Finance Program Management Department Faculty of Economic Petra Christian University Surabaya 2009

 Describe the process for obtaining and recording resources needed for an early-stage venture  Describe and prepare a basic balance sheet  Describe and prepare a basic income statement  Explain the use of internal statements as they relate e to formal financial statement

 Briefly describe two important internal operating schedules the cost of production schedule and the inventories schedule  Prepare a cash flow statement and explain how it helps monitor a venture’s cash position  Describe operating breakeven analysis in terms of NOPAT breakeven revenues

BALANCE SHEETINCOME STATEMENT Assets: Acquire initial assets (e.g., initial cash, office furniture, computer, etc) Liabilities and Equity: Obtain seed financing (e.g., entrepreneur’s Assets, family, and friends) Revenues: No sales (consequently no money Is coming in) Expenses: (e.g., rent, utilities, subsistence salary for entrepreneur) BALANCE SHEETINCOME STATEMENT Assets: Acquire production assets (e.g., inventories and equipment to produce products and give credit to customer) Liabilities and Equity: Obtain startup financing (e.g., business angels and venture capitalists in addition to seed financing sources) Revenues: Making sales (money begins flowing in) Expenses: (additional expenses to produce and market products and to record business transactions) DEVELOPMENT STAGE IN LIFE CYCLESTARTUP STAGE IN LIFE CYCLE

Assets: Financial, physical, and intangible items owned by the business Balance sheet assets Lists assets in declining order of liquidity, or how quickly the asset can be converted into cash

ASSETSLIABILITIES AND EQUITY Cash and marketable securities$30,000 Receivables0 Inventories10,000 Total current assets40,000 Gross equipment20,000 Less: Accumulated depreciation0 Net equipment20,000 Building0 Other long-term assets0 Total assets$60,000 Payables$10,000 Accrued wages0 Bank loans0 Other current liabilities0 Total current liabilities10,000 Long –term debts10,000 Capital leases0 Total long-term liabilities10,000 Owners’ equity40,000 Total liabilities and equity$60,000

Net sales$120,000 - Cost of goods sold(78,000) Gross earnings42,000 - Marketing expenses(12,500) - Administrative expenses(18,000) - Building rental(6,000) - Depreciation expenses(1,000) Earning before interest and taxes4,500 -Interest(500) Earning before taxes (taxable income)4,000 - Taxes (25%)(1,000) Net income (earning after tax)$ 3,000

Cash flow from operating activities Net income$ 3,000 + Depreciation1,000 - Increase in receivables(50,000) - Increase in inventories(16,000) + Increase in payables5,000 + Increase in accrued wages3,000 Net cash flow from operating activities(54,000) Cash flow from investing activities - Increase in gross equipment0 Cash flow from financing activities + Increase in other short-term liabilities25,000 Net change excluding cash account(29,000) Beginning cash and marketable securities30,000 Ending cash and marketable securities$ 1,000

Year 1Year 2Year 3 Number of units sold5,00015,00025,000 Revenues$ 500,000$1,500,000$ 2,500,000 - Cost of goods sold(325,000)(975,000)(1,625,000) Gross profit175,000525,000875,000 - Administrative expenses(200,000) - Marketing expenses(180,000) EBITDA(205,000)145,000495,000 - Depreciation(25,000) EBIT(230,000)120,000470,000 - Interest expenses(20,000) EBT(250,000)100,000450,000 - Taxes75,000(30,000)(135,000) Net income$ (175,000)$ 70,000$ 315,000

 EBITDA = earning before interest, taxes, depreciation, and amortization  EBDAT = earning before depreciation, amortization, and taxes  EBDAT breakeven = amount of revenues needed to cover a venture’s cash operating expenses  Cash flow break even = cash flow at zero for a specific period (EBDAT = 0)

Year 1Year 2Year 3 Number of units sold5,00015,00025,000 Revenues$ 500,000$1,500,000$ 2,500,000 - Cost of goods sold (65% of revenues)(325,000)(975,000)(1,625,000) Gross profit175,000525,000875,000 - Administrative expenses(200,000) - Marketing expenses(180,000) - Interest expenses(20,000) EBDAT$ (225,000)$ 125,000$ 475,000 Percent of revenues-45%8.3%19%

 Amount of revenues just offsetting variable and cash fixed costs (EBDAT breakeven)  EBDAT = revenues ( R ) – variables costs (VC) – cash fixed costs (CFC)  VC = variable costs revenues ratio (VCRR) x (R )  Survival revenues (SR) = VC + CFC CFC = SR – VC  CFC = SR – (VCRR) x (SR)  CFC = SR[1 – (VCRR)]  SR = [CFC/(1 – VCRR)]

 CFC = adm exp + marketing exp + financing exp  CFC = $200,000 + $180,000 + $20,000  C FC = $400,000  VCRR = cost of goods sold/revenues  SR = $400,000/( )  SR = $400,000/0.35  SR = $1,142,857 = $1,143,000 (rounded)

Survival revenues$1,143,000 - COGS (65%)(743,000) Gross profit400,000 - Administrative expenses(200,000) - Marketing expenses(180,000) - Interest expenses(20,000) EBDAT0

 NOPAT net operating profit after taxes or EBIT times one minus the firm’s tax rate = EBIT (1 – tax rate)  NOPAT breakeven revenues (NR) amount of revenues needed to cover a venture‘s total operating costs = Total operating fixed costs (TOFC)/(1 – VCRR)

Year 1Year 2Year 3 Number of units sold5,00015,00025,000 Revenues$ 500,000$1,500,000$ 2,500,000 - Cost of goods sold(325,000)(975,000)(1,625,000) Gross profit175,000525,000875,000 - Administrative expenses(200,000) - Marketing expenses(180,000) EBITDA(205,000)145,000495,000 - Depreciation(25,000) EBIT(230,000)120,000470,000 - Taxes (at a 30% effective rate)69,000(36,000)(141,000) NOPAT(161,000)84,000329,000 Percent of revenues(32.2%)5.6%13.2%