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    Chapter 10Chapter 10

    The Financial PlanThe Financial Plan

    Vishnu Parmar, IBAVishnu Parmar, IBA

    University of Sindh, JamshoroUniversity of Sindh, Jamshoro

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    IntroductionIntroduction

    Financial Plan provides a complete picture ofFinancial Plan provides a complete picture ofhow much and when funds are coming into thehow much and when funds are coming into theorganization?organization?

    Where funds are going?Where funds are going?

    How much cash is available?How much cash is available?

    What is the projected financial position of theWhat is the projected financial position of the

    firmfirm It provides short term basis for budgeting andIt provides short term basis for budgeting and

    helps to prevent lack of cashhelps to prevent lack of cash

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    IntroductionIntroduction

    The financial plan must explains to meet allThe financial plan must explains to meet all

    financial obligations and maintains thefinancial obligations and maintains the

    ventures liquidity in order to either pay offventures liquidity in order to either pay offdebt of provide a good return on investment.debt of provide a good return on investment.

    FP needs three years of projected finance dataFP needs three years of projected finance data

    to satisfy any outside investorsto satisfy any outside investors

    First year must reflect monthly dataFirst year must reflect monthly data

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    Pro Forma StatementsPro Forma Statements

    Pro Forma StatementsPro Forma Statements

    Are projections of a firms financial position overAre projections of a firms financial position over

    a future period (pro forma income statement) or ona future period (pro forma income statement) or on

    a future date (pro forma balance sheet).a future date (pro forma balance sheet).

    Using beginning balance sheet balances, theyUsing beginning balance sheet balances, they

    depict projected changes on the operating anddepict projected changes on the operating and

    cashcash--flow budgets which are added to createflow budgets which are added to createprojected balance sheet totals.projected balance sheet totals.

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    Preparing Financial BudgetsPreparing Financial Budgets

    BudgetBudget One of the most powerful tools the entrepreneur can use inOne of the most powerful tools the entrepreneur can use in

    planning financial operations.planning financial operations.

    Operating BudgetOperating Budget A statement of estimated income and expenses over aA statement of estimated income and expenses over a

    specified period of time.specified period of time.

    Cash BudgetCash Budget A statement of estimated cash receipts and expendituresA statement of estimated cash receipts and expenditures

    over a specified period of timeover a specified period of time..

    Capital BudgetCapital Budget The plan for expenditures on assets with returns expectedThe plan for expenditures on assets with returns expected

    to last beyond one year.to last beyond one year.

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    The Operating BudgetThe Operating Budget

    Sales ForecastingSales Forecasting

    Creating an operating budget through preparation of theCreating an operating budget through preparation of thesales forecast.sales forecast.

    F

    orecastingF

    orecasting Linear regression: a statistical forecasting technique.Linear regression: a statistical forecasting technique.

    Y = a + bxY = a + bx

    YYis a dependent variableis a dependent variableits value isits value is dependent on thedependent on thevalues ofvalues ofaa,, bb, and, and xx..

    xxis an independent variable that is not dependent onis an independent variable that is not dependent onany of the other variablesany of the other variables

    aa is a constant.is a constant.

    bb is the slope of the line of correlation (the change inis the slope of the line of correlation (the change in YY

    divided by the change individed by the change in xx).).

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    Operating & Capital BudgetsOperating & Capital Budgets

    Before pro forma income statement, the entrepreneurBefore pro forma income statement, the entrepreneur

    should prepare operating & capital budget.should prepare operating & capital budget.

