the financial plan: projecting financial requirementsjul 01, 2018 · measuring cash flows •cash...
TRANSCRIPT
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
CHAPTER 10
The Financial Plan:
Projecting
Financial
Requirements
Developing the New Venture Business PlanPart 3
© 2008 Cengage Learning. All rights reserved. 10–2
Looking AHEAD
1. Describe the purpose and content of the income
statement, the balance sheet, and the cash flow
statement.
2. Forecast a new venture’s profitability.
3. Determine asset requirements, evaluate financial
sources, and estimate cash flows for a new venture.
4. Explain the importance of using good judgment when
making projections.
After you have read this chapter, you should be able to:
© 2008 Cengage Learning. All rights reserved. 10–3
Understanding Financial Statements
• Financial Statements (Accounting Statements)
Reports of a firm’s financial performance and
resources
Helps determine a startup’s financial requirements
Assesses the financial implications
of a business plan
• Basic Financial Statements
Income statement
Balance sheet
Cash flow statement
© 2008 Cengage Learning. All rights reserved. 10–4
Understanding Financial Statements (cont’d)
• Income Statement
A report showing the profit or loss from a firm’s
operations over a given period of time.
“How profitable is the business?”
Sales (revenue) – Expenses = Profits
– Revenue from product or service sales
– Costs of producing product/service (cost of goods sold)
– Operating expenses (marketing, selling, general and
administrative expenses, and depreciation)
– Financing costs (interest paid)
– Tax payments
© 2008 Cengage Learning. All rights reserved. 10–5
Sections of the Income Statement (cont’d)
• Cost of Goods Sold
The cost of producing or acquiring goods or services
to be sold by a firm
• Gross profit
Sales less the cost of goods sold
• Operating expenses
Costs related to marketing and selling a firm’s product
or service, general and administrative expenses, and
depreciation
• Operating income
Earnings before interest and taxes are paid
© 2008 Cengage Learning. All rights reserved. 10–6
Sections of the Income Statement (cont’d)
• Financing Costs
The amount of interest owed to lenders on borrowed
money
• Net Income Available To Owners (Net Income)
Income that may be distributed to the owners or
reinvested in the company
• Depreciation Expense
Costs related to a fixed asset, such as a building or
equipment, distributed over its useful life
© 2008 Cengage Learning. All rights reserved. 10–7
The Income Statement:
An Overview
10-1
© 2008 Cengage Learning. All rights reserved. 10–8
Operating Activities
Sales Revenue
=
=
=
Operating Income
Earnings Before Taxes
Net Income Available
to Owners
Cost of producing or
acquiring product or
service
(cost of goods sold)
Gross profit
Marketing and selling
expenses, general and
administrative
expenses and
depreciation
(operating expenses)
,
–
=
–
Financing Activities
Operating Income
Interest expense
on debt
(financing costs)
–
Taxes
Earnings Before Taxes
Income taxes–
Sections of the Income Statement (cont’d)
© 2008 Cengage Learning. All rights reserved. 10–9
Income Statement for Trimble & Associates Leasing, Inc.,
for the Year Ending December 31, 2007
10-2
© 2008 Cengage Learning. All rights reserved. 10–10
The Balance Sheet
• Balance Sheet
A report showing a firm’s assets, liabilities, and
owners’ equity at a specific point in time
Total Assets = Debt + Owner’s equity
© 2008 Cengage Learning. All rights reserved. 10–11
The Balance Sheet: An Overview10-3
© 2008 Cengage Learning. All rights reserved. 10–12
The Balance Sheet: Current Assets
• Current Assets (Gross Working Capital)
Assets that can be converted to cash within the firm’s
operating cycle
Cash
Currency and negotiable instruments
Accounts receivable
The amount of credit extended to customers that is
currently outstanding
Inventory
Raw materials and products held in anticipation of
eventual sale
© 2008 Cengage Learning. All rights reserved. 10–13
The Balance Sheet: Fixed Assets
• Fixed Assets
Relatively permanent resources intended for use in
the business (not for resale)
• Depreciable Assets
Assets whose value declines (depreciates) over time
• Gross Fixed Assets
Original cost of depreciable assets before any
depreciation expense has been taken
• Accumulated Depreciation
Total depreciation expense taken over the assets’ life
© 2008 Cengage Learning. All rights reserved. 10–14
The Balance Sheet: Fixed Assets (cont’d)
• Net Fixed Assets
Gross fixed assets less accumulated depreciation
• Other Assets
Assets other than current assets and fixed assets,
such as patents, copyrights, and goodwill that have an
estimated value
© 2008 Cengage Learning. All rights reserved. 10–15
The Balance Sheet: Debt
• Debt
Business financing provided by a creditor
• Current (Short-Term) Debt
Accounts payable: credit payable to suppliers
Accrued expenses: short-term liabilities incurred
but not paid
Short-term notes: Cash amounts borrowed that
must be repaid within a short period of time
• Long-Term Debt
Loans and mortgages with maturities greater than
one year
© 2008 Cengage Learning. All rights reserved. 10–16
The Balance Sheet: Debt (cont’d)
• Mortgage
A long-term loan from a creditor for which real estate
is pledged as collateral
© 2008 Cengage Learning. All rights reserved. 10–17
The Balance Sheet: Types of Financing
• Owners’ Equity
Money that the owners invest in the business
Owners are “residual owners” of the firm.
