Financial Plan Flashcards
What is the purpose of a financial plan? How do financial projections contribute to that?
The purpose of a financial plan in to answer two main questions:
a) How financially attractive is a venture?
b) How much money does it need and when?
Financial projection play a key role in answering these questions, as they forecast the financial performance of the proposed venture. Financial projections are composed of three main documents: Income statement, Cash flow statement and Balance sheet.
What is the difference between financial statement and financial projections?
What are they needed for?
Financial statements are back-ward looking; they are an accounting tool that keep track of the past financial performance of the venture.
Financial projections are forward-looking; they forecast the future performance of the proposed venture.
Financial statements are used for bookkeeping.
Financial projections are used for planning and assessing the viability of the business model.
What do the financial projections consist of? Describe each document.
Income statements breaks down the profits and losses of the venture (Revenue to net income). It aims to understand the profitability of the venture and shows when the company will reach break-even.
Cash-flow projections show the when cash arrives and leaves the company. It is broken down into Operating cash flow, Investing activities (tangible and intangible investments) and financing activities (inflows and outflows to equity holders). Cash flow projections indicated when the company will reach cash flow positive.
Balance sheet projections show assets and liabilities (typically at the end of a fiscal year). It produces a key piece of information: the net working capital, which is a measure of business efficiency. Balance sheets also show how the venture plans to grow its assets over time and how much capital is needed to support the growth of the venture over time.
Key difference between income statement and cash flow statement, is that Income statement record revenues when transactions take place, while cash flow statements note when the cash actually reaches the company.
What are the main steps involved with styling financial projections?
a. Define a timeline
b. Estimate the revenues
c. Estimate the costs
d. Build the three financial statements
e. Formulate the financial plan
What factors affect the appropriate choice of a timeline and milestones?
The time horizon and the reporting frequency are issues to take into account when defining the timeline and milestones. Also the type of industry and product play a role.
What are top-down versus bottom-up revenue projections and which are their relative strengths?
top-down: demand side logic.
bottom-up: supply side logic.
Top-down: Easy, represent total potential market size. Does not work well when the market size is huge or doesn’t exist yet.
Bottom-up: more precise, represent the actual capacity of the venture to generate revenues. Easy to overstate by assuming each item will receive revenues equal to the whole list price.
- What are the most important costs that need to be considered for a new venture?
Cost of goods sold (COGS): actual cost of producing the good/service sold (raw materials, manufacturing…)
Operating expenses: the cost of running the business (employees, rental spaces, bills…)
Capital expenditure: amount spent in capital investments, can be tangible (machinery, utensils…depreciation through time) or intangible (IP, amortisation through time).
What is working capital? How does it affect the financial projections of a start-up?
Net working capital = current assets – current liabilities.
It does not affect the income statement, it is at the core of the balance sheet, and it affects the cash flow statement since Cash Flow = income – net working capital – capital expenditures + depreciation.
What are the relative roles of projected income statement, balance sheet and cash flow statement?
Income statement shows the breakdown of the profits and losses of the venture (Revenues top line, net income bottom line). It show the company’s profitability and when it will reach break-even date (reaching a viable scale of operations such total revenues cover total costs).
Cash-flow projections, show when the cash arrives and leaves the company. It consists of 3 main sections: Operational expenses, Investing activities (tangible and intangible assets) and Financing activities (inflow and outflow of cash from equity holders). It shows when the company will reach cash flow positive date (when the income becomes large enough to cover capital expenditures and net working capital).
Balance sheet shows the assets and liabilities of the company. Show the Net working capital = current assets - current liabilities, which is a measure of business efficiency. It also provides a breakdown of how the company plans to grow its assets over time an how much capital investment is needed to support it.
How can one use financial projections to assess the financial attractiveness of a venture?
Income statement aims to show the profitability of the venture. Financial attractiveness is highly subjective.
Other than break-even date and cash-flow positive date, financial projection also show payback date which is when the cash balance (sum of all cashflows of previous years) turns positive, hence the total losses incurred by the venture have been offset, it has paid all of its offsets.
This number can show in how long investors will “get their money back”, and what growth the company will have after that point.
- How does one find the total and current amount of funding needed by a start-up?
The cash flow statement contains the necessary information about how much funding does a venture need.
One can model the cash flow statement without accounting for financing, and the cash balance corresponding to the year the cash flow becomes positive represents the total financing needed for the venture.
In the case of staged financing, matching the financial projections with the required milestones can provide a good basis for determining the stage financing amount
- What information should be conveyed to investors when pitching the financial plan?
a) Assumptions
b) Revenues
c) Costs
d) Profitability
e) Funding needs
