1 of 45

SIMPLE STEPS FOR STARTING YOUR BUSINESS

1

Session 4: Financial Matters

2 of 45

SIMPLE STEPS FOR STARTING YOUR BUSINESS

2

[insert local sponsorship information here if relevant, otherwise delete this slide]

3 of 45

ABOUT SCORE

SCORE volunteers are successful and experienced business executives

Seminars and workshops Free mentoring:

One-on-one
E-mail

Resources for small businesses:

[chaptername].score.org

3

Session 4: Financial Matters

4 of 45

MENTORING LOCATIONS

4

[Local mentoring locations will be provided on this slide.]

Please make note of this information in your manual.

Session 4: Financial Matters

5 of 45

PROCESS ROADMAP

5

One-on-One Mentoring

“Go or No-go” decision &�next steps with mentor

Mentoring/Build Business Plan

Session 1:�Startup Basics

Session 2:

Business Concept

Session 3: Marketing Plan

Session 4:�Financial Matters

Session 5: Funding Options

Session 4: Financial Matters

6 of 45

WORKSHOP BENEFITS

6

Helps you develop your feasibility plan
Takes you through the decision-making process
Provides you with the information to help make a “go or no-go” decision on your business idea
Has the core information to create a complete business plan for bankers and investors
Gives you the key directions you need to get started

Session 4: Financial Matters

7 of 45

AGENDA

7

Financial planning
Financial projections
Forecasting sales
Pricing fundamentals
Understanding financial statements
Recordkeeping

Session 4: Financial Matters

8 of 45

THE IMPORTANCE OF FINANCIAL PLANNING

8

Match business concept with personal income goals
Gain a better understanding of financial risks and rewards of entrepreneurship
Figure out how much money you will need to start and run your business
Identify development and startup costs, ongoing operations expenses and funds needed to finance the business
Create a plan to help guide future business decisions and monitor results
Enables you to communicate with stakeholders (investors, lenders, employees, etc.) about the business’s finances

Session 4: Financial Matters

9 of 45

THE IMPORTANCE OF FINANCIAL PLANNING

9

A financial plan is your forecast of sales, costs, profits and assets for the first year or more after startup
Use it to predict how successful your new business might be and to understand where your money will be allocated and where it will come from
Helps you examine the feasibility of your numbers and organize your business finances
It’s a:
Modeling tool that helps you evaluate variable factors
Benchmark for tracking progress
Blueprint you can adjust to achieve your financial goals

Session 4: Financial Matters

The first job is to determine the financial feasibility of your business ideas. If the feasibility assessment makes sense, then the draft financial plan can be turned into a tool for all the other purposes shown here.

You need to predict how your business will operate. This is YOUR forecast of sales, costs, profits and assets over the first year or more after you start your business.

You will use it to forecast how successful your new business might be when you start up, following your business plan. It is an important tool to understand where your money will be allocated and where it will come from.

In the future, you should use your plan with your accountant to periodically review and update your forecast based on business history, along with your business plan in the coming months and years.

Financial models are complicated because there can be a lot of data to analyze and consolidate into “standard financial reports.”

As your business grows, go over your financial plan with your accountant periodically to review and update your forecast based on your past business history and your business plan.

10 of 45

FINANCIAL PROJECTIONS TEMPLATE

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!

10

Session 4: Financial Matters

SCORE knows that you may not understand accounting so we simplified the process for you. All you need to do is:

Input the data into the spreadsheets and update when required.
The financial results are automatically calculated so you need to know where to look for the results.
Determine if your automatically calculated forecast of cash flow, profit and loss and balance sheet information are acceptable for start-up.

You do NOT need to understand all the math here. SCORE recommends that you work with your mentor for help in completing forecasts, and that you work with an accountant for ongoing business needs and advice.

It’s important to note that these projects can have a big impact on your Go or No Go decision. You can start a business without a financial projection, but SCORE recommends that knowing the value of financial planning is an important part of your overall business start-up work.

11 of 45

FINANCIAL PROJECTIONS TEMPLATE

The first six worksheets are:

Required Startup Funds
Salaries and Wages
Fixed Operating Expenses
Projected Sales Forecast
Projected Sales Forecast (2)
Cash Receipts – Disbursements

11

Session 4: Financial Matters

Financial statements can be overwhelming to clients. We understand their concerns and will guide them through this exercise. As clients start filling in the model, they will be making up numbers that they will change later. They will not finish this model in this workshop but will finish it with their SCORE mentor.

The SCORE Financial Projections Template was programmed to be used by people who are not accountants. Remember that financial forecasting is not accounting. It enables clients to create financial projections in the format that professional reviewers find acceptable.

They should answer questions (identified by BLUE type) and to fill in blank CELLS (shown in WHITE typeface) on Excel spreadsheets with those numbers which represent their current assumptions about what is the correct course for them to follow. They should input their estimates of what will lead to financial success --- with given amounts of equity and loan funds at their disposal --- with the products or services which they will offer --- marketed as they intend, over the next three years.

The SCORE financial projections template will use those assumptions to model the core financial numbers and financial statements which would result were those assumptions put into play. This is an enormous help to anyone trying to create a winning business plan.

* Group Exercise: Refer to the Estimated Startup Costs worksheet in the workbook. Instruct client to estimate their startup expenditures and expense costs. These costs will need to be funded to start operation.

