financial aspects of a business plan chapter 36.2
TRANSCRIPT
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Financial Aspects of a Business Plan
Chapter 36.2
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Estimating Business Income and Expenses
• The income statement is a summary of your business’s income and expenses during a specific period, such as a month, a quarter, or a year.
• Also called a profit and loss statement.
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Income Statement
• Several Main parts:– Total and Net sales– Cost of goods sold– Gross Profit– Expenses of operating the business– Net income from operations– Net profit before income taxes– Net profit after income taxes
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Estimating Total Sales
• The income generated by a business depends on the yearly volume of sales.
• 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.
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Calculating Net Sales
• The total of all sales for any period of time is called gross sales.
• The total of all sales returns and allowances is subtracted from gross sales to get net sales.
• Net sales represent the amount left after gross sales have been adjusted for returns and allowances.
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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.
• To calculate cost of goods sold, use the following formula:
Beginning Inventory
+ Net Purchases- Ending Inventory
= Cost of Goods Sold
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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: Net Sales
- Cost of Goods Sold
= Gross Profit
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Projecting Business Expenses
• Operating Expenses are the costs of operating the business, which includes both variable and fixed expenses.
• Variable expenses– Change from one month to the next.– Include items such as advertising, office
supplies, telephone and utilities.– Calculated as a percentage of some baseline
amount.
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Projecting Business Expenses
• Fixed Expenses– Costs that remain the same for a period of time. – Include items such as depreciation, insurance,
rent and office salaries.
Depreciation: represents the amount by which the value of a business’s assets has fallen in a given period of time.
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Calculating Payroll Expenses
• The amount earned by an employee is gross pay.
• Net pay is what the employee receives after deductions for taxes, insurance, and voluntary deductions.
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Net Income from Operations
• Net income is the amount left after the total expenses are subtracted from gross profit.
• A net loss results when total expenses are larger than the gross profit on sales.
• Interest is the money paid for the use of money borrowed or invested.
• The principal is the interest paid on any money you borrow to start your business.
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Net Profit or Loss before taxes
Net Income from operations
+ Other Income
- Other Expenses
= Net profit (or loss) before taxes
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Net Profit or Loss after Taxes
• The amount left over after federal, state, and local taxes are subtracted.
• Represents the actual profit from operating the business for a certain period of time.
• The projected income statement should be completed on a monthly basis for new businesses. Then completed on a quarterly basis after the first year.
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Balance Sheet
• The balance sheet is a summary of a business’ assets, liabilities and owner’s equity.
• Current assets are expected to be converted to cash in the upcoming year.– Examples include cash in the bank, accounts
receivable, and inventory.
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Balance Sheet
• Fixed assets are used over period of years to operate your business.– Examples include land, buildings, equipment,
furniture, and fixtures.
• Current Liabilities are the debts the business expects to pay off during the upcoming business year– Examples include accounts payable, notes
payable, taxes payable, and salaries.
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Balance Sheet
• Long-term liabilities are debts that are not due in the next 12 months. – Examples include mortgages and long term
loans.
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Analysis of Financial Statements
• Lenders use the following types of operating ratios to determine how well a business is operating over a certain period of time:– Liquidity ratios: used to analyze the ability of a
firm to meet its current debts.• Current assets divided by current liabilities.• The higher the ratio the better.
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Analysis of Financial Statements
• The Acid Test Ratio: used to see if the company can meet its short-term cash needs.– Formula is cash plus marketable securities plus
net receivables divided by current liablities.
• Activity Ratios: used to determine how quickly assets can be turned into cash.– Divide net sales by average trade receivables.– The lower the ratio the better.
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• Stock Turnover Ratio: measures how many days it takes to turn the inventory. – Formula: Divide net sales by average trade
receivables.
• Profitability Ratios measure how well the company has operated in the past year.– Profit Margin on Sales (net income/net sales)– Rate of Return on Assets (net income/total
assets.
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Cash Flow Statement
• A monthly plan that shows when you anticipate cash coming into the business and when you expect to pay out cash.
• Itemizes how much cash you started with, projected cash expenditures, and how and when you plan to receive cash.
• Tells when you will need additional funds and when you will have cash left over.
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Loans
• You should be able to borrow additional money if needed if your business has potential and your balance sheet shows enough assets to serve as collateral.