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THE FINANCIAL PLAN

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PR.OFILE

TONY HSIEH

Tony believes that they are crucial in maintaining a competitive edge and were important in achieving the $1 billion in sales. Tony makes a visit during the second week and offers anyone $2. Good budgeting and financial planning are also significant factors in helping to reach these lofty goals'1 some unique hnancial characteristics. are costly to the company. The company's focus on customer service is designed to make sure the customer has a quality experience from beginning to end. both at the employee and customer level. Although these services. This not only enhances each customer's loyalty but also attracts new customers. or where employees exist. In addition. then he or she is responship. which has recently expanded to clothing. The un¡que culture of the company also includes such things as happy hours. His philosophy regarding these strategies is that only a happy employee ca. Customers are invited to submit reviews and to share their experience with others. and life-related issue support that Tony pays for out of his own pocket.282 PART 3 FROM THE OPPORruNIYTO THE BUSINESS PI-AN warehouse to Kentucky to be nearer the UPS hub and to ensure the fast delivery of the products offered. a nap room. which are included in the discussion that follows. the . the cornpany tries to ensure their continued interest by keeping them engaged in various online and social media outlets. sible for the tudgeting dec entrepreneur should prepare operroprietor.000 if they would like to drop out and quit the program.n provide great service. Only 1 percent of the hires have taken him up on the offer. handbags. To ensure that the hires are serious. Once Zappos wins over a customer (75 percent of the customers are repeaters). fully paid health insuran(e. and accessories. all employees once hired must complete a four-week customer loyalty training prograrn to make sure they understand the culture that has made the company so successful. OPERATING AND CAPITAL BUDGETS Before developing the pro ating and capital budgets.

for the cost of goods produced.l. salaries. From the sales forecasts the entrepreneur will then determine the cost of these sales.1 illustrates a simp first three months of operation. In a manufacturing venture the ng them to as a buffer Table 10."p. advertising. month. As can be seen in the following.CHAPTER 10 THE FINANCIAL PLAN 283 ndi be budgets will ultimately rest with the owners o. this budget can be a very valuable tool to assess cash needs. the production required in the month of January is greater than the projected sales because of the need to retain 100 unis in inventory. the entrepreneur must first develop a sales budget that is an estimate of the expected volume of sales by month. After completing the sales budget.r."ln?o. This budget. Thus. This ales in_ crease. provides the basis for the pro forma statements discussed in this chapter. As can be seen. this ncrease demand and cost of goods sold as a direct expense. in the preparation of the pro forma income statement. items can contact w the additional employee. utilities. Methods of projecting sales are discussed next. Thus. "nt. tion from this budget is the actu necessary to allow for sudden changes in demand. First a list of fixed expenses (incurred regardless of sales volume) such as rent. In February the actual production will take into consideration the inventory from January for that continues budg inventory. in those ventures in which high levels of inventory ar€ necessary or where demand fluctuates signifrcantly because ofseasonality. along with the manufacturing budget illustrated in Table 10. üre entrepreneur can then focus on operating costs. .

you're being both irrespon- sible and stupid. since the federal government may be called upon for financial rescue.- 4 Tell the Truth. It is easy to take advantage of a situation for financial gain. .t consistent with . Don't Exploit.. Because money was being made in these deals.: When you can reasonably foresee that a decision is likely to hurt people and you make that decision anyway. 6. Prevent flarm. However... . A leader has an ethical obligation to be hoñest with stakeholders about issues thát directly concern them. _-. According to a recent three-part story in Iáe Wall Street Journal. the willingness of investors to buy and sellfinancial products whose complexity they didn't fully understand was one of the primary catalysts of the bust. no one thought to question what was going on or had the strength of character to speak up about any suspicions. subprime mortgage lenders and brokers who lend money to people likely to default are enriching them_ selves at the expense of the rest of us. . but doing so isn. 5. :. 2 Know YourProduct. ' . For example. knowing your product isn't a nicety of doing business. lt is an 2U i .