Total Time: 10 minutes

12 of 45

FINANCIAL PROJECTIONS TEMPLATE REQUIRED STARTUP FUNDS

How much do you need?
What will it be used for?
Also consider starting costs for employees: salaries, taxes, benefits
This develops the Assets part of opening Balance Sheet

12

Fixed Assets	Amount
Real Estate-Land	100,000
Real Estate-Buildings	30,000
Leasehold Improvements	15,000
Equipment	5,000
Furniture and Fixtures	2,000
Vehicles	20,000
Other
Total Fixed Assets	$ 172,000

Operating Capital	Amount
Pre-Opening Salaries and Wages	-
Prepaid Insurance Premiums	2,500
Inventory	30,000
Legal and Accounting Fees	3,000
Rent Deposits	-
Utility Deposits	300
Supplies	1,000
Advertising and Promotions	2,000
Licenses	-
Other Initial Start-Up Costs	-
Working Capital (Cash On Hand)	3,000
Total Opening Capital	$ 41,800
Total Required Funds	$ 213,800

Session 4: Financial Matters

Hand out copies of the spreadsheets for. We will review together as we go through the upcoming slides.

Explain information boxes on the first page. Turn to page two: Required Start-up Funds.

Explanation: Includes all start-up costs, funds that will be expended and assets that need to be acquired prior to the first day of business.

It is developing the Assets part of the opening Balance Sheet. It is also used by those who have existing businesses to set up their existing balance sheet info and to explain what additional funds they need to acquire and how they plan apply those funds in their business. Students will need to calculate this amount for each idea to evaluate financial feasibility.

This first worksheet -tab 1- asks you to list all of those items and to assign dollar values to them.

The client also will need to estimate how much they will need on hand to pay for the salaries and benefits of employees and other business costs until revenue from sales begins to generate enough cash flow to cover the ongoing operations expenses. The model suggests that they calculate this up front need for cash or recognize that it will show up fast in the bank working capital Line of Credit requirements that are developed in the Cash Flow section of the template.

13 of 45

SOURCES OF FUNDING

13

Sources of Funding	Percentage	Totals
Owner’s Equity	53.79%	115,000
Outside Investors	0.00%	-
Additional Loans or Debt
Commercial Loan	15.81%	33,800
Commercial Mortgage	23.39%	50,000
Credit Card Debt	0.00%	-
Vehicle Loans	7.02%	15,000
Other Bank Debt	0.00%	-
Total Sources of Funding	100%	$213,800
Total Funding Needed

Session 4: Financial Matters

This worksheet is the “flip side” of the previous worksheet. Here you listed what funds are needed and why and here you list the sources from which those funds are expected to come.

Carried over from the preceding statement is the question of how much of any funds to be raised will be used to cover new operating expenses and how much for purchase of mortgaged real estate and other fixed assets. The reason is because in real estate, the purchased property itself will be used as collateral against a loan. For commercial loans, or working capital loans, where the money will be used to cover other financing needs, some type of collateral other than the purchased items may be required. Also, length of loans will tend to be shorter than for mortgaged real estate and the interest rate may differ.

This section of the financial model also asks how much of the business will be financed by the owners and how much from outside sources. Please recognize that bank loans for start-up businesses are far from a “slam dunk”. We will discuss many different potential sources of funds in the next workshop. For planning and forecasting purposes, we are more concerned right now with the question of “how much” rather than “from whom’?

The Owner’s Equity and Outside Investors are both segments of equity capital financing. Note that there are 5 types of interest bearing debt available for use. The green cells may be modified to change the interest rate and the time bound terms of the loan, i.e. the number of months of the loan repayment period. Note that the principal and interest payment requirements are automatically calculated and this financial information is automatically transferred to the P&L and Cash Flow statements.

Group Exercise: Have the clients work on first two pages for their business.

Don’t worry about accuracy, just understand the process, which is the main focus. The client will change the numbers frequently before they have completed the feasibility planning process. The small group coaches will assist their assigned clients in this process. Have them do this exercise on paper or on the Excel computer model.

Participants with multiple ideas should do the exercise for each idea (either in session or focus on one during class and do rest with mentor in between sessions).

Total time to complete and discuss: 20 minutes.

14 of 45

SALARIES AND WAGES

14

Employee Types	Number of Owners /Employees	Average Hourly Pay (to 2 decimal places, ex. $15.23)	Estimated Hrs./Week�(per person)	Estimated Pay/Month (Total)
Owner(s)	1	23.08	40	$ 4,000
Full-Time Employees	3	5.77	40	$ 3,000
Part-Time Employees	0			$ -
Independent Contractors	0			$ -
Total Salaries and Wages	4	$ 28.85	80	$ 7,000

Payroll Taxes and Benefits	Wage Base Limit	Percentage of Salary/Wage		Estimated Taxes & Benefits/Month (Total)
Social Security	$ 110,111	6.20%		$ 434
Medicare	--	1.45%		$ 102
Federal Unemployment Tax (FUTA)	$ 7,000	0.80%		$ 19
State Unemployment Tax (SUTA)	$ 7,000	3.45%		$ 81
Employee Pension Programs	--	2.85%		$ 200
Worker's Compensation	--	0.00%		$ -
Employee Health Insurance	--	0.00%		$ -
Other Employee Benefit Programs	--	0.00%		$ -
Total Payroll Taxes and Benefits		14.75%		$ 834

Total Salaries and Related Expenses				$ 7,834

Session 4: Financial Matters

Include wages for employees AND business owner(s)
Mandatory and voluntary fringe benefits should total about 15%
Include about 4% of base compensation for benefit programs so that all benefits total about 15%
Data is automatically copied to P&L and Cash Flow statements

This is pretty straightforward. Call their attention to a few items that may warrant some additional consideration. Regardless of legal business structure, have the client include compensation for themselves and all employees. This is financial planning, not bookkeeping or tax reporting or filing, they will want to capture all anticipated personnel costs in their plan.

