Financial Projections
HACC Institute for Entrepreneurial Studies
David McNaughton 221-1213
dwmcnaug@hacc.edu
The Ambiguous Financial World
How do you handle it?
Dealing with Bankers and
Accountants
•Learn some of the terminology
•What does the bank look for?
•Sources of funding
•Investors
Expectations from this class
 Understand what your own personal financial




obligations are for the next 12 months
Use that information to prepare your business
forecast
Understand the basic accounting terms
What records are required by law to be kept
Use of the three basic financial sheets
Reason to Keep Records
 Law

Must be separate, complete, permanent, and
accurate
 Management


To properly evaluate your business
Assist in decision making
Outside Help
 If you will be using an accountant for taxes, meet
with him prior to the start of your business so that
he can help you define exactly what records should
be kept
 Then evaluate how you will create these records –
computerized or handwritten ledgers
 Doing this correctly from the beginning is essential
Personal Budgeting
 What income do you need to survive?
 Completing the personal budgeting statement
 The importance of this information
 How is this related to my business
development?
Personal Budget Preparation
 Start with all your income
 Then list actual expenses or calculate an
average
 Plan for savings
 Adjustments
 Determine minimum living expenses
 Handout
Minimum Living expenses
 Worksheet
 What does this tell us?
 How does this relate to my business?
Vocabulary (The Basics)
 Account payable – A liability backed by the general
reputation and credit standing of the deptor
 Account receivable – A promise to receive cash
from a customer for whom goods and/or services
have been provided by the activity
 Accrual Basis Accounting – Accounting that
records the impact of a business event as it occurs,
regardless of whether the transaction affected
cash.
10
Vocabulary (The Basics)
 Accrued Expense – An expense the business has
incurred but not yet paid
 Accrued Revenue – A revenue that has been
earned but not yet collected in cash
 Adjusting Entry – Entry made at the end of the
period to assign revenues to the period in which
they are earned; and expenses to the period in
which they are incurred.
 Asset – An economic resource that is expected to
be of benefit in the future.
11
Vocabulary (The Basics)
 Book Value of an Asset – The assets cost minus
accumulated depreciation
 Cash Basis Accounting – Accounting that records
transactions only when cash is received or paid.
This methodology excludes receivables, payables,
and depreciation in its computations.
 Chart of Accounts – List of all accounts and their
account numbers in the ledger
 Current Assets – An asset that is expected to be
converted to cash, sold, or consumed during the
next 12 months, or within the business’s normal
operating cycle
12
Vocabulary (The Basics)
 Current Liabilities – A debt due to be paid with cash
or with goods and services within one year or
within the entity’s operating cycle
 Current Ratio – Measures the ability to pay current
liabilities with the current assets. (Current
Assets/Current Liabilities)
 Debt Ratio – This ratio measures the ability to pay
for both current and long term debts (total liabilities)
(Total Liabilities/Total assets)
 Lower debt ratio is preferred
(.60 is safe, .80 is risky)
13
Vocabulary (The Basics)
 GAAP – Accounting guidelines formulated by the
Financial Accounting Standards Board (FASB) that
govern how accountants measure, process and
communicate financial information
 Journal – The chronological accounting record of
an entity’s transactions
 Liability – An economic obligation such as a debt
payable
 Liquidity – Measure of how quickly an item can be
converted to cash
14
Vocabulary (The Basics)
 Matching principle – The basis for recording
expenses (Identify all expenses, measure
expenses and match them against the revenues
earned in the same span of time)
 Net Income – Excess of total revenues over total
expenses. (Net Earnings or Net Profit)
 Net Loss – Excess of total expenses over total
revenues
 Note Payable – A written promise of future
payment
15
Vocabulary (The Basics)
 Note Receivable – A written promise for future




collection of cash
Posting – Copying amounts from the journal to the
ledger
Revenue – Amounts earned by delivering goods or
services to a customer
Transaction – An event that affects the financial
position of a particular entity and can be recorded
later
Trial Balance – A list of all accounts with their
balances taken from the ledger used to ensure that
total debits equal total credits
16
Vocabulary (The Basics)
 Unearned Revenue – A liability created
when a business collects cash from
customers in advance of doing work
(deferred income)
17
NUMBER OF BUSINESSES BY
BUSINESS STRUCTURE
Sole Proprietor
Corporations
Partnerships
LLC
18
REVENUE BY BUSINESS
STRUCTURE
Sole Proprietor
Corporations
Partnerships
LLC
19
Forms of Business Ownership
(continued)
 A sole proprietorship is operated by an
individual for profit.
 A partnership is an association of two or more
persons who carry out a business as co-owners for
a profit.



General partnership
Limited partnership
Limited liability company
Forms of Business Ownership(continued)
 The corporation is a legal entity according to
U.S. law.