In the wake of the toy industry's lead-paint scare in 2007. PRO FORMA INCOME STATEMENTS The marketing plan discussed in Chapter 8 provides an estimate of sales for the next 12 months. . which can include the computation of the cost of capital and the anticipated return on the investment using present value methods. Inc.. vehicles. buying used. 13. It may also considerevaluating the costs of make or buy decisions in manufacturing or a comparison of leasing. but .nothing more than price gouging. 8." and that Mattel was working with the Consumer product Safety Source: Reprinted from February 2. This means. Capital budgets are intended to provide a basis for evaluating expenditures that will impact the business for more than one year.good leadership. which was. in part. Don't Make Frornises You Can. Because of the complexity of these decisions. . tractors in China whose toys didn't meet U. 10. 2009 issue of BusinessWeek by special permission.000 for unfair business practices following Hurricane Katrina. safety standards. BusinessWeek Onlinz. Since sales are the major source ofrevenue and since other operational activities and expenses relate to sales volume. a capital budget may project expenditures for new equipment.5. Mattel CEO Robert Eckert took the high road and told a Senate subcommittee that the company failed "by not closely overseeing subcon. it is usually the first item that must be defined. .. or buying new equipment.3 summarizes all the profit data during the hrst year of operations for MPP Plastics. Transparency and accountability should be the new buzzwords. computers.: 9 the long-term negative consequences are real and significant: In New york State. After Hurricane lke hit last the wholesale price of gasolÍne shot up. for example. p. but generally speaking.t Keep . we have a strong duty to be true to our word. There are rare circumstances in which we not only have a right but an ethical obligation to break a prom: ise. more than a dozen companies were fined more than $60. For example. Take Responsibility for your Mistakes. or even a new facility. This company makes plastic moldings for such customers as hard goods 285 . and keep the promises you make. year. copyight @ 2009 by The McGraw-Hill Companies. . Table 10. 7. ln the short run. companies that exploited a natural tragedy may have profited financially. "A¡e You a Good Leader?" bv Bruce Weinstein. it is recommended that the entrepreneur enlist the assistance of an accountant. . that business leaders who make mistakes should apologize to those they have let down and do whatever is necessary to make amends.

Forecasting techniques such as survey of buyers' intentions. Given existing data on the number of "hits" by a similar type of Web site.286 PART 3 FROMTHEOPPORruNIYTOTHEBUSINESSPLAN *Added shipper in month 3lTrade show +Plant and equipment of $72. and some trial experience might provide the basis for these hgures. it is possible to project the number of consumers who will actually buy products from the Web site and the average dollar amount per transaction. pro forma income Projected net profit calcul ated from proj ected revenue minus projected costs and expenses manufacturers. or time series may be used to project sales. From the number of hits. depending on the given situation in any particular period. it wilt take a while for any new venture to build up sales. Heavy advertising expenditures (discussed subsequently) also will be incurred to create this awareness. the company begins to earn a profit in the eleventh month. a giftware Internet start-up could project the number of average hits expected per day or month. The pro forma income statements also provide projections of all operating expenses for each of the months during the frrst year. In preparation of the pro forma income statement. The costs for achieving these increases can be disproportionately higher in some months. and appliance manufacturers.ü10 depreciated straight line for five yeus.2. composite of sales force opinions. Using a reasonable percentage of these "hits" times the average transaction will provide an estimate of sales revenue for the Internet start-up. Sales revenue for an Internet start-up is often more diffrcult to project since extensive advertising will be necessary to attract customers to the Web site. For example. As can be seen from the pro forma income statement in Table 10. a giftware Internet company can anticipate no sales in the first few months until awareness of the Web site has been created.2 It may also be possible to find hnancial data on similar start-ups to assist with these projections. Marketing research. Cost ofgoods sold remains consistent at 50 percent ofsales revenue. toy manufacturers. . As discussed earlier and illustrated in Table 10. sales by month must be calculated hrst. expert opinions.3. As would be expected. industry sales.

In projecting the operating expenses for years 2 and 3. In the second year. shows a modest profit of e venture adds an additional em_ ployee and also incurs a 26 percent increase in sales. In the pro forma statements for MPP Plasúcs (Tables 10. the mmpany does not need to spend with the sales increase. rent. we can see that the venture begins to eam a .4).3 and 10. Generall¡ investors prefer to see projections. insurance' and interest are likely to remain steady unless new equipment or additional space is purchased.CHAPTER ¡O THE FINANCIAL PLAN 287 ciation or Food Marketing Institute These percentages are determined industry. utilities.gffi. Items like depreciation. Some utility expenses such as heat and power can be computed uy using p a $16.3. it is helpful to first look at those expenses that will likely remain stable over time. the costs will need to be included In addition to the monthly pro forma income statement for the should be made for years 2 and 3. Year I totals have already been calculated in Table 10.Other industries also pub such as those listed in Table 7 -2. As new personnel are hired to support the increased business. Salaries and wages for the company should reflect the number of personnel employed as well as their role in the organization (see the organization plan in Chapter 9).Trade associations and trade magazines will also often quote these ratios in industry newsletters or trade articles. resulting in a net profit of $121 .3ü) .

