The Financials

TextbookChapter16TheFinancials311-326.docx

Home >Business & Finance homework help >The Financials

Sources and Use of Funds statement Page 311

Complete the following form to describe how much money you are seeking and how you will use the funds raised. Be as specific as possible: If you know what equipment you are going to buy, list it; if you have a loan from the First State Bank, for example, state the name of the lending institution, amount, and terms.

Number of funding rounds expected for full financing: _____________________________________________

Total dollar amount being sought in this round: ___________________________________________________

Source of Funds

Equity Financing:

Preferred Stock: ___________________________________________________________

Common Stock: ___________________________________________________________

Debt Financing:

Mortgage Loans: ___________________________________________________________

Other Long Term Loans: ____________________________________________________

Short Term Loans: _________________________________________________________

Convertible Debt: __________________________________________________________

Investment from Principals: ________________________________________________

Use of Funds

Capital Expenditures:

Purchase of Property: _______________________________________________________

Leasehold Improvements: ____________________________________________________

Purchase of Equipment/Furniture: _____________________________________________

Other: ___________________________________________________________________

Working Capital:

Purchase of Inventory: ______________________________________________________

Staff Expansion: ___________________________________________________________

New Product Line Introduction: _______________________________________________

Additional Marketing Activities: ______________________________________________

Other Business Expansion Activities: ___________________________________________

Other: ___________________________________________________________________

Debt Retirement: _________________________________________________________

Cash Reserve: ____________________________________________________________

Submit this with the Financial section of your business plan.

When completing the balance sheet, you may find you need more help with this form than with any other, especially when trying to figure accumulated depreciation or the worth of inventory. Get help from your accountant or have your accountant prepare the form. But you must still understand it since much of the information on balance sheet(s) does not change very quickly, you can prepare balance sheets primarily on a quarterly or annual basis (unless, of course, your potential funding sources want monthly projections).

The supplemental Business Plan Financials includes the Balance Sheet worksheets and will automatically handle calculations and transfers from other worksheets for you.

“A sure killer for a proposal is a plan that shows improper use of funds. If all the funds aren’t going to build the business, we’re not interested in financing it.”

Ann Winblad

Venture Capitalist

Sources and Use of Funds section Page 312

Sources and Use of Funds

If you are seeking outside financing, either through loans or investors, those contemplating giving you money will naturally want to know what you’re going to do with the money you raise. They will also want to see what other sources of money you have, if any, and whether you have contributed any of your own funds.

To provide such information, devise a one-page description of the sources and use of funds. This can go in the business plan itself or can be sent with the cover letter to potential financing sources. It should tell a potential investor that you have specific plans for the money you raise, that you are not taking on debts or giving up equity thoughtlessly, and that you will use funds to make your business grow.

Your Sources and Use of Funds statement on page 311 is particularly helpful to you with investors or lenders if you show you are using your funds to start or expand a business rather than to offset existing debts (a use that investors notoriously dislike), or if you already have some commitment of financing already from respected sources (which shows that other people believe in your company), or if you are committing significant personal funds (which shows you believe in the project enough to take substantial personal risk).

In “Sources of Funds,” you should include both funds you have received to date and the amounts you are now seeking, clearly delineating each.

In preparing the “Sources and Use of Funds” statement, consider the following issues and terms:

■	Funding Rounds. The number of development stages at which you will seek financing from the investment community.
■	Total Amount. Amount of money sought in this round of financing, from all funding sources.
■	Equity Financing. Amount you will raise by selling ownership interest in the company.
■	Preferred Stock. Outstanding stock for which dividends will be paid, before other dividends can be paid for common stock or before other obligations of the company are paid; investors often want preferred stock.
■	Common Stock. Stock for which dividends are paid when the company is profitable and has paid preferred stock dividends and other obligations.
■	Debt Financing. Amount of money you will raise by taking out loans.
■	Long-Term Loans. Loans to be paid back in more than a year’s time.
■	Mortgage Loans. Loans taken out with property as collateral.
■	Short-Term Loans. Bridge loans, credit lines, and other loans to be paid back in less than a year.
■	Convertible Debt. Loans that are later convertible to stock at the funder’s option, giving both the security of a loan and the potential of stock.
■	Investment from Principals. Amount of money that you or other key employees are contributing to the company; this can be in the form of cash or property.
■	Capital Expenditures. Purchase of necessary equipment or property.
■	Working Capital. Funds to be used for the ongoing operating expenses of the business.
■	Debt Retirement. Funds used to pay off existing loans or obligations.