Incorporated in one of the fifty states or territories of
the United States.
 Public Corporation: stock is sold to the public.
 Private Corporation: Stock is not sold to the public.
 All corporations are formed as C corporations unless
they meet the requirements of and request Subchapter
S tax status.
 Subchapter S corporation: Private corporation with special tax
status granted by Internal Revenue Service (IRS)
 Maximum of 100 shareholders
 No double taxation
Forms of Business Ownership
(continued)
 A Limited Liability Company (LLC) is a hybrid
business entity having features of both
partnerships and corporations.




Taxed as a partnership
Has limited liability for its owners
Flows through income and losses to individual
owner’s tax returns
http://en.wikipedia.org/wiki/Limited_liability_com
pany
Business Records
 Sales records
 Cash Receipts
 Cash Disbursements
 Accounts Receivable
 Capital Equipment
 Insurance
 Payroll
Sales Record
 All income derived from the sale of your
product or service
 One category or many as total sales
 Or many by different products or service
Cash Receipts
 Money generated through cash sales
 Money collected from accounts receivable
not your sales numbers
 A cash & carry business only accepts cash at
point of sale so all receipts are considered
cash
Cash Disbursements
 Operating expenses or accounts payable
 Pay by check
 Problems with petty cash accounts
 Records kept together
 Check, invoice, receipt, and record
Accounts Receivable
 Sales from credit ( not credit cards)
 Managed monthly and aged
 Be prudent with extensions of credit beyond
60 days
Capital Equipment
 Detailed Records on major purchases
 What is major?
 Only items you would depreciate
 Not leased equipment
 Record should include





Date purchased
Vendor
Description
How paid for
Check number
Insurance
 Records of all insurance
 Include carriers
 List of filed claims
Payroll
 All payroll tax information for at least four
years
 There are 20 different kinds of employee
records that must be kept
Ways to keep track of records
 Bookkeeping
 Computerized
List of records to keep
 Amount and sources of gross receipts






Cash register tapes
Bank deposit slips
Receipt Books
Invoices
Credit card charge slips
Any 1099-MISC forms
List of records to keep
 Purchases




Cancelled Checks
Cash register receipts
Credit card sales slips
Invoices
List of records to keep
 Expenses







Cancelled checks
Cash register tapes
Account statements
Credit card sales slips
Invoices
Petty cash Slips and records
Expenses that are subject to special rules
List of records to keep
 Assets
 When and how acquired
 Purchased price
 Cost of improvements
 Deductions taken
 How asset was used
 How and when asset was disposed of
 Selling price
 Expenses of sale
How records are kept
 Journals and ledgers
 Business checkbook and reconciliation
 Single verse double entry system
 Computerized
 Microfilm
 Electronic storage
Cash Accounting vs Accrual
 When do I have to use Accural

Inventory

Accepting credit


Not credit cards
Structure of business
Financial Statements
Balance Sheet
Income Statement (or Profit Statement)
Statement of Cash Flow
Order of Importance
 Cash Flow Statement
 Balance Sheet
 Income Statement
Balance Statement Review
Uses (Assets = Liabilities + Worth)
Represents a snapshot at a specific time
Shows what you own and what you owe
Balance Sheet Format
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Current Assets
Liabilities
Accounts payable
Accrued Expenses
Current Portion of debt
Income Taxes payable
Current Liabilities
Other assets
Fixed Asset at cost
Accumulated Depreciation
Long Term Debt
Capital Stock
Retained Earnings
Net Fixed Assets
Total Assets
Shareholders’ Equity
Total Liabilities & Equity
Balance Sheet - Terminology
 Total assets

Current assets


Cash, accounts receivable, inventory
Fixed assets



Land
Building & equipment (less accumulated
depreciation)
Net building & equipment
Balance Sheet - Terminology
 Total liabilities

Current liabilities


Accounts payable, notes payable, taxes payable
Long-term liabilities (debt)
 Total equity




Preferred stock
Common stock par value
Paid-in capital in excess of par (common)
Retained earnings
Balance Sheet
Income Statement Review
Sales – Costs – Expenses = Income
For a Period of Time
Usually a Quarter or Year
Income Statement Format (Traditional)
Net Sales
Cost of Goods
Gross Margin
Sales & Marketing
Research & Development
General & Administration
Operating Expense
Income From Operations
Interest Income
Income Taxes
Net Income
Income Statement
Cash Flow Statement
Think of as a Check Register Summary
Shows cash in, cash out, and balance.
Cash Flow Statement Format
Ratios
 Current Ratio = current assets
current liabilities
 Gross Margin = net sales – CGS
 Gross Margin % = gross margin
net sales
 Debt/ Worth = total liabilities
net worth
at least 1
Highest
Climbing
Low as
possible
More Ratios
 Review of other ratios









Quick Ratio
Debt Ratio
Inventory Turnover
Days Sales Outstanding
Investment Turn-over ratio
Operating Margin
Gross Margin
Net Margin
ROI, ROA, ROE
Financial Projection Tool
 www.entr-203.wikispaces.com
 http://www.slideshare.net/dwmcnaughton/fina
ncial-projections-2011-hu