radio. it is most important to be conservative for initial planning purposes. and. Inventory costs would be based on the projected sales revenuejust as would be the case for any retail store. When calculating the projected operating expenses. links from the Web sites of magazines such as Womnn's Day. Better Homes and Gardens. Selling expenses. however. and print-all selected because of their link to ttre target market.288 PART 3 FROMTHEOPPORruNIYTOTHEBUSINESSPLAN *No taxes are incuned in profitable yeus 2 and 3 because of tl¡e carryover of losses in yru l. advertising. and Google. Sales may not be regarded as cash because a sale may be incurred but payment may not be made for 30 days. These expenses would typically involve a selection of sea¡ch engines such as Yahoo!. Proht is the result of subtracting expenses from sales. salaries and wages. MSN. PRO FORMA CASH FLOW Cash flow is not the same as profit. inventory and advertising expenses. A reasonable proht that is earned with conservative estimates lends credibility to the potential success of the new venture. and taxes may be represented as a percentage of the projected net sales. capital budgeting and operating expenses will tend to be consumed by equipment purchasing or leasing. For the lnternet start-up. and extensive media advertising in magazines. In . Lycos. Cash flows only when actual payments are received or made. whereas cash flow results from the difference between actual cash receipts and cash payments. Advertising costs. the giftware Internet company introduced ea¡lier would need to purchase or lease an extensive amount of computer equipment to accommodate the potential buyers from the Web site. television. industry standard costs per square foot of space that is utilized by the new venture. For example. would need to be extensive to create awareness for the giftwa¡e Web site. Family CircIe.

profitable success for a new ven there The is illustrated in Table 10.CHAPTER 10 THE FINANCIAL PLAN 289 addition. cash payments to reduce the principal on a loan do not constitute a business expense but do constitutá a reduction ofcash. h flow. It is important for the entrepreneur to make monthly projections of cash like the monthly projections made for profits. revenue because of this fee. On the other hand. which the in_ come statement but to understand there are some adjustments that need to be made to the venture at a point in time and is sometimes easier to understand. not all bills are paid immediately. In this met For strict accounting purposes the indirect and the direct method. g of this chapteq one occasions.5. The numbers in the cash flow projections are constituted from .

B U'SI NESSWEEK PROVIDE ADVICE TO AN. These are hard-working. I also recommend that they meet face to face with their banker. including deep cuts in operating costs. they will be able to point to the cost measures already in place and forestall foreclosure on their loan. even if they have to take a hit by offering cash discounts or accepting partial payment just to bring the money in. copyright @ 2009 by The McGraw-Hill Companies. CONTROL The owners of Hot & Cold have three choices: Walk away at great personal financial ruin. Problem to Stay in Business. It'll hurt. sequences for failure to comply. They're teetering on the verge of bankruptcy. hope for a big client to fly to their rescue and help them pay off their huge debt. What can I do to get faster payments on my billing? 3. its problems mult¡pl¡ed. a plumbing and heating supply company in the heart of Virginia's Shenandoah Valley.2UJ9 issu¿ of BusinessWeek by special permission. Overtime alone is about 9250.is at $6 million in sales and is running at a loss iñ'excess of $1 million. .. The three guys who took over from the family who founded Hot & Cold have no training as managers. Crunching the numbers over the past five years shows lost opportunity and bad financial management have cost the company about 95 million in profits. But. or take control of their own business. Asthe housing boom g(ew.m.'They. Large positive cash flows in any time period may need to be invested in short-term sources or deposited in a bank to cover future time periods when disbursernents .AS' SEEN I N . on Monday.. can't be "tepid" about this. My business is profitable. is hgqdgd forthe slaughterhouse. To keep the company alive. but it's not too late. The bank is nervous.businessweek-com. they've mortgaged their homes. But as the company expanded.000 a year. If disbursements are greater than receipts in any time period. CONTROL. Hold department meetings at 8 a. Today Hot & Cold. First they nged to:sit down with each department head and develop an adopting plan for cash management. www..r so did sales." by George Cloutier with Samantha Marshall. Every job needs to be monitored by microscope from start to finish. from $z mill¡on a year to $14 million over four years. Hot & Cold requires drastic íniernal over- haul.* ADVICE TO AN ENTREPRENEUR An entrepreneur friend saw the above article and has asked you for some adv¡ce: '| . As a result. This business needs to get serious about collecting the cash that clients owe them. the entrepreneur must either borrow funds or have cash in a bank account to cover the higher disbursements. and threatening to take their business elsewhere.ENTREPRENEUR ABOUT SOLVING THEIR CASH-FLOW PROBLEM TO STAY IN BUSINESS Hot & Cotd Inc. to see what did and did not get done. maxed out their credit cards at usurious interest rates. My receivables are averaging about 75 days.:At least 20% of their workforce of 50 will have to be fired. and cashed in their 401(k)s. the pro forma income statement with moditications made to account for the expected timing of the changes in cash. they worked for somebody else. Should I be concerned that this wíll affect mv cash flow? 2. then meet again on Friday at 6 p. As the economy faltered and poor management continued. Inc-. Worker morale is low and employees are phoning it in because they are convinced they'll be out of a job tomorrow. talented contractors and engineers with great knowledge of how to carry plumbing and installation projects to completion. The old cash cow is chopped meat. lf they've followed my advice so far. "Solve Your Cash-Flou. for most of their careers. and ready to pull the plug on its line of credit. SOLUTION: CONTROL. The steady supply of new business has dried up. and the three owners'lives are on the line.m. and no amount of sales could cover the warts. issue marching orders. and forceful in their insistence that there will be dire con. revenue started dropping by more than $2 million a year. They need to be clear in their instructions. but I seem to always run short of cash at the end of each month? Why is that? +Source: Replinted from July 24. the few remaining cf ients are unhappy.

