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Chapter 6
FINANCIAL PLANNING: LONG-TERM AND SHORT-
TERM
© 2003 South-Western College Publishing
ENTREPRENEURIAL FINANCE Leach & Melicher
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CHAPTER 6:LEARNING OBJECTIVES
Understand the concept of a sustainable sales growth rate
Understand the process of identifying when and how much additional funds will be needed to support the venture’s sales forecasts
Develop an understanding of the impact of varying sales growth rates on the amount and timing of additional funds needed
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CHAPTER 6:LEARNING OBJECTIVES
Describe the percent of sales method for preparing long-term financial plans
Explain why projected statements of cash flows are important to the entrepreneur
Describe how projected statements of cash flow relate to cash budgets
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VENTURE LIFE CYCLE
DEVELOPMENT STAGE
STARTUP STAGE
SURVIVAL STAGE
LIQUIDATERESTRUCTURE
RAPID GROWTH STAGE
GO PUBLICSELL OR MERGE
MATURITY STAGE
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VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
Development Stage:
Screen Business Ideas
Prepare Business Plan
Obtain Seed Financing Startup Stage:
Choose Organizational Form
Prepare Initial Financial Statements
Obtain First Round Financing
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VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
Survival Stage:Monitor Financial PerformanceProject Cash NeedsObtain First Round Financing>Possible Actions: Liquidate v.
Restructure Rapid Growth Stage:
Create and Build ValueObtain Additional FinancingExamine Exit Opportunities>Possible Actions: Go Public v.
Sell/Merge
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VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
Maturity Stage:
Manage Ongoing Operations
Maintain and Add Value
Obtain Seasoned Financing
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FORECASTING SALES OR REVENUES
Forecasting for Early Stage Ventures: Firms that are in either
their development, startup, or survival stage, or just entering
into their rapid growth stage of their life cycle.
Industry Probability of Sales Component
Sales Scenario Occurrence Growth Rate Weight
Optimistic forecast .30 X 60% = 18.0%
Most likely forecast .40 X 50% = 20.0%
Pessimistic forecast .30 X 40% = 12.0%
1.00 Expected Value = 50.0%
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ESTIMATING SUSTAINABLE SALES GROWTH RATES
Internally Generated Funds: Net income or profits after taxes earned over an accounting period
Sustainable Sales Growth Rate: Rate at which a firm can grow sales based on the retention of profits in the business
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ESTIMATING SUSTAINABLE SALES GROWTH RATES
Equity Beginning
EquityIn Changeg
quityBeginningE
quityBeginningEtyEndingEquig
Equity Beginning
Equityg
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ESTIMATING SUSTAINABLE SALES GROWTH RATES
RR x )(NI/E g
RR x )(NI/EE/E
RateRetention x IncomeNet E
beg
beg beg
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ESTIMATING SUSTAINABLE SALES GROWTH RATES
MultiplierEquity Turnover xAsset Margin x Profit Net ROE
FP ROA g
Policies Financial ePerformanc Operating g
RR CE
TA
TA
NS
NS
NIg
CE
TA
TA
NS
NS
NI
CE
NIROE
beg
X
X
XXX
XX
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ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH
Financing Capital Needed (FCN): financial funds needed to acquire assets necessary to support a firm’s sales growth
Spontaneously Generated Funds: increases in accounts payables and accruals (wages and taxes) that occur with a sales increase
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ESTIMATING ADDITIONAL FINANCING NEEDED TO SUPPORT GROWTH
Additional Funds Needed (AFN): financial funds still needed to finance asset growth after spontaneously generated funds and any increase in retained earnings have been used
AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings
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AFN EQUATION
RateRetention RR
IncomeNet NI
sliabilitie Accrued AL
payable Accounts AP
yearcurrent andyear next between salesnet in Change NS
salesNet NS
assets Total TA :where
)(RR NS
NI)(NS - NS)(
NS
AL AP - NS)(
NS
TAAFN o
o
o1
o
oo
o
o
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AFN CALCULATIONS
Sales last year = $1,600,000 Asset investment = $1,000,000 Net Income = $160,000 Current Assets = $520,000 Fixed Assets = $480,000 Accounts Payable = $48,000 Accrued Liabilities = $32,000 Projected next year sales = $2,080,000
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AFN CALCULATIONS
$68,000
)(.10)(1.00$2,080,000 - 00).05($480,0 -00)625($480,0.