In the financials, I look for a well-prepared, well-annotated balance sheet. And I like an Assumption Sheet with the Income Statement, so I know exactly how those figures got there.”

Ann Winblad

Venture Capitalist

Assumption Page 313

Assumption Sheet

Financial forms are merely meaningless numbers unless they are based on decisions and facts. Your potential financing sources want to see how you arrived at your numbers and must be convinced that your assumptions are reasonably accurate. If, for instance, you have indicated your sales at a certain amount, investors want to see what size you are assuming the market to be and what percentage of the market you are assuming you will be able to secure. If those figures seem realistic, you increase your credibility; if those assumptions seem based on inaccurate numbers or overly optimistic projections, investors are going to look at the rest of your plan with greater skepticism.

It is good discipline for you, as well, to learn to develop an assumption sheet whenever you do financial projections. Otherwise, you can be too easily tempted to write down figures that look good on paper but have little to do with reality.

If you have worked through the business planning process, putting together an assumption sheet should be a relatively easy task. You have already asked yourself most of the questions called for on this form and have the answers available to you.

An assumption sheet should list purely straightforward information; it does not require substantial detail or explanation. You do not even need to use sentences; just provide the data in each category. (You can use the first sentence, as written on the worksheet, on your own assumption sheet.) Be familiar with these assumptions so that you are ready to defend your assumptions when meeting with investors.

Complete the Assumption Sheet on pages 316–317 and include a finished Assumption Sheet at the conclusion of your financial forms in your business plan.

Break-Even Analysis Page 314

Break-Even Analysis

Finally, you want to determine how much income you must earn to pay your expenses — at what point you break even. At the break-even point you are neither making a profit nor losing money; you have just covered the cost of staying in business and making your sales. Most people new to business assume their break-even point is when sales equal the amount of fixed expenses: rent, telephone, insurance, and so forth. Fixed expenses are easy to determine, since they are in place from the time you first open your doors, and they remain relatively stable regardless of the amount of sales.

But because almost all sales have some costs associated with them, you must also figure the variable cost of sales into your break-even analysis; otherwise you do not have a true picture of your cost of doing business.

For instance, if you are a florist and your fixed expenses (rent, utilities, salaries, and so on) are $20,000 a month, it’s not just enough to make $20,000 in sales: You would still be losing money. You must pay for flowers, vases, delivery, and commissions to floral wire services before you earn income on a sale. If these costs amount to an average of 30% of the cost of each sale, at $20,000 in income, you’re still $6,000 in the hole ($20,000 in fixed expenses plus $6,000 in costs of goods).

“The best business plans are a combination of a PowerPoint presentation and a succinct and well-thought-out operating model, showing how the business would be run on the revenue and expense side. The most important thing is that it’s based on the formula: revenue equals price times quantity. It should be a ‘bottom up’ financial model rather than ‘I’m going to get 10% of the market.’ ”

Mark Gorenberg

Venture Capitalist

The total cost of goods keeps rising as your sales rise; unlike your fixed costs, the figure keeps changing and is harder to pin down. But your gross profit margin — the average percentage you earn on each sale after direct costs are deducted — it stays basically the same. (As you sell greater amounts, you may be able to increase your profit margin by receiving volume discounts; for the purpose of this exercise however, you can assume a stable gross profit margin.)

To determine an actual break-even point, you must know your:

■	Fixed expenses
■	Gross profit margin (average percentage of gross income realized after cost of goods)

Then, to figure the amount of total sales needed to break even, you work the equation:

Fixed Expenses = Total Sales x Gross Profit Margin (GPM)

or saying the same thing:

Fixed Expenses = Total Sales

GPM

In the above example of the florist, we know:

■	Fixed Expenses = $20,000
■	Gross Profit Margin (GPM) = 70% (since cost of goods is 30%)

So, the numbers would look like:

20,000 = Total Sales to Break Even

.70

Doing the arithmetic, we see that this florist must make $28,571 to reach the break-even point.

A break-even analysis is an important tool for your internal planning. However, it is not necessary for you to include a break-even analysis in a business plan submitted to outside funding sources. (Of course, there is nothing wrong with including it if you wish.)

Break-Even Analysis

Monthly Total Fixed Expenses (FE): $_________________________________

Gross Profit Margin, in percentage terms (GPM): ______________________%

Divide: (FE): $ _________________

________________________ = $ _______________________

GPM: _______________% (Sales to Break Even)

Complete the worksheet above to figure your own break-even point. The supplemental Business Plan Financials package will perform a break-even analysis for you.

