1. Al Fikra, Qatar's National Business Plan Competition 2014 Financial Projections January 2014 Prepared by Professor George White and S. Thomas Emerson, Distinguished Career Professor of Entrepreneurship at Carnegie Mellon University Qatar

2. Agenda Introducing Financial Statements Sales Forecasting Guide – Al Fikra Financials Template Financial Ratios Financing Measuring Internal Rate of Return

3. Income Statement (P & L) Statement of Owner’s Equity/Retained Earnings Balance Sheet Statement of Cash Flows Major Financial Statements

4. Al Fikra 2014 Inflows of assets in exchange for products and services provided to customers.

5. Al Fikra 2014 Costs incurred or the using up of assets from generating revenue

6. Computing Net Income MerchandiserService Company Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Operating Expenses Revenue Cost of Sales Gross Profit

7. Al Fikra 2014 Covers a period of time. From the Income statement.

8. ABC Corportation Statement of Retained Earnings For Year Ended December 31,2005 Retained Earnings, January 1 $0 Add: Net Income 48 Total $48 Less: Dividends 40 Retained Earnings, December 31 $8

9. Al Fikra 2014 Properties or economic resources owned by a business

10. Al Fikra 2014 Debts or Obligations of the business

11. Al Fikra 2014 Owner’s claim on the assets of a business From the Statement Of Owner’s Equity

12. ABC Corportation Partial Balance Sheet December 31,2005 Shareholders’ Equity Share Capital $500 Retained Earnings 8 Total Shareholders’ Equity $508

13. Al Fikra 2014 From the balance sheet

14. Estimate your market size - # of potential customers - Average amount spent per customer - Total Industry Sales Evaluate Competition Estimate Your Share of the Market Don’t estimate over your capacity !! Sales Forecasting

15. Sales Forecasting Template

16. B to B Sales Forecasting Template

17. Follow the instruction sheet given to you Cells highlighted in BLUE can be changed to reflect your company’s situation Cells highlighted in YELLOW contain formulas that can be altered to reflect your company’s situation It is NOT recommended to change any cells that are not colored Al Fikra Financials Template

18. Sales and Cost of Goods Sold Forecasting

19. Payroll forecasting

20. Payroll Tax and Benefit Assumptions

21. Expense Assumptions

23. Capital Asset Additions

24. Interest Rate, Income Tax Rate, Financing Injections - Summaries

25. Working Capital Current Ratio Return on Assets Return on Equity Gross Margin % Net Income/Profit Margin % Financial Ratios

26. The difference between current assets and current liabilities. Working Capital Working Capital = Current Assets - Current Liabilities

27. Measures the short-term debt paying ability of the company. Current Ratio Current Ratio Current Assets Current Liabilities =

28. Return made on the assets employed for a given period Return on Assets Net Income Total Assets =

29. Return made on the Owner’s Equity in the business Return on Equity Net Income Total Shareholders’ Equity =

30. Gross Margin earned as a percentage of Sakes Gross Margin % Gross Margin Sales Revenue =

31. Net Income earned as a percentage of Sales Net Income / Profit Margin % Net Income Margin % Net Income Sales Revenue =

32. Equity Financing Pros – Less risk than debt as no legal obligation to pay dividends or buy back shares Cons – Give up ownership and control

33. Debt Financing Pros – Retain full ownership and control – Leverage can enhance shareholder returns Cons – Legal obligation to pay interest and principal when due

34. You are a new start up company with an innovative product. You invest QR 1,500,000 in your company and wish to sell a 25% equity stake in your company to other non-active investors for QR 2,000,000. You would issue 100,000 shares of which you would own 75,000 shares and the other investors would own 25,000 shares. You plan to pay out 20% of the profits each year in the form of dividends. Investors have the opportunity to sell their shares any time after 3 years. Investor Return Calculation - Example

35. You prepare your financial projections and annual net profits show as follows: Year 1QR 200,000 Year 2QR 900,000 Year 3QR 2,000,000 Year 4QR 4,000,000 Year 5QR 6,000,000 You estimate that the company will be worth 5 times the following year’s estimated earnings (P/E Ratio = 5) after 3 years. Investor Return Example (cont’d)

36. What is the estimated value of the company after 3 years? Price/Earnings = 5 times Price/QR 4,000,000 = 5 Price = QR 20,000,000 Question 1

37. What share of this amount would the non active investors be entitled to? QR 20,000,000 X 25% = QR 5,000,000 Question 2

38. How much would the non active investors receive in dividends for the first 3 years. Y1. QR 200,000 X 20% payout X 25% share = QR 10,000 Y2. QR 900,000 X 20% payout X 25% share = QR 45,000 Y3. QR 2,000,000 X 20% payout X 25% share = QR 100,000 Question 3

39. What would the non active investors Internal Rate of Return (IRR) be if they sold their shares after 3 years? Question 4

40. Solution - Question 4

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