Understanding Your Financial
Requirements
Conducting a Feasibility Study: Part 2
Evaluate financial feasibility of concept
Estimate one-time start-up expenditures
Estimate expected monthly operating expenses
Develop short-term financial projections
Pro forma
income statement
Forecast your
cash flow
Determine your breakeven point
Pro forma
balance sheet
To be good at your business, you have to
know your numbers ----- COLD.
Harold Gineen
Former Chair of IT&T
At a minimum, a good set of financial
projections should include:




A pro forma income statement
A balance sheet
A cash flow statement
A detailed explanation of the
assumptions that underlie the
projections
Start With a Sources and
Applications of Funds Table


Requires you to state what you intend
to spend your money on for start-up
expenses (i.e. applications of funds)
and
where you will get the money (i.e.
sources of funds)
Sources of Funds
Equity (what the business owes the owner)




Cash
Equipment
Material
Inventory
Loans (what the business owes others)



Short-term
Long-term
Line of credit
Near Equity


Family money
Angel investments
Application of Funds
General Start-up Costs



Organizational costs – legal, accounting, business registration,
franchise fees, etc.
Prepaid expenses – insurance, licenses and permits, security
deposits, utility deposits, first and last month’s rent, opening
advertising and promotion.
Inventory and office supplies
Leasehold Improvements

Electrical, plumbing, signage, washrooms, carpeting, mirrors, air
conditioning, wall paper and painting, etc.
Equipment Costs

Tables, desks, chairs, filing cabinets, production machinery,
storage cabinets, cell phone, computers, fax machine, copier,
automobile, etc.
Cash Reserve

Cash on hand to cover cash flow shortfall until breakeven.
The purpose of these financial projections
is to enable you to answer the following
questions:



How much money will your business
need to maintain a positive cash flow?
When exactly will you need the money?
What kind of money (debt or equity or
both) should it be?
Sample Pro Forma Income Statement
TOUGH GUYS SPORTING GOODS
PRO FORMA INCOME STATEMENT
For the year ending [date]
Net sales
$526,000
Less: Cost of goods sold:
Beginning inventory
$167,000
Plus: Net purchases
361,000
Goods available for sale
$528,000
Less: Ending inventory
181,000
Cost of goods sold
347,000
Gross margin
$179,000
Operating expenses
169,000
Net Profit (Loss) Before Income Tax
$ 10,000
(A)
(B)
(C)
(D)
(E)
Completed Pro Forma Income Statement
TOUGH GUYS SPORTING GOODS
PRO FORMA INCOME STATEMENT
For the Year (date)
1. Gross Sales
2. Less: Cash Discounts
A. NET SALES
Cost of Goods Sold:
3. Beginning Inventory
4. Plus: Net Purchases
5. Total Available for Sale
6. Less: Ending Inventory
B. COST OF GOODS SOLD
C. GROSS MARGIN
Less: Variable Expenses
7. Owner’s Salary
8. Employees’ Wages and Salaries
9. Supplies and Postage
10. Advertising and Promotion
11. Delivery Expense
12. Bad Debt Expense
13. Travel
14. Legal and Accounting Fees
15. Vehicle Expense
16. Miscellaneous Expenses
$526,000
0
$526,000
$167,000
361,000
$528,000
181,000
$347,000
$179,000
40,000
41,000
0
10,000
3,700
0
0
2,600
0
24,700
Continued
Completed Pro Forma Income Statement
(Continued)
TOUGH GUYS SPORTING GOODS
PRO FORMA INCOME STATEMENT
For the Year (date) - Continued
D. TOTAL VARIABLE EXPENSES
Less: Fixed Expenses
17. Rent
18. Repairs and Maintenance
19. Utilities (Heat, Light, Power)
20. Telephone
21. Taxes and Licenses
22. Depreciation
23. Interest
24. Insurance
25. Other Fixed Expenses
E. TOTAL FIXED EXPENSES
F. TOTAL OPERATING EXPENSES
G. NET OPERATING PROFIT (LOSS)
$122,000
15,300
4,200
4,800
1,000
1,000
5,300
10,000
2,600
2,600
$ 46,800
$169,000
$ 10,000
Sample Cash Flow Forecast
Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods
12-Month Cash Flow Projections
Minimum Cash
Balance Required =
5,000
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Year 1
Total
Cash Flow from Operations
(during month)
1. Cash Sales
2. Payments for Credit Sales
3. Investment Income
4. Other Cash Income
12,000 18,000 22,200 28,800 30,000 36,600 39,000 30,000 24,000 24,000 21,000 30,000 315,600
0 8,000 12,000 14,800 19,200 20,000 24,400 26,000 20,000 16,000 16,000 14,000 190,400
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
A. TOTAL CASH ON HAND
$12,000 $26,000 $34,200 $43,600 $49,200 $56,600 $63,400 $56,000 $44,000 $40,000 $37,000 $44,000 $506,000
Less Expenses Paid
(during month)1
5. Inventory or New Material
6. Owner’s Salary
7. Employees’ Wages
and Salaries
8. Supplies and Postage
9. Advertising and Promotion
10. Delivery Expense
11. Travel
12. Legal and Accounting Fees
13. Vehicle Expense
14. Maintenance Expense
15. Rent
16. Utilities
17. Telephone
18. Taxes and Licences
19. Interest Payments
20. Insurance
21. Other Cash Expenses
B. TOTAL EXPENDITURES
-13,200 -19,800 -24,420 -31,680 -33,000 -40,260 -42,900 -33,000 -26,400 -26,400 -23,100 -33,000 -314,160
-3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -3,000 -36,000
-2,000
0
-2,000
-200
0
-500
0
-1,000
-1,100
-450
0
-1,000
0
-600
-2,000
-3,000
0
-1,000
-250
0
-250
0
0
-1,100
-450
0
0
-50
0
-2,000
-3,000
0
-500
-250
0
-250
0
0
-1,100
-450
0
0
-53
0
-2,000
-3,500
0
-700
-300
0
-250
0
-800
-1,100
-450
0
0
-93
-600
-2,000
-4,300
0
-700
-300
0
-250
0
0
-1,100
-450
0
0
-100
0
-2,000
-4,300
0
-700
-400
0
-250
0
-1,000
-1,100
-450
0
0
-107
0
-2,000
-4,500
0
-800
-400
0
-250
0
0
-1,100
-450
0
0
-107
-600
-2,000
-4,500
0
-1,000
-500
0
-250
0
-500
-1,100
-450
0
0
-107
0
-2,000
-3,000
0
-500
-300
0
-250
0
-1,000
-1,100
-450
0
0
-107
0
-2,000
-2,500
0
-800
-300
0
-250
0
0
-1,100
-450
0
0
-107
-600
-2,000
-2,500
0
-800
-300
0
-250
0
-700
-1,100
-450
0
0
-107
0
-2,000
-3,900
0
-1,500
-500
0
-250
0
0
-1,100
-450
0
0
-107
0
-2,000
-41,000
0
