ENTREPRENEURIAL FINANCE
FINANCIAL PLANNING: SHORT TERM AND LONG TERM
1

Development Stage:
 Screen Business Ideas
 Prepare Business Plan
 Obtain Seed Financing

Startup Stage:
 Choose Organizational Form
 Prepare Initial Financial Statements
 Obtain First Round Financing
2

Survival Stage:
 Monitor Financial Performance
 Project Cash Needs
 Obtain First Round Financing
 Possible Actions: Liquidate v. Restructure

Rapid Growth Stage:
 Create and Build Value
 Obtain Additional Financing
 Examine Exit Opportunities
 Possible Actions: Go Public v. Sell/Merge
3

Early-Maturity Stage:
 Manage Ongoing Operations
 Maintain and Add Value
 Obtain Seasoned Financing
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5
6
7
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
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
Usually begins with forecast of sales
Short term financial planning broken
down into monthly forecast
In monthly forecast, should consider the
impact of seasonality
Longer term financial planning : 3 – 5
years
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Sales Schedule
Purchase Schedule
Inventory Schedule
Production Schedule
Wages and Commission Schedule
Cash Budget
 A venture’s projected cash receipts and
disbursements over a forecast period

Balance Sheet, Profit and Loss
9
FINANCIAL ASSUMPTIONS
March
April
May
June
July
August
Projected Sales ($)
92,000
115,000
184,000
138,000
115,000
92,000
Buying a used delivery truck
Miscellaneous Cash Expense
Rent
Insurance Expense
Depreciation Expense
Tax Rate
Wages Payment Policy
Payment 1
Payment 2
Wages
6,900 USD
5% of the current sales
4,600 USD per month
460 USD per month
1,150 USD per month
0%
2 times of payment a month
50%
50%
5,750 USD per month fixed
15% of sales as a variable commission
Wages are paid a half month after earned
COGS
70% of sales
Inventory policy
80% of the sales for the month plus a USD 46,000
Sales Policy
Cash
Credit
Inventory Policy
Balance
Inventory Cushion
The venture payment policy
This month
Following month
Cash Beginning Balance
Interest rate of founder's loan
Borrow and Repay
Term of Loan
Minimum Cash Balance
60%
40%
80% of the sales for the month
46,000 USD
50%
50%
23,000 USD
1.5% per month
at the end of every month
2 years
23,000 USD
10
PDC Company
Initial Balance Sheet
As of March 31
In USD
ASSETS
Current Assets
Cash
Accounts Receivable
Paint Inventory
Prepaid Insurance
Total Current Assets
LIABILITIES AND EQUITY
Current Liabilities
23,000 Accounts Payable
36,800 Accrued Wages
110,400 Total Current Liabilities
4,140
174,340
Property, Plant and Equipment
Gross property, plant and equipment
Accumulated depreciation
Net Book Value - PPE
85,100
-29,440 Owner's Equity
55,660
181,585
Total Assets
230,000 Total Liabilities and Equity
230,000
38,640
9,775
48,415
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12
13
14
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PDC Company
Projected Income Statements
For The Period Of March - July
In USD
March
92,000
64,400
27,600
April
115,000
80,500
34,500
May
184,000
128,800
55,200
June
138,000
96,600
41,400
July
115,000
80,500
34,500
April to July
552,000
386,400
165,600
Operating Expenses
Wages and Commissions
Rent
Miscellaneous Expenses
Insurance
Depreciation
Total Operating Expenses
19,550
4,600
4,600
460
1,150
30,360
23,000
4,600
5,750
460
1,150
34,960
33,350
4,600
9,200
460
1,150
48,760
26,450
4,600
6,900
460
1,150
39,560
23,000
4,600
5,750
460
1,150
34,960
105,800
18,400
27,600
1,840
4,600
158,240
Income From Operations
(2,760)
6,440
1,840
464
421
5,976
1,419
Sales
Cost of Goods Sold
Gross Margin
Interest Expense
Net Income
-
(2,760)
(460)
-
(460)
(460)
103
(563)
7,360
988
6,372
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PDC Company
Projected Balance Sheets
As Of The Periods Ended
In USD
March
April
May
June
July
Mar Vs Apr Apr Vs May June Vs May July Vs June
Current Assets
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Total Current Assets
23,000
36,800
110,400
4,140
174,340
23000
46000
149040
3,680
221,720
23000
73600
123280
3,220
223,100
23000
55200
110400
2,760
191,360
29487.04
46000
97520
2,300
175,307
0
-9,200
-38,640
460
-47,380
0
-27,600
25,760
460
-1,380
0
18,400
12,880
460
31,740
6,487
9,200
12,880
460
16,053
Plan Equipment, Fixtures and Others
Less : Accumulated Depreciation
Net Fixed Assets - Book Value
85,100
-29,440
55,660
92,000
-30,590
61,410
92,000
-31,740
60,260
92,000
-32,890
59,110
92,000
-34,040
57,960
-6,900
1,150
-5,750
0
1,150
1,150
0
1,150
1,150
0
1,150
1,150
230,000
283,130
283,360
250,470
233,267
-53,130
-230
32,890
17,203
59,570
51,520
41,860
11500
16675
13225
30935 28064.025 6864.9854
102,005
96,259
61,950
33,810
11500
0
45,310
20,930
1,725
30,935
53,590
-8,050
5,175
-2,871
-5,746
-9,660
-3,450
-21,199
-34,309
-8,050
-1,725
-6,865
-16,640
Total Assets
Current Liabilities
Accounts Payable
Accrued Wages and Commissions Payable
Loan
Total Current Liabilities
38,640
9,775
0
48,415
Owner's Equity
181,585
181,125
187,101
188,520
187,957
-460
5,976
1,419
-563
Toal Liabilities and Equity
230,000
283,130
283,360
250,470
233,267
53,130
230
-32,890
-17,203
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PDC Company
Projected Statement of Cash Flows
In USD
April
Cash Flow From Activities
Net Income
Adjusments to Net Income for Cash Flow
+ Depreciation Expense
- Changes in Receivable
- Changes in Inventory
- Changes in Prepaid Insurance
Changes in Accounts Payable
+ Change in Accrued Liablities
Total Adjustment
Net Cash Flow from Operations
(460)
1,150
(9,200)
(38,640)
460
20,930
1,725
(23,575)
(24,035)
May
June
5,976
1,150
(27,600)
25,760
460
(8,050)
5,175
(3,105)
2,871
Cash Flow From Investing
Capital Expenditure (CAPEX)
Net Cash Used by Investments
(6,900)
(6,900)
Cash Flow From Financing
Equity Issues
Dividens
Debt Issues
Net Cash Flow From Financing
30,935
30,935
(2,871)
(2,871)
Net Change In Cash
Beginning Cash Balance
Ending Cash Balance
23,000
23,000
0
23,000
23,000
-
July
1,419
(563)
1,150
18,400
12,880
460
(9,660)
(3,450)
19,780
21,199
1,150
9,200
12,880
460
(8,050)
(1,725)
13,915
13,352
-
-
(21,199)
(21,199)
23,000
23,000
(6,865)
(6,865)
6,487
23,000
29,487 18
Expected Value is the weighted average of a set of
scenarios or possible outcomes
 Steps to validate sales forecast:

 Forecast future sales growth rates for several possible scenarios
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and the likelihood of each scenario
Corroborate the venture’s projected sales growth rates with
industry growth rates and venture’s past market share (top
down or market share driven approach to sales forecasting)
Through direct contact with existing and potential customers
(bottom up or customer driven approach to forecasting sales)
The likely impact of major operating changes (changes in R and
D, pricing policies, credit policies, A&P)
Include the impact of inflation
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
When performing forecasting, should have
more than 1 scenario:
 Optimistic
 Normal
 Pessimistic
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Forecasting for Early Stage Ventures (firms that are in either
their development, startup, or survival stage, or just entering
into their rapid growth stage of their life cycle)
Industry
Sales Scenario
Optimistic forecast
Most likely forecast
Pessimistic forecast
Probability of
Occurrence
.30
.40
.30
1.00
Sales
Components
Growth Rate
to Sum
X
60%
=
X
50%
=
X
40%
=
Expected Value =
18.0%
20.0%
12.0%
50.0%
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Forecasting Sales for New Venture
Forecast
Year
Sales ($ Millions)
2011
5
2012
7.5
2013
11.25
2014
16.88
2015
25.31
Average
Percentage Change
(Sales Growth Rate)
50%
50%
50%
50%
50%
Growth rate for a new venture can be too optimistic as shown above which is a
subject to be challenged
 The new venture investors tend to adjust this optimism and forecasting
difficulties by revising a venture’s sales forecast downward and expenses upward

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Forecasting Sales for New Venture - Revision
Probability of Sales Growth Sales Growth
Industry Sales Scenario Occurrence
Rates
Rates
Optimistic Forecast
0.2
60%
12%
Management Forecast
0.4
50%
20%
Pessimistic Forecast
0.4
10%
4%
Expected Value
36%
Forecasting Sales for New Venture - Revision
Forecast Year
2011
2012
2013
2014
2015
Sales ($ Millions)
5
6.8
9.25
12.58
17.11
Average
Percentage
Change (Sales
36%
36%
36%
36%
36%
Forecasting Sales for New Venture - Revision
Industry Sales Scenario
Management Forecast
Pessimistic Forecast

