Chapter

10

The Financial Plan

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
To understand the role of budgets in
preparing pro forma statements
To understand why positive profits
can still result in a negative cash flow
To learn how to prepare monthly pro
forma cash flow, income, balance
sheet, and sources and applications
of funds statements for the first year
of operation
10-2

Learning Objectives
To explain the application and
calculation of the break-even point
for the new venture
To illustrate the alternative software
packages that can be used for
preparing financial statements

10-3

Operating and Capital

Budgets
Sales budget - An estimate of the
expected volume of sales by month
Determined on the basis of sales
forecasts
Manufacturing ventures - Costs of
internal production and subcontracting
are compared
Includes ending inventory estimation

10-4

Table 10.1 - A Sample

Manufacturing Budget for First
Three Months

10-5

Operating and Capital

Budgets
Operating costs
Fixed expenses incurred regardless of
sales volume
Variable expenses must be linked to
strategy in the business plan

Capital budgets - Provide a basis for

evaluating expenditures

10-6

Table 10.2 - A Sample Operating

Budget for First Three Months
($000s)

10-7

Pro Forma Income

Statements
Pro forma income:
Projects net profit calculated from
projected revenue minus projected costs
and expenses.
Starts by calculating monthly sales
Projects operating expenses for each of
the months during the first year
Projections should be made for years 2
and 3 as well
10-8

Table 10.3 - MPP Plastics Inc., Pro

Forma Income Statement, First Year by
Month ($000s)

10-9

Pro Forma Cash Flow

Projected cash available calculated
from projected cash accumulations
minus projected cash disbursements
Not the same as profit
Sales may not be regarded as cash
Profit as a measure of success may be
deceiving if there is significant negative
cash flow

Can be projected using the indirect

or direct method
10-10

Table 10.5 - Statement of Cash

Flows: The Indirect Method

10-11

Table 10.6 - MPP Plastics Inc.,

Pro Forma Cash Flow, First Year
by Month ($000s)

10-12

Pro Forma Balance Sheet

Summarizes the projected assets,
liabilities, and net worth of the new
venture
Consists of:
Assets
Liabilities
Owners equity: Amount invested and/or
retained from the venture operations

10-13

Table 10.7 - MPP Plastics Inc., Pro

Forma Balance Sheet, End of
First Year ($000s)

10-14

Break-Even Analysis
Breakeven: Volume of sales where
the venture neither makes a profit
nor incurs a loss
The break-even formula
B/E(Q) = __________TFC______________
SP-VC/unit (marginal contribution)

Weakness - Determining if a cost is a

fixed or variable
10-15

Table 10.8- Determining BreakEven Formula

*Fixed costs are those costs that, without change in present productive capacity, are not affected by changes in volume of output.
Variable costs are those that are affected in total by changes in volume of output.
The variable costs per unit is all those costs attributable to producing one unit. This cost is constant within defined ranges of production.

10-16

Figure 10.1 - Graphic

Illustration of Breakeven

10-17

Pro Forma Sources and

Applications of Funds
Summarize all the projected sources
of funds available and how these
funds will be disbursed
Sources of funds

Operations
New investments
Long-term borrowing
Sale of assets

10-18

Pro Forma Sources and

Applications of Funds
Uses

Increase assets
Retire long-term liabilities
Reduce owner or stockholders equity
Pay dividends

10-19

Software Packages
Track financial data and generate
financial statements
Present different scenarios and
assess their impact on the pro forma
statements

10-20