Assumption Sheet Page 316-317

The figures on the previous financial forms are based on the following assumptions: Change the zeros to the applicable dollar amount, units, or rate.

Sales Year Year Year Annual Growth

Product Line $ Units $ Units $ Units Rate%

0 0 0 0 0 0 0%

Total 0 0 0 0 0 0 0%

Describe the projected increase/decrease in selling price of each product line/service._____________________

____________________________________________________________________________________________________________________________________________________________________________________

Personnel/Management

Describe the number of employees and assumptions regarding total payroll projected in the financial forms.___

____________________________________________________________________________________________________________________________________________________________________________________

Describe key management positions to be added and timing._________________________________________

____________________________________________________________________________________________________________________________________________________________________________________

Gross Profit Margin

List the projected gross profit margin for each product line or service.__________________________________

Describe any major changes in cost of goods that are projected to affect gross profit margin.________________

Key Expenses

Describe the timing and costs of key projected expenses.

Planet Expansion or New Branches_____________________________________________________________

__________________________________________________________________________________________

Major Capital Purchases______________________________________________________________________

__________________________________________________________________________________________

Major Marketing Expenses____________________________________________________________________

__________________________________________________________________________________________

Research and Development____________________________________________________________________

__________________________________________________________________________________________

Other Key Expenses_________________________________________________________________________

__________________________________________________________________________________________

Financing

Describe any financing debt (loans) that are projected to be added or retired.____________________________

Describe the interest rates assumed to be in effect for these financial projections._________________________

Other

Describe any other major developments that are assumed in creating your financial projections (such as strategic partnerships, competitive situation, etc.).__________________________________________________

Submit this with the financial section of your business plan.

Notes:

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Sample Plan: Sources and Use of Funds Page 325

Total Dollar Amount Being Sought: $160,000 in equity financing. The company prefers that this entire amount be secured from only one investor.

Funding Rounds: ComputerEase expects only one funding round for full financing. If the company were to later become a franchise, another funding round would be considered at that time.

Use of Funds

Capital Expenditures:

Leasehold Improvements: $10,000

Purchase of Equipment/Furniture: 30,000

Total Capital Expenditures: 40,000

Working Capital:

Purchase of Inventory: 10,000

Staff Expansion: 50,000

Additional Marketing Activities: 30,000

Other Business Expansion Activities: 30,000

Total Working Capital: 120,000

Total Use of Funds $160,000

Sample Plan: Assumptions Page 326

ASSUMPTIONS

The figures on the previous financial forms are based on these assumptions:

Sales by line ($ expressed in 000’s) 2014 2015 2016 Growth Rate

$/ Units $/ Units $/ Units 2015-2016

Training Center classes (Corporate) 91/11 228/25 443/45 80%

On-Site (Corporate) 223/25 310.5/30 440.3/39 30%

Center Classes (Saturday) 27.7/11 207.1/40 207.1/60 50%

Online Classes 125/16 242.2/28 545.5/58 107%

These sales figures reflect price increases of 10% annually for Corporate Training Center classes and online classes; 15% in 2015 and 10% in 2016 for corporate on-site training classes, and 10% in 2015 and 15% in 2016 for Saturday classes.

Personnel

The staff size of the company (two FT professionals and one PT support) will stay constant for the remainder of 2014. In 2015, the payroll increases to four FT professionals, one FT support, and one PT support. In 2016, the payroll is projected at four FT professionals, one PT professional, and two FT support.

Expansion

Figures in these projections assume opening a second Training Center classroom on 1/1/15. Direct costs associated with expansion include leasehold improvements, equipment/furniture, and marketing. Additional operating costs include equipment rental and addition of a staff trainer. This expansion increases capacity in corporate training classes by 100%.

Financing

To date, ComputerEase has been financed by a $60,000 investment from Scott E. Connors; a $30,000, 10% interest-only loan from L. Silver (Mr. Connors’ sister-in-law), due 12/31/14; and a $40,000 no-interest loan from Mr. Connors, principal due on or before 3/31/15. Projections call for the retirement of $30,000 of the Connors loan in 2014, with the remainder by 3/31/15, and the remainder of the Silver loan when due. The 2015–16 financial projections assume securing an additional $160,000 of investment income by 1/1/15.