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Entrepreneurship

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Entrepreneurship ­ MGT602
VU
Lesson 31
THE FINANCIAL PLAN (Continued....)
OPERATING AND CAPITAL BUDGETS
A.
Before developing the pro forma income statement, the entrepreneur should prepare
operating and capital budgets.
1.
If the entrepreneur is a sole proprietor, he or she will be responsible for the budgeting
decisions.
2.
In a partnership, or where employees exist, the initial budgeting process may begin with
one of these individuals.
3.
Final determination of budgets will ultimately rest with the owners or entrepreneurs.
B.
In the preparation of the pro forma income statement, the entrepreneur must first develop
a sales budget, an estimate of the expected volume of sales by month.
1.
From sales forecasts, the entrepreneur will determine the cost of these sales.
2.
Estimated ending inventory will also be included.
C.
Production or Manufacturing Budget.
1.
This budget provides a basis for projecting cash flows for the cost of goods produced.
2.
The important information in this budget is the actual production required each month
and the needed inventory to allow for changes in demand.
3.
This budget reflects seasonal demand or marketing programs, which can increase demand
and inventory.
4.
The operating budget is an important document, as the pro forma income statement will
only reflect the actual costs of goods.
D.
Operating Budget.
1.
Next the entrepreneur can focus on operating costs.
2.
Fixed expenses (incurred regardless of sales volume) include rent, utilities, salaries, interest,
depreciation, and insurance.
3.
The entrepreneur will need to calculate variable expenses, which may change from month
to month depending on sales volume, such as advertising and selling expenses.
E.
Capital budgets are intended to provide a basis for evaluating expenditures that will
impact the business for more than one year.
1.
A capital budget may project expenditures for new equipment, vehicles, or new facilities.
2.
These decisions can include the computation of the cost of capital and the anticipated
return on investment using present value methods.
3.
The entrepreneur should enlist the assistance of an accountant.
PRO FORMA INCOME STATEMENTS
A.
Sales is the major source of revenue; since other activities relate to sales, it is usually the
first item defined.
B.
In preparing the pro forma income statement, sales by month must be calculated first.
1.
Market research, industry sales, and trial experience might provide the basis for
these figures.
2.
Forecasting techniques, such as a survey of buyers' intentions or expert opinions,
can be used to project sales.
3.
The costs for achieving increases in sales can be higher in early months.
C.
Sales revenues for an Internet start-up are often more difficult to project.
1.
A giftware Internet start-up could project the number of average hits expected per
day or month based on industry data.
2.
From the number of "hits" it is possible to project the number of consumers who
will buy products and the average dollar amount per transaction.
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Entrepreneurship ­ MGT602
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D.
The pro forma income statements also provide projections of all operating expenses for
each month of the first year.
1. Selling expenses as a percentage of sales may also be higher initially.
2. Salaries and wages should reflect the number of personnel employed, as well as their
roles in the organization.
3. Any unusually expenses, such as those for a key trade show, should be flagged and ex-
plained at the bottom.
E.
In addition to the first year's statement, projections should be made for years 2 and 3.
1.
Investors generally prefer to see three years of income projections.
2.
Some expenses will remain stable over time, like depreciation, utilities, rent,
insurance, and interest.
3.
When calculating the projected operating expense, it is important to be
conservative for initial planning purposes.
F.
For the Internet start-up, capital budgeting and operating expenses will involve equipment
purchasing or leasing, inventory, and advertising expenses.
G.
Many of the recent Internet start-ups have not earned a profit.
PRO FORMA CASH FLOW
A.
Cash flow is not the same as profit.
1.
Profit is the result of subtracting expenses from sales.
2.
Cash flow results from the difference between actual cash receipts and cash
payments.
3.
Cash flows only when actual payments are made or received.
B.
For an Internet start-up, the same transaction would involve the use of a credit card in
which a percentage of the sale would be paid as a fee to the credit card company.
C.
On many occasions, profitable firms fail because of lack of cash; therefore, using profit as
a means of success may be deceiving.
D.
There are two standard methods used to project cash flow.
1.
In the indirect method some adjustments are made to the net income based on
the fact that actual cash may not have actual been receive or disbursed.
2.
The direct method, a simple determination of cash in less cash out, gives a fast
indication of the cash position of the new venture at a point in time.
E.
It is important for the entrepreneur to make monthly projections of cash, pro forma cash
flow.
1.
If disbursements are greater than receipts in any time period, funds will have to be
borrowed or cash reserve tapped.
2.
Large positive cash flows may need to be invested in short term sources.
3.
Usually the first few months of start-up will require external cash in order to
cover cash outlays.
F.
The most difficult problem with projecting cash flows is determining the exact monthly
receipts and disbursements.
1.
Some assumptions will need to be made and should be conservative so enough
funds can be maintained to cover the negative cash months.
2.
These cash flows will also assist in determining how much money will need to be
borrowed.
G.
The pro forma cash flow is based on best estimates and may need to be revised to ensure
accuracy.
H.
It is useful to provide several scenarios, each based on different levels of success.
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Entrepreneurship ­ MGT602
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PRO FORMA BALANCE SHEET
A.
The entrepreneur should also prepare a projected balance sheet depicting the condition of
the business at the end of the first year.
The pro forma balance sheet summarizes the assets, liabilities, and net worth of
1.
the entrepreneurs.
2.
Every business transaction affects the balance sheet.
3.
The balance sheet is a picture of the business at one moment in time and does not
cover a period of time.
B.
Assets.
Assets represent everything of value that is owned by the business.
1.
2.
The assets are categorized as current or fixed.
a.
Value is not necessary replacement cost-it is the actual cost expended
for the asset.
b.
