JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
Your assignment is due at 8 AM on Thursday, January 12. Be prepared to discuss your
financial model with a panel of mentors on Friday, January 13th or Saturday, January 14th.
A hands-on workshop session will be held Thursday, January 5 from 5-8 PM to walk
through an example venture and directly assist you with your financial model.
This document is designed to serve as an introduction to the E-Scholars Financial Forecast
Model, which you can use to prepare your financial statements. The model will generate your
Pro Forma Financial Statements, Statement of Cash Flows, and Balance Sheets based on
assumptions that you enter. You will need to enter information about the startup phase of
your business (the “Initial Capital and Expenses” worksheet) and the operating phase of your
business.
Download the E-Scholars Financial Forecast Model from the IEI website – escholars359 is
the password. Save the file with a new file name on your computer. Use the download
model as your stable model that you can always revert to and use the renamed model as
your canvas for building forecasting scenarios for your business.
DATA YOU NEED TO ENTER: STARTUP PHASE vs OPERATING PHASE
STARTUP PHASE
DURATION VARIES
OPERATING PHASE
YEAR 1
YEAR 2
YEAR 3
YEAR 4
YEAR 5
No revenue yet
The revenue you receive from sale of your product or service
The costs your venture incurs
to get your product or service
ready for sale.
The fixed and variable costs your business incurs to deliver your product or
service to your customers.
Startup Fixed Cost Examples:
Fixed Cost Examples
1 Equipment – computers etc
2 Office Space Lease
3 Pay employees/contractors
4 Prototype builds
5 Other costs to build product
or service
1
2
3
4
5
Capital Equipment
Building + Land
Salaries
Interest on long term debt
Costs of service contracts
Variable Cost Examples
1
2
3
4
5
Manufacturing Supplies
Hourly Labor
Distribution Costs
Supplies
Travel
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
Once you enter the needed revenue, cost, and capital data, the spreadsheet will automatically
calculate your inventory, depreciation expenses, accounts receivable, and accounts payable
based on your input. Please note that:

You are only required to enter data in cells that have a yellow color. Do not change the
cells that have a blue color (these cells contain formulas).

The sheets that compute your financial statements (“Year 1” to “Year 5” and “Five Year
Summary” are locked. You do not need to enter any data in these worksheets.
The model template has numbers entered into yellow cells that are just to test the
model to be sure it works. They must be changed by you to numbers that reflect your
business.
IF YOUR BUSINESS PROJECTIONS ARE 0 FOR A GIVEN CATEGORY OR YELLOW CELL
ENTER 0 IN THE CELL, DON’T LEAVE THE NUMBERS FROM THE ORIGINAL MODEL.
You can use this tool to describe the potential of your venture in financial terms and can create
multiple scenarios as you work through your business operations and your assumptions change.
To use your time most efficiently, we make the following recommendations.

DO NOT MAKE CHANGES TO THE FORMAT OF THE MODEL AS YOU MAY BREAK FORMULA
LINKS.

ALWAYS SAVE YOUR FILE AS AN EXCEL 97-2004 WORKBOOK TO ENSURE COMPATIBILITY
WITH OTHER COMPUTERS.

SAVE YOUR EXCEL FILE EVERY 15 MINUTES – IF YOU BREAK A LINK OR MAKE A MISTAKE,
YOU WON’T LOSE YOUR WORK AND CAN MORE READILY FIX THE PROBLEM.
2
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
The remainder of this document provides step-by-step instructions on how to enter information
about your venture in the spreadsheet to generate financial statements for the business.
STEP 1
Startup Capital and Expenses Tab
First, put the name of your venture and your name(s) in the header. You can only do it here,
but the headers for all tabs will then have your venture name and your name displayed.
