1. Super-project.eu Lecture
Financial Planning
Super-project.eu
Lecture

2. Topics Covered Financial statements Financial analysis
The start up costs budget
The balance sheet,
The income statement/ Profit and loss account / Income - expenses statement
The cash flow statement
Financial analysis
Break-even analysis
Vertical or common size analysis
Horizontal or change analysis
Ratio analysis
Financial forecasting
Forecasting revenue of an established business
Forecasting revenue of a new venture
Integrated financial modelling

3. Aim for the session By the end of the session, students will:
Understand basic financial statements and learn how to prepare their projections.
Understand principles and learn how to execute financial analysis using basic financial ratios and break-even analysis.
Learn financial forecasting techniques suitable for start-up businesses.

4. 1. Financial Statements The start up costs budget
The start up costs budget gives you answers on questions:
how much money you need to initiate, develop and run your new business.
which sources of funds you will use to cover your business needs.
On excess or shortage of funds in particular periods.
Startup costs add up expenses you will incur before starting, assets you will need to have, and how much money you will need to keep the business running during the first few months before sales start rolling in.
The most effective way to calculate startup costs and sources of funds is to use a worksheet and available spreadsheets. Free downloads e.g. 4 4

5. 1. Financial Statements . .
Relationship among Cash flow, Balance Sheet and Income Statement
Cash Flow
+Cash In
-Cash Out
Ending Cash
Starting Cash
Income Statement
+ Revenues
- Costs
=Profit /Loss
Balance Sheet
Current Assets
Own Funds
Liabilities
Fixed Assets A P 5 5

6. Snapshot of assets and liabilities at a point in time.
1. Financial Statements
Balance Sheet at 12/31/20XX
Snapshot of assets and liabilities at a point in time.
Assets
Current assets
Cash
Accounts receivable (A/R)
Inventory
Total current assets
Fixed assets (PP&E)
Gross fixed assets
Less: accumulated depreciation
Net fixed assets
Intangible assets
Total assets
Liabilities
Current liabilities
Accounts payable (A/P)
Wages payable
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Equity
Common stock
Retained earnings
Total equity
Total liabilities and equity

7. 1. Financial Statements Impact of changes on cash flow
Balance Sheet
Impact of changes on cash flow
Assets   Cash 
Assets   Cash 
Liabilities or Equity   Cash 
Liabilities or Equity   Cash 
Changes to retained earnings
Beginning retained earnings
+ Net Income (Loss)
Dividends
= Ending retained earnings

8. Income Statement at 12/31/20XX
1. Financial Statements
Income Statement at 12/31/20XX
Money brought into a company by its business activities
Costs that go into creating product and services that company sells
Revenue
− Cost of goods sold (COGS)
= Gross profit
− Operating expenses
= Earnings before interest and taxes (EBIT)
+ Interest income − Interest expense
= Earnings before tax (EBT)
− Income tax expense
= Net income (NI)
Business costs NOT directly related to PRODUCING goods and services for sale

9. 1. Financial Statements Cash Flow Statement Net Income
Financial planning
is all about cash....
1. Financial Statements
Cash Flow Statement
(year ended 12/31/20XX)
Net Income
Plus: depreciation and amortization
(Increase) decrease in accounts receivable
(Increase) decrease in inventory
Increase (decrease) in accounts / wages payable
Operating cash flow
Less: change in gross fixed assets
Investing cash flow
Increase (decrease) in notes payable
Increase (decrease) in long-term debt
Increase (decrease) in common stock
Less: dividends paid
Financing cash flow
Net cash flow
Plus: beginning cash
Ending cash

15. 2. Financial Analysis
Break-even analysis / cost-volume-profit analysis in generally means to calculate the point that equates the costs with revenues.
Break-even point is calculate either as minimum quantity of product (BEQ) or revenue (BER).
BEQ = Fixed costs/(price per unit of product minus variable operating cost per unit of product)
BER = Fixed cost /( 1 – (variable cost per unit/price per unit)). 15

16. 2. Financial Analysis
Vertical (Common size analysis) and Horizontal (Change Analysis)
In common size analysis, all income statement items are divided by sales, and all balance sheet items are divided by total assets. To know structure B/S and I/S is important for analysis and projections.
In percent change analysis, all items are expressed as a percent change from the first year, called the base year, of the analysis.To know dynamic of each item is useful for analysis and projection, too. 16

17. 2. Financial Analysis
Ratio Analysis
its aim is to analyse the company financial statement by the way of constructing and calculating different ratios which can be used as general indictors to assess the company´s performance.
Dynamic ratio analysis and industry benchmark comparative ratio analysis are frequently applied. 17

18. 2. Financial Analysis Ratio Analysis (cont.)
In companies that are not publicly traded the following groups of ratios are used:
Liquidity ratio (e.g. Current ratio, Quick ratio).
Profitability/ efficiency ratios (e.g. sales profit margin, ROA,ROE).
Operational activity ratios (e.g. inventory turnover ratio; accounts receivable ratio, accounts payable ratio, fixed and total assets turnover).
Debt/leverage ratio (e.g. total debt ratio, times interest earned ratio, long term debt ratio and debt/equity ratio). 18

19. 3. FinancialForecasting
Financial forecasting is the process of predicting the future state and value of financial and economic indicators based on current knowledge and current and past data.
Key steps that guide the forecasting process and the creation of financial model:
a/ build and support assumptions that may come from fundamental analysis of the opportunity, information on comparable companies, or expert judgment.
b/ start with a forecast of revenue as most other aspects of the financial model are related to revenue.
c/ decide whether to develop the forecast in real or nominal terms which means to decide how inflation would be included into forecast.
d/ integrate the financial statements it means through spreadsheet formula to integrate the pro forma balance sheet, income statement end cash flow statement.
e/ determine an appropriate time span for forecast which depends on purpose of the forecast.
f/ determine an appropriate forecasting interval which depends on planning period of the venture.
g/ assess the assumptions of the model across the financial statements. 19

20. 3.FinancialForecasting
Forecasting the revenue of an established business
There are five simple (naïve) approaches often used for revenue forecasting:
Forecasting based on the historical nominal growth rate of sales.
Forecasting based on the historical real growth rate of sales.
Weighting the historical growth rates of sales.
Exponential smoothing is an alternative weighting scheme that brings more accurate results the previous methods when historical data are limited.
Forecasting based on fundamentals takes into consideration influence of macroeconomic development on sales growth.
(see more Smith et al.2011) 20

21. 3. FinancialForecasting
Forecasting revenue of a new venture
There are two approaches used for this forecasting:
a/ Yardsticks
b/ Fundamental analysis
If for some new ventures exists reasonable comparable yardsticks companies then their public or non-public data are used for forecasting. Comparable dimensions that are important: product/customer attributes, distribution channels, manufacturing technology etc. 21

22. 3. FinancialForecasting
Forecasting revenue of a new venture (cont.)
b/ Fundamental analysis
For simple new venture like opening coffee shops empirical data gathering through talking to customers, observations of traffic, prices etc. is sufficient.
For innovative new ventures analysis must be more complex and should start with estimation of the size of the relevant market. Then demand and supply approaches are applied. 22

23. 3. FinancialForecasting
Integrated financial modelling
Goal of the of integrated financial modelling is to create set of integrated financial statements that capture interactions between pro forma statements (balance sheet, income statement and cash flow), reflect assumption changes across all statements, and add time dimension to accommodate growth.
The items of pro forma statements are projected values based on a specific forecasting method and a certain set of assumptions.
The pro forma analysis is useful for established companies but especially for new venture. 23