1. Creating a Successful Financial Plan
Chapter 11
Creating a Successful Financial Plan

2. Financial Management
a process that provides entrepreneurs with relevant financial information in an easy-to-read format on a timely basis.
It allows entrepreneurs to know not only how their businesses are doing financially but also why they are performing that way.

3. Basic Financial Statements
The Balance Sheet
The Income Statement
The Statement of Cash Flows

4. Balance Sheet
a financial statement that provides a snapshot of a business’s financial position, estimating its worth on a given date; it is built on the fundamental accounting equation: Assets = Liabilities + Owner’s Equity.

5. Balance Sheet Terms
Current Assets – assets such as cash and other items to be converted into cash within one year or within the company’s normal operating cycle.
Fixed Assets – assets acquired for long-term use in a business.
Liabilities – creditors’ claims against a company’s assets.
Current Liabilities – those debts that must be paid within one year or within the normal operating cycle of a company.
Long-term Liabilities – liabilities that come due after one year.
Owner’s Equity – the value of the owner’s investment in the business.

6. Income Statement
a financial statement that represents a moving picture of a business, comparing its expenses against its revenue over a period of time to show its net income (or loss).

7. Income Statement Terms
Cost of Goods Sold – the total cost, including shipping, of the merchandise sold during the accounting period.
Gross Profit Margin – gross profit divided by net sales revenue.
Operating Expenses – those costs that contribute directly to the manufacture and distribution of goods.

8. Statement of Cash Flows
a financial statement showing the changes in a company’s working capital from the beginning of the year by listing both the sources and the uses of those funds.

9. Creating Projected Financial Statements
Creating projected financial statements helps entrepreneurs to transform their business goals into reality.

10. Creating Projected Financial Statements
One of the most important tasks confronting the entrepreneur launching a new enterprise is to determine the amount of funding required to begin operation as well as the amount required to keep the company going until it begins to generate positive cash flow.
The amount of money needed to begin a business depends on the type of operation, its location, inventory requirements, sales volume, and many other factors.

11. Creating Projected Financial Statements
Every new firm must have enough capital to cover all start-up costs, including funds to rent or buy plant, equipment, and tools, and to pay for advertising, wages, licenses, utilities, and other expenses.
In addition, an entrepreneur must maintain a reserve of capital to carry the company until it begins to generate positive cash flow

12. Creating Projected Financial Statements
The Projected Income Statement
When creating a projected income statement, the first step is to create a sales forecast. An entrepreneur has two options: to develop a sales forecast and work down or to set a profit target and work up.

13. Calculating the Break-Even Point
Break-even Point – the level of operation (sales dollars or production quantity) at which a company neither earns a profit nor incurs a loss.
Fixed Expenses – expenses that do not vary with changes in the volume of sales or production.
Variable Expenses – expenses that vary directly with changes in the volume of sales or production.