After the third y@r the venrure wi¡ nred debt or equity finaocing for . rrhre f@nders put up 100'000 $ exDilslon each for working capital through the first rhrre yars. with the *Inventory is valu€d at cost or average of $2 0O/unit.CHAPTER 10 THE FINANCIAL PI.AN 291 pro Íorma ceshflow Projected cash available calculated from projected c¿sh accumulations minus projected cash disbu¡sements example that 80 percent of the cost of goods is paid in the month that it is incurred.

and net worth of the new venture ¿ss¿rs Items that are owned or available to be used in the venture operations forma income and cash flow staúements to help justify some of the hgures. Each of the categories is explainedhere: . we can note that in February the actual cost of goods was $ 16. This issue often creates cash flow problems for entrepreneurs when they do not realize that debt is a cash disbursement only and that inúerest is an operating expense.These current assets are often dominated by receivables or money that is owed to the new venture from customers.3. as well as need. familiarize the entrepreneur with the factors affecting the operations. Thus.000. These cash flow projections assist the entrepreneur in determining how much money he or she will need to raise to meet the cash demands of the venture. or $100. we actually pay only 80 percent of this in the month incurred-but we also pay 20 percent of the cost of goods sold that is still due from January.a In the case of both the pro forma income statement and the pro forma cash flow. the balance sheet is a picture ofthe business at a certain moment in time and does not cover a period of time. Assets. If the entrepreneurs in our example had to use debt for the start-up.800. cash flows can be determined for each month. However.e. each based on different levels ofsuccess of the business. Thus. The estimates or projections should include any assumptions so that potential investors will understand how and from where the numbers were generated. and net worth of the entrepreneurs. In our example. Every business transaction affects the balance sheet.7 depicts the balance sheet for MPP Plastics. oratotal of $14. It summarizes the assets. Management of these receivables is . is based on best estimates. the venture starts with a total of $300. PRO FORMA BALANCE SHEET The entrepreneur should also prepare a projected balance sheet depicting the condition of the business at the end of the first year. the venture begins to turn a positive cash flow from operations.500) should the projections fall short of expectations. Fixed assets are those that are tangible and will be used over a long period of time. These scenarios and projections not only serve the purpose of generating pro forma income and cash flow statements but. It is most important for the entrepreneur to remember that the pro forma cash flow like the income statement. The balance sheet will require the use of the pro pro fornla balance sheet Summarizes the projected assets. it is sometimes useful to provide several scenarios. the actual cost of goods cash outflow in February is . We can see that by the twelfth month.m0. Current assets include cash and anything else that is expected to be converted into cash or consumed in the operation ofthe business during a period of one yearor less. quarterly or annually). A start-up venture in a weak economy may hnd it necessary to revise cash flow projections frequently to ensure that their accuracy will protect the firm from any impending disaster. but because of the time and expense. then they would need to show the interest payments in the income statement as an operating expense and indicate the principal payments to the bank as a cash disbursement. liabilities.2 x $10.000 from each of the three founders. the total assets equal the sum of the liabilities and owners'equity. liabilities. These represent everything of value that is owned by the business. Value is not necessarily meant to imply the cost of replacement or what its market value would be but is the actual cost or amountexpended for the assel The assets are categorized as current or fixed.. more importantly. still leaving enough cash available ($41.292 PART 3 FROM THE OPPORruNIY TO THE BUSINESS PI-AN remainder paid in the following month.000.5 The pro forma balance sheet reflects the position of the business at the end of the frrst year. referring back to Table 10. Using conservative estimates.8 x $16. Thus. it is common to prepa¡e balance sheets at periodic intervals (i.000 + . As can be seen. Table 10. not as an operating expense.