Suggest that all mandatory and voluntary fringe benefits should total about 15% of base salary compensation, so include about 4% of base compensation for benefit programs. That entry will bring the plan up to around 15% in total.

The yellow tab % change cells are used to drive the expected or desired increase in salaries & wages for years 2 and 3 in the model.

These inputs are automatically transferred to the P&L and Cash Flow statements.

15 of 45

FIXED OPERATING EXPENSES

15

Session 4: Financial Matters

	January
Expenses
Advertising	900
Car and Truck Expenses	800
Commissions and Fees	-
Contract Labor (Not included in payroll)	-
Insurance (other than health)	400
Legal and Professional Services	150
Licenses	-
Office Expense	250
Rent or Lease -- Vehicles, Machinery, Equipment	200
Rent or Lease -- Other Business Property	300
Repairs and Maintenance
Supplies	300
Travel, Meals and Entertainment	300
Utilities	500
Miscellaneous	200
Total Expenses	$ 4,300

Depreciation expense is automatically tabulated based on inputs from tab one
Interest expense on debt capital is automatically calculated from tab one and from Line of Credit requirements from Cash Flow statements
Beware: Overwriting numbers in years 2 and 3 expense cells will overwrite formula

Note that if they want to change expense titles, they can unprotect the sheet, make their changes carefully and then protect the sheet again. The yellow tab % change cells are used to drive the expected or desired increase in operating expenses for years 2 and 3 in the model.

You can overwrite the numbers in any expense cell for years 2 and 3, but if you do, you will lose the formula in that cell which is used to calculate future expenses from the % change cells. So be careful about doing that. In terms of updated revisions of the financial model, it is better to keep the formulas intact for future revisions.

Note that depreciation expense is automatically calculated from the inputs in tab 1 and that interest expense on debt capital is automatically calculated from inputs in tab 1 and from Line of Credit requirements that are developed in the subsequent Cash Flow statements.

Group Exercise: Have the client work on this worksheet for their business. Do one for each idea (either in session or focus on 1 during class and do rest with mentor in between sessions). Remind them not to worry about accuracy, but focus on understanding the process. They can work on more accurate projections as they learn more and have more time on their own to do it.

Total time: 10 minutes

16 of 45

COMPONENTS OF YOUR FINANCIAL PLAN

There are 5 elements that comprise a �financial plan:

Required startup funds
Salaries and wages
Fixed operating expenses
Projected sales forecast
Cash receipts and disbursements

16

Session 4: Financial Matters

17 of 45

REQUIRED STARTUP FUNDS

Here are some factors to consider as you calculate your required startup funds.

How much money do you need to get your business up and running?
What will it be used for?
What are your expected sources of capital?
How much will be financed by you and your partners, and how much by other sources?

17

Session 4: Financial Matters

18 of 45

SALARIES & FIXED OPERATING EXPENSES

18

Include wages for employees and the business owners
Remember to include taxes on wages
Typically, mandatory and voluntary fringe benefits total about 30% wages

SALARIES AND WAGES: ^{FIXED OPERATING EXPENSES:}

Fixed operating expenses are the administrative expenses necessary to run the business
These include costs such as insurance, rent, utilities, sales commissions, advertising, taxes and licenses

Session 4: Financial Matters

19 of 45

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

19

Session 4: Financial Matters

What items or blocks of time make up their typical or AVERAGE unit of sale? What will be included in the AVERAGE purchase which their customers make from them during the next 12 months? For example, if they sell things (like a retailer), how many items, and what items, will be listed on the bill of sale? If they sell blocks of service time, like a business consultant, how many hours do you expect to be billing in an AVERAGE job?

Maybe they have more than one type of customer, so it is difficult to imagine one typical or average purchase for their business. If they need to do so, they can break that answer down into two or three AVERAGE purchases, to include two or three different types of customer transactions. Four categories of sales and direct cost of goods sold is the limit, because that is all the computer program is equipped to handle. Our experience is that the vast majority of both start-up and existing businesses can structure their projected sales units and values into the four categories available in the financial model.

What will be the unit price? How much is the customer going to have to pay you for that AVERAGE unit of sale? When you add up the prices of all the individual items or blocks of time that appear on that bill of sale, how much are you planning to charge your typical customer for that average unit of purchase?

If the client elected to define two or three units of sale, they will need now to calculate unit prices for each of the average or typical sales invoices. These typical or average UNIT prices are the key to successful use of SCORE forecast. Have them think it through carefully. They should take their time in arriving at that definition.