Creditors have first claim on the assets of the firm.
• Retained earnings
Profits less withdrawals (dividends) over the life of the
business
Owners’
equity =Owners’
investment–Cumulative dividends
paid to owners
Cumulative
profits+
Owners’
equity =Owners’
investment +Earnings retained
within the business
© 2008 Cengage Learning. All rights reserved. 10–18
Balance Sheets for Trimble & Associates Leasing, Inc.,
for December 31, 2006 and 2007
10-4
© 2008 Cengage Learning. All rights reserved. 10–19
The Fit of the Income Statement and Balance Sheet10-5
© 2008 Cengage Learning. All rights reserved. 10–20
The Cash Flow Statement
• Cash Flow Statement
A financial report showing a firm’s income (cash)
when it is received and expenses when they are paid.
Cash flows from normal operations (operating
activities)
Cash flows related to the investment in or sale of
assets (investment activities)
Cash flows related to financing the firm
(financing activities)
© 2008 Cengage Learning. All rights reserved. 10–21
Profits Versus Cash Flows
• Accrual-Basis Accounting
Matches revenues when they are earned against the
expenses associated with those revenues.
Sales reflect both cash and credit (noncash) sales
Inventory purchased on credit is a noncash
expense
Depreciation is a noncash expense
Income tax is accrued and not entirely expensed
• Cash-Basis Accounting
Reports transactions only when cash is received or a
payment is made.
© 2008 Cengage Learning. All rights reserved. 10–22
Measuring Cash Flows
• Cash Flows from Operations
Net cash flows generated from operating a business
Calculated by adding back to operating income
depreciation, deducting income taxes, and
factoring in any changes in net working capital.
• Adjusted Income
After-tax cash flow
• Net Working Capital
Money invested in current assets less accounts
payable and accruals
© 2008 Cengage Learning. All rights reserved. 10–23
Measuring Cash Flows (cont’d)
• Cash Flows from Investment Activities
Cash inflows and outflows resulting from the sale or
purchase of equipment or another depreciable asset
• Cash Flows from Financing Activities
Cash inflows and outflows resulting from:
Paying dividends and interest expense.
Increasing or decreasing short-term and long-term
debt.
Issuing or repurchasing stock.
© 2008 Cengage Learning. All rights reserved. 10–24
After-Tax Cash Flows
from Operations
Cash
Flows
from Assets
Changes in
Operating
Working Capital
Changes in
Long-Term
Assets
Computing Cash Flows from Assets
After-tax cash flows
from operations
Investments in
operating
working capital
Investments
in long-term
assets
Cash
flows from
assets=
© 2008 Cengage Learning. All rights reserved. 10–25
Computing Other Cash Flows
• After-Tax Cash Flows From Operations
Net income Depreciation
expense
Interest
Expense
After-tax
cash
flows from
operations
= + +
• Operating Working Capital
Current
assets
Operating
Working
Capital= –
Account payable
and accruals
© 2008 Cengage Learning. All rights reserved. 10–26
Cash Flow Statement for Trimble & Associates Leasing, Inc.,
for the Year Ending December 31, 2007
10-6
© 2008 Cengage Learning. All rights reserved. 10–27
Cash Flows
from Financing
Interest and Dividends
Paid to Investors
Increase in Debt
(firm issues new debt)
Increase in Equity
(firm issues new stock)
Decrease in Debt
(firm repays debt)
Decrease in Equity
(firm repurchases
outstanding stock)
Increases in Cash Flows from Financing
Decreases in Cash Flows from Financing
Cash Flows from Financing
© 2008 Cengage Learning. All rights reserved. 10–28
Cash Flow Patterns10-7
Pattern 1. This firm has positive cash flows from operations, negative investment cash
flows, and positive cash flows from financing. It is using its cash flows from
operations and new financing to expand the firm’s operations.
Pattern 2. This firm is using cash flows from operations to expand the business, pay down
debt, and/or pay its owners.
Pattern 3. This firm is encountering negative cash flows from operations, which are being
covered by selling assets and by borrowing or acquiring more equity financing.
Pattern 4. This firm has negative cash flows from operations and is growing the company’s
fixed assets through increased financing. This firm is a startup business that has
yet to break even, is investing in assets to produce future cash flows, and is
having to raise capital to make that happen.
© 2008 Cengage Learning. All rights reserved. 10–29
Financial Forecasting
• Pro Forma Financial Statements
Statements that project a firm’s financial performance
and condition
Purposes of pro forma statements:
How profitable can the firm be expected to be, given
the projected sales levels and the expected sales
expense relationships?
What will determine the amount and type of
financing (debt or equity) to be used?