Depreciable Assets
These are assets that cost more than $2500 AND have an expected service life greater than 1
year. If you buy a set of computers, networking equipment, and printers at one time at a cost
that exceeds $2500, then you can capitalize the cost and depreciate it over time. (Assets are
part of the capital of the business). If the purchase price of a product or service is less than
$2500, OR if the item has a service life of less than one year, then you must treat it as an
Expense Item for the year.
The model automatically calculates depreciation of assets purchased. Note that tax law
requires different schedules of depreciation for different classes of assets. Enter in the
appropriate classification the cost of assets you expect to purchase in the Startup Phase by
classification. You may not depreciate the cost of any land purchased.
Expense Items
These are costs incurred to build the capability to produce a product or service and are not
depreciated over time. Asset purchases of less than $2500 and purchases of assets with an
expected service life of less than one year are Expense Items for the year. Examples include
such cost categories as legal advice, information technology consulting, contract employee
expense, advertising, and other services that are provided to your venture in the Startup Phase.
Enter the cost of expenses you expect to incur in the Startup Phase by classification. Use the
tab “Expense Details” as a worksheet to capture all the expected costs. Assign them to a
classification and enter the total expenses for the classification in the Expense Items categories
of the “Initial Capital and Expenses” tab.
Working Capital
3
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
The cost of products you have produced that are ready for sale – your initial inventory – and
the expendable supplies required to facilitate the production and distribution (including
packaging) of your product or service are part of your Working Capital. Enter your estimated
inventory, supply costs, prepaid insurance, rent deposits, prepaid software subscriptions and all
other prepaid costs. You classify these items as Working Capital because they are purchased
assets that enable you to sell and deliver to customers.
Cash Reserve
Your venture will largely be operating with cash on hand during the Startup Phase. New
ventures need to have enough cash on hand for unexpected expenses and to support your
venture if your product or service development takes longer than planned (a common
occurrence). Your financial plan should anticipate less than perfect execution with a buffer of
cash. Enter the amount of operating expenses you expect to incur over 4 months and the
product or service production costs you expect to incur over 2 months. These numbers
aggregated are your Cash Reserve.
Enter your expected operating expenses for four months as a cash reserve requirement.
Include your actual operating expenses in Operating Expenses x 4 months. Enter the costs of
the product or service you intend to sell for 2 months in Product/Service Cost of Sales x 2
months as a cash reserve requirement.
Accounts Payable
Any item your venture purchases in Startup Phase not paid for by cash or personal credit card
and with a balance due is an Account Payable.
Enter the total of expenses that you expect to incur in this period but pay for in a later period in
Accounts Payable.
Investment
Funds either invested by or borrowed from yourself, your family or friends, banks, angel
investors, or others are considered investment in the venture.
Enter the total amount of funds lent to the venture that are payable within 1 year in Short Term
Debt. Enter the total amount of funds lent to the venture that are payable after 1 year in Long
Term Debt. Enter equity investor amounts that will generate returns for investors at some
point in the future in Equity Investment. The conditions and terms for this investment are
typically outlined in a Term Sheet.
4
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
STEP 2
Sales Revenue Assumptions 1-3 and Sales Revenue Assumptions 4-5 Tabs
Estimate your total available market – the number of customers available to your venture.
Define a number of total units that can potentially be sold and enter into the line titled Total
Available Market – units. The total market may grow over time; if you expect it to do so, show
this growth over the 60 months of the financial model.
Determine the unit share of market you expect to achieve in each year. This share will likely
grow over time as more people are aware of your product or service. A unit in a service
business is one sale of your service to a customer. A unit in a product business is one product
sold to a customer. Enter the number of units you expect your venture to sell in each month in
Share of Market – units (this business). Enter the selling price per unit to your customer in Sell
Price per Unit ($). You may be selling your product to a distributor or directly to the end user –
the selling price is the price you receive from your customer, the person or entity that pays you
directly.