“How many units will they sell during the next twelve months?” At this point, having answered the key questions, they now have the entire sales forecast formula, which the SCORE forecast model will use to generate the sales forecast and any of the financial documents in their business plan which are derived from the sales forecast.

Unit price times number of units = sales forecast

Unit direct cost of material and labor = cost of goods sold forecast

Only consider the total 12 month sales forecast. Later in today’s workshop, you will be talking about how that 12 month forecast might be broken down monthly, to allow them to include seasonal variations in sales into their planning.

20 of 45

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
Back in number to make business profitable

20

Session 4: Financial Matters

21 of 45

GROUP EXERCISE: DEFINING SALES CATEGORIES

21

We Are Planet Earth has 3 categories of sale:

Their own e-commerce website
Via Amazon
On their Shopify store

Session 4: Financial Matters

22 of 45

PRICING YOUR PRODUCTS/SERVICES

22

Smart Pricing Strategy: �Starts with understanding the market price: the average price charged by your competitors and the price at which their product or service is generally valued in the marketplace. You can then choose to charge a:

Premium price (if you have a superior, value-added product or service)
Discount price (which is generally hard for small companies to sustain)
Similar price to your competitions’ (market price)

Elements of pricing:

Premium price (if you have a superior, value-added product or service)
Consumer reaction
Competition
Cost
Credit terms and discount

Session 4: Financial Matters

Properly pricing your product or service is key to

your company’s success. Developing a smart pricing

strategy starts with understanding the market price,

which is the average price charged by all your

competitors and the price at which their product

or service is generally valued in

the marketplace.

You can then choose to charge a premium price

(if you have a superior, value-added product or

service), a discount price (which is generally hard

for small companies to sustain) or a price similar

to the competition’s (market price).

Customer sets price (shows what market can bear)

A higher price = higher expectations and vice versa.

A low price might lead to loss of perceived value.

Avoid price wars.

Figure out how sensitive your customers are to the prices.

Bundle prices together to create more value.

Credit terms can make your product more attractive.

Don’t churn/lose money.

Look at the value chain – create a sales force through reward system.

23 of 45

PRICING CONSIDERATIONS

23

Channel:

You may need to vary prices based on your sales channel/s. For example, if you sell directly to consumers and retailers/resellers, you’ll have to charge the retailers less so they can sell it for the same retail price you do and still make a profit. If you sell to businesses, remember small businesses have lower budgets than big corporations.

Mark-up on Cost:

Calculating pricing based on a markup of your cost to produce the product/service.

Bundling:

Charging lower prices when customers buy more than one product or service

Target Market:

If you market to luxury buyers or your clients need extra attention, build the additional costs into your prices.

Session 4: Financial Matters

For

example, if you sell directly to consumers as well

as to retailers/resellers, you’ll have to charge the retailers

less so they can sell it for the same retail price you do

and still make a profit. If you’re selling to businesses,

consider the type of business and price accordingly. Small

businesses have lower budgets, while big corporations

have more to spend.

n markup on cost: Some companies calculate pricing

based on a markup on their cost to produce the product

or service. Your market research should show you average

markups for your industry.

n bundling: “Bundling” means you charge lower prices

when customers buy more than one product or service,

than if they only bought one. For instance, if you offer

website design, web hosting and email marketing services,

create a cheaper bundle price to entice customers to sign

up for all three services.

n target market: Consider your target market when

setting prices. For example, if your target market is a

sophisticated buyer or requires more personal attention,

build the additional costs into your prices.

24 of 45

PRICING CONSIDERATIONS

24

Promotional Pricing:

Consider offering sales or promotional prices to attract new customers or encourage customers to buy more

Introductory Pricing:

New companies often offer introductory pricing, to entice consumers to take a chance on doing business with them

Session 4: Financial Matters

25 of 45

SETTING YOUR INITIAL PRICES

25

Consider the COGS (cost of goods sold):�The direct costs of producing the products. Add to�that total to create a profit margin.

When pricing a service, consider standard industry practices, plus market prices.

What do your competitors charge? Will you will match it, beat it or charge more?

Session 4: Financial Matters

Setting and Adjusting Prices

Pricing isn’t a one-time task, but an ongoing effort. As your

new business gets off the ground, you’ll probably have to

tinker with your prices until you find the right formula that

increases both sales and profits. You’ll also need to

adjust prices as market conditions change

and as your business grows. Here are

the steps to follow at each stage of the

game.

SET YOUR INITIAL PRICE:

● Consider the COGS (cost of goods

sold), which is the direct costs of producing

the products. Add to that total to create

a profit margin. When pricing a service,

consider standard industry practices, plus

market prices.

● Know the competition’s price and whether you

will match it, beat it or charge more. Unless you

are offering a truly unique product/service, it is

difficult for a new business to charge top prices.

26 of 45

ADJUSTING YOUR PRICES

26

Monitor customer demand. Is your product or service selling? If not, rethink your pricing.

Compare your sales to the competition.
Are your sales similar to, better than or worse than theirs?
Ensure you’re providing value commensurate with your price.
Consider using credit terms or bundling pr4oducts/services to make your offerings more attractive.
Unless you’re experiencing increased demand, before increasing prices, look for ways to reduce costs.

