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7/27/2019 Chapter 10 Revised
1/10
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright 2006 Thomson Business & Professional Publishing.
All rights reserved.
Part 3 Developing the New
Venture Business Plan
The Financial Plan
Part 1:Projecting Financial
Requirements
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 104
Understanding Financial Statements
Income StatementA report showing the profit or loss from a firms
operations over a given period of time.
How profitable is the business?
SalesExpenses = Profits
Revenue from product or service sales
Costs of producing product or service (cost of goods sold)
Operating expenses (marketing, selling, general and
administrative expenses, and depreciation)
Financing costs (interest paid)
Tax payments
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 109
The Balance Sheet
Balance SheetA report showing a firms assets, liabilities, and
owners equity at a specific point in time
Total Assets = Outstanding debt + Owners equity
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Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 1017
Balance
Sheets for
Petri &
AssociatesLeasing, Inc.,
for December
31, 2004 and
2005
Exhibit 10.4
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Profits Versus Cash Flows
Accrual-Basis AccountingA method of accounting that matches revenues when
they are earned against the expenses associated with
those revenues
Sales reflect both cash and credit (noncash) sales Inventory purchased on credit is a noncash expense
Depreciation is a noncash expense
Income tax is accrued and may not be entirely expensed
Cash-Basis AccountingA method of accounting that reports transactions only
when cash is received or a payment is made
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The Fit of the Income Statement and the Balance Sheet
Exhibit 10.5
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The Cash Flow Statement
Cash Flow StatementA financial report showing a firms income (cash)
when it is received and expenses when they are paid.
Cash flows from normal operations (operating activities)
Cash flows related to the investment in or sale of assets(investment activities)
Cash flows related to financing the firm(financing activities)
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Financial Forecasting
Pro Forma Financial StatementsStatements that project a firms financial performance
and condition
Purposes of pro forma statements:
How profitable can the firm be expected to be, given theprojected sales levels and the expected sales expenserelationships?
What will determine the amount and type of financing (debt
or equity) to be used? Will the firm have adequate cash flows? If so, how will they be
used; if not, where will the additional cash come from?
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Exhibit 10.9
Assets-to-Sales-Financing Relationships
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Good Forecasting Requires
Good Judgment
Practical Suggestions
Develop realistic sales projections.
Build projections from clear assumptions about marketing and
pricing plans. Do not use unrealistic profit margins.
Dont limit your projections to an income statement.
Provide monthly data for the upcoming year and annual data for
succeeding years.
Avoid providing too much financial information.
Be certain that the numbers reconcileand not by simply
plugging in a figure.
Follow the plan.