Will the firm have adequate cash flows? If so, how
will they be used; if not, where will the additional
cash come from?
© 2008 Cengage Learning. All rights reserved. 10–30
Forecasting Profitability
• Net Income Depends On:
Amount of sales
Cost of goods sold and operating expenses
Interest expense
Taxes
“If we’re doing so well, then why am I always so broke?”
© 2008 Cengage Learning. All rights reserved. 10–31
Pro Forma Income
Statements for
C&G Products, Inc.
10-8
© 2008 Cengage Learning. All rights reserved. 10–32
Forecasting Assets and Financing Requirements and Cash Flows
• Bootstrapping
Minimizing a firm’s investments
• Determining Asset Requirements
Use industry ratios for assets-to-sales
Use breakeven analysis and empirical data
• Percentage-of-Sales Technique
Using a percentage of the total sales for a firm as the
basis for forecasting the level of assets. accounts
receivable, and inventories to be held by a firm.
© 2008 Cengage Learning. All rights reserved. 10–33
Assets-to-Sales Financing Relationships10-9
© 2008 Cengage Learning. All rights reserved. 10–34
Percentage-of-Sales Technique Example
© 2008 Cengage Learning. All rights reserved. 10–35
Determining Financing Requirements
• Basic Principles for Financing of Firms
The more assets a firm needs, the greater the firm’s
financial requirements.
A firm should finance its growth in such a way as to
maintain proper liquidity.
The amount of total debt that can be used in financing
a business is limited by the amount of funds provided
by the owners.
Some types of short-term debt maintain a relatively
constant relationship with sales.
There are two sources of equity: external and internal.
© 2008 Cengage Learning. All rights reserved. 10–36
Determining Financing Requirements
• Liquidity
The degree to which a firm has working capital
available to meet maturing debt obligations.
• Current Ratio
The firm’s relative liquidity, determined by dividing
current assets by current liabilities.
• Debt Ratio
Debt as a fraction of assets; total debt divided by total
assets.
Spontaneous financing—debts such as accounts
payable that increase as the firm grows.
© 2008 Cengage Learning. All rights reserved. 10–37
Sources of Equity Capital
• External Equity
The owners’ original investment
• Profit Retention
The reinvestment of profits in a firm
• Internal Equity
Capital from retaining profits within the firm
• Forecasting financial requirements (in total):
Total
sources of
financing
Spontaneous
financing
Profits
retained
within the
business
Total asset
requirements= +=External
sources of
financing+
© 2008 Cengage Learning. All rights reserved. 10–38
Projected Balance Sheets
for C&G Products, Inc.
10-10
© 2008 Cengage Learning. All rights reserved. 10–39
Good Forecasting RequiresGood Judgment
• Practical Suggestions
1. Develop realistic sales projections.
2. Build projections from clear assumptions
about marketing and pricing plans.
3. Do not use unrealistic profit margins.
4. Don’t limit your projections to an income statement.
5. Provide monthly data for the upcoming year and annual data
for succeeding years.
6. Avoid providing too much financial information.
7. Be certain that the numbers reconcile—and not by simply
plugging in a figure.
8. Follow the plan.
© 2008 Cengage Learning. All rights reserved. 10–40
Key TERMS
• financial statements
(accounting statements)
• income statement
(profit and loss statement)
• cost of goods sold
• gross profit
• operating expenses
• operating income
• financing costs
• earnings before taxes
• net income available to owners
(net income)
• depreciation expense
• balance sheet
• statement of net worth
• current assets
(gross working capital)
• accounts receivable
• inventory
• fixed assets
• depreciable assets
• gross fixed assets
• accumulated depreciation
• net fixed assets
• other assets
• debt
• current debt
(short-term liabilities)
• accounts payable
(trade credit)
© 2008 Cengage Learning. All rights reserved. 10–41
Key TERMS
• accrued expenses
• short-term notes
• long-term debt
• mortgage
• ownership equity
• retained earnings
• cash flow statement
• accrual-basis accounting
• cash-basis accounting
• cash flows from operations
• adjusted income
• net working capital
• pro forma financial statements
• bootstrapping
• percentage-of-sales technique
• liquidity
• current ratio
• debt ratio
• spontaneous financing
• external equity
• profit retention
• internal equity
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
Appendix 10A:
Computing Cash
Flows for Trimble
& Associates
Leasing, Inc.
Developing the New Venture Business PlanPart 3
© 2008 Cengage Learning. All rights reserved. 10–43
Income Statement and
Balance Sheet Changes for
Trimble & Associates
Leasing, Inc., for the Year
Ending December 31, 2007
A10-1
© 2008 Cengage Learning. All rights reserved. 10–44
Cash Flow Statement for Trimble & Associates Leasing, Inc., for the Year
Ending December 31, 2007
A10-2
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
Appendix 10B:
Computing Cash
Flows for C&G
Products, Inc.
Developing the New Venture Business PlanPart 3
© 2008 Cengage Learning. All rights reserved. 10–46
Cash Flow Statements for C&G Products, Inc.A10-B