Session 4: Financial Matters

27 of 45

DON’T GET INTO A PRICE WAR

27

Setting your prices too low may sound like a great way to boost sales
But prices that are too low disrupt the marketplace by leading to a price war
Unnaturally low prices can’t be sustained—and in a price war, the new business suffers the most
This is one war you can’t win, so don’t start one

Session 4: Financial Matters

28 of 45

GROSS PROFIT MARGIN

What is gross profit margin?

Sales ($) minus direct cost of sales

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

28

Session 4: Financial Matters

Talk a bit about a fundamental concept in financial forecasting—the direct cost of goods sold that varies generally with sales volume vs. indirect costs, generally called overhead expenses, that are fixed or semi-fixed (i.e. they don’t vary directly with sales fluctuations).

Businesses normally can’t sustain a gross profit margin as a percentage of sales in excess of the industry norm, which can be found in the RMA financial statement studies. So it’s a sound idea for the client to know the industry norm and use it in their projections. If not, they should be prepared to defend their numbers strongly because any reviewer will challenge data substantially different than industry averages.

Review some GPM % norms:

Manufacturing 50% to 60%

Wholesale 20% to 25%

Retail 33%

Contracting 20% to 25%

Service often shown as 100%, if there are no direct costs of the services sales

Gross profit margin % of sales is automatically calculated and displayed in both the “projected sales forecasts” tabs and in the P&L statements.

29 of 45

PROJECTED SALES FORECAST

29

Session 4: Financial Matters

Product Lines 1	Year 1 Totals	January
Recycled Products
Goods Sold	125	6
Total Sales	$250,000	$11,000
Total CIGS	$137,500	$6,050
Total Margin	$112,500	$4,950

They will need to visualize some average unit of sales or package of goods and services that they offer to customers. In the case of a retail store, this might be a bundle of products which will make up the average customer transaction. Once they have that picture in mind, have them count up those items and calculate:

1. What collectively that will cost them as a package to supply

2. What collectively they will charge the customer who buys them from them.

These two totals become the unit cost and unit price.

Have them calculate their sales in units, as opposed to $, so that at this stage the focus is on physical things or blocks of service time that they expect to sell to their customers. From the preceding price, direct cost and gross profit margin inputs, the computer program already has the information it needs to translate these unit sales into dollar amounts.

Their preliminary notes will have defined for them what unit or units of typical transaction packages make sense for them business. If they are having trouble thinking this through, their SCORE mentor can help them. We can’t supply the final answers, since that depends on their intentions, but we can help them to organize and go through the information gathering and estimating process.

In estimating unit sales for subsequent years, they will be applying some basic assumptions about how growth will occur. The yellow input cells labeled Year Two Growth and Year Three Growth may be changed to drive the % sales increase assumptions for years two and three. Or the sales projection numbers may be directly input into the appropriate cells, but if you do this, you will loose the built-in formulas driven by the % increase assumptions and you will have to manually modify such cells in any future revisions.

Group Exercise: Create your Projected Sales Forecast (15 minutes). Emphasize understanding the process and walk them through it. One way to do this is to have them start with year-3 forecast numbers (when the business is well established and operating at a strong level) and then back off 30% to get to year 2 and then back off 50% from year 2 to get to year 1. Do for each idea (either in session or focus on 1 during class and do rest with mentor in between sessions)

30 of 45

ADDITIONAL INPUTS

30

Session 4: Financial Matters

Accounts Receivable (A/R) Days Sales Outstanding
Percent of Collections	Year 1	Year 2	Year 3
Paid within 30 days	30%	30%	30%
Paid between 30 and 60 days	30%	30%	30%
Paid in more than 60 days	40%	40%	40%
Allowance for bad debt	0%	0%	0%
This should equal 100% ---->	100%	100%	100%

Accounts Payable (A/P)
Percent of Disbursements	Year 1	Year 2	Year 3
Paid within 30 days	0%	0%	0%
Paid between 30 and 60 days	100%	100%	100%
Paid in more than 60 days	0%	0%	0%
This should equal 100% ---->	100%	100%	100%

Once a sale is made, you need to know what percent of money you will collect and when. The question refers to the terms of payment 0-30, 31-60, or more than 60 days which are typical in the industry, or with the category of customer with whom they will be dealing. Sometimes it is possible to expedite payment by selling via credit cards or by offering a discount for payment with 10 days, for example. In other cases, especially when their customers are larger companies or government agencies, such policies will have little effect. Clients will have to conform to their normal payment policies and know what they are.

Group Exercise: complete your Cash Receipts and Disbursements worksheet (10 minutes). Remind clients to specify the minimum bank account balance they want to have at all times, since the template uses it for modeling short term bank debt Line of Credit requirements. Also, suggest a 20% income tax rate (to cover all taxes, based on 15% federal and 5% state/local) for planning purposes.

Inputs are finished, except for inputs that will be made in the Cash Flow statements. YEAH!! Now review the output financial statements.

31 of 45

UNDERSTANDING FINANCIAL STATEMENTS

31

Income Statement:

Gross profit margin and overhead expense management

Cash Flow Statement:

Funds management

Balance Sheet:

A/R, Inventory & A/P management

Breakeven Analysis:

Use of industry comparison ratios

Session 4: Financial Matters

32 of 45

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?

