Creating a Successful Financial Plan
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Transcript of Creating a Successful Financial Plan
Copyright © 2011 Pearson Education
CHAPTER CHAPTER 1111
Copyright © 2011 Pearson Education
Ch, 11: Creating a Successful Financial Plan 11 - 2
Common mistake among business owners: Failing to collect and analyze basic financial data.
Many entrepreneurs run their companies without any kind of financial plan.
Only 11% of business owners analyze their companies’ financial statements as part of the managerial planning process.
Financial planning is essential to running a successful business and is not that difficult!
Copyright © 2011 Pearson Education
Ch, 11: Creating a Successful Financial Plan 11 - 3
Balance Sheet – “Snapshot.” Estimates the firm’s worth on a given date; built on the accounting equation:
Assets = Liabilities + Owner’s Equity Income Statement – “Moving picture.”
Compares the firm’s expenses against its revenue over a period of time to show its net income (or loss): Net Income = Sales Revenue - Expenses
Statement of Cash Flows – Shows the change in the firm's working capital over a period of time by listing the sources and uses of funds.
Copyright © 2011 Pearson Education
Ch, 11: Creating a Successful Financial Plan 11 - 4
Helps the entrepreneur transform business Helps the entrepreneur transform business goals into realitygoals into reality
Challenging for a business start-upChallenging for a business start-up Start-ups should focus on creating Start-ups should focus on creating
projections for two yearsprojections for two years Projected financial statements:Projected financial statements:
Income statementsIncome statements Balance sheetBalance sheet
Copyright © 2011 Pearson Education
Ch, 11: Creating a Successful Financial Plan 11 - 5
“How is my company doing?” A method of expressing the
relationships between any two elements on financial statements.
Important barometers of a company’s health.
Studies indicate few small business owners compute financial ratios and use them to manage their businesses.
Copyright © 2011 Pearson Education
Ch, 11: Creating a Successful Financial Plan 11 - 6
Ratios – useful yardsticks of comparison. Standards vary from one industry to another; the key
is to watch for “red flags.” Critical numbers – measure key financial and
operational aspects of a company’s performance. Examples: Sales per labor hour at a supermarket Food costs as a percentage of sales at a restaurant. Load factor (percentage of seats filled with
passengers) at an airline.
Copyright © 2011 Pearson Education
Breakeven point - the level of operation at which a business neither earns a profit nor incurs a loss.
A useful planning tool because it shows entrepreneurs minimum level of activity required to stay in business.
With one change in the breakeven calculation, an entrepreneur can also determine the sales volume required to reach a particular profit target.
Ch, 11: Creating a Successful Financial Plan 11 - 7
Copyright © 2011 Pearson Education
Step 1. Determine the expenses the business can expect to incur.
Step 2. Categorize the expenses in step 1 into fixed expenses and variable expenses.
Step 3. Calculate the ratio of variable expenses to net sales. Then compute the contribution margin:
Ch, 11: Creating a Successful Financial Plan 11 - 8
Contribution Margin = Contribution Margin = 1 - 1 - Variable ExpensesVariable ExpensesNet Sales EstimateNet Sales Estimate
Step 4.Step 4. Compute the breakeven Compute the breakeven point:point:
Breakeven Point Breakeven Point ($)($)
= = Total Fixed Costs Total Fixed Costs Contribution MarginContribution Margin
Copyright © 2011 Pearson Education
Step 1. Net Sales estimate is $950,000 with Cost of Goods Sold of $646,000 and total expenses of $236,500.
Step 2. Variable Expenses: $705,125Fixed Expenses: $177,375
Step 3. Contribution margin:
Ch, 11: Creating a Successful Financial Plan 11 - 9
Contribution Margin = Contribution Margin = 1 - 1 - $705,125$705,125$950,000$950,000
StepStep 4. 4. Breakeven Point:Breakeven Point:
Breakeven PointBreakeven Point$$
= = $177,375$177,375
.26.26
= .26= .26
= $682,212= $682,212
Copyright © 2011 Pearson Education
Ch. 6: Franchising and the Entrepreneur 11 - 10
FIGURE 11.8 Break-Even Chart for the Magic Shop
Copyright © 2011 Pearson EducationCh, 11: Creating a Successful Financial Plan 11 - 11
Preparing a financial plan is a critical step
Entrepreneurs can gain valuable insight through: Pro forma statements Ratio analysis Breakeven analysis