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Burke Workshop Doing Financial Projections

Burke Workshop Doing Financial Projections

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Published by Aakash Sawani
It helps in fundamental analysis of the company
It helps in fundamental analysis of the company

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Published by: Aakash Sawani on Sep 13, 2013
Copyright:Attribution Non-commercial

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09/29/2014

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Yale
 
School of Forestry & Environmental Studies
Kroon Café
Doing Financial Projections
What You Need
 Clear ideas about the purpose and audience for your projections. Understanding of the key drivers of financial results for the business. Some knowledge of accounting & financial statement analysis: Skill in using spreadsheet software -- such as Excel Creativity, attention to detail, and good judgment. A lot of time.
Some Warnings
O
Most people starting new businesses are much too optimistic
about thefuture financial results of their business. Their energy and enthusiasm cloudtheir judgment. They
underestimate the time it takes to get things done,and how much things will cost.
Over-optimistic expectations often lead tounderestimating how much money they need to finance initial losses.
O
Once a business really gets going (in Year 2 or 3),
doubling the size of thebusiness each year is about the maximum a good CEO really canachieve.
Even growth that fast (double every year) is extremely difficult tomanage. Most successful businesses do not grow
faster 
than 100% per year,nor do they need to.
Getting Started
O
Financial projections should include the following kinds of final “output”: 
Income Statements
 
Balance Sheets
 
Sources and Uses of Cash Statements (Cash Flow Statements)
O
The invention of spreadsheet software has made financial statement modelseasy to create and even easier to play with. Follow this link for a simpleprojection model template.
O
In practice, though, you will likely have to build your own income statementmodel. The key drivers often are unique to the particular situation. You canuse the template model, however, to help calculate Balance Sheets, Sourcesand Uses of Cash, plus do some Statement Analysis – just by inputting your custom income statement, and making some simple assumptions.
O
It is usually best to do monthly projections for the first two years, thenquarterly after that. Add the periods up, and present the annual summaries topotential financing sources.
 
Yale
 
School of Forestry & Environmental Studies
Kroon Café
Income Statements:
Monthly ProjectionsMonth 1Month 2Month 3Month 4Month 5Month 6RevenuesCost of Goods SoldGross ProfitSales & Marketing ExpenseGeneral & Admin ExpenseOperating IncomeDepreciation ExpenseInterest ExpenseTaxesNet Income (Loss)
Key points:
o
Revenues & expenses
are independent of cash payments. Recognize themwhen a transaction happens, not when cash comes in or goes out (maybemuch later).
o
Cost of Goods Sold
are the
direct costs
in producing your service materials, installation costs, customer service, maintenance, etc.
o
Revenue – Costs of Goods Sold = Gross Profit
o
General & Administrative
are support costs, like finance, HR, IT, topmanagement
o
Gross Profit Sales & Marketing General & Admin = OperatingIncome
, also known as Operating Cash Flow
 
o
Following these conventions allows for comparison of your projections withother similar business’ results.
o
Depreciation expense
spreads out the cost of property, plant and equipment – over its useful life.
o
R&D costs?
Making Assumptions
O
Start with the monthly numbers for Year 1
. For any business raisingmoney, making your numbers in your first year of projections is reallyimportant. If you, as management, miss these numbers you may:1.Run out of money too soon,
 
Yale
 
School of Forestry & Environmental Studies
Kroon Café
2.Get fired and/or 3.Not be able to raise more money.If 1) or 3) happens, you will probably go bust.
O
Consider the macroeconomic situation
when building your projections: Overall economic growth rate of GDP during projection period Economic recession(s) - timing, duration Rate of inflation Level of interest rates
O
Tackle the Income Statement first
. Project your number of customersbased on the key revenue driver. Project
monthly sales
– for twelvemonths....
Monthly ProjectionsMonth 1Month 2Month 3Month 4Month 5Month 6Customers
0011204577
Revenues
00361326
o
Next, think through the 12 months of costs associated with these sales: Cost of Goods Sold materials, installation costs, inspection,maintenance, regulatory costs, billing system Selling costs – sales people, advertising, travel, web site Administrative Costs Management, office space, supplies, utilities,insurance
o
Points to remember: You may not have any revenues for the first few months – as you build thesystem, sign up customers, etc. – but you will still have expenses. Modelthis. Don’t forget to figure in one-time start-up costs (incorporate, write abusiness plan, licensing, permitting fees, getting regulatory approval, etc.) If you have more than one product or service, model them separately,then total them. Be sure to model total headcount and include cost of benefits (20-25% of salary, typically). You should allocate personnel costs into Cost of GoodsSold, Marketing & Sales and General & Administrative, based on function. Rental space can be: (Headcount x Avg. Sq. Ft. Per Person x $ Cost Per Sq. Ft.)

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