and the payment of any principal would be shown in the cash flow statement. However. should the entrepreneurs need to borrow money f¡om a bank for the future purchase of equipment or for additional growth capital. Subsequent end-of-year balance sheets would show only the remaining amount of principal due on the note payable. the more stress is placed on the cash needs of the venture. unfortunately. A liabililies Money that is owed to creditors ' more detailed discussion of the management of receivables is presented in chapter 13. There are no long-term liabilities in our Mpp plastics example because the venture used funds from the founders to start the business. it is often necessary to delay payments of bills to more effectively manage cash flow. any business owner wants bills to be paid on time by suppliers so that he or she can pay any bills owed on time.Ideally.riorrr.CHAPTER 10 THE FINANCIAL PLAN 293 lmportant to the cash flow of the business since the longer it takes for customers to pay their bills. and others may be long-term debts. These accounts represent everything owed to creditors. during *". Although pro-pi payment of what is owed (payables) establishes good credit ratings and a good retaiionship with suppliers. As stated earlie¡ any interest on this note would appear as an expense in the income statement. Some ofthese amounts may be due within a year (current liabilities). the balance sheet would sñow long-term liabilities in the form of a note payable equal to the principal amount borrowed. Liabilities. -uoy .

This amount represents the excess of all assets over all liabilities. and direct labor are most likely to be va¡iable costs. Materials. Eventually. must be covered by sales volume for a company to break even.000 that was invested into the business by MPP Plastics' three entrepreneurs is included in the owners'equity or net worth section of the balance sheet.SP : VC lUnit: break-even quantity total hxed costs selling price va¡iable costs per unit As long as the selling price is greater than the variable costs per unit.rnd that customers are think- ovrner equitJ¡ The amount owners have invested and/or retained from the venture operations . and expenses decrease owners'equity and either increase liabilities or decrease assets. Thls.6 The break-even formula is derived in Table 10. Thus. It represents the net worth of the business. However. The break-even sales point indicates to the entrepreneur the volume of sales needed to cover totai variable and fixed expenses. salaries and wages' rent. However. More discussion of this issue is also included in Chapter 13. The problem with this strategy is that while the entrepreneur may think that slower payment of bills will generate better cash flow. some contribution can be made to cover hxed costs. . breakev¿n is that volume of sales at which the business will neither make a proht nor incur a loss. and other expenses that a¡e incurred with the production of a sinsle unit. We already know from the projections in Table 10. Break-even analysis is a useful technique for determining how many breakeven Volume of sales where the venture neither makes a profit nor incurs a loss units must be sold or how much sales volume must be achieved to break even.8 and is given as: B/E(Q\: TFC SP - VC/Unit (marginal contribution) where B/E(Q) : TFC : . at which point the firm has reached breakeven. This will provide further insiglrt into the financial potential for the start-up business. Sales in excess of the break-even point will result in a profrt as long as the selling price remains above the costs necessary to produce each unit (variable cost). based on the net loss incuned in year 1. regardless of the number of units sold. materials. these contributions will be sufficient to pay all fixed costs. and insurance as hxed. Owner equity. These obligations. The $300. or fixed costs. revenue increases assets and owners' equity. this is not the break-even point since the firm has obligations for the remainder of the year that must be met. The major weakness in calculating the breakeven lies in determining whether a cost is frxed or variable. retained earnings is negative.294 PART 3 FROM THE OPPORruNIYTO THE BU5IN65 PLAN firms hold back payment of their bills to better manage cash flow. he or she may also f. For new ventures these determinations will require some judgment. In our MPP Plastics example. it is reasonable to regard costs such as depreciation. The variable costs per unit usually can be determined by allocating the direct labor. it is helpful for the entrepreneur to know when a profit may be achieved. BREAK-EVEN ANALYSIS In the initial stages ofthe new venture. Any profit from the business will also be included in the net worth as retained earnings. with the result that no one gains any cash advantage. ing the same thing. selling expenses such as commissions.3 that MPP Plastics will begin to e¿rn a profrt in the eleventh month.

