Chapter IX

Financial Planning

This chapter develops a strategy to do the financing. It is the author's opinion that the entrepreneur must
develop that strategy before dealing with the venture capitalist or other sources of capital. What we have seen
thus far is the development of the business and the quantification of what is needed to develop the business.
There has been a limited description of how the business is to be financed. We start the chapter with the four
most important part of financial planning in the business plan. This may include the; Key Financial Indicators
and Financial Ratios, Cash Flows Projection, Projected Income Statements and Balance Sheet, and Break-even
analysis. The Key Financial Indicators and Financial Ratios.

1. The Balance Sheet. It is also known as the Statement of Financial Position. It has the list of the firm’s
asset and liabilities, providing a snapshot of it’s financial position at a given point in time. (Brigham &
Houston, 2020)

Assets Liabilities
Current Assets Current Liabilities
Cash 5,000 Accounts Payable 1,000
Accounts Receivable 2,000 Accrued Expense 2,000
Prepaid Rent 8,000 Unearned Revenue 4,000
Inventory 3,000 Total Current Liabilities 7,000
Long-term Liabilities 168,000
Total Current Assets 20,000 Total Liabilities 175,000
Stockholders’ Equity
Long-term Assets Ordinary Share Capital 15,000
Machinery 2,000 Preference Share Capital -
Accumulated 15, 120 15, 120 Retained Earnings -
Depreciation 987.5 987.5
Total Long-term Assets 16, 107. 5 Total Stockholders’ Equity -
Total Assets 226, 107. 5 Total Liabilities and Stockholders’ 15,000
Equity

Table 1. Balance Sheet (Statement of Financial Position) Sample Format

2. Statement. The income statement (also known as the Statement of Financial Performance) lists the
firm’s revenues and expenses over a period. The last part of the income statement shows the firm’s net
income, which is a measure of its profitability during the period. The income statement is sometimes
called a profit and loss, or “P&L” statement, and the net income is also referred to as earnings.
 Sales 3,240
Less: Sales Returns and Allowances 1, 050
Net Sales -
Less: Cost of goods sold -
Gross Profit 5,000
Less: Operating Expenses 1,050
Income from operations 235
Less: Interest expense 80
Income before income tax 226,107.5
Less: Income Tax (30%) 168,000
Net Income/Net Loss -
Table 2. Income Statement Sample Format

3. The Statement Cash Flows. The firm’s statement of cash flows is a report that shows how items affect
the balance sheet and income statement affect the firm’s cash flows (Brigham & Houston, 2019). It
utilizes the information from the income statement and balance sheet to determine how much cash the
firm has generated and how that cash gas been allocated during a set period. Cash flows are divided into
three (3) sections: operating activities, investment activities, and financing activities (Berk & DeMarzo,
2017)
2022

I. Operating Activities
Net Income 16,016
Depreciation and Amortization 987.5
Increase in Inventories 2,187
Increase in Accounts Receivable 1,755
Increase in Accounts Payable 4,294
Increase in Accrue Wages and Taxes 913
Net Cash provided by (used in) operating activities 5,855.75
II. Investing Activities
Addition to property, plant, and equipment 15,000
Net cash used in investing activities 6,450
III. Financing Activities
Increase in Notes Payable -
Increase in Bonds -
Payment of Dividends to Stockholders 2,691.7
Net Cash provided by financing activities 7,580.5
IV.
Net decrease in cash (Net sum of I, II, and III) 3,605
Cash and equivalents at the beginning of the year 18, 842.4
Cash and equivalents at the end of the year 226,107.5
Table 3. Statement of Cashflows Sample Format

4. Statement of Stockholder’s Equity- Changes in stockholders' equity during the accounting period are
reported in the Statement of Stockholders' Equity. Stockholders allow management to retain earnings
and reinvest them in the business, use retrained earnings for additions to plant and equipment, add
inventories, and the like. Firms do not just pile up cash in a bank account. As reported on the balance
sheet, retained earnings do not represent cash and are not "available" for dividends or anything else
(Brigham & Houston, 2020)
 Sweetie Pie’s
Common-Size Statement of Financial Position
May 20, 2022, and 2023
2022 2023
Assets
Current Assets
Cash 5,000 6.76% 7,000 5.4%
Marketable Securities 800 42.25% 800 47.25%
Accounts Receivable, net 15,000 2.25% 17,000 2.22%
Inventory 3,000 11.27% 5,000 7.56%
Prepaid Expenses 10,000 3.38% 8,000 4.725%
Total Current Assets 33,000 100% 37,800 100%

Long-Term Investments 100.000 66.66% 80.000 72.73%

Property, Plant, and Equipment 50,000 33.33% 30,000 27.27%
Total Assets 150,000 100% 110,000 100%

Liabilities
Current Liabilities 7,000 2.5% 11,000 17.54%
Long-Term Liabilities 168,000 1.04% 154,000 1.25%
Total Liabilities 175,000 1.04% 193,000 1.25%
Stockholders' Equity
Preferred Stock, 6%, P100 par - -% - -%
Common Stock, P30 par - -% - -%
Retained Earnings - -% - -%
Total Stockholders' Equity - -% - -%
Total Liabilities and Stockholders' Equity - -% - -%

Table 4. Vertical analysis - Common-size statement of financial position

Sweetie Pie’s
Common-Size Income Statement
May 20, 2022, and 2023 (in pesos)
2022 2023
Sales 3, 240 % %
Less: Sales Returns and Allowances 1,050 % %
Net Sales - % %
Less: Cost of goods sold - % %
Gross Profit 5,000 % %
Less: Operating Expenses 1,050 % %
Income from operations 135 % %
Less: Interest expense 80 % %
Income before income tax 226,107.5 % %
Less: Income Tax (30%) 168,000 % %
Net Income - % %

Table 5. Vertical analysis - Common-size income statement