Financial Aspects of a
Business Plan
Chapter 36.2
Estimating Business Income and
Expenses
• The income statement is a summary of your
business’s income and expenses during a
specific period, such as a month, a quarter,
or a year.
• Also called a profit and loss statement.
Income Statement
• Several Main parts:
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Total and Net sales
Cost of goods sold
Gross Profit
Expenses of operating the business
Net income from operations
Net profit before income taxes
Net profit after income taxes
Estimating Total Sales
• The income generated by a business
depends on the yearly volume of sales.
• Verify your estimated sales volume by
comparing it with projected industry figures
for your size of business and location.
• The accuracy of your sales estimates will
also depend on the quality of your market
analysis.
Calculating Net Sales
• The total of all sales for any period of time
is called gross sales.
• The total of all sales returns and allowances
is subtracted from gross sales to get net
sales.
• Net sales represent the amount left after
gross sales have been adjusted for returns
and allowances.
Cost of Goods Sold
• The total amount spent to produce or to
purchase the goods that are sold is called
the cost of goods sold.
• To calculate cost of goods sold, use the
following formula:
Beginning Inventory
+ Net Purchases
- Ending Inventory
= Cost of Goods Sold
Determining Gross Profit
• Gross profit on sales is the difference
between the net sales and the cost of goods
sold.
• The formula for calculating gross profit:
Net Sales
- Cost of Goods Sold
= Gross Profit
Projecting Business Expenses
• Operating Expenses are the costs of
operating the business, which includes both
variable and fixed expenses.
• Variable expenses
– Change from one month to the next.
– Include items such as advertising, office
supplies, telephone and utilities.
– Calculated as a percentage of some baseline
amount.
Projecting Business Expenses
• Fixed Expenses
– Costs that remain the same for a period of time.
– Include items such as depreciation, insurance,
rent and office salaries.
Depreciation: represents the amount by which
the value of a business’s assets has fallen in a
given period of time.
Calculating Payroll Expenses
• The amount earned by an employee is gross
pay.
• Net pay is what the employee receives after
deductions for taxes, insurance, and
voluntary deductions.
Net Income from Operations
• Net income is the amount left after the total
expenses are subtracted from gross profit.
• A net loss results when total expenses are
larger than the gross profit on sales.
• Interest is the money paid for the use of
money borrowed or invested.
• The principal is the interest paid on any
money you borrow to start your business.
Net Profit or Loss before taxes
Net Income from operations
+ Other Income
- Other Expenses
= Net profit (or loss) before taxes
Net Profit or Loss after Taxes
• The amount left over after federal, state, and
local taxes are subtracted.
• Represents the actual profit from operating
the business for a certain period of time.
• The projected income statement should be
completed on a monthly basis for new
businesses. Then completed on a quarterly
basis after the first year.
Balance Sheet
• The balance sheet is a summary of a
business’ assets, liabilities and owner’s
equity.
• Current assets are expected to be converted
to cash in the upcoming year.
– Examples include cash in the bank, accounts
receivable, and inventory.
Balance Sheet
• Fixed assets are used over period of years to
operate your business.
– Examples include land, buildings, equipment,
furniture, and fixtures.
• Current Liabilities are the debts the business
expects to pay off during the upcoming
business year
– Examples include accounts payable, notes
payable, taxes payable, and salaries.
Balance Sheet
• Long-term liabilities are debts that are not
due in the next 12 months.
– Examples include mortgages and long term
loans.
Analysis of Financial Statements
• Lenders use the following types of
operating ratios to determine how well a
business is operating over a certain period
of time:
– Liquidity ratios: used to analyze the ability of a
firm to meet its current debts.
• Current assets divided by current liabilities.
• The higher the ratio the better.
Analysis of Financial Statements
• The Acid Test Ratio: used to see if the
company can meet its short-term cash
needs.
– Formula is cash plus marketable securities plus
net receivables divided by current liablities.
• Activity Ratios: used to determine how
quickly assets can be turned into cash.
– Divide net sales by average trade receivables.
– The lower the ratio the better.
• Stock Turnover Ratio: measures how many
days it takes to turn the inventory.
– Formula: Divide net sales by average trade
receivables.
• Profitability Ratios measure how well the
company has operated in the past year.
– Profit Margin on Sales (net income/net sales)
– Rate of Return on Assets (net income/total
assets.
Cash Flow Statement
• A monthly plan that shows when you
anticipate cash coming into the business and
when you expect to pay out cash.
• Itemizes how much cash you started with,
projected cash expenditures, and how and
when you plan to receive cash.
• Tells when you will need additional funds
and when you will have cash left over.
Loans
• You should be able to borrow additional
money if needed if your business has
potential and your balance sheet shows
enough assets to serve as collateral.