4). so we can assume a variable cost per unit of $z.CHAPTER IO THEFINANCIALPLAN 295 *Fixed costs are those costs that.00 $636. re not afiffted by chmges in yolurc ofoutput tVariable costs are those that are aff@ted in total by changes in volume ofouFut. In this case we estimate the average selling price of all components for use in our calculations. uring these calculations we can then determine the venture's break-even point (B/E) in unit! as follows: B/E: TFC SP - VCNnit $636. we also know from our example that cost of goods sold is 50 percent of sales revenue. .00/unit. the large number of different products and the size lots of customerpurchases prohibit any individual product break-even calculation. ln our MPP Plastics example.00 per unit' Sales below this number will result in a loss for the company.oo. we see that ñxed costs in year I are $636. it is necessary to likely to be selling a large volume make an assumption regarding the average selling price based on production and sales revenue' The entrepreneurs determine that the average selling price of all these components is $4. Fixed costs are determined by weighting the costs as a function of the sales projections for each product. From the pro forma income statement (Table 10. ¡The viliable costs per uoit is all Úrose costs at¡ributable to producing one uniL This cost is constant within defined nngs of production- Recall that in our MPp plastics for the toy industry and hard goods plastic molded parts Since the company is es.150 that are sold by the venrure will result in a profit of $2. 150 units Any units beyond the 318.300 $2. ttren 40 percent of hxed costs should be allocated to that product. In cases where the firm produces more than one product and it is feasible to allocate hxed costs to each product.00 3 I 8.300. if it is assumed that 40 percent of the sales are for product X. For example.300 $4. then it is possible to calculate a break-even point for each product. without change ¡n present prductilc capacity.00 _ : - $2.

as in Figure 10. Since at the end of the frrrst year a proht was earned. after the hrst year of operation. In addition. the entrepfeneuf can try different states of nature (e. Questions often asked are.9. Many of the funds were obtained from personal funds or loans. different selling prices. Where did the cash come from? How was the cash used? and What happened to asset items during the period? Table 10.ffunds Summarizes all the projected sources of funds available to the venture and how these funds will be disbursed The pro forma sources and applications of funds statement illustrates the disposition of earnings from operations and from other hnancing. It is often diffrcult for the entrepreneur to understand how the net income for the year was disposed of and the effect of the movement of cash through the business.296 PART 3 FROMTHEOPPORruNIYTOTHEBUSINESSPLAN One of the unique aspects of breakeven is that it can be gfaphically displayed.. PRO FORMA SOURCES AND APPLICATIONS OF FUNDS pro [orrna sources and applicotiuns o. Its purpose is to show how net income and financing were used to increase assets orto pay offdebt.9 shows the pro forma sources and applications of funds for MPP Plastics Inc. different fixed costs and/or variable costs) to ascertain the impact on breakeven and subsequent profits. it too would be added to the sources of funds. Depreciation is added back because it does not repr€sent .1.

Unable to find a beer-flavored potato chip.r. .. He says he generated $500. Withi whipped hc rn¡i he *¡ was shipping packages of aptly na which retail from 91. ods (WFMI). Controlling only the design and direction of the product.-o:r"#.ffi.000 in revenue in 2OOj and g1.39 to $3. and publix grocery stores.60.#. Stern used $ 11. which he credits to his virtual business model: He outsources . jt. il ilr:. Mary. i¡.200 of his own money to launch the Portland (Ore.1 ips. everything but the creativity. Stern. That keeps his overhead low: His only employees_a book_ keeper and a marketer-both work part time from a garage.3 million in 2008.- pertise in industrial desiqn to market snack foods."s ti. He claims a profit margin of l1%. SuperValu (SVU).t""'"':.) company. Stern garita Whipped up his own batch. who.s known to carry chip samples in assl . he relies on others to manufacture and distribute it.

