Week 7 (chapter 9)

Question 1

Pro-forma Financial statement and common mistakes

Answer 1

Pro-for a financial statement: a tool used to express a business idea in numbers, based on financial assumptions and projections, often basic, show confidence to stakeholder.

Mistakes:
1) not understanding the revenue drivers
2) underestimating costs
3) underestimating time to generate revenue
4) lack of comparable
5) top-down vs bottom-up forecasting
6) underestimating time to secure financing

Question 2

3 MUST financial statements and how often their done

Answer 2

1) Income statement: overall performance, starts with revenue, subtract expenses, ends with net income or loss, does NOT describe actual cash flow.
Monthly first 2 years and annually year 3-5

2) Balance sheet: assets, liabilities, shareholders’ equity, is a snapshot of accounts at a particular time. Yearly only

3) Cash flow statement: Bottom line of income statement, adds/subtracts all cash transactions. Monthly first 2 years and annually year 3-5

Question 3

2 methods of developing financial statements and where to start

Answer 3

1) Build-Up methods: identify all sources of revenue, determine the revenue for a typical day, do the same for costs, refine operating costs, create preliminary income statement.

2) Comparison methods: compare revenue projects to industry metrics, run scenario analysis, compare common-sized cost percentages to industry averages. Scenario analysis (check if the business model still works even under different scenarios, try different metrics)

Question 4

Preliminary Income Statement

Answer 4

1) Revenue Projection: how many customers you expect per day, what their likely to buy & how often, split products into categories, strengthen your assumptions by the number of years

2) Cost of Goods Sold: direct costs of items sold, estimate your margins on products sold- start simple and sharpen, similar to revenue assumption, create cost worksheet, calculate gross profit margins

3) Operating expenses: indirect expenses of running the business, create an operating expenses worksheet, break expenses into “daily”, “monthly” and “yearly”, reexamine assumptions & refine the worksheet.