Determine the variable cost for material and labor per unit sold. These costs aggregated
constitute your unit cost of goods sold or COGS. In a most businesses, the variable cost or
VCOGS is typically a maximum of 60% of selling price. If your calculated maximum VCOGS is
greater than 60% of the price for which you sell the product, then it is necessary to evaluate
what you can do to reduce your VCOGS. Businesses with VCOGS greater than 60% have by
definition gross margins less than 40% and may not be viable over the long term.
You can repeat these steps for each revenue stream you have. A revenue stream is defined as
one source of revenue for a business. If you are selling a product, then one revenue stream is
for the product itself, and a second revenue stream could be for parts and service. If your
business will have multiple locations, then a second outlet or a franchised outlet can be viewed
as generating secondary revenue streams.
The E-Scholars Financial Forecast Model automatically totals each revenue stream into Total
Revenues for your business. There are two Sales Revenue Assumption tabs: complete your
sales and cost assumptions for both tabs, “Sales Revenue Assumptions 1-3”, and “Sales
Revenue Assumptions 4-5”.
5
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
STEP 3 Inventory Assumptions
Estimate (1) the number of months of finished product you want to have in inventory and (2)
the number of months of materials you want to have in inventory. Once you enter these two
numbers, the spreadsheet will calculate the dollar value of your inventory each month.
In order to estimate the number of months of accumulated inventory your venture will keep on
hand, you should evaluate (1) the time it takes your suppliers to deliver an order to you and (2)
the time required to build your product once supplies are in hand. If you underestimate the
time required to obtain inventory or build your product, you may be unable to supply all of the
customers who want to buy from you. However, overestimation of inventory requirements
means you have cash tied up in finished products or supplies you will only sell or use months in
the future. Reducing the time between the purchase of supplies and the sale of finished
products is the motivation behind Just-In-Time (JIT) inventory management.
STEP 4 Depreciation Assumptions
Enter your monthly planned purchases of depreciable assets in the yellow columns. All assets
with a value over $2500 that are purchased for a business are considered long term capital
assets of the business. Depreciation is a mechanism to recognize that these assets are used up
over time. We have set typical depreciation terms for 5 categories of assets that are consistent
with the terms for most businesses.
Choose the category and enter the asset purchase price in the appropriate yellow cell. For
example, if you purchased a $5000 donut-making machine for your donut business in the first
month of operation, then you would enter the $5000 amount in Year 1, Month 1 of Machinery
Equipment Office Equipment Value – the top left corner yellow cell.
Enter all the assets you expect to purchase under the appropriate category and determine
when you will buy them by year and month – enter the purchase price (plus installation and
taxes) in the appropriate cell.
If you have assets that are depreciated for longer terms than the 5-year duration of your
financial projections in the Excel model, don’t worry or try to fix it. Just focus on entering the
asset in the right category and date purchased.
Purchased buildings are typically depreciated over 20 years. Purchased land is not depreciated.
Note the depreciation terms in the Depreciation Assumptions Tab. These are accepted practice
and are automatically calculated in the model – so there is no need to define or change them.
6
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
STEP 5 Accounts Receivable Assumptions
When your business incurs expenses to deliver product or service to customers, your money is
spent, a sale is made, the product and service is delivered, and the revenue is recognized as
income. However, you still may not have the actual cash in your hand. There are many
businesses that fail because they run out of cash and can’t find funds to pay their short-term
liabilities. Your entries in the Accounts Receivable Assumptions tabs in the E-Scholars Financial
Forecast Model automatically creates a Cash Flow Statement that shows the status of your cash
in hand, what cash has yet to be paid to you, what cash you many never collect, and what cash
you have not yet paid to others.
We want E-Scholars to create cash flow models for ventures as part of each financial forecast so
they can define how their business needs to operate, and ensure they will have enough cash to
sustain operations. With the E-Scholars Financial Forecast Model, you can define an initial set of
assumptions for how your business will operate and then, as your planning for the business
evolves, you can readily change your assumptions and see the effect on your Cash Flow
Statement.
