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Chapter 6

ENTREPRENEURIAL FINANCE. FINANCIAL PLANNING: SHORT TERM AND LONG TERM. Chapter 6. Venture Life Cycle: Operating And Financial Decisions. Development Stage: Screen Business Ideas Prepare Business Plan Obtain Seed Financing Startup Stage: Choose Organizational Form

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Chapter 6

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  1. ENTREPRENEURIAL FINANCE FINANCIAL PLANNING: SHORT TERM AND LONG TERM Chapter 6

  2. 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

  3. Venture Life Cycle: Operating And Financial Decisions • Survival Stage: • Monitor Financial Performance • Project Cash Needs • Obtain First Round Financing • Possible Actions: Liquidate v. Restructure • Rapid Growth Stage: • Create and Build Value • Obtain Additional Financing • Examine Exit Opportunities • Possible Actions: Go Public v. Sell/Merge

  4. Venture Life Cycle: Operating And Financial Decisions • Early-Maturity Stage: • Manage Ongoing Operations • Maintain and Add Value • Obtain Seasoned Financing

  5. Short-term Cash Planning Tools • Sales Schedule • Purchase Schedule • Wages and Commission Schedule • Cash Budget

  6. PDC Company Operating & Cash Budget

  7. PDC Company Operating & Cash Budget

  8. PDC Company Operating & Cash Budget

  9. Check With Projected Financials • As a check on the cash budget, you can get the exact same cash balance by constructing a full set of financial statements. See Exhibits 6.3 – 6.5 in the textbook.

  10. 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) The more Mature the firm – The more accurate the Forecast Industry Probability of Sales Components Sales Scenario Occurrence Growth Rate to Sum Optimistic forecast .30 X 60% = 18.0% Most likely forecast .40 X 50% = 20.0% Pessimistic forecast .30 X 40% = 12.0% 1.00 Expected Value = 50.0%

  11. 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 See Chart

  12. 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

  13. Estimating Additional Funds Needed To Support Growth • Additional Funds Needed (AFN): gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings, or, • AFN = Required Increase in Assets – Spontaneously Generated Funds – Increase in Retained Earnings

  14. AFN Equation

  15. 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 • See Chart

  16. AFN Calculations

  17. 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

  18. 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

  19. Game Toy Income Statements(2010 Actual, 2011 Projected)

  20. Game Toy Balance Sheets(2010 Actual, 2011 Projected)

  21. Game Toy Statements of Cash Flow(Projected 2011)

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