Probability of
Occurrence
Sales Growth
Sales Growth
Rates
Rates
0.5
50%
25%
0.5
0%
0%
Expected Value
25%
There are many possible scenario-weighting combinations, some of which are valid views
of new venture’s possible future
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
There are several potential impediments to a
relationship between incremental sales and incremental
cash flow:
 The incremental sales must be sold at prices that cover all
incremental costs (capacity and variable costs)
 The revenue from additional unit sales must cover increases in
working capital investments (inventory and accounts receivable)
required to support those incremental sales
 Only when sales revenues cover all of these costs are there free
cash flows that give rise to an increase in venture value
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
Internally Generated Funds:
Net income or profits after taxes earned over an accounting
period
 Can be distributed to owners or reinvested to support growth
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Sustainable Sales Growth Rate:
Rate at which a firm can grow sales based on the retention of
profits in the business
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Ending Equity  Beginning Equity
g
Beginning Equity
Change In Equity
g
Beginning Equity
Equity
g
Beginning Equity
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E  Net Income x Retention Rate
E/E beg  (NI/Ebeg) x RR
g  (NI/Ebeg) x RR
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
Assumptions
 Initial book value of equity $1o million
 No new equity injection nor withdrawal
 Net Income $2million
 Dividend $500,000 (25% of NI) and keep $1,500,000 (75%)
 g = (2000,000/10,000,000) x 0.75 = 0.15 = 15%
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ROE  Net Profit Margin x Asset Turnover x Equity Multiplier
NI NI NS TA
ROE 

x
x
CE NS TA CE
NI NS TA
g
x
x
x RR
NS TA CEbeg
g  Operating Performanc e x Financial Policies
g  ROA x FP
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Assumptions
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
Sales $1,600,000
NI $160,000
Beginning Equity $800,000
Asset $1,000,000
Retention Rate = 1
g = 160,000/1,600,000 x 1,600,000/1,000,000 x
1,000,000/800,000 = 0.2 = 20%
 g = Operating Performance x Financial Policy
= ROA x FP
= NI / TA x TA/CE Beg x RR = 160,000/1,000,000 x 1000,000/800,000 x
1
= 0.16 x 1.25 x 1 = 20%
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

In the event that a growing venture’s
investment in assets is not financed by
profits from business operations plus
spontaneous financing from suppliers,
employees and governments, additional
funds will be needed.
These additional funds will need to come
from external parties
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
Financing Capital Needed (FCN):



financial funds needed to acquire assets necessary to
support a firm’s sales growth
Some of this funding gap will be covered by trade credit
and other current liabilities the increase spontaneously
with sales
Spontaneously Generated Funds:
increases in accounts payables and accruals (wages and
taxes) that occur with a sales increase
 Example: when sales increase, credit purchases from
suppliers increase, leading to increase in accounts payable
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
Additional Funds Needed (AFN):
gap remaining between the financial capital needed and that
funded by spontaneously generated funds and retained
earnings, or,

AFN =
Required Increase in Assets
– Spontaneously Generated Funds
– Increase in Retained Earnings
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TA o
APo  ALo
NIo
AFN 
(NS) (NS) - (NS1)
(RR o)
NSo
NSo
NSo
where : TA  Total assets
NS  Net sales
NS  Change in net sales between next year and current year
AP  Accounts payable
AL  Accrued liabilitie s
NI  Net Income
RR  Retention Rate
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Sales last year = $1,600,000
Asset investment = $1,000,000
Net Income = $160,000
Current Assets = $520,000
Fixed Assets = $480,000
Accounts Payable = $48,000
Accrued Liabilities = $32,000
Projected growth rate = 30%
Projected next year sales = $2,080,000
(1,600,000 x 1.3)
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AFN 
$1,000,000
$80,000
$160,000

($480,000) ($480,000) - ($2,080,000)
(1.00)
$1,600,000
$1,600,000
$1,600,000
 .625($480,000) - .05($480,000) - $2,080,000(.10)(1.00)
 $68,000

Implication:
 The venture needs $300,000 in additional capital to acquire
assets to achieve the projected 30% growth in sales
 $24,000 comes from spontaneously generated funds (liabilities
to suppliers, employees)
 $208,000 comers from retained earnings
 The remaining AFN $68,000 raised from external financing
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Expects to grow 30% each year for 2 years
Sales in 2 year = $1,600,000 x 1.3 x 1.3 = $2,704,000
Total two year sales = $2,080,000+$2,704,000 = $4,784,000
Two year change in sales = $2,704,000 - $1,600,000 = $1,104,000
Asset investment = $1,000,000
Net Income = $160,000
Current Assets = $520,000
Fixed Assets = $480,000
Accounts Payable = $48,000
Accrued Liabilities = $32,000
Projected growth rate = 30%
AFN =
$1000,000 / $1600,000 x ($1,104,000) - $80,000 / $1,600,0000 ($1,104,000)
- ($4,784,000) x $160,000 / $ 1,600,000 x 1
=
0.625 x ($1,104,000) - 0.05 x ($1,104,000) - $4,784,000 x 0.1 x 1
=
$ 690,000 - $55,200 - $478,400
=
$156,400
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
Percent of Sales Forecasting Method:
make projections based on the assumption that certain costs
and selected balance sheet items are best expressed as a
percentage of sales
 For example: COGS ratio is 60% current year ; assumed to be the
same for next year
 If, for example, assets were 67% of sales last year ; will be forecasted
the same in next year
 If, for example, sales grow by 30%, assets also grow by 30%

Constant Ratio Method:
variant of the percent of sales method that projects selected
cost and balance items at the same growth rate as sales
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

The ability to project sales forecast accurately is
crucial to the venture’s financial health
Financial Forecasting Process To Project
Financial Statements
1. Forecast sales
2. Project income statement
3. Project balance sheet
4. Project statement of cash flows
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