how they are disbursed. The pro forma income statement provides a sales estimate in the first year (monthly basis) and projects operating expenses each month. bill paying. where the venture is very small and limited in time and resources. All these firms offer more comprehensive accounting software. will provide a quick assessment ofthe likely hnancial projections given different scenarios. and the general financial well-being of the new venture. They typically offer tutorials and support gea¡ed toward the successful implementation of these packages. If a more comprehensive package is needed. at least in the business planning stage. For purposes of completing the pro forma statements. using the computer spreadsheet Software. particularly for new users. The most basic and most popular comprehensive packages are mentioned in the preceding. Microsoft Excel is the most widely used spreadsheet software and is available in Macintosh and PC formats. and these usually can bepurchased online or at a local computer store. IN REVIEW SUMMARY This chapter introduces several financial projection techniques. it is probably easiest to use a spreadsheet program. that the softwa¡e selected be very simple and easy to use. evaluate the benefits of the most appropriate options. The value of using a spreadsheet in the start-up phase for financial projections is simply being able to present different scenarios and assess their impact on the pro forma slatements. and [axes. inventory manag€ment. Most of these software packages allow for check writing. These packages offer basic payroll and general ledger accounting software for the start-up venture. Microsoft Ofhce Accounting. A simple Intemet sea¡ch will identify hundreds of accounting software companies. and CheckMark Software Inc. as do many other companies.298 PART 3 FROMTHEOPPORTUNIYTOTHEBUSINESSPI. invoicing. Wtrat would be the effect of a price decrease of 10 percent on my pro forma income statement? What would be the impact of an increase of l0 percent in operating expenses? and How would the lease versus purchase ofequipment affect my cash flow? This type of analysis. payroll. It is recommended in the start-up stage. since numbers may change often as the entrepreneur begins to develop budgets for the pro forma statements. The simplest to use and least expensive ($79 to $12t0) software products are QuickBooks (Intuit Inc-). A single fictitious example of a new venture (MPP Plastics Inc.) is used to illustrate how to prepare each pro forrna statement. the amount of cash available. credit management. .AN SOFTWARE PACKAGES There are a number of financial software packages available for the entrepreneur that can track financial data and generate any important financial statement. frien{ or consultant who can assess his or her needs. Each of the planning tools is designed to provide the entrepreneur with a clear picture of where funds come from. Prices for these packages can range from $199 to $999 (and up) depending on the comprehensiveness of the softwa¡e. The entrepreneur will need software to maintain the books and to generate financial statements. The softwa¡e packages vary in price and complexity. which are based on marketing plan projections and objectives. the entrepreneur should discuss the options with a business associate. These estimates are determined from the appropriate budgets. and assist the entrepreneur in selecting the package that will best ñt the venture's needs. It helps to answer such questions as. Peachtree (Sage Software).

From the Internet. what items are listed as assets? As riabirities? How much is the owners. How useful is a financial plan when it is based on assumptions of the future and we are confident that these assumptions are not going to be 100 percent correct? . re in d Does it depend trepreneur face if an entrepreneur h 3. Research the software packages avairabre to herp entrepreneurs. companies pranning to make an initial púbric offering (rpo) mustsubmita financial plan as part of their prospectus. which do you berieve is tÁe best?l*iy? 2. collect a prospectus . ""p"it Find an initial public offering prospectus for three companies. equity? for what purpose do they say they are going to use the additional funds raised frorn the in¡t¡al public offering? DISCUSSION 1.with the financials for a business pran. w¡rt *i* ii" major assúmptions made in constructing these financiar prans? compare and contrast these financial plans with what we would of a financial plan as 3' part of a business plan.CHAPTER 1O THE FÍNANCIAL PLAN 2gg RESEARCH TASKS 1. from three different companies and analyze their financial plans.