Your first task here is to determine your Accounts Receivable status so you can forecast your
cash flows. Accounts Receivable are funds due to your company from customers who have
already received the product or service you offer. We want you to estimate the % of Accounts
Receivable in the following categories:
1. Those that are collected within the month of the sale – either a cash sale or a sale
with payment before the end of the month in the row titled Paid in Month of Sale
(Cash Sales)
2. Those that are collected the first month after the sale and transfer of product or
service from your venture to the customer in the row titled Paid in First Month After
Sale (Credit Sales)
3. Those that are collected 2 to 4 months after the sale and transfer of product or
service from your venture to the customer in the appropriate row, e.g., Paid in
Second Month After Sale (Credit Sales), Paid in Third Month After Sale, and Paid in
Fourth Month After Sale.
4. Those that are considered not collectible – a percentage of your total sales that you
will not be paid for – come from customers that have your product or have
consumed your service but will never pay you for it. Assume for your business that
any receivables not collected in 6 months are uncollectible. Typically, businesses
7
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
allocate 2-4% of sales as uncollectible debt. If your business model does not include
any sales on credit, then this step may not be required. Enter the percentage in the
row titled Not Collected (Bad Debt Expense)
Your percentages should sum to 100%. If they do not, you have made a mistake.
STEP 6 Assumptions Years 1-3 and Assumptions Years 4-5 Tabs : Income Statement
1. Enter your fixed expenses by month and category for Years 1-3 and Years 4-5. Use the
categories to be sure you have included all the typical expenses incurred by a business over
time. These expenses are Fixed Costs – you will pay these expenses even if you don’t sell
anything (Variable Costs are expenses associated with the production and delivery of each
product or service delivered – these are your VCOGS).
These expense categories may not fit perfectly with your exact spending, but pick the
closest Fixed Expenses category for your expenditures. Keep notes for yourself in the
“Expense Details” tab explaining how you allocated your spending to these categories.
These notes don’t automatically calculate in other tabs – you have to explicitly enter them
in the “Income Assumptions Tab.”
2. Note the Benefits category. Your employees may be contract or permanent. Typically
businesses pay permanent or long-term employees a salary and provide benefits including
health care. Your venture may start with contract employees or consultants at first, but
over the long term, your planning should estimate when you will need full time employees
to properly execute the business. In most cases, full time employees are compensated with
salary or hourly wage plus benefits. Use the benefit calculations provided in addition to the
fixed salary expenses you are calculating. These benefit costs are automatically calculated
as a percentage of salary.
3. If you expect to borrow funds, then the assumed annual interest rate for short-term and
long-term loans. For Year 1, enter this information in cells B35 and B36. Once you enter
these percentages, the spreadsheet will automatically calculate your monthly interest rate.
Remember to enter these interest rates for all 5 years.
You may not have any borrowed funds. If this is your case, then leave the cells blank. Keep
in mind that an equity investment (monies put in by you, friends and family, angel investors,
and others) is typically not a loan. It does not collect interest, but rather relies on the
growth in value of the business over time to generate returns.
8
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
STEP 7 Assumptions Years 1-3 and Assumptions Years 4-5 Tabs : Balance Statement
A Balance Sheet is a snapshot of the status of the business at any one time. Its value to you as
the principal of the business is to show you where the business stands. What assets does it
own? What liabilities does it have? The difference is the equity the owners have in the
business. The fundamental equation of accounting is ALOE: Assets = Liabilities + Owner’s
Equity.
Assets
Inventory : 1-5 months supply of inventory Enter the dollar value of the inventory you expect
to need in order support your sales volume. An average lead time is 30-60 days for product or
supplies to support service delivery, so start with a 60 day supply for inventory unless your
venture requires longer or shorter inventory lead times. Enter a number for each month that
corresponds to your sales projections.