32

Session 4: Financial Matters

33 of 45

INCOME AND EXPENSE STATEMENT (P&L)

33

Session 4: Financial Matters

	January	February	March
Revenue
Plant Mix	10,000	10,000	10,000
Plant Mix – Web	-	-	-
Plant Mix – Distant Nursery	-	-	-
Product 4	-	-	-
Product 5	-	-	-
Product 6	-	-	-
Total Revenue	$ 10,000	$ 10,000	$ 10,000
Cost of Goods Sold
Plant Mix	5,500	5,500	5,500
Plant Mix – Web	-	-	-
Plant Mix – Distant Nursery	-	-	-
Product 4	-	-	-
Product 5	-	-	-
Product 6	-	-	-
Total Cost of Goods Sold	$ 5,500	$ 5,500	$ 5,500
Gross Margin	$ 4,500	$ 4,500	$ 4,500
Payroll	$ 7,834	$ 7,834	$ 7,834

The income statement is the financial picture of business results over a period of time. It accounts for sales, expenses and resulting profit or loss, and is the measuring device for judging the operating success and feasibility, over time. It is required of all businesses and has to follow the format prescribed for standard accounting practice. It is required annually, but usually prepared monthly or quarterly, with the final report for the year being the annual summary that is filed as part of the business’s tax return. This information is needed to manage your business. It’s vital, not optional. Businesses are also required to pay their taxes in quarterly installments, based on that proportion of total annual profit earned in each quarter.

The top line on the pro forma income statement shows the incoming revenue that is predicted from sales to customers. From that is subtracted cost of what the client sells, or cost of goods sold. Next, forecasted expenses of operating the business are subtracted. Those are broken down, for convenient analysis by category: salaries and wages, rent, insurance, travel, office expense, etc.

What is left over after those subtractions is called operating income. We are not finished yet. Operating income is then modified for any non-operational income or expenses (like interest collected or paid). The final result of this simple addition/subtraction exercise is called income before taxes or profit before taxes. This is what you use to determine now much the business has generated in taxable income.

Sales or income are calculated from the assumptions made on unit price and volume. Cost of Sales is built from assumptions on unit material and labor unit cost. The difference is Gross Margin. SWB expenses (Salary, wages and benefits) are over and above those direct labor expense accounted for in the Cost of Sales.

Business expenses include the many other expenses required to run the business. SWB, business expenses including depreciation expense, and interest expense are subtracted from the Gross Margin to give the Net Operating Profit. Recognize that the depreciation expense and interest expense are automatically calculated based in the info provided in the planning process. All the other expenses are displayed as determined. Income tax expense is also automatically calculated.

34 of 45

CASH FLOW PROJECTION

34

Session 4: Financial Matters

	January	February	March
Beginning Balance	$ 3,000	$ 3,000	$ 3,000
Cash Inflows
Cash Sales	3,000	3,000	3,000
Accounts Receivable	-	3,000	7,000
Total Cash Inflows	$ 3,000	$ 6,000	$ 10,000

Cash Outflows
Investing Activities
New Fixed Asset Purchases	-	-	-
Additional Inventory
Cost of Goods Sold	-	5,500	5,500
Operating Activities
Operating Expenses	4,300	4,300	4,300
Payroll	7,834	7,834	7,834
Taxes	-	-	-
Financing Activities
Loan Payments	1,346	1,346	1,346
Owners Distribution
Line of Credit Interest		70	157
Line of Credit Repayments
Dividends Paid

Cash Flow differs from the Income or P&L statement in that it does not have non-cash items like depreciation expense, but it does contain cash outlay items not shown in the P&L, like cash outgo for loan principal repayment and other capital purchases. This is probably the most important document for lenders. Bankers will be looking for those entries that describe plans to borrow money, since their business is making loans and they want your business. They would like it if the predicted cash withdrawals were designed to meet the scheduled payment of interest and principal to banks. Since they are familiar with other firms, lenders also will be trying to judge whether the anticipated collections from customers, anticipation of tax bills and the like seem realistic. Clients have to repay bankers with money collected from customers, after the tax people (who have first claim) have taken their cut. Bankers are keenly aware of that!

The output forecast also provides the answer to a major financial forecasting questions: How much money do they need to borrow, at the maximum amount, during the time of these projections. The answer is at the bottom of this forecast page.

The cash flow statement is also the most important measuring device, and a benchmark. Those predictions will be used on a monthly basis to determine whether, or rather to what extent, those predictions actually are occurring as the year progresses. The checking account, ALWAYS, must have a positive balance. Clients must monitor cash inflow (especially customer collections) to make certain that more cash is being taken in than is planned for spending. If not, spending plans must be revised.

35 of 45

CASH FLOW PROJECTION

35

Session 4: Financial Matters

	January	February	March
Beginning Balance	$ 3,000	$ 3,000	$ 3,000
Cash Inflows
Cash Sales	3,000	3,000	3,000
Accounts Receivable	-	3,000	7,000
Total Cash Inflows	$ 3,000	$ 6,000	$ 10,000

Cash Outflows
Investing Activities
New Fixed Asset Purchases	-	-	-
Additional Inventory
Cost of Goods Sold	-	5,500	5,500
Operating Activities
Operating Expenses	4,300	4,300	4,300
Payroll	7,834	7,834	7,834
Taxes	-	-	-
Financing Activities
Loan Payments	1,346	1,346	1,346
Owners Distribution
Line of Credit Interest		70	157
Line of Credit Repayments
Dividends Paid

This form of cash flow statement most commonly used for small businesses actually mimics the format of a monthly checking account statement. It shows cash inflow and outflow. Like a check book, the cash flow statement shows the opening balance, anticipated cash deposits, anticipated cash withdrawals, and the end balance for each month. The ending balance for month one becomes the opening balance for the next month.

