Simple Steps
for Starting Your Business
Financial Projections
v.20121208
Simple Steps for Starting Your Business
The SCORE Foundation would like to thank
For showing their support of America’s small
businesses by sponsoring this series.
To learn more about Bank of America, visit:
www.bankofamerica.com/smallbusiness/
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A Special Thanks to Our Local Sponsors
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Simple Steps for Starting Your Business
Session 4:
Financial Plan &
Projections
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Simple Steps Roadmap
To Accelerate Your Success
Session 1:
Start-up
Basics
PERSONAL MENTORING
Decide
to
Continue
Session 2:
Business
Concept
Session 3:
Marketing
Plan
Session 4:
Financial
Projections
Session 5:
Funding
Sources
“GO OR NO GO” DECISION &
NEXT STEPS WITH MENTOR
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Agenda
•
•
•
•
•
•
Importance of financial planning
Building your financial model
Start-up funds
Fixed operating expenses
Forecasting sales units and
prices
Understanding financial
statements:
– Income statement
– Cash flow statement
– Balance sheet
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Introductions
• Introductions
• Name
• Your business idea
• What you hope to get out of
this session
• 30 seconds!
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Benefits of
Financial Planning & Goal Setting
•
•
•
•
Match business concept with
personal income goals
Gain a better understanding of
financial risks and rewards
Identify early development and
start-up costs, ongoing
operations expenses and funds
needed to finance the business
Have a plan to help guide
business decisions and monitor
results
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Why is a Financial Plan Important?
• Helps you examine the
feasibility of your numbers
• Organizes your business
finances
• A modeling tool that helps
you evaluate variable factors
• A benchmark for tracking
progress
• A blueprint you can adjust to
achieve your financial goals
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Financial Projection Model
Common Concerns:
• The spreadsheets look
complicated. I don’t think I can
do this on my own.
• I don’t understand all the
figures and math.
• This is overwhelming.
• Can I start my business without
a financial projection model?
Businesses don’t plan to fail – they often fail to plan!
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Simplified Statements
Cash Flow
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Financial Projection Model
• Your work is SIMPLIFIED:
1 - Provide the INPUTS and update when
required
2 –The RESULTS that are CALCULATED
AUTOMATICALLY, so you need to learn
where to look
3 – Determine if calculated forecast of
cash flow, profit and loss and balance
sheet information are acceptable for
startup.
• You DON’T need to know all the math
• Work with your mentor on the forecasts.
• Your accountant can provide ongoing
advice.
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Anne’s Nursery Example
• Produces specimen
trees, shrubs and vines
• Projected third year
sales: $710,000
• Sells to retail nurseries
and end consumers
• S-corporation
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Financial Model Template
The first six worksheets are:
1.
2.
3.
4.
5.
6.
Required Start-Up Funds
Salaries and Wages
Fixed Operating Expenses
Projected Sales Forecast
Projected Sales Forecast (2)
Cash Receipts – Disbursements
The remaining worksheets are
calculated financial statements
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Need Software?
The training templates are authored using Microsoft Word (word
processor) Excel (spreadsheet)
You DON’T need to know how to “program” spreadsheets, only how to
fill in the data in the templates and find / use the results – all
automatically calculated!
If you already have and use the software– GREAT!
If you do not have the software packages, there is an excellent FREE
alternative that is compatible with Microsoft Office:
Open Office - The Free and Open Productivity Suite
Available for PC and Mac – Word Processor/ Spreadsheet / Presentation
Download at: http://www.openoffice.org/
Documentation, if you need tutorials, etc:
http://documentation.openoffice.org/
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SCORE Financial Projections Model
SCORE Financial Projection Model
Please read this entire page before you do anything else
This spreadsheet walks you through the process of developing an integrated set of financial projections.
To use this model, simply complete any information asked for found in the color yellow.
Example: Fill in boxes that look like this
A number found in the color green is optional information that you can complete.
Example: Check these assumptions
Otherwise, any information found in black type is automatically calculated for you.
Although the cells that are calculated are locked (or protected), you can turn off this protection to modify the sheets.
To do this, select "Tools" from the menu bar at the top of the screen. Then select, "Protection."
Finally, select "Unprotect Sheet" and you will be able to edit any labels or formulas.
Before you begin, we need some information about your business to best customize your financial statements.
Please enter the name of your business in the box below:
Anns Nursery
The first six worksheets in this workbook are steps you will need to complete. They are titled:
1. Required Start-Up Funds
2. Salaries and Wages
3. Fixed Operating Expenses
4. & 5. Projected Sales Forecast (2 sheets)
6. Cash Receipts and Disbursements
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Required Start-Up Funds
How much do you need? What will it be used for?