-11,000
-4,000
0
-3,250
0
-5,000
-13,200
-5,400
0
1,000
-1,046
-2,400
-24,000
(27,050) (30,900) (35,023) (44,473) (45,200) (53,567) (56,107) (46,407) (38,107) (37,507) (34,307) (45,807) (494,456)
Continued
1. Expenses and other payments should be entered as negative (-)
numbers.
Sample Cash Flow Forecast (Continued)
Pro Forma Cash Flow Forecast for Tough Guys Sporting Goods
12-Month Cash Flow Projections (Continued)
Minimum Cash
Balance Required =
5,000
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Year 1
Total
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
0
6,000
0
0
4,150
0
0
4,800
0
0
813
0
0
851
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
16,614
0
0
0
0
0
0
0
0
0
0
0
0
0
0
$6,000 $4,150 $4,800
$813
$851
$0
$0
$0
$0
$0
$0
Capital
Purchase of Fixed Assets
Sale of Fixed Assets
C. CHANGE IN CASH FROM
PURCHASE OR SALE
OF ASSETS
Financing
Payment of Principal of Loan
Inflow of Cash from Bank Loan
Issuance of Equity Positions
Repurchase of Outstanding
Equity
D. CHANGE IN CASH FROM
FINANCING
E. INCREASE (DECREASE)
IN CASH
F. CASH AT BEGINNING OF
PERIOD
G. CASH AT END OF PERIOD
MEET MINIMUM CASH
BALANCE
($9,050)
$10,000
$950
($750) $3,977
$950
$0 $16,614
($60) $4,851 $3,033 $7,293 $9,593 $5,893 $2,493 $2,693 ($1,807) $28,158
$200 $4,177 $4,116 $8,967 $12,000 $19,293 $28,886 $34,779 $37,272 $39,965 $10,000 2
$200 $4,177 $4,116 $8,967 $12,000 $19,293 $28,886 $34,779 $37,272 $39,965 $38,158 $38,158
Finance Finance Finance Finance Accept. Accept. Accept. Accept. Accept. Accept. Accept. Accept.
2. This entry should be the same amount as for the beginning of the year. All other rows will be the total for the entire year.
Accept.
Sample Pro Forma Balance Sheet
TOUGH GUYS SPORTING GOODS BALANCE SHEET
End of Year 1
ASSETS
Current Assets:
1. Cash
2. Accounts Receivable
3. Inventory
4. Other Current Assets
A. Total Current Assets
Fixed Assets:
5. Land and Buildings
less depreciation
6. Furniture and Fixtures
less depreciation
7. Equipment
less depreciation
8. Trucks and Automobiles
less depreciation
9. Other Fixed Assets
less depreciation
B. Total Fixed Assets
C. Total Assets (C = A + B)
9,000
17,000
185,000
27,000 ________
$238,000
0
0
40,000
40,000
0
0
0
0
18,000
18,000
_______
$ 58,000
$296,000 Continued
Sample Pro Forma Balance Sheet
(Continued)
TOUGH GUYS SPORTING GOODS BALANCE SHEET
End of Year 1 (Continued)
LIABILITIES
Current Liabilities (due within 12 months)
10. Accounts Payable
11. Bank Loans/Other Loans
12. Taxes Owed
D. Total Current Liabilities
Long-Term Liabilities
13. Notes Payable (due after one year)
14. Other Long-Term Liabilities
E. Total Long-Term Liabilities
F. Total Liabilities (F = D + E)
NET WORTH (CAPITAL)
SHARE CAPITAL
Common Shares
Preferred Shares
RETAINED EARNINGS
G. Total Net Worth (G = C - F)
H. Total Liabilities and Net Worth (H = F + G)
97,000
29,000
_______
$126,000
100,000
59,000
_______
$159,000
$285,000
1,000
0
10,000
$ 11,000
$296,000
The Relationship Between
Financial Statements
Income
Balance sheet
Statement
Statement
Sales
- Expenses
Net Income
Cash flow
Assets
Inflows
- Liabilities
Outflows
Equity
Dividends
(Retained Earnings)
Minus dividends
General Linkages Between the Core Statements
Period 1
Period 2
Beginning
Balance
Sheet
Closing
Balance
Sheet
Beginning
Balance
Sheet
Period #0
Period #1
Period #2
Cash Flow
Sheet
Assumptions
statement
Period #1
Period #1
Income
Statement
•Balance sheet
Period #1
•Cash flow
•Income
•Sales
Assumption
statement
Period #2
•Balance sheet
•Cash flow
Sales
Forecast
Period #1
•Income
•Sales
Estimate Capital Needed for a Range of Sales
180
160
140
120
100
80
60
40
20
0
Pessimistic
Most Likely
Optimistic
1st
Qtr
2nd
Qtr
3rd
Qtr
4th Year
Qtr
1
Expenses (thousands of dollars)
Determining Your Breakeven Point
Profit Area
Sales
600
Total Costs
500
Breakeven Point
400
300
Loss Area
200
Fixed Expenses
100
100
300
500
700
Sales Revenue (thousands of dollars)
900