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Dokumen - Tips Technopreneurship Wk12 Only
Dokumen - Tips Technopreneurship Wk12 Only
TECHNOPRENEURSHIP
Week 12
year of operation.
Explain the application and calculation of
the break-even point for the new venture.
employees exist,one
may begin with theof
initial
thesebudgeting process
individuals,
depending on his or her role in the venture.
Figure 10.1 illustrates a simple format for a production or
manufacturing budget for the first three months of
operation.
This provides an important basis for projecting cash flows
for the cost of goods produced, which includes units in
inventory.
The important information from this budget is the actual
production required each month and the inventory that
is necessary to allow for sudden changes in demand.
As can be seen, the production required in the month of
January is greater than the projected sales because of the
need to retain three units in inventory.
In the second month, the actual production required is
less than projected sales because the inventory needs are
less than in the first month.
Thus, this budget reflects seasonal demand
or marketing programs that can increase
demand and inventory.
The pro forma income statement will only
reflect the actual costs of goods sold as a
direct expense.
Thus, in those ventures in which high levels
of inventory are necessary or where demand
fluctuates significantly
seasonality, this budgetbecause
can be of
a very
valuable tool to assess cash needs.
After completing the sales budget, the entrepreneur
can then focus on operating costs.
First a list of fixed expenses (incurred regardless of
sales volume) such as rent, utilities, salaries,
interest, depreciation, and insurance should be
completed.
Estimated costs for many of these items can be
ascertained from personal experience or industry
benchmarks or through direct contact with real
estate brokers, insurance agents, and consultants.
Anticipation of the addition of space, new employees,
and increased advertising can also be inserted in
these projections as deemed appropriate.
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
These variable expenses must be linked to
strategy in the business plan.
Figure 10.2 provides an example of an
operating budget. In this example we can see
that rent increases in month 3 because the
company adds warehousing space.
Salaries are also expected to increase in this
month because of the addition of a shipper, and
advertising increases because the primary season
for this product is approaching.
This budget, along with the manufacturing
budget illustrated in Figure 10.1, provides the
basis for the pro forma statements being
discussed.
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
Capital budgets are intended to provide a basis for
evaluating expenditures that will impact the business
for more than one year.
For example, a capital budget may project
expenditures for new equipment, vehicles,
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
number
standardofpercentage
units sold of
or sales.
by using an industry
For example, for a restaurant, the National
Restaurant Association or Food Marketing
Institution publishes standard cost of goods
percentages of sales. These percentages are
determined from members and studies
completed on the restaurant industry.
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
5/25/2018 TECHNOPRENEURSHIP W K12 only - slide pdf.c om
Cash flow is not
of subtracting the same
expenses as profit.
from sales, Profit
whereasis the result
cash
flow results from the difference between actual cash
receipts and cash payments. Cash flows only when
actual payments are received or made.
Sales may not be regarded as cash because a sale
may be incurred but payment may not be made for
30 days. In addition, not all bills are paid
immediately.
On the other hand, cash payments to reduce the
principal on a loan do not constitute a business
expense but do constitute a reduction of cash.
Also, depreciation on capital assets is an expense,
which reduces profits, not a cash outlay.
As stated earlier, one of the major problems that
new ventures face is cash flow.
On many occasions, profitable firms fail because
of lack of cash.
Thus,
a new using
ventureprofit
may beas deceiving
a measureif there
of success
is a for
significant negative cash flow.
For strict accounting purposes there are two
standard methods used to project cash flow:
1. The indirect method.
2. The direct method.
In this method
income the but
statement objective is to not there
to understand repeatare
what is in the
some
adjustments that need to be made to the net income
based on the fact that actual cash may or may not have
actually been received or disbursed.
For example, a sale transaction of P1,000 may be
included in cash
paid so no net income, but theThus,
was received. amount
for has
cashnot yet been
flow
purposes there is no cash available from the sales
transaction.
For simplification and internal monitoring of cash flow
purposes, many entrepreneurs prefer a simple
determination of cash ainfast
This method provides lessindication
cash out. of the cash position
of the new venture at a point in time and is sometimes
easier to understand.
It is important for the entrepreneur to make
monthly projections of cash like the monthly
projections made for profits. The numbers in the
cash flow projections are constituted from the
pro forma income statement with modifications
made to account for the expected timing of
the changes in cash.
If disbursements are greater than receipts in
any time period, the entrepreneur must either
borrow funds or have cash in a bank account
to cover the higher disbursements.
Large positive cash flows in any time
period may need to be invested in short-term
sources or deposited in a bank in order to
cover future time periods when
disbursements
Usually the firstare
fewgreater
months than receipts.
of the start up
will require external cash (debt) in order to
cover the cash outlays.
As the business
accumulate, the succeeds and can
entrepreneur cashsupport
receipts
negative cash periods.
impending disaster.
projections should The estimates
include or
any assumptions so
that potential investors will understand how and
from where the numbers were generated.
The entrepreneur should also prepare a
projected balance sheet depicting the
condition of the business at the end of the
first year.
The balance sheet will require the use of the
pro forma income and cash flow statements
to help justify some of the figures.
It reflects the position of the business at the end
of the first year. It summarizes the assets,
liabilities, and net worth of the entrepreneurs.
