1. Section 36.2 Financial Aspects of a Business Plan
Marketing Essentials
n Chapter 36 Financing the Business
Section Financial Aspects of a Business Plan

2. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
What You'll Learn
How to estimate business income and expenses
How to prepare an income statement
How to calculate payroll and other expenses itemized on an income statement
How to prepare a balance sheet
How to prepare a cash flow statement

3. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Why It's Important
Financial institutions and investors in any new business will want to know why you need their money, how you are going to use it, and how you plan to repay them. The financial section of a business plan provides this information to prospective lenders.

4. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Key Terms
income statement
gross sales
net sales
net income
interest
principal
balance sheet
net worth
cash flow statement

5. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Estimating Business Income and Expenses
You must estimate the money you expect to earn and to spend in operating your business. The financial document that is used to calculate a business's revenue, costs, and expenses over a specific period of time is the income statement. This statement is often called a profit and loss statement.
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6. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Estimating Business Income and Expenses
Income statements have several major parts. Each item is added to or subtracted from total sales to find the amount of profit:
Total Sales
- Returns and Allowances
= Net Sales
- Cost of Goods Sold
= Gross Profit
- Expenses of Operating the Business
= Net Income from Operations
- Income Taxes
= Net Profit
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7. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Estimating Total Sales
It is important to calculate a reasonable estimated sales volume. You must verify your estimated sales volume by comparing it with projected industry figures for your size of business and location. The accuracy of your sales estimates will also depend on the quality of your market analysis.

8. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Calculating Net Sales
The total of all sales for any period of time is called gross sales.
Net sales represents gross sales minus all sales returns and allowances.

9. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Cost of Goods Sold
The total amount spent to produce or to purchase the goods that are sold is called the cost of goods sold. The calculation is as follows:
Beginning Inventory
+ Net Purchases
- Ending Inventory
= Cost of Goods Sold
For service businesses, gross profit is the same as net sales.

10. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Determining Gross Profit
Gross profit on sales is the difference between the net sales and the cost of goods sold. The formula for calculating gross profit is:
Net Sales
- Cost of Goods Sold
= Gross Profit

11. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Projecting Business Expense
Operating expenses are the costs of operating the business, which include both variable and fixed expenses.
Variable expenses change from one month to the next.
Example: advertising, office supplies, telephone, and utilities
Fixed expenses are costs that remain the same for a period of time.
Example: depreciation, insurance, rent, and office salaries

12. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Calculating Payroll Expenses
To calculate payroll expenses, you must estimate the number of employees you need, then research typical salaries in your area, and related taxes.

13. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Payroll Journal
A payroll journal summarizes each employee’s pay period, hours worked, earnings, deductions, and net pay. What is Nancy Baker’s net pay for the period ending August 21?

14. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Calculating Total Expenses
To calculate total expenses, add all the variable expenses to the fixed expenses.
Total Variable Expenses
+ Total Fixed Expenses
= Total Expenses

15. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Net Income from Operations
Net income is the amount left after the total expenses are subtracted from gross profit.
The formula for calculating net income from operations is:
Gross Profit on Sales
- Total Expenses
= Net Income from Operations

16. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Calculating Other Income
In the "Net Income From Operations" section of the income statement, list money earned from sources other than sales:
dividends on stocks or
interest—money paid for the use of money borrowed or invested

17. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Calculating Other Expenses
The main "other expense" a new business will have will be interest payments on money borrowed to start the business. The amount you borrow is called the principal. Interest is calculated as a percentage of the principal.

18. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Net Profit of Loss Before Taxes
Net profit or net loss before taxes is calculated this way:
Net Income from Operations
+ Other Income
- Other Expenses
= Net profit (or loss) before taxes

19. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet
A balance sheet is a summary of a business's assets, liabilities, and owner's equity.
Assets are anything of monetary value that you own. They are classified as either current or fixed assets.
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20. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet
Current assets are expected to be converted into cash in the upcoming year.
Example: Cash in the bank, accounts receivable (money owed to you by your customers), and inventory.
Fixed assets are used over a period of years to operate your business.
Example: Land, buildings, equipment, furniture, and fixtures.
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21. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet
Liabilities are amounts the business owes. They are classified as current or long-term.
Current liabilities are the debts the business expects to pay off during the upcoming business year.
Example: Accounts payable, notes payable, and employee salaries.
Long-term liabilities are debts that are not due in the next 12 months.
Example: Mortgages and long-term loans.
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22. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet
Net worth is the difference between the assets of a business and its liabilities:
Assets - Liabilities = Net Worth (Equity)
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23. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Analysis of Financial Statements
Lenders use ratio analysis as a way of determining how a business is performing as compared to other businesses in the industry. There are several common ratios to analyze financial statements:
Liquidity Ratio
Acid Test Ratio
Activity Ratios
Profitability Ratios
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24. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Analysis of Financial Statements
Liquidity Ratios show the ability of a firm to meet its current debts.
The Acid Test Ratio shows if the company can meet its short-term cash needs.
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25. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Analysis of Financial Statements
Activity Ratios determine how quickly assets can be turned into cash.
Profitability Ratios measure how well the company has operated the past year.
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26. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Cash Flow Statement
A cash flow statement is a monthly plan that shows when you anticipate cash coming into the business and when you expect to pay out cash. A cash flow statement helps you to see if you will have enough money when you need to pay your bills.

27. Financial Aspects of a Business Plan
SECTION 36.2
Financial Aspects of a Business Plan
Loans
If you project that you will need additional money during the year, you may be able to borrow money to keep your business going through start-up and through slow sales months.

28. Reviewing Key Terms and Concepts
ASSESSMENT
36.2
Reviewing Key Terms and Concepts
1. What financial document can you use to calculate a business's earnings and expenses?
2. What are the major categories that are calculated on the income statement?
3. How are payroll expenses calculated?
4. What is the purpose of a balance sheet?
5. What is a cash flow statement? What is its purpose?

29. ASSESSMENT Thinking Critically 36.2
What steps could a business take to improve cash flow?

30. Marketing Essentials
End of Section 36.2