleAssets Liabilities and Owners' Equity

Cash $6,600 Liabilities

Accounts Receivable $6,200 Notes Payable $30,000

Accounts Payable

Total liabilities $30,000

Tools and equipment $25,000 Owners' equity

Capital Stock $7,000

Retained Earnings $800

Total owners' equity $7,800

Total $37,800 Total $37,800

Your Next Steps

Research your business and production costs.

Develop your overhead and breakeven analysis.

Prepare Startup Cost Prepare Cash Flow & Profit & Loss