(Exercise 1a)
• How much do you
need?
• What will it be used
for?
• This develops Assets
part of opening
Balance Sheet.
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Sources of Funding
•
•
•
What are your expected sources of capital?
Amount financed by owners vs. outside sources.
Need to ensure funding exceeds start-up costs.
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Salaries and Wages
(Exercise 1b)
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Exercise 1 a/b - Startup Expenses/Wages
Worksheets 1 & 2
• Fifteen minute exercise:
• Ten minutes worksheet 1 (1a)
• Five minutes worksheet 2 (1b)
– Fill in the quick data
assumptions that apply to your
business
• Class discussion key concepts
WS4 Financial Projections -Exercise 1a Startup Funds.xls
WS4 Financial Projections -Exercise 1b Salaries and Wages.xls
60m
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Fixed Operating Expenses
• Depreciation expense
is calculated based on
inputs from tab one
• Interest expense on
debt capital is
calculated from tab
one and Cash Flow
statements
• Beware: Overwriting
numbers in years 2
and 3 expense cells
will overwrite formula
(Exercise 2)
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Exercise 2 -Fixed Operating Expenses
Worksheet 3
• Ten-minute exercise:
– Fill in quick data assumptions that
apply to your business.
• One-on-one Mentoring
• Class review key concepts
WS4 Financial Projections - Exercise 2 - Fixed Operating Expenses.xls
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Stretch Break
10 minutes, please
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Forecasting Sales Units
What unit categories make
sense for your business?
• You need to figure out if
you’re selling:
– Products
– Services (hours or fixed
price)
– Combination (packages)
• Determine what makes up
your “unit of sale”
• Determine your direct cost
per unit
• Determine your price per unit
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Sales Unit Data Sources
Sales unit category or grouping
• Product, service, package,
volume, customer type
Unit cost and price
• Build up from sources
• Subcontract
• Competition
Sales volume in units
• Estimate from market
• Competition
• Number to make business
profitable
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Product Producing Firm
Ann’s Nursery has three
categories of sale:
1. Direct to local retailers
2. Through representatives
to distant retailers
3. Through internet-based
sales to end consumers
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Unit of Sale Categories
Think about:
• What is your business?
• What would be your units of
sale categories?
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Gross Profit Margin
What is gross profit
margin?
– Sales ($) minus Cost of
Goods Sold
Why is it important?
– Requires you to cost out
what you’re selling
– Helps you determine
adequacy of gross price
for what you’re selling
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Gross Profit Margin
How much do you need & what will it be used for?
Note: There are up to 4
supply chain or product
types available to allow
sales and fixed cost
allocation segmentation
90m
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Sales Approaches for Worksheet 4-5
Preferred
forecasting approach
“Unit sales price” and
“unit cost” approach.
vs. alternative
“$1.00 price” and
“percentage of sales”
approach.
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Projected Sales Forecast
(Exercise 3)
Forecast sales
units by category:
product, service or
hours
• Examples:
– Retailer
(products)
– Hairdresser
(service)
– Computer
repair (hours)
120m
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Exercise 3 - Projected Sales Forecast
Worksheet 4
• 10-minute Exercise:
– Fill in the numbers (price, cost
and volume) that apply to
sales unit categories for your
business.
– Use sheet 4 for your first
channel and sheet 5 for 2nd
channel then build additional
sheets, one per channel
• One-on-one mentoring
• Class review key concepts
WS4 Financial Projections - Exercise 3 - Sales Forecast.xls
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Resulting Financial Model Statements
Remaining tabs in the spread
sheet:
• Income Statement
• Cash Flow Statement
• Balance Sheet
• Financial Diagnostics
• Year End Summary
• Breakeven Analysis
• Ratios
140m
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Understanding Financial Statements
Income Statement
– Gross profit margin and overhead
expense management
Cash Flow Statement
– Funds management
Balance Sheet
– Accounts Receivable (A/R),
Inventory and Accounts Payable
(A/P) management
Breakeven Analysis
Use of industry comparison ratios
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Why 3 Financial Statements?
1. Income statement
– How long to reach profitability?
– Do I make a profit or loss?
2. Cash flow statement
– Do I have enough sources of funds
to operate, sustain & grow the
business?
3. Balance sheet
– What are my assets & liabilities?
– How much am I worth?
These are Management Decision Tools
that need frequent review!