Current assets include cash and anything that will be converted into
cash within a year.
c.
Fixed assets are those that will be used over a long period of time.
d.
Management of receivables, or money owed by customers, is important
to the business' cash flow of the business.
C.
Liabilities.
Liabilities accounts represent everything owed to creditors.
1.
2.
Current liabilities are due within a year.
3.
Others are long-term debts.
4.
It is often necessary to delay payments of bills in order to more effectively
manage cash flow.
D.
Owners Equity.
1.
This amount represents the excess of all assets over all liabilities.
Owners equity represents the net worth of the business.
2.
3.
Any profit from the business will also be included in the net worth as retained
earnings.
BREAK-EVEN ANALYSIS
A.
It is helpful for the entrepreneur to know when a profit may be achieved.
Break-even analysis is a technique for determining how many units must be sold
1.
in order to break even.
2.
The firm has fixed cost obligations that must be covered by sales volume in order
for a company to break even.
3.
The break-even point is that volume of sales at which the business will neither
make a profit nor incur a loss.
4.
The break even sales point is the volume of sales needed to cover total variable
and fixed expenses.
B.
The break-even formula is:
B/E (Q) =  TFC
SP-VC/unit (marginal contribution)
1.
As long as the selling price is greater than the variable costs per unit, some
contribution can be made to cover fixed costs.
2.
The major weakness in calculating the break-even is determining whether a cost is
fixed or variable.
3.
Costs such as depreciation, salaries and wages, rent, and insurance are usually
fixed.
4.
Materials, selling expenses, and direct labor are most likely variable costs.
C.
When the firm produces more than one product, break-even may be calculated for each
product.
D.
The entrepreneur can try different states of nature, such as different selling prices to see
the impact on break-even and profits.
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Table of Contents:
  1. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:DEFINITION OF ENTREPRENEUR
  2. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:Possibility of New Venture Formation
  3. ENTREPRENEURIAL PROCESS/START UPS:GOVERNMENT AS AN INNOVATOR
  4. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND:ENTREPRENEURIAL PROCESS
  5. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…)
  6. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):CLIMATE FOR ENTREPRENEURSHIP
  7. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):PROBLEMS AND SUCCESSFUL EFFORTS
  8. THE INDIVIDUAL ENTREPRENEUR:ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS
  9. THE INDIVIDUAL ENTREPRENEUR (continued…):Personal Values, Work History, MOTIVATION
  10. THE INDIVIDUAL ENTREPRENEUR (continued…):ROLE MODELS AND SUPPORT SYSTEMS
  11. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES:INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES, Minority interests
  12. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):DIRECT FOREIGN INVESTMENT
  13. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):BARRIERS TO INTERNATIONAL TRADE
  14. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):ENTREPRENEURIAL PARTNERING
  15. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):SOURCES OF NEW IDEAS
  16. CREATIVITY AND THE BUSINESS IDEA:METHODS OF GENERATING NEW IDEAS, CREATIVE PROBLEM SOLVING
  17. CREATIVITY AND THE BUSINESS IDEA:PRODUCT PLANNING AND DEVELOPMENT PROCESS
  18. LEGAL ISSUES FOR THE ENTREPRENEUR:NEED FOR A LAWYER, PATENTS
  19. LEGAL ISSUES FOR THE ENTREPRENEUR:TRADEMARKS, LICENSING
  20. LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE
  21. CREATING AND STARTING THE VENTURE:WHAT IS THE BUSINESS PLAN, PRESENTING THE PLAN
  22. CREATING AND STARTING THE VENTURE (Continued….):WRITING THE BUSINESS PLAN
  23. CREATING AND STARTING THE VENTURE (Continued….):
  24. CREATING AND STARTING THE VENTURE (Continued….):WHY SOME BUSINESS PLANS FAIL, MARKETING PLAN
  25. THE MARKETING PLAN:MARKET RESEARCH FOR THE NEW VENTURE
  26. THE MARKETING MIX:STEPS IN PREPARING THE MARKETING PLAN
  27. THE ORGANIZATIONAL PLAN:DEVELOPING THE MANAGEMENT TEAM, LEGAL FORMS OF BUSINESS
  28. THE ORGANIZATIONAL PLAN (Continued….)
  29. THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY
  30. THE FINANCIAL PLAN:OPERATING AND CAPITAL BUDGETS
  31. THE FINANCIAL PLAN (Continued….):PRO FORMA INCOME STATEMENTS, PRO FORMA CASH FLOW
  32. PRO FORMA SOURCES AND USES OF FUNDS:PERSONAL FUNDS, FAMILY AND FRIENDS
  33. PRO FORMA SOURCES AND USES OF FUNDS:COMMERCIAL BANKS
  34. BANK LENDING DECISIONS:SMALL BUSINESS ADMINISTRATION LOANS
  35. SOURCES OF CAPITAL:GOVERNMENT GRANTS
  36. SOURCES OF CAPITAL:PRIVATE PLACEMENT, BOOTSTRAP FINANCING
  37. CAPITAL SOURCES IN PAKISTAN:PROVINCIAL LEVEL INSTITUTIONS, FINANCIAL INSTITUTIONS
  38. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  39. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  40. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  41. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  42. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  43. NEW VENTURE EXPANSION STRATEGIES AND ISSUES:JOINT VENTURES, ACQUISITIONS
  44. NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued….):DETERMINING THE PRICE FOR AN ACQUISITION
  45. ENTREPRENEURSHIP & PAKISTAN:GENDER DEVELOPMENT STATUS WOMAN AS AN ENTREPRENEUR IN PAKISTAN