1. FINANCIAL PLANNING: LONG-TERM AND SHORT-TERM
ENTREPRENEURIAL FINANCE
Leach & Melicher
Chapter 6
FINANCIAL PLANNING: LONG-TERM AND SHORT-TERM
© 2003 South-Western College Publishing

2. 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
Describe the percent of sales method for preparing long-term financial plans

3. CHAPTER 6: LEARNING OBJECTIVES
Explain why projected statements of cash flows are important to the entrepreneur
Describe how projected statements of cash flow relate to cash budgets

4. VENTURE LIFE CYCLE

5. 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

6. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
Survival Stage:
Monitor Financial Performance
Project Cash Needs
Obtain First Round Financing
Liquidate v. restructure
Rapid Growth Stage:
Create and Build Value
Obtain Additional Financing
Examine Exit Opportunities
Go public v. Sell or merge

7. VENTURE LIFE CYCLE: OPERATING AND FINANCIAL DECISIONS
Maturity Stage:
Manage Ongoing Operations
Maintain and Add Value
Obtain Seasoned Financing

8. 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 X 60% = %
Most likely forecast X % = %
Pessimistic forecast X % = %
Expected Value = %

9. 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

10. ESTIMATING SUSTAINABLE SALES GROWTH RATES

11. ESTIMATING SUSTAINABLE SALES GROWTH RATES

12. ESTIMATING SUSTAINABLE SALES GROWTH RATES

13. 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

14. 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

15. AFN EQUATION

16. 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

17. AFN CALCULATIONS

18. 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

19. 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

20. GAME TOY INCOME STATEMENTS (2001 Actual, 2002 Projected)

21. GAME TOY BALANCE SHEETS (2001 Actual, 2002 Projected)

22. SHORT-TERM CASH PLANNING TOOLS
Sales Schedule
Purchase Schedule
Wages and Commission Schedule
Cash Budget

23. PDC COMPANY OPERATING & CASH BUDGET

24. PDC COMPANY OPERATING & CASH BUDGET

25. PDC COMPANY OPERATING & CASH BUDGET

26. PDC COMPANY OPERATING & CASH BUDGET

27. PDC COMPANY OPERATING & CASH BUDGET