Every business transaction affects the balance
sheet, but because of the time and expense, as
well as need, it is common to prepare balance
sheets at periodic intervals (i.e., quarterly or
annually).
Thus, the balance sheet is a picture of the
business at a certain moment in time and does
not cover a period of time.
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 amount expended for
the asset.
The assets are categorized as current or fixed.
Current assets include cash and anything else
that is expected to be converted into cash or
consumed in the operation of the business
during a period of one year or less.
Fixed assets are those that are tangible
and will be used over a long period of lime.
These current assets are often dominated by
receivables or money that is owed to the new
venture from customers.
Management of these receivables is important
to the cash flow of the business since the
longer it takes for customers to pay their
bills, the more stress is placed on the cash
needs of the venture.
These accounts
creditors. represent
Some of everything
these amounts mayowed to
be due
within a year (current liabilities), and others may
be long-term debts, such as the loan taken by
MPP Plastics to purchase equipment and support
cash flow.prompt payment of what is owed
Although
(payables) establishes good credit ratings and a
good relationship with suppliers, it is often
necessary to delay payments of bills in order to
more effectively
Ideally, manage
any business cash
owner flow.bills to be paid
wants
on time by suppliers so that he or she can pay
any bills owed on time.
This amount represents the excess of all assets
over all liabilities. It represents the net worth of
the business.
The P50,000 that was invested into the business
by the two entrepreneurs is included in the owner
equity or net worth section of the balance sheet.
Any profit from the business will also be included
in the net worth as retained earnings.
Thus, all revenue increases assets and owner
equity, and all expenses decrease owner equity
and either increase liabilities or decrease assets.
In the initial stages of the new venture, it is
helpful for the entrepreneur to know when
a profit may be achieved.
This will provide further insight into the
financial potential for the start-up business.
Break-even analysis is a useful technique for
determining how many units must be sold or
how much sales volume must be achieved in
order to break even.
We already know from the projections in Figure
10.3 that MPP Plastics will begin to earn a profit
in the fourth month. However, this is not the
break-even point since the firm has obligations
for the remainder of the year that must be met,
regardless of the number of units sold. These
obligations, or fixed costs, must be covered
by sales volume in order for a company to break
even.
Thus,
which breakeven is that
the business volume make
will neither of sales at
a profit
nor incur a loss.
The break-even sales point indicates to the
entrepreneur the volume of sales needed to
cover total variable and fixed expenses.
Sales in excess of the break-even point will
result in a profit as long as the selling price
remains above the costs necessary to
produce each unit (variable cost).
The break-even formula is derived in Figure
10.8 and is given as:
B/E Q) = TFC / SP - VC/unit [marginal
contribution])
As long as the selling price is greater than the
variable costs per unit, some contribution
can be made to cover fixed costs.
Eventually,
sufficient tothese contributions
pay all fixed costs, will be
at which point
the firm has reached breakeven.
The major
lies in weakness
determining in calculating
whether a costthe
is breakeven
fixed or
variable.
For new ventures these determinations will
require some judgment. However, it is reasonable
to expect
wages, such
rent, costs
and as depreciation,
insurance salaries and
to be fixed.
Materials, selling expenses such as
commissions, and direct labor are most likely to
be variable costs.
The variableby
determined costs per unit
allocating can
the usually
direct be
labor,
materials, and other expenses that are incurred
with the production of a single unit.
Thus, if we determine that the firm has
fixed costs of P250,000, variable costs per
unit of P4.50, and a selling price of P10.00,
the breakeven will be as follows:
B/E = TFC / (SP - VC/unit)
= P250,000 / PI0.00 - P4.50
= P250,000 / P5.55
= 45,454 units
Any units beyond 45,454 that are sold by the
above firm will result in a profit of P5.50 per
unit. Sales below 45,454 units will result in a
loss to the firm.
In those
more thaninstances wherebreakeven
one product, the firm produces
may be
calculated for each product.
Fixed costs would have to be allocated to
each product
the costs or determined
as a function by weighting
of the sales
projections.
Thus, it might be assumed that 40 percent of
the sales are for product X; hence 40 percent
of total fixed costs would be allocated to that
product.
If the entrepreneur feels that a product requires
more advertising, overhead, or other fixed costs,
this should be included in the calculations. In
addition, the entrepreneur can try different states
of nature (e.g., different selling prices, different
fixed costs and/or
the impact variableand
on breakeven costs) to ascertain
subsequent
profits.
◦
3.
4. Long-term borrowing
Sale of assets
The major uses or applications of funds are:
◦ 1. To increase assets
◦
◦
2.
3. Retire
Reducelong-term liabilities
owner or stockholders' equity
◦ 4. Pay dividends
1. Is it
cash ormore important
profits? Does it for an entrepreneur
depend on the type to
of track
business and/or industry? What troubles will an
entrepreneur face if she or he tracks only profits and
ignores cash? What troubles will an entrepreneur face
if
2.she
Howoruseful
he tracks
is a only cash plan
financial and ignores
when it profits?
is based on
assumptions of the future and we are confident
that these assumptions are not going to be 100
percent correct?
3. Software packages that are available to help
entrepreneurs with the financials for a business plan.