Not only were costs reduced. vol. .ir"l. The author argues that short-term performance is . and they need to work more customers.:iil::. Carter. employees.:i'::'Financé-:Finance tor A practical-oriented text that focuses specifically on the needs of individuals starting their own businesses. vol. pp. lts emphasis is on financial issues for proprietorships. This article drscusses the importance of reaching financial success for a business enterprise. Gahagan. and ttieir supply chains.7' pp.. pp. The results of a regional survey of small-business entrepreneurs are presented.'(2005).5. Basically. pp. and Marilyn A. (2005). partnerships. 3.ffi1llly. their use of and their motivation to use bootstrap financing. 2008). no. (February 2008). vol. Financial Analysts lournal. A unique chapter on personal finance áas been added in thís edition. Entrepreneurship and Re' gional Development. no. Reducing Operating Costs through Innovation. Chartes E. but profits and convenience to the employees and customers were increased.esults should be helpful to consultants and agencies that assrst small firms with funding These entrepreneurs were queríed regarding alternatives.'. 129-44. the author with argues that closely change:s are needed ¡n the 11. 61. Generally Accepted Accounting Princi- ples (GAn4.17. there needs to be a chiange in how companies think about capital markets. Predicting Cash Flow from Operations: Evidence on the Comparative Abilities for a Continuum of Measu res.ÍÍ. Convenience Store Decisionl pp. Howtl Fix Financial Reportins. Jim. 17. 65-79. The r..?:vid.. no. Jones. these results indicate that perceived risk is highly associated with the owners'assessment of the importance of bootstrap financing techniques. Alfred. 87-94. (November 1 1. The Economics of Short-Term Performance Obsession. 6-8 A smal!-business owner of a servíce center and car wash drscusses how he was able to reduce costs through the integration of energy-cost-savíng strateg¡es. Extending the work of Wínborg and Landstrom. 3. As market conditions change dramatically withín a single planning period. Bootstrap Financing and Owners' Perceptions of Their Business Constraints and Opportunities.3OO PART 3 FROMTHEOPPORÍUNITYTOTHEBUSINESSPLAN SELECTED READINGS . l¡mited liability companies) and S corporations. Twenty af the'wealthiest countries sent their finance ministers to a conference to discuss how to overhaul the globat financial system. Strategic Finance. Reaching for Financial Success. Journal of Applied Business Research. Rappaport. 2. Eusiness week 3#. This article focuses on a three-pronged program for reducíng short-term corporate performance obsession. Howeven their results have proved largely inconclusive and contradictory. (2004). Prior studies have'attempted to confirm or reject the assertíon that accrual accounting measures provide better information for predicting cash flows than do cash basis measures.Íi3l1l.lii. budgeting and planning forecasts and the financial plans they produce are critical to the business owner. #:"ffi1. vol. Jordan.*1lr.ll. This study identifies research constructs that may have driven these inconsistent findings and makes adiustments to mitigate their effects. and Howard Van Auken. no.. Waldron. Craig. (2001).2O. 12-13. ln addition. Richard B.

This article describes the critical "financials" that can make or break a business. These stritegíes invorve píoducíng a reliable projection with the appropriate cash budget. Zabihollah. for an End of year Finan_ The article offers suggestions on how small businesses can increase revenue needs for 2009. firms need to maximize the business value relative to rivais tJ *ing proactive in investor relations. David. the audit committee. (September/October 2001). (June 2008). David. END NOTES 1 2. and what useful information about the business can be obtained from each statement. co mpan i es shou I d sponsible and reliable reports. Mandie. externar auditors.ularly important to young companies.64_67. Home Business Magazine. This forecast or projectioncash of cash needs is a work in progress and shoutá be monitored regut)rty to ensure reliability. how it differs from other financial statements. Physi ci a n Executive. it is important th¿f because there is such ftei¡b¡tity in estimating the timtiiiij ii to recogn¡ze accruals.7 2-7 6. Understanding Financial Statements. companies should monitor and maximize cash flow by managíng customer credit and reducing working capital.CHAPTER 1O THE FINANCIAL PLAN 301 part¡c. Taylor. aná divesting ninror" business. Time ciaf Tune-Up. 26_30. The author describes. High-euarity Financiar Reporting: The six-Legged Stool. The authors offer recommendations to stabilize business during a downturn. However. How to rdentify short and Long-Term Liquidity Needs Accurately. Rezaee. need to manage cash effectively to ensure that funding is secured at an earry date. Journal of Corporate Treasury Management. and Daniel stelter. This articte argues that quality fin g we I I -ba I a nced. parties. (February 2003). Rhodes.zman. firms need to protect íheí existing business by reducing costs' managing the product tine. sal. First. . pp. Business owners shourd biil custotmers financial to meet lromptty to en- hance receivabtes. Jessica Reagan. Third. 291_96. 50_5g. (November/December 200g). (February 2009). seize Advantage in a Downturn. Strategic Finance. lt explains each financial statement. Bitts should be paid on time to avoid /ate fees. second. Tarantino. Harvard Eusiness Review pp. fu ncti o n i n syste m g ove rna nce. pp. which are: the board of directors.the. these short-term performance predictiois may not accuratery picture the cash frow forecasts. pp. Ábo suggestions are provided on where to find excess expenses. the top manage_ ment team' internar auditors. and governíng bodies. pp.

PART 3 .