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Income and Expense Statement
Profit and Loss (P&L)
Operating results for a period of
time:
•
Sales
• Expenses
• Net Profit or Loss
(“Bottom Line”)
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Projected Income Statements: Part 1
160m
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Projected Income Statements: Part 2
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Cash Flow Projection
Cash Flow Statements
Show:
• Cash inflow and cash
outflow
• Like checkbook register
• How much cash is
generated and when
• When cash is needed for
major purchases
• If enough cash is generated
for loan payment
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Cash Flow Projection
•
•
•
Differs from income and P&L:
– P&L reports billings and
accrued expenses
– Cash flow reports collections
and payments
Has cash payments for capital
purchases and payments on
loan principal:
– The P&L does not show these
Cash flow, sources and uses of
funds are the most important
documents in the loan package
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Projected Cash Flow
Think about Accounts Receivable – will you collect everything?
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Balance Sheet
• Your financial position
at a point in time
(snapshot of the moving
train)
• What you own (assets)
• What you owe
(liabilities)
• Your net worth (assets
minus liabilities)
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Balance Sheet
180m
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Pro Forma Balance Sheet 1
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Pro Forma Balance Sheet 2
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Break Even Analysis
How many sales do you need to make, Sales
at what
price, at what costs and in
Units to Reach Break Even Point
what time period to be profitable?
$10 ea
- $ 5 ea
= $ 5 ea (50%)
Or $12,000 to $13,000 / .50 =
$24,000 to $26,000 sales
or about 2,400 to 2,600 items
$40,000
$30,000
$20,000
$10,000
Units Sold x 100
Fixed Costs
Fixed+ Semi Fixed
Total Fixed + Variable
Total Sales
51
46
41
36
31
26
21
16
11
$0
6
Break Even = Total fixed + semi fixed cost /
%contribution margin
$50,000
1
Fixed Costs
$10,000
Semi Fixed Costs
$2000-3000
Influenced by volume
but not associated
per unit (example –
commission tiers,
temporary labor,
office supplies)
$60,000
Dollars
Example:
Sales Price
Variable Cost
Contribution Margin
Breakeven Analysis
Breakeven, for a time period, is where:
Gross Profit Margin $ = Total Expenses $ and
Sales Volume = $0 Profit
Breakeven Sales $ =
Fixed Cost / %Gross
Margin
The spread between
breakeven and sales
forecast is very
important (the wider the
better)
Ann does NOT reach
breakeven this year!
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Break-even Estimate
(divided by)
200m
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Stretch Break
10 minutes, please
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Benchmarking
Benchmarking is:
Comparing financial information to
relevant information of a similar
company or historical information of
the industry norms.
If you don’t know what the standard
is you cannot compare yourself
against it.
160m
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Financial Research Resources
• Risk Management Association
(RMA) annual statement studies
• Industry norms and key business
ratios (Dun & Bradstreet)
• Financial ratios, business statistics
& benchmarks
(www.BizStats.com) -FREE
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Using Financial Ratios
• RMA publishes average financial
ratios for actual business results
of thousands of different
companies. You can find ratios in
the Sarasota Selby library’s
business section, your bank or
SCORE.
• Ratios help estimate both your
first income statement and
balance sheet.
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Using Financial Ratios
• Give you a quick check—and a
reality check—on how you stack
up against your peer companies
in your industry.
• Used by the bankers to test
whether your business plan
estimates are valid for your type
of business.
220m
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RMA % & Ratio Comparison
Compare forecasted results to
RMA data to review:
• Strengths
• Weaknesses
• Opportunities for
improvement
• Threats
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RMA % & Ratio Comparison
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Review
•
•
•
•
•
•
Importance of financial
planning
Building your financial model
Start-up funds
Fixed operating expenses
Forecasting sales units and
prices
Understanding financial
statements:
– Income statement
– Cash flow statement
– Balance sheet
www.score.org
58
Simple Steps for Starting Your Business
Testing Your Business Ideas
aSession 1  Start-up Basics
aSession 2  Your Business Concept
aSession 3  Marketing Plan
aSession 4  Financial Projections
Session 5  Funding Sources
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Homework
Download documents at:
http://www.score-suncoast.org/QSHandouts.aspx
1. Complete a rough draft of your input sheets
from the exercises today
2. Put the values in the “QuickSTART Session
4 Financial Projections Template” – look at
the resulting financial reports
3. Obtain your RMA ratio data.
4. See your SCORE mentor to finish your
projections and help with the RMA data.
5. With the help of your mentor, you will be
reviewing output sheets and modifying
inputs several times before it makes sense.
See you at the next session on Funding
Sources
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Need Help?
• Manasota SCORE
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• Ask SCORE for advice online:
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• Find a SCORE office near you:
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Contact
SCORE
• Email SCORE:
contact@score.org
• Web Site:
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