Financial Projections

Burrill CompetitionSpring 2007

A Brief Exercise…

• Take a few minutes and try to think of the various categories of expenses your venture will have for the first 12 months or so.

• Income Statement– Definition: Profit or loss of a business over time– Use: Project & monitor profit & so operating efficiency

• Cash Flow Statement– Definition: Tracks the inflows & outflows of cash– Use: Project & monitor the cash available for operations

& growth

• Balance Sheet– Definition: Snapshot of a firm’s wealth – and how it has

funded that wealth– Use: Project & monitor the growth or decline of a firm’s

value/capital - and so potential

Financial statements

+ Net Revenues

- Cost of Goods Sold

= Gross Profit

- Operating Expenses

= Operating Profit

+/- Other Income/Expenses

= Profit before tax

- Tax

= Profit after tax

Income statement

• Income Statement– Definition: Profit or

loss of a business over time

– Use: Project & monitor profit & so operating efficiency

Income statement

Gross Profit

OperatingProfit

Net Profit

P.A.T.COGS

Op. Exp.

OtherExp. Tax

Revenues

Other Income

Div>CF

R/E>B/S

+ Net Revenues

- Cost of Goods Sold

= Gross Profit

Income statement

• Net Revenues– Sales after discount, less

returns

• Cost of Goods Sold– Direct goods + direct labor per unit sold

• Gross Profit– Amount left to cover operations

• COGS/Sales – Constant or improving as percentage– Perils and pleasures of volume

= Gross Profit

- Operating Expense

= Operating Profit

Income statement

• Operating Expenses– Salaries (benefits, taxes)– Sales & Marketing– General Administration (supplies, IT,

insurance)– Space (rent, maintenance, utilities)– Depreciation (spreading capital

expense over use/ time)– Professional fees

• Operating Profit– Basic measure of success

= Operating Profit

+/- Other Inc or Exp

= Profit before taxes

Income statement

• Other Income– Sidelines (can be very valuable and/or

indicate new businesses or products)– Interest

• Other Expense– Cost of financing, especially interest

on loans– Other miscellaneous expenses

• Profit before Taxes– Net income

= Profit before Taxes

- Income Taxes

= Profit after Taxes

Income statement

• Income Taxes– State and local– Don’t confuse tax management

with management• Profit after Taxes

– Captured wealth– Reinvest (retained earnings) >

B/S– Distribute (dividends) > CF

Account categories that matter

• Revenues– Major lines and/or channels– Other income sources

• COGS– Direct labor, raw materials, subcontracts

• Operating Expenses– Reflect business model: Marketing/Sales, GA– Subdivide important categories; lump together

unimportant ones

• Other Expenses

+ Net Revenues

- Cost of Goods Sold

= Gross Profit

- Operating Expenses

= Operating Profit

+/- Other Income/Expenses

= Profit before tax

- Tax

= Profit after tax

Account categories exercise

• Planning: What categories should matter?

• Analysis: What categories has management chosen – and what do they tell you?

Cash flow projections

• Cash Flow Statement– Definition: Tracks the

inflows & outflows of cash

– Use: Project & monitor the cash available for operations & growth

+ Revenues- Cost of Goods- Operating Expenses (excluding

depreciation)= Cash flow from operations

+ Investment income- Acquisition of space, r&d,

equipment, etc = Cash flow from investment

+ Equity investment+ Loans- Repayments- Dividends / owner withdrawals= Cash flow from financingCash on Hand – End of Period

Building the cash flow statement

• Inflows– Operating: Adjust revenues for bad debt and timing– Financing: Capital inflows? Loans?

• Outflows– Operating: Inventory purchases– Operating: Operating expenses (without

depreciation), adjusted for timing– Investment: Capital purchases– Financing: Principal repayment, investor

repayment, owner withdrawals

Current AssetsLong-term Assets= Total Assets

Current LiabilitiesLong-term Liabilities= Total Liabilities

Capital InvestmentRetained Earnings= Total Equity

Balance sheet

• Balance Sheet– Definition: Snapshot

of a firm’s wealth – and how it has funded that wealth

– Use: Project & monitor the growth or decline of a firm’s value/ capital - and so potential

A = L + E

• Assets = Wealth = Use of Funds – Cash, loans to customers (A/R), buildings,

equipment, inventory, partnerships– Platform for growth

• Liabilities = LeveragedSource of Funds– Nervous claims on wealth secured by contracts &

collateral such as loans from vendors, banks, other sources, bonds

– Expand possibilities while increasing risk

• Equity = Capital = Invested Source of Funds– More patient claim on wealth secured by control,

especially owners’ capital plus retained profits