Financial Plan

• Financial Plan - is the portion of the business plan that speaks of the product or service performance.
• Financial Management - begins when the entrepreneur starts to raise capital for the business venture.
• Capital - is the money that will be allocated by the entrepreneur to establish a business.
• Sources of Capital:

  • Personal Savings
  • Borrowing Money
  • Look for investors
  • Banks or financial institutions
• Collateral - refers to a high value asset that is submitted by the business to the bank when applying for a loan and will be subject for repossession if the business defaults.
• Revenue - is the output of a sale wherein the sales price exceeds the cost to produce the product or render the service.
• Revenue is earned when the product is already sold or service has been rendered regardless if the business is paid in cash or credit.
• After establishing that the business opportunity will really bring a revenue, the next step is to estimate how big the revenue is on an annual basis.
• Revenue is deferred when the product or service has not yet been delivered or sold but the customer already paid in advance.
• Factors affecting estimation of revenue:

  • the economy and the external primary target market
  • external competitors
  • internal business
• Income Statement - A financial statement that details the computation of net revenue by deducting cost of sales, expenses and taxes from the gross revenue.
• Cost of Sales - is more complicated because there is a need to input balances for raw materials inventory, work-in process, inventory, and finished goods inventory.
• Cost of Services - for service companies.
• Depreciation - refers to the value reduction of the non-current asset primarily due to natural wear and tear and other value- reducing factors.
• Balance Sheet - A core financial statement that describes the financial position of the business. The entrepreneur must separate his or her personal assets and liabilities and only account for what assets are attributable to the business. The business should be separate and distinct personality.
• 3 Elements of Balance Sheet

  • Assets
  • Liabilities
  • Owner's Equity/Capital
• Assets - represent the resources of the business that are expected to have future economic value
• Current Assets - consist of mostly the liquid assets that can be exchange to cash within one year.
• Noncurrent Assets - long term assets that can be converted to cash for more than one year.
• Liabilities - are what the business owes to another person, a financial institution or any creditor
• Owner's equity/Capital - funds allocated by the entrepreneur to run the business
• The Accounting Equation:

  Assets = Liabilities + Capital
• Cash Flow Statement - because cash is the most important asset of a business, the entrepreneur must be vigilant in monitoring its whereabouts. It may look as if the business is earning enough as seen in the income statement, but it doesn’t mean that the business has no cash flow issues.
• Sources of Positive Cash Flows (Inflows)

  • service/sales revenues
  • fees
  • interest income
  • dividends from investments and loans
• Sources of Negative Cash Flows (Outflows)

  • operational expenses
  • investments
  • machine purchases
  • payments to suppliers
  • payment to creditors