Post on 16-Jan-2016
Al Fikra, Qatar's National Business Plan Competition
2014
Financial Projections
January 2014
Prepared by Professor George White and S. Thomas Emerson,
Distinguished Career Professor of Entrepreneurship
at Carnegie Mellon University Qatar
Agenda
• Introducing Financial Statements
• Sales Forecasting
•Guide – Al Fikra Financials Template
• Financial Ratios
• Financing
•Measuring Internal Rate of Return
• Income Statement (P & L)
• Statement of Owner’s Equity/Retained Earnings
• Balance Sheet
• Statement of Cash Flows
Major Financial Statements
Al Fikra 2014
Revenues:
Consulting revenue 3,800$
Rental revenue 300
Total revenues 4,100$
Operating Expenses:
Rent expense 1,000$
Salaries expense 700
Total operating expenses 1,700
Net income 2,400$
Finlay Interiors
Income Statement
For Month Ended January 31, 2005
Inflows of assetsin exchange forproducts and
servicesprovided tocustomers.
Al Fikra 2014
Revenues:
Consulting revenue 3,800$
Rental revenue 300
Total revenues 4,100$
Operating Expenses:
Rent expense 1,000$
Salaries expense 700
Total operating expenses 1,700
Net income 2,400$
Finlay Interiors
Income Statement
For Month Ended January 31, 2005
Costs incurred or the usingup of assets
from generating revenue
Computing Net Income
Merchandiser Service Company
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Net Income Net Income
Operating Expenses
Revenue
Cost of Sales
Gross Profit
Al Fikra 2014
Carol Finlay, capital, January 1 -$ Add:
Investment by owner $10,000Net income 2,400 12,400
Total $12,400Less: Withdrawal by owner 600Carol Finlay, capital, January 31 $11,800
Finlay InteriorsStatement of Owner's Equity
For Month Ended January 31, 2005
Covers a period
of time.
From the Income
statement.
ABC Corportation
Statement of Retained EarningsFor Year Ended December 31,2005
Retained Earnings, January 1 $0Add: Net Income 48Total $48Less: Dividends 40Retained Earnings, December 31
$8
Al Fikra 2014
Cash 8,400$ Accounts payable 200$ Supplies 3,600 Notes payable 6,000 Equipment 6,000 Total liabilities 6,200$
Carol Finlay, capital 11,800
Total assets 18,000$
Total liabilities and owner's equity 18,000$
Assets
Owner's Equity
Liabilities
Finlay InteriorsBalance Sheet
January 31, 2005Properties or economic resources owned by abusiness
Al Fikra 2014
Cash 8,400$ Accounts payable 200$ Supplies 3,600 Notes payable 6,000 Equipment 6,000 Total liabilities 6,200$
Carol Finlay, capital 11,800
Total assets 18,000$
Total liabilities and owner's equity 18,000$
Assets
Owner's Equity
Liabilities
Finlay InteriorsBalance Sheet
January 31, 2005Debts or
Obligations of the
business
Al Fikra 2014
Cash 8,400$ Accounts payable 200$ Supplies 3,600 Notes payable 6,000 Equipment 6,000 Total liabilities 6,200$
Carol Finlay, capital 11,800
Total assets 18,000$
Total liabilities and owner's equity 18,000$
Assets
Owner's Equity
Liabilities
Finlay InteriorsBalance Sheet
January 31, 2005Owner’s
claim on theassets of abusiness
From the Statement Of Owner’s
Equity
ABC Corportation
Partial Balance SheetDecember 31,2005
Shareholders’ Equity Share Capital $500 Retained Earnings 8Total Shareholders’ Equity $508
Al Fikra 2014
Cash flows from operating activities:Cash received from clients $4,100Cash paid for supplies (3,400) Cash paid for rent (1,000) Cash paid to employee (700) Net cash used by operating acitivities ($1,000)
Cash flows from investing activities: 0Cash flows from financing activities:
Investment by owner $10,000Withdrawal by owner (600) Net cash provided by financing activities 9,400
Net increase in cash $8,400Cash balance, January 1 - Cash balance, January 31 $8,400
Finlay InteriorsCash Flow Statement
For Month Ended January 31, 2005
From the
balance sheet
• Estimate your market size- # of potential customers- Average amount spent per customer- Total Industry Sales
• Evaluate Competition
• Estimate Your Share of the Market
•Don’t estimate over your capacity !!
Sales Forecasting
Sales Forecasting Template
B to B Sales Forecasting Template
• Follow the instruction sheet given to you
• Cells highlighted in BLUE can be changed to reflect your company’s situation
• Cells highlighted in YELLOW contain formulas that can be altered to reflect your company’s situation
• It is NOT recommended to change any cells that are not colored
Al Fikra Financials Template
Sales and Cost of Goods Sold Forecasting
Payroll forecasting
Payroll Tax and Benefit Assumptions
Expense Assumptions
Expense Assumptions
Capital Asset Additions
Interest Rate, Income Tax Rate, Financing Injections - Summaries
•Working Capital
• Current Ratio
• Return on Assets
• Return on Equity
•Gross Margin %
•Net Income/Profit Margin %
Financial Ratios
• The difference between current assets and current liabilities.
Working Capital
Working Capital = Current Assets - Current Liabilities
• Measures the short-term debt paying ability of the company.
Current Ratio
CurrentRatio
Current AssetsCurrent Liabilities
=
• Return made on the assets employed for a given period
Return on Assets
Return on Assets
Net IncomeTotal Assets
=
• Return made on the Owner’s Equity in the business
Return on Equity
Return on Equity
Net IncomeTotal Shareholders’ Equity
=
• Gross Margin earned as a percentage of Sakes
Gross Margin %
Gross Margin %
Gross MarginSales Revenue
=
• Net Income earned as a percentage of Sales
Net Income / Profit Margin %
Net Income Margin %
Net IncomeSales Revenue
=
Equity Financing
• Pros
– Less risk than debt as no legal obligation to pay dividends or buy back shares
• Cons
– Give up ownership and control
Debt Financing
• Pros
– Retain full ownership and control
– Leverage can enhance shareholder returns
• Cons
– Legal obligation to pay interest and principal when due
• You are a new start up company with an innovative product. You invest QR 1,500,000 in your company and wish to sell a 25% equity stake in your company to other non-active investors for QR 2,000,000. You would issue 100,000 shares of which you would own 75,000 shares and the other investors would own 25,000 shares. You plan to pay out 20% of the profits each year in the form of dividends. Investors have the opportunity to sell their shares any time after 3 years.
Investor Return Calculation - Example
You prepare your financial projections and annual net profits show as follows:
• Year 1 QR 200,000• Year 2 QR 900,000• Year 3 QR 2,000,000• Year 4 QR 4,000,000• Year 5 QR 6,000,000• You estimate that the company will be worth 5
times the following year’s estimated earnings (P/E Ratio = 5) after 3 years.
Investor Return Example (cont’d)
• What is the estimated value of the company after 3 years?
Price/Earnings = 5 times Price/QR 4,000,000 = 5 Price = QR 20,000,000
Question 1
• What share of this amount would the non active investors be entitled to?
QR 20,000,000 X 25% = QR 5,000,000
Question 2
• How much would the non active investors receive in dividends for the first 3 years.
Y1. QR 200,000 X 20% payout X 25% share = QR 10,000
Y2. QR 900,000 X 20% payout X 25% share = QR 45,000
Y3. QR 2,000,000 X 20% payout X 25% share = QR 100,000
Question 3
• What would the non active investors Internal Rate of Return (IRR) be if they sold their shares after 3 years?
Question 4
Solution - Question 4