Anticipated cash deposits are broken down by logical category for easy explanation to reviewers. It shows which cash deposits represent anticipated collections from customers, which represent money expected to be deposited from loans, and which money represents cash to be invested in the firm, as equity, by the owners.

Anticipated cash withdrawals are helpfully broken out by type – rent, insurance, tax payments, interest payment, loan repayments, etc. – to help make them more understandable to reviewers.

Ann’s statement starts off each month with a beginning cash balance, adding cash inflows, subtracting cash outflows, adjusting the result with a bank Line of Credit draw down so that the ending cash balance is what is needed to start the next month’s beginning cash balance. We have projected for enough cash to get us through the unprofitable first three months. However, even with that cash, clients still need a line of credit to handle the ramp-up of much higher sales that is occurring in the future periods. This is not apparent from the income statement. Clients need to know both the income and cash flow statement results and projections on a regular basis to run their business.

This is the only other tab in the model where manual inputs will be made to financially model the business concept. Note the green lines where additions to fixed assets may be made to reflect expected additional equipment purchases and where additions to inventory made be made to reflect needed additional inventory to support the expected sales growth in the business. Those additional capital requirement will automatically be reflected in a cash balance drawdown or an increase in the required bank line of credit. And the resulting bank debt will be automatically taken into account by the model in calculating ongoing interest expense. In the same way, the client will use the green lines for line of credit repayment and dividend distributions to reflect planned debt repayments and for any planned dividend payments to investors.

Note that the maximum Line of Credit requirement shows up in month 7, July, as approximately $48,000, thus answering the feasibility question: “How much additional money am I going to need, over and above the initial start-up funding, to sustain my business until such time as it begins to generate a positive cash flow, necessary to pay down bank debt?”

36 of 45

BALANCE SHEET

36

Session 4: Financial Matters

ASSETS	First Year
Current Assets
Cash	3,000
Accounts Receivable	37,500
Inventory	30,000
Prepaid Expenses	5,867
Other Initial Costs	-
Total Current Assets	$ 76,367

Fixed Assets
Real Estate – Land	100,000
Real Estate – Buildings	30,000
Leasehold Improvements	15,000
Equipment	5,000
Furniture and Fixtures	2,000
Vehicles	20,000
Other	-
Total Fixed Assets	$ 172,000
(Less Accumulated Depreciation)	$ 8,757
Total Assets	$ 239,609

The balance sheet shows a company’s financial position at a single point in time. On the left side of the sheet are assets, all the things that a business owns and uses to carry on its functions. On the right hand side are the liabilities, all the things that are owed. Also, on the right and side is owners equity (net worth). The simple formula is Assets minus Liabilities equals Owners Equity or Net Worth.

For Ann’s, some assets are classified together as short-term assets. Those are assets that typically will be used up or change into cash within a year. Cash, accounts receivable (yet uncollected bills), pre-paid expenses (upcoming bills that have been pre-paid) and inventory are examples.

Below those are listed long-term or fixed assets. Those are the things, which have been bought, or will be bought, to use in the business for more than one year – buildings and equipment basically. They are called long term because they will be in use for longer than 1 year. The total of all the numbers on the left side, the Assets, have to be balanced by numbers which add up to the same total on the right.

There are two categories for Liabilities: they are debt, money owed to others, and owner’s equity or net worth that is that proportion of asset value which represents the invested money of the business owner(s).

Debt, like assets is divided into two categories. Short-term debt items are expected to be paid off within a year. Long-term debt items are expected to be paid off over a period of more than one year. For this simple template, mortgage debt and notes payable will generally be the long-term debt category, while line of credit balance is synonymous with short term bank debt.

37 of 45

BREAKEVEN ANALYSIS

37

Breakeven is where:

Gross Profit Margin

=

Total Expenses

OR

Sales Volume = 0 Profit

Breakeven Sales $ = Fixed Cost / GM%

The spread between breakeven and sales forecast is very important (the wider the better).

Session 4: Financial Matters

Gross Margin % of Sales
Gross Margin	$ 151,300
Total Sales	$ 347,000
Gross Margin/Total Sales	43.6%
Total Fixed Expenses
Payroll	$ 94,013.18
Operating Expenses	$ 71,068.69
Operating + Payroll	$ 165,082
Breakeven Sales in Dollars (Annual)
Gross Margin % of Sales	43.6%
Total Fixed Expenses	$ 165,082
Yearly Breakeven Amount	$ 378,608
Monthly Breakeven Amount	$ 31,551

The SCORE forecast software computes the breakeven point for users. Refer to tab 19. The break even point expressed in annual sales dollars is the annual sales that is needed to reach zero profit for the business. The following is the formula and assumptions for that calculation. The bottom line is that breakeven sales can be calculated by dividing Total Operating Expense by Gross Margin %(as a % of sales).

