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Section 3: Launching the Business

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Creating a Successful
Financial Plan

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 Learning Objectives
 Describe how to prepare the basic financial
statements and use them to manage a small
business.
 Create projected (pro forma) financial statements.

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 Financial Management

Financial management:
A process that provides entrepreneurs with
relevant financial information in an easy-to-read
format on a timely basis.
It allows entrepreneurs to know not only how
their businesses are doing financially but also
why they are performing that way.

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 The Importance of
a Financial Plan
 Common mistake among business owners: Failing
to collect and analyze basic financial data.
 Many entrepreneurs run their companies without
any kind of financial plan.
 About 75% of business owners do not understand
or fail to focus on the financial details of their
companies.
 Financial planning is essential to running a
successful business and is not that difficult!
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Basic Financial Statements
Balance Sheet:
“Snapshot” of the firm’s worth on a given date

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 Basic Financial Statements
(continued)

Income Statement:
“Moving picture”
 Net Income = Sales Revenue - Expenses

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 Basic Financial Statements
(continued from 11-7)

Statement of Cash Flows:

Shows the change in the firm's working capital
over a period of time by listing the sources and
uses of funds.

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 Creating Projected
Financial Statements
 Helps the entrepreneur transform business
goals into reality
 Challenging for a business start-up
 They should be realistic and well-researched!
 Start-ups should create two-year projections
 Projected financial statements:
 Income statement
 Balance sheet

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 Break-Even Analysis
Breakeven point:
The level of operation at which a business neither
earns a profit nor incurs a loss.
A useful planning tool because it shows
entrepreneurs minimum level of activity required to
stay in business.
With one change in the breakeven calculation, an
entrepreneur can also determine the sales volume
required to reach a particular profit target.

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 Ratios
Net Profit Margin = Net profit / Sales

Return on Assets = Net Profit / Total Assets

Ch. 11: Creating a Successful Financial Plan

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 Conclusion

Preparing a financial plan is a critical step

Entrepreneurs can gain valuable insight
through:
Pro forma statements

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