Copyright © 2011 Pearson Education CHAPTER 11

Copyright © 2011 Pearson Education Ch, 11: Creating a Successful Financial Plan  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  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  Helps the entrepreneur transform business goals into reality  Challenging for a business start-up  Start-ups should focus on creating projections for two years  Projected financial statements:  Income statements  Balance sheet

Copyright © 2011 Pearson Education Ch, 11: Creating a Successful Financial Plan  “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  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

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 Contribution Margin = 1 - Variable Expenses Net Sales Estimate Step 4. Compute the breakeven point: Breakeven Point ($) = Total Fixed Costs Total Fixed Costs Contribution Margin Contribution 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: $705,125 Fixed Expenses: $177,375 Step 3. Contribution margin: Ch, 11: Creating a Successful Financial Plan Contribution Margin = 1 - $705,125 $950,000 Step 4. Breakeven Point: Breakeven Point $ = $177, =.26 =.26 = $682,212 = $682,212

Copyright © 2011 Pearson Education Ch. 6: Franchising and the Entrepreneur FIGURE 11.8 Break-Even Chart for the Magic Shop

Copyright © 2011 Pearson Education Ch, 11: Creating a Successful Financial Plan Conclusion Preparing a financial plan is a critical step Entrepreneurs can gain valuable insight through: Pro forma statements Ratio analysis Breakeven analysis