FINANCIAL ASPECTS OF A BUSINESS PLAN Mark Kolta
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.
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
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.
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.
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
Determinin g 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
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.
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.
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.
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.
Net Profit or Loss before taxes
Net Income from operations + Other Income - Other Expenses = Net profit (or loss) before taxes
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.
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.
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.
Balance Sheet
• Long-term liabilities are debts that are not due in the next 12 months. – Examples include mortgages and long term loans.
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.
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.
• 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.
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.
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.