How Much $$
Content
How much $$ does the new venture need? -Calculation of new venture's financiing needs using financial foreasting. BEGINNING THE PROCESS -Ensure that all statements have footnotes for each individual item to explain what they mean, to dissolve any uncertainty. -Usually involves 3 cases: worst, most likely and best case scenerio -accompany with written justifications of the sales estimates. -project the assets and liabilities to support the sales forecast levels first. This will constitute the income statement. Avoid forming the BL sheet first. - Leave allocation of equity and financing to the financiers. -Time period must be consistent: fix the time period to either monthly or quarterly for statements. -2 functions of monthly forecasts: 1) act as a budget 2) show tax payments on cash flow. -forecast for 5 years to cater to VCs need to get projected valuation of biz based on future earnings. (which determines equity to be owned by shareholders) COGS -after making sales forcast, next est COGS - dont use a percentage of sales to est COGS (only when there is adequate supporting evidence for the assumed percentages eg efficiency of assembly or cost of RM has declined etc ) -Start with section of volume data eg unit sales -> make a decision on when production start (eg 2 mths before sales start). This is good for finding avg wages and time required to assemble a product KEY EXPENSES -Include Depreciation into COGS so that we can eliminate this when compiling cash flow. - 1) Forcast G&A: dont use % as its quite fixed. Instead, forecast a detailed schedule of all GA items -pay attention to officer's salary: start off low, then increase as profits come in. -2) Forecast selling expenses: Treat selling expenses the same way as GA. 3) Taxes: include state income taxes, use % applied to net profit before taxes ONCE INCOME STATEMENT IS DONE, GO TO BL SHEET COMPLETING THE BL SHEET -1) Cash: results from the cash flow statement, and not forecasted separately. 2) AR, which forecasted in 2 ways: - (i) more complicated way- as a % of sales/mth (different % per month based on assumptions) OR (ii) use turnover ratio- monthly sales X12 DIVIDED by turnover no. (efficiency in usage of assets?) This forecast will produce constant AR -If sales are seasonal, use % of sales to forecast. (more accuracy) 3) inventory - more difficult than AR due to seasonality in sales. It consists of 3 types: RM(production schedule will tell how much RM is required) , work in process (examine production schedule and assume
avg cost for when they are half completed) and finished goods(avg cost of each product). Estimate/guess for each component and then sum them up. 4) Other assets include principally prepaid expenses, to be itemized and priced on separate schedule, total shown on balance sheet. 5) AP - include all purchases except initial one, assume payment for next mth. (for readings) 6) Accured expenses - include prepaid, selling, GA expenses less insurance, depreciation and bad debts. (assume most of these expenses would be paid in following mth and let them lag one mth ) 7) Accured taxes - apply tax rules to income statement item for taxes. (estimates can be based on previous years earnings) 8) Long term debt vs equity - include "bring along financing" in long term debt eg purchase of equipment. Leave equity to decision of outside investors. Dont consider this when doing startup forecasting. Decide only after the investing is done. LASTLY, CASH FLOW : combined IS and BL -For IS: actual amts are shown for a period. For BL, its the changes that are shown from period to period -Contains 7 parts for cash flow. -1) Consider leaving receivables based financing as a last resort because the amount can be used as a collateral for getting more VC/loans/needed fundings. 2) total operating cash outflows (includes COGS, GA, selling expenses and taxes from IS) 3) net operating cash flow = 1-2. This shows how much cash is generated from basic ops of company to be used to grow the coy. This $$ will be used to pay for total priority outflows (including the rent etc) (4) 5) Total discretionary outflows: expenditures eg R&D, ads or other capital expenditures 6) Total financial flows: dont put anything here except prementioned "bring along financing" 7)net change in cash and mkt securities (3-4-5 +/- 6) This would be negative for first few months HOW MUCH CASH NEEDED THEN? -Look at the net change in cash and see the maximum decrease. company will need this amt for the base case scenerio -formulate best and worst case. -take difference between maximum negative cash balance for most likely scenerio - most optimistic/pessiistic - get a difference -Add this difference to the maximum decrease, then round up. -If the VCs dont buy in, go back to balance sheet/IS to make cost effective changes. -Get all the money in one shot. Dont buy in for installments. -Key to determine the $$ needed is cash flow statement.
avg cost for when they are half completed) and finished goods(avg cost of each product). Estimate/guess for each component and then sum them up. 4) Other assets include principally prepaid expenses, to be itemized and priced on separate schedule, total shown on balance sheet. 5) AP - include all purchases except initial one, assume payment for next mth. (for readings) 6) Accured expenses - include prepaid, selling, GA expenses less insurance, depreciation and bad debts. (assume most of these expenses would be paid in following mth and let them lag one mth ) 7) Accured taxes - apply tax rules to income statement item for taxes. (estimates can be based on previous years earnings) 8) Long term debt vs equity - include "bring along financing" in long term debt eg purchase of equipment. Leave equity to decision of outside investors. Dont consider this when doing startup forecasting. Decide only after the investing is done. LASTLY, CASH FLOW : combined IS and BL -For IS: actual amts are shown for a period. For BL, its the changes that are shown from period to period -Contains 7 parts for cash flow. -1) Consider leaving receivables based financing as a last resort because the amount can be used as a collateral for getting more VC/loans/needed fundings. 2) total operating cash outflows (includes COGS, GA, selling expenses and taxes from IS) 3) net operating cash flow = 1-2. This shows how much cash is generated from basic ops of company to be used to grow the coy. This $$ will be used to pay for total priority outflows (including the rent etc) (4) 5) Total discretionary outflows: expenditures eg R&D, ads or other capital expenditures 6) Total financial flows: dont put anything here except prementioned "bring along financing" 7)net change in cash and mkt securities (3-4-5 +/- 6) This would be negative for first few months HOW MUCH CASH NEEDED THEN? -Look at the net change in cash and see the maximum decrease. company will need this amt for the base case scenerio -formulate best and worst case. -take difference between maximum negative cash balance for most likely scenerio - most optimistic/pessiistic - get a difference -Add this difference to the maximum decrease, then round up. -If the VCs dont buy in, go back to balance sheet/IS to make cost effective changes. -Get all the money in one shot. Dont buy in for installments. -Key to determine the $$ needed is cash flow statement.