Remember simple 8^th grade algebra—solve for X (breakeven sales).

The SCORE financial model has calculated for Ann’s business how large a sales volume it needs to reach the break even point. That is the point at which the gross margin you are taking in (sales minus cost of sales) is sufficient to cover the fixed expenses of running the business.

If actual sales are less than the break even amount, then clients may need to recalculate how they plan to run the business. What they have planned is not going to work too long, and the client may need to rethink what they are planning. Sales revenue has to become greater in relation either to cost of sales, expenses of doing business or some combination of both.

Most start-up businesses expect to pass the breakeven sales level within the first 6 to 18 months of the business, quite frequently in year two.

38 of 45

BENCHMARKING & FINANCIAL RATIOS

38

Test the feasibility of your plans by conducting research:

RMA annual statement studies
Industry norms and key business ratios (D&B)
Financial ratios, business statistics & benchmarks: www.bizstats.com

Session 4: Financial Matters

Ratios	Year One
Liquidity
Current Ratio	0.5
Quick Ratio	0.3
Safety
Debt to Equity Ratio	1.4
Debt-Service Coverage Ratio - DSCR	-0.1
Profitability
Sales Growth	0.0%
COGS to Sales	56.4%
Gross Profit Margin	43.6%
SG&A to Sales	42.0%
Net Profit Margin	-4.8%
Return on Equity (ROE)	-17.0%
Return on Assets	-7.0%
Owner's Compensation to Sales	13.8%
Efficiency
Days in Receivables	38.9
Accounts Receivable Turnover	9.3
Days in Inventory	55.2
Inventory Turnover	6.5
Sales to Total Assets	1.4

Benchmarking is comparing financial information to relevant information of a similar company or historical information for the industry norms. If you don’t know what the standard is, you cannot compare yourself against it. It is an excellent way to test the validity and feasibility of your plans is to benchmark them against generally accepted standards.

Financial Ratios

Risk Management Association (RMA) publishes standard financial ratios for actual business results of thousands of different companies. You can find ratios in your library’s business section, your bank or SCORE. Ratios help estimate both your first income statement and balance sheet.

Bankers or investors will be comparing the ratios between certain line items on the P&L and Balance Sheet projections with standards for a particular industry. That is one way to measure the credibility of projections, a measure of credit worthiness and the safety of invested or borrowed funds. Such data is supplied by RMA and is usually available in a library’s reference section.

Could Ann’s profit projections be on the high side of realistic? What should she do about that? What questions should she ask herself? (it appears that her profit before taxes is high and this probably comes from a high estimate of sales in the third year. So one correction is to lower sales to a more realistic level.)

39 of 45

FINANCIAL STATEMENT ANALYSIS

Monthly preparation and review of financial statements (within 10 days after the close of the month)
Ratio analysis
A/R and A/P analysis
Comparative benchmark analysis

39

Session 4: Financial Matters

40 of 45

RECORDKEEPING AND FINANCING

Preparation is essential
Lenders want facts, research and accurate projections
Whether you seek funding now or in the future, your records should be in order

40

Session 4: Financial Matters

41 of 45

ACCOUNTING AND RECORDKEEPING SYSTEMS

41

Manual vs. computerized
Choosing the system
Hiring a bookkeeper vs. DIY
Training and educating yourself in accounting and understanding financial statements
Working with your accountant

Session 4: Financial Matters

There are many software programs available to make record-keeping, bookkeeping and accounting far easier than doing it manually.

Clients should choose the accountant before choosing the bookkeeping system, and should use whatever they strongly recommend. Clients should also insist that the accountant help them set up the system and the “chart of accounts” so that they get the reports when they want them and in the format they choose. A part-time bookkeeper is a rational option, especially if the knowledge and/or the time is lacking.

If you’re still not comfortable with interpreting your financial statements, consider taking a class. It will be worth the investment of time, money, and effort necessary to learn.

Your accountant should be an advisor to you on an ongoing basis, not just someone who sets up books and prepares tax returns. Ask how he/she can best help you and for recommendations on developing an excellent working relationship.

42 of 45

SIMPLE STEPS FOR STARTNG YOUR BUSINESS

42

Session 1: Startup Basics

Testing Your Business Ideas�

Session 1 🡪 Startup Basics

Session 2 🡪 Business Concept

Session 3 🡪 Marketing Plan

Session 4 🡪 Financial Matters

Session 5 🡪 Funding Options

SIMPLE STEPS FOR STARTING YOUR BUSINESS

43 of 45

WE CAN HELP YOU

43

We can help you:

Further research your idea
Complete your feasibility plan
Finalize your financial forecast
Develop your business plan
Prepare your loan package
Launch your business
Grow your business

Session 4: Financial Matters

44 of 45

HELP US, HELP YOU

Please complete our workshop survey:

On a scale of 0 - 10, how likely is it that you would recommend this workshop to your friends and colleagues?
What is the primary reason for the answer you just gave us?
What is the most important improvement that would make you rate us closer to a 10?

44

Session 4: Financial Matters

45 of 45

SIGN-UP

Sign up for the remaining workshop!

[Insert chapter registration information here, including website and costs]

45

Session 3: Marketing Plan