    Sole proprietor prepares total budget by himself as heSole proprietor prepares total budget by himself as he

    is the alone decision makeris the alone decision maker

    In partnership and Corporation other people alsoIn partnership and Corporation other people also

    involves, it depends upon the responsibilities likeinvolves, it depends upon the responsibilities like

    sales budget may prepare by Sales Manager,sales budget may prepare by Sales Manager,Production manager prepares manufacturing budgetProduction manager prepares manufacturing budget

    etcetc

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    Table 10.1 (Sales Budget)Table 10.1 (Sales Budget)

    DescriptionDescription JanJan FebFeb MarchMarch

    Projected Sales UnitProjected Sales Unit 5,0005,000 8,0008,000 12,00012,000

    Desired Ending InventoryDesired Ending Inventory 100100 200200 300300

    Available for SaleAvailable for Sale 5,1005,100 8,2008,200 12,30012,300

    Less Beginning InventoryLess Beginning Inventory 00 100100 200200

    Total Production RequiredTotal Production Required 5,1005,100 8,1008,100 12,10012,100

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    Table 10.2Table 10.2

    Operating Budget for 3 monthsOperating Budget for 3 monthsExpensesExpenses JanJan FebFeb MarchMarch

    SalariesSalaries 23.223.2 23.223.2 26.226.2

    RentRent 22 22 22

    UtilitiesUtilities 0.90.9 0.90.9 0.90.9

    AdvertisingAdvertising 13.513.5 13.513.5 1717

    Selling ExpensesSelling Expenses 11 11 11

    InsuranceInsurance 22 22 22

    Payroll taxesPayroll taxes 2.12.1 2.12.1 2.52.5

    DepreciationDepreciation 1.21.2 1.21.2 1.21.2

    Office expensesOffice expenses 1.51.5 1.51.5 1.51.5

    Total ExpensesTotal Expenses 47.547.5 47.447.4 54.354.3

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    Pro forma Income StatementPro forma Income Statement

    Income StatementIncome Statement

    Commonly referred to as the P&L (profit and loss)Commonly referred to as the P&L (profit and loss)

    statement from activities of the firm.statement from activities of the firm.

    Provides the results of the firms operations.Provides the results of the firms operations.

    Income Statement CategoriesIncome Statement Categories

    Revenues:Revenues: gross sales for the periodgross sales for the period

    Expenses:Expenses: Costs of producing goods or servicesCosts of producing goods or services

    Net Income:Net Income: The excess (deficit) of revenues overThe excess (deficit) of revenues over

    expenses (profit or loss)expenses (profit or loss)

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    Pro forma Income StatementPro forma Income Statement

    Proposed net profit calculated from projectedProposed net profit calculated from projected

    revenue minus projected cost and expensesrevenue minus projected cost and expenses

    It should be made for 3 years because investorsIt should be made for 3 years because investorsprefer to use three years of income projectionsprefer to use three years of income projections

    TABLE 10.3TABLE 10.3

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    Statement of Cash FlowStatement of Cash Flow

    An analysis of the cash availability and cash needs ofAn analysis of the cash availability and cash needs of

    the business that shows the effects of a companysthe business that shows the effects of a companys

    operating, investing, and financing activities on itsoperating, investing, and financing activities on its

    cash balance.cash balance. How much cash did the firm generate fromHow much cash did the firm generate from

    operations?operations?

    How did the firm finance fixed capitalHow did the firm finance fixed capital

    expenditures?expenditures?

    How much new debt did the firm add?How much new debt did the firm add?

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    Statement of Cash FlowStatement of Cash Flow

    Was cash from operations sufficient to financeWas cash from operations sufficient to finance

    fixed asset purchases?fixed asset purchases?

    The use of a cash budget may be the best approachThe use of a cash budget may be the best approach

    for an entrepreneur starting up a venturefor an entrepreneur starting up a venture..

    Cash flow can be determined for each month.Cash flow can be determined for each month.

    It assist the entrepreneur in determining howIt assist the entrepreneur in determining how

    much money he or she will need to raise tomuch money he or she will need to raise tomeet the cash demands of the venturemeet the cash demands of the venture

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    ProPro--forma Cash Flowforma Cash Flow

    Projected cash available calculated fromProjected cash available calculated from

    projected cash accumulation minus projectedprojected cash accumulation minus projected

    cash disbursementcash disbursement

    Cash flows only when actual payments areCash flows only when actual payments are

    received or madereceived or made

    The most difficul