(1.00) $1,600,000
$160,0000)($2,080,00 - ($480,000)
$1,600,000
$80,000 - ($480,000)
$1,600,000
$1,000,000
AFN
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PROJECTING OR FORECASTING FINANCIAL STATEMENTS
Percent of Sales Method: make projections based on the assumption that certain costs and selected balance sheet items are best expressed as a percentage of sales
Constant Ratio Method: variant of the percent of sales method that projects selected cost and balance items at the same growth rate as sales
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PROJECTING OR FORECASTING FINANCIAL STATEMENTS
FINANCIAL FORECASTING PROCESS TO PROJECT FINANCIAL STATEMENTS
1. Forecast sales
2. Project income statement
3. Project balance sheet
4. Project statement of cash flows
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GAME TOY INCOME STATEMENTS (2001 Actual, 2002 Projected)
ACTUAL FORECAST2001 2002
Sales $1,600,000 1.3 x 2001 sales $2,080,000CGS 960,000 .60 x 2002 sales 1,248,000 Gross Profit 640,000 832,000Marketing Exp 160,000 .10 x 2002 sales 208,000G & A Exp 152,000 Fixed costs 152,000Deprec. Exp 48,000 .030 x 2002 sales 62,400 EBIT 280,000 409,600Less Interest 13,300 Initially fixed 13,300 EBT 266,700 396,300Less Taxes @ 40% 106,700 40% of EBT 158,500Net Income 160,000 237,800-Cash Distrib. 0 0\__________ \__________Added RE $160,000 $237,800
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GAME TOY BALANCE SHEETS (2001 Actual, 2002 Projected)
ACTUAL FORECAST2001 2002
Cash $16,000 .01 x 2002 sales $20,800A/R 184,000 .115 x 2002 sales 239,200Inventories 320,000 .20 x 2002 sales 416,000 Total C/A 520,000 .325 x 2002 sales 676,000Net P & E 480,000 .300 x 2002 sales 624,000 Total Assets 1,000,000 .625 x 2002 sales 1,300,000 __- __-A/P 48,000 .03 x 2002 sales 62,400Accrued Liabilities 32,000 .02 x 2002 sales 41,600Bank Loan 120,000 120,000 Total C/L 200,000 224,000Common Equity 800,000 +237800 1,037,800Addt'l Funds Needed 0 38,200Total Liab & OE $1,000,000 $1,300,000 ___ ___
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SHORT-TERM CASH PLANNING TOOLS
Sales Schedule Purchase Schedule Wages and Commission Schedule Cash Budget
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PDC COMPANY OPERATING & CASH BUDGET
SALES SCHEDULE MARCH APRIL MAY JUNE
Schedule 1:Sales Forecast $92,000 $115,000 $184,000 $138,000 Credit sales, 40% 36,800 46,000 73,600 55,200 Credit sales, 60% 55,200 69,000 110,400 82,800
Schedule 2:Cash Collections Cash sales this month 69,000 110,400 82,800 100% last month's credit sales 36,800 46,000 73,600 Total colections 105,800 156,400 156,400
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PDC COMPANY OPERATING & CASH BUDGETPURCHASES SCHEDULES
MARCH APRIL MAY JUNESchedule 3:PurchasesEnding inventory $110,400 $149,040 $123,280 $110,400+CGS 64,400 80,500 128,800 96,600=Total needed 174,800 229,540 252,080 207,000-Beginning inventory 97,520 110,400 149,040 123,280=Purchases 77,280 119,140 103,040 83,720
Schedule 4:Purchase Disbursements50% last mos purch 38,640 59,570 51,520+50% this mos purch 59,570 51,520 41,860=Disbursements for purchases 98,210 111,090 93,380
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PDC COMPANY OPERATING & CASH BUDGET
WAGES & COMMISSIONS SCHEDULE MARCH APRIL MAY JUNE
Schedule 5:Wages & Commiss. Wages (fixed) $5,750 $5,750 $5,750 $5,750 +Commissions 15% of current sales 13,800 17,250 27,600 20,700=Total 19,550 23,000 33,350 26,450
Schedule 6:Disbursements-Wages/Commiss.50% last mos exp. 9,775 11,500 16,675+50% this mos exp. 11,500 16,675 13,225=Total 21,275 28,175 29,900
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PDC COMPANY OPERATING & CASH BUDGET
CASH BUDGET APRIL MAY JUNE JULY
Begin. Cash $23,000 $23,000 $23,000 $23,000Cash receipts: Customer collections 105,800 156,400 156,400 124,200Totl cash before financing 128,800 179,400 179,400 147,200Cash disbursements: Merchandise 98,210 111,090 93,380 75,670 Wages & Comm 21,275 28,175 29,900 24,725 Misc Exp 5,750 9,200 6,900 5,750 Rent 4,600 4,600 4,600 4,600 Truck Purchase 6,900 0 0 0Total Disbursements 136,735 153,065 134,780 110,745
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PDC COMPANY OPERATING & CASH BUDGET
APRIL MAY JUNE JULYTotal Disbursements 136,735 153,065 134,780 110,745 Min. cash balance 23,000 23,000 23,000 23,000 Total cash needed 159,735 176,065 157,780 133,745 Excess of total cash -$30,935 $3,335 $21,620 $13,455Financing New borrowing $30,935 $0 $0 $0 Repayments 2,871 21,199 6,865 Loan balance $30,935 $28,064 $6,865 $0 Interest 0 464 421 103Total effects of financing $30,935 -$3,335 -$21,620 -$6,968Cash balance 23,000 23,000 23,000 29,487
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