MODULE 2 INTRODUCTION TO FORECASTING WEL Financial Intelligence.
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Transcript of MODULE 2 INTRODUCTION TO FORECASTING WEL Financial Intelligence.
Module 2 - Forecasting
Proforma Income Statement - this records sales and expenses for a given time period according to accounting standards.
Balance Sheet – Financial snapshot of the venture. Shows assets, liabilities and owners equity
Anatomy of a Balance Sheet
Balance Sheet
shows the balance between the venture Assets and Liabilities
plus the Owner’s Equity
Assets = Liabilities + Owner’s Equity
“Snapshot” of the venture
at a particular point in time
Current Assets(Easily turned into cash)
Cash & petty cash
Accounts recv’ble
Inventory/supplies
Prepaid expenses
Fixed Assets(Fairly permanent investments needed for operations)
Land, buildings
Prod & office equip’t.
Furniture
Vehicles
Current Liabilities(Debts and financial obligations that need to be paid within 12 months)
Accounts payable
Notes payable
Payroll
Taxes payable
Long-term Liabilities(Balances that come due after the current operating year)
Mortgages
Bank loans
Equip’t loans
Owner’s Equity (aka: “Net Worth”)
(Determined by subtracting the Total Liabilities from the Total Assets)
What owner has left if she liquidated all assets and paid off all debts.
Total Liabilities
+ Owner’s Equity must always
= Total Assets
Assets = Liabilities + Owner’s Equity
Note: This figure will differ based on legal structure
Anatomy of a Balance Sheet
Current Assets
Cash 1,000
Accts Rec 2,000
Inventory 5,000
Prepaid
Insurance 250
Total 8,250
Fixed AssetsLease Improv. 2,000
Equipment 5,000
Vehicles 10,000
Total 17,000
Total Assets 25,250
Current Liabilities
Overdraft 1,600
Credit Cards 2,500
Payroll 1,325
Taxes pay. 825
Total 6,250
Long-term LiabilitiesEquip. Loan 1,800
Vehicle Loan 8,000
Total 9,800
Total Liabilities 16,050
Owner’s Equity (aka: “Net Worth”)
Owner Capital 15,000
Retained Earnings (5,800)
Total Equity 9200
Total Liabilities and Equity
25,250
Assets = Liabilities + Owner’s Equity
Sample Balance Sheet
Balance Sheet Terms
Assets:
Things of value that the business owns. Assets are grouped into two categories:
Current Assets – these include cash, inventory, prepaid expenses and accounts receivable (money that the business is owed).
Fixed or Long-term Assets – items with a useful life over one year. The depreciation or decrease in value of assets is accounted for by way of depreciation expenses.
Balance Sheet Terms
Liabilities:
Debts or money that the business owes. They are grouped into two categories:
Current Liabilities – These are financial obligations that the business must meet within a year such as accounts payable and taxes.
Long-term liabilities – Any liability for which payment continues longer than one year. Examples include mortgages, bank loans, and equipment leases.
Balance Sheet Terms
Equity:
Equity – represents the owner’s equity, which is the “net worth” of the business.Capital – This will vary based on the legal structure however will include the “capital” of the company which is commonly cash given in exchange for shares of the company.
Retained Earnings - This is the cumulative earnings (or losses) of previous years.
ProForma Income Statement
Income Statement
shows sales/revenue and expenses over a period of time
Also known as P&L
(Profit and Loss Statement)
Used toMeasure resultsFind financial problemsIdentify profit centers to know where to concentrate resources
Figure taxes, borrow money and sell stock
Anatomy of Income Statement + Revenue (input of cash)
+ Gross sales ̶� Less Returns and allowances
= Net sales– Cost of goods sold (“variable” expenses: Labor, Direct, Other)
=Gross profit (revenue – cost of producing prod/serv)
– General and administrative (“fixed” expenses)Admin., Marketing, office, utilities, equip. maintenance, etc.
=Net operating income
+ Total other income (gain (loss) on sale of assets; interest)
=Net income (loss)
Sample of Income Statement
Acme Store Inc. Jan. 31, 2007 (in Dollars)
Gross sales $20,000 Less Returns and allowances 400
Net sales 19,600
Cost of goods sold 8,500Gross profit 11,000
General and administrativeRent 5,000Admin& Office Labour 2,300Utilities 1,800Maintenance & Supplies 300 9.400
Income (before taxes) $1,600
Income Statement Terms
Income Statement - The revenue and associated expenses for the sales of goods and/ or services for a period of time. Cost of Goods Sold (COGS) - Are the costs that a business incurs as a result of producing its product or service.
Gross Profit - The income earned after COGS have been deducted from revenue.
Pricing Strategies
New ventures need to forecast sales and revenues as part of the planning process. A key factor that drives this is the pricing strategy.
Effective pricing strategies are the result of something between an exact science based on logical factors and an intuitive insight based on instinct.
The simplest method for pricing products or services is that which results in maximum net revenue.
Pricing Strategies - BEP
Break Even Point (BEP)
It is critical to understand a company’s BEP as part of the forecasting process.
The level of operation (sales dollars or production quantity) at which a company neither earns a profit nor incurs a loss.
Fixed and Variable Expenses
In order to determine BEP, expenses must be categorized as fixed and variable:
Fixed expenses – expenses that do not vary with the volume of sales or production (rent, depreciation, interest rate)
Variable expenses – expenses that vary directly with changes in the volume of sales or production (raw materials cost, sales commissions, etc.)
Pricing Strategies
It is critical to understand at what points sales cover costs, and the venture starts to make a profit.
C=$ cost
a
sales
Variable expenses
Number of units
Fixed Costs
profit
loss
$$
X=units produced or sold
Pricing Strategies
Profit Planning - An example:Store buys and sells a single product
Selling price is $5/unit;
Purchase cost is $3/unit
Fixed cost is $100/period
Contribution Margin is ($5-$3)/$5 = 40%
How the profit varies as volume of sales varies?
Pricing Strategies
Break- Even Point :
Break-even sales ($) =
= Fixed costs / contribution margin (%)
= $100 / 0.4 = $250
Break-even volume (units)
= Fixed costs / margin per unit
= $100 / ($5 - $3) = 50 units
Adding in a Profit
What should be the level of sales for $100 profit?Sales ($) Fixed costs + Desired net income
contribution margin = ($100 +$100)/ 0.4 = $500
Volume (units) Fixed costs + Desired net income
per unit contribution margin ($100 +$100)/ 2 = 100
Markup
The difference between the cost of product or service and its selling price is the Markup.
Dollar markup = Retail price – Cost of merchandise % markup = Dollar markup / Cost of unit
Example: If a shirt costs $15 and the manager plans to sell it for $25
Dollar markup = $25 - $15 = $10 % markup = $10 / $15 =66.67%
Summary Module 2
This section has provided an overview of key financial documents including:Balance Sheet
Assets = Liabilities + Owners Equity
Proforma Income Statement
Sales - Pricing strategies and sales forecasts
Expenses - Variable & Fixed Expenses
Profit - Break Even Analysis
Assignment
Create an opening balance sheet for your venture
Use Excel template: “Key Financial Documents” (sheet E)
Create an income statement for your venture
Use Excel template: “Key Financial Documents” (sheet D)