Marketing Essentials

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Marketing Essentials
n Chapter 36 Financing the Business
Section 36.2 Financial Aspectsof a Business Plan
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SECTION 36.2
Financial Aspects of a Business Plan
What You'll Learn

• How to estimate business income and expenses
• How to prepare an income statement
• How to calculate payroll and other expenses
  itemized on an income statement
• How to prepare a balance sheet
• How to prepare a cash flow statement

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SECTION 36.2
Financial Aspects of a Business Plan
Why It's Important
Financial institutions and investors in any new
business will want to know why you need their
money, how you are going to use it, and how you
plan to repay them. The financial section of a
business plan provides this information to
prospective lenders.
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SECTION 36.2
Financial Aspects of a Business Plan
Key Terms

• income statement
• gross sales
• net sales
• net income
• interest

• principal
• balance sheet
• net worth
• cash flow statement

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SECTION 36.2
Financial Aspects of a Business Plan
Estimating Business Income and Expenses
You must estimate the money you expect to earn
and to spend in operating your business. The
financial document that is used to calculate a
business's revenue, costs, and expenses over a
specific period of time is the income statement.
This statement is often called a profit and loss
statement.
Slide 1 of 2
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SECTION 36.2
Financial Aspects of a Business Plan
Estimating Business Income and Expenses
Income statements have several major parts. Each
item is added to or subtracted from total sales
to find the amount of profit Total Sales -
Returns and Allowances Net Sales - Cost of
Goods Sold Gross Profit - Expenses of
Operating the Business Net Income from
Operations - Income Taxes Net Profit
Slide 2 of 2
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SECTION 36.2
Financial Aspects of a Business Plan
Estimating Total Sales
It is important to calculate a reasonable
estimated sales volume. You must 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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SECTION 36.2
Financial Aspects of a Business Plan
Calculating Net Sales
The total of all sales for any period of time is
called gross sales. Net sales represents gross
sales minus all sales returns and allowances.
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SECTION 36.2
Financial Aspects of a Business Plan
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. The calculation is as follows
Beginning Inventory Net Purchases -
Ending Inventory Cost of Goods Sold For
service businesses, gross profit is the same as
net sales.
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SECTION 36.2
Financial Aspects of a Business Plan
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 is Net
Sales - Cost of Goods Sold Gross Profit
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SECTION 36.2
Financial Aspects of a Business Plan
Projecting Business Expense

• Operating expenses are the costs of operating the
  business, which include both variable and fixed
  expenses.
• Variable expenses change from one month tothe
  next.
• Example advertising, office supplies,
  telephone, and utilities
• Fixed expenses are costs that remain the same
  for a period of time.
• Example depreciation, insurance, rent, and
  office salaries

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SECTION 36.2
Financial Aspects of a Business Plan
Calculating Payroll Expenses
To calculate payroll expenses, you must estimate
the number of employees you need, then research
typical salaries in your area, and related taxes.
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SECTION 36.2
Financial Aspects of a Business Plan
Payroll Journal
A payroll journal summarizes each employees pay
period, hours worked, earnings, deductions, and
net pay. What is Nancy Bakers net pay for the
period ending August 21?
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SECTION 36.2
Financial Aspects of a Business Plan
Calculating Total Expenses
To calculate total expenses, add all the variable
expenses to the fixed expenses. Total Variable
Expenses Total Fixed Expenses Total
Expenses
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SECTION 36.2
Financial Aspects of a Business Plan
Net Income from Operations
Net income is the amount left after the total
expenses are subtracted from gross profit. The
formula for calculating net income from
operations is Gross Profit on Sales - Total
Expenses Net Income from Operations
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SECTION 36.2
Financial Aspects of a Business Plan
Calculating Other Income

• In the "Net Income From Operations" section of
  the income statement, list money earned from
  sources other than sales
• dividends on stocks or
• interestmoney paid for the use of money borrowed
  or invested

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SECTION 36.2
Financial Aspects of a Business Plan
Calculating Other Expenses
The main "other expense" a new business will
have will be interest payments on money borrowed
to start the business. The amount you borrow is
called the principal. Interest is calculated as a
percentage of the principal.
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SECTION 36.2
Financial Aspects of a Business Plan
Net Profit of Loss Before Taxes
Net profit or net loss before taxes is calculated
this way Net Income from Operations Other
Income - Other Expenses Net profit (or
loss) before taxes
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SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet
A balance sheet is a summary of a business's
assets, liabilities, and owner's equity. Assets
are anything of monetary value that you own. They
are classified as either current or fixed assets.
Slide 1 of 4
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SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet

• Current assets are expected to be converted into
  cash in the upcoming year.
• Example Cash in the bank, accounts
  receivable (money owed to you by your
  customers), and inventory.
• Fixed assets are used over a period of years to
  operate your business.
• Example Land, buildings, equipment,
  furniture, and fixtures.

Slide 2 of 4
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SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet

• Liabilities are amounts the business owes. They
  are classified as current or long-term.
• Current liabilities are the debts the business
  expects to pay off during the upcoming business
  year.
• Example Accounts payable, notes payable, and
  employee salaries.
• Long-term liabilities are debts that are not
  due in the next 12 months.
• Example Mortgages and long-term loans.

Slide 3 of 4
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SECTION 36.2
Financial Aspects of a Business Plan
The Balance Sheet
Net worth is the difference between the assets of
a business and its liabilities Assets -
Liabilities Net Worth (Equity)
Slide 4 of 4
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SECTION 36.2
Financial Aspects of a Business Plan
Analysis of Financial Statements

• Lenders use ratio analysis as a way of
  determining how a business is performing as
  compared to other businesses in the industry.
  There are several common ratios to analyze
  financial statements
• Liquidity Ratio
• Acid Test Ratio
• Activity Ratios
• Profitability Ratios

Slide 1 of 3
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SECTION 36.2
Financial Aspects of a Business Plan
Analysis of Financial Statements
Liquidity Ratios show the ability of a firm to
meet its current debts. The Acid Test Ratio
shows if the company can meet its short-term cash
needs.
Slide 2 of 3
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SECTION 36.2
Financial Aspects of a Business Plan
Analysis of Financial Statements
Activity Ratios determine how quickly assets can
be turned into cash. Profitability Ratios
measure how well the company has operated the
past year.
Slide3 of 3
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SECTION 36.2
Financial Aspects of a Business Plan
Cash Flow Statement
A cash flow statement is a monthly plan that
shows when you anticipate cash coming into the
business and when you expect to pay out cash. A
cash flow statement helps you to see if you will
have enough money when you need to pay your bills.
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SECTION 36.2
Financial Aspects of a Business Plan
Loans
If you project that you will need additional
money during the year, you may be able to borrow
money to keep your business going through
start-up and through slow sales months.
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ASSESSMENT
36.2
Reviewing Key Terms and Concepts
1. What financial document can you use to
calculate a business's earnings and
expenses? 2. What are the major categories that
are calculated on the income statement? 3. How
are payroll expenses calculated? 4. What is the
purpose of a balance sheet? 5. What is a cash
flow statement? What is its purpose?
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ASSESSMENT
36.2
Thinking Critically
What steps could a business take to improve cash
flow?
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Marketing Essentials
End of Section 36.2