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8/13/2019 Ch 06 Financial Planning Short Term and Long Term
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FINANCIAL PLANNING: SHORT TERM AND LONG TERM
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2012 South-Western Cengage Learning
ENTREPRENEURIAL FINANCE Leach & Melicher
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Construct a cash budget Describe how projected
statements of cash flowrelate to cash budgets
Explain why projectedstatements of cash flow areimportant to theentrepreneur
Understand the concept of a
sustainable sales growth
Understand the process of
identifying the quantity and
timing of additional funds
needed to support theventures sales forecasts
Connect sales growth rates to
the amount and timing of
additional funds needed
Describe the percent-of-salesmethod for preparing
financial plans
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Development Stage: Screen Business Ideas
Prepare Business Plan
Obtain Seed Financing
Startup Stage: Choose Organizational Form
Prepare Initial Financial Statements
Obtain First Round Financing
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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
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Early-Maturity Stage: Manage Ongoing Operations Maintain and Add Value
Obtain Seasoned Financing
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Sales Schedule
Purchase Schedule Wages and Commission Schedule Cash Budget
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As a check on the cash budget, you can getthe exact same cash balance by constructing
a full set of financial statements. See Exhibits6.3 6.5 in the textbook.
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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)
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%
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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 ofprofits in the business
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EquityBeginning
EquityInChangeg
EquityBeginning
EquityBeginningEquityEnding g
EquityBeginning
Equityg
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RRx)(NI/Eg
RRx)(NI/EE/E
RateRetentionxIncomeNetE
beg
beg beg
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MultiplierEquityTurnover xAssetMargin xProfitNetROE
FPROA xg
PoliciesFinancialxePerformancOperatingg
RRxCE
TAx
TA
NSx
NS
NIg
CETAx
TANSx
NSNI
CENIROE
beg
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Financing Capital Needed (FCN):financial funds needed to acquire assets necessary tosupport a firms sales growth
Spontaneously Generated Funds:increases in accounts payables and accruals (wages andtaxes) that occur with a sales increase
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Additional Funds Needed (AFN):gap remaining between the financial capital needed and thatfunded by spontaneously generated funds and retained
earnings, or,
AFN =Required Increase in AssetsSpontaneously Generated Funds
Increase in Retained Earnings
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RateRetentionRR
IncomeNetNI
sliabilitieAccruedAL
payableAccountsAP
yearcurrentandyearnextbetweensalesnetinChangeNS
salesNetNSassetsTotalTA:where
)(RRNS
NI)(NS-NS)(
NS
ALAP-NS)(
NS
TAAFN o
o
o1
o
oo
o
o
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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
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$68,000
)(.10)(1.00$2,080,000-00).05($480,0-00)625($480,0.
(1.00)$1,600,000
$160,000
0)($2,080,00-($480,000)$1,600,000
$80,000
-($480,000)$1,600,000
$1,000,000
AFN
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Percent of Sales Method:make projections based on the assumption that certain costsand selected balance sheet items are best expressed as a
percentage of sales
Constant Ratio Method:variant of the percent of sales method that projects selectedcost and balance items at the same growth rate as sales
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Financial Forecasting Process To ProjectFinancial Statements
1. Forecast sales2. Project income statement3. Project balance sheet4. Project statement of cash flows
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