Real Estate Purchase If you purchase real estate, land, or a building to support operations of
your business, enter the total dollar value in the appropriate month. This is a one-time entry
for each real estate purchase. Buildings can be depreciated over time, but land is not
depreciated at all (under the assumption that land doesn’t wear out with use).
Equipment Purchase If you purchase any equipment at a cost greater than $2500 to support
operations of your business, enter the total dollar value in the appropriate month. These are
multiple entries, one for each piece of equipment purchased.
Accounts Payable
Enter your assumptions regarding your accounts payable. For Year 1, enter this information in
cells B53 and B54. We want you to estimate the % of Accounts Payable in the following
categories:
1. Those that are paid within the first month after purchase;
2. Those that are collected in the second month after purchase;
(The spreadsheet assumes that the balance of your supplies purchases are paid in the month of
purchase.) Once you enter these percentages, the spreadsheet will automatically compute
your monthly accounts payable. Remember to enter these percentages for all 5 years.
9
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
Liabilities
Loans paid back within one year are Short Term Loans. Enter any expected borrowed funds on
behalf of the venture, including loans from individuals, banks, and personal credit card debt
incurred on behalf of the venture under Short term loan addition. Enter any expected
repayment of these borrowed funds under Short term loan paid off. Enter loans expected to be
repaid after one year under Long term loan additions and enter any expected repayment of
these borrowed funds under Long term loan paid off.
Investments by Owners
Any additional investment received by your venture should be added to this line at the time the
investment funds are actually received by you. This includes your own money, money invested
by friends and family, and angel investors’ money.
FINANCIAL STATEMENTS “YEAR 1” – “YEAR 5” AND “FIVE YEAR SUMMARY” TABS
Note that these tabs have locked white cells. Your entries in the Assumptions tabs will
populate the financial statements in each year. Don’t attempt to unprotect the sheets and
cells without saving a backup copy of your financials first and making changes to a second copy.
Definitions
These definitions are taken from Wikipedia. See these entries in Wikipedia for a more detailed
explanation.
An Income Statement indicates how the revenue (money received from the sale of products
and services before expenses are taken out, also known as the "top line") is transformed into
the net income (the result after all revenues and expenses have been accounted for, also
known as the "bottom line"). It displays the revenues recognized for a specific period, and
the cost and expenses charged against these revenues, including writeoffs such as depreciation
and amortization of assets and taxes.[1] The purpose of the income statement is to show
managers and investors whether the company made or lost money during the period being
reported.
An important thing to remember about an income statement is that it represents a period of
time, such as a month, quarter, or year. This contrasts with the balance sheet, which represents
a snapshot of conditions at a single moment in time.
A Balance Sheet is a summary of the financial balances of a sole proprietorship, a business
partnership or a company. Assets, liabilities and ownership equity are listed as of a specific
10
JANUARY 13 AND 14 MENTOR ASSIGNMENT: FINANCIAL STATEMENTS
date, such as the end of a fiscal year. A balance sheet is often described as a "snapshot of a
company's financial condition."
A Cash Flow Statement is a financial statement that shows how changes in balance
sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing, and financing activities. Essentially, the cash flow statement is concerned
with the flow of cash in and cash out of the business. The statement captures both the current
operating results and the accompanying changes in the balance sheet. As an analytical tool, the
statement of cash flows is useful in determining the short-term viability of a company,
particularly its ability to pay bills.
EXPENSE DETAILS
This tab is your worksheet. It is not linked with the other tabs and is intended as a tool for you
to think through your expenses, categorize them, and record them. You will then need to enter
the data in the E-Scholars Financial Forecast Model manually.
It is good practice to use additional tabs you create at the end of the model to work through
and document your thinking. The detail of expenses that add up to an entry in the financial
model is just one use for additional tabs.
COMMENTS AND QUESTIONS
If you have questions to pose to mentors or comments you want to remember for later, use
this tab to record your thinking at the time. Consider keeping a running list of items, including
dates and actions taken or required.
11