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The Economics of Business Financial Analysis Assignment

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Added on: 2022-08-20 00:00:00
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Question Task Id: 403845
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Your first assignment consists of 3 parts
In a single Excel Workbook, create a start-up budget, pro-forma income and expense statement, and a pro-forma cash flow statement for your new business venture.
Start-Up Budget - how much money will it take to open your doors on day 1, as well as a budget projection for the first three months of operation when you may not have enough revenue to support yourself
Income and Expense Statement – presented monthly for the first year, then annually for the next three years of operation
Cash Flow Statement – presented quarterly for the first year, then annually for the next three years of operation
In a single Word Document,
for EACH statement create at least two paragraphs that contains a list of key assumptions that support the numbers in the statements (explain how you derived your numbers) and a summary of the statements that highlights key points of interest to prospective investors (e.g., when the business becomes profitable, how much invested capital it requires, where the capital will come from).
                    b. Then, include a table of key financial ratios with a detailed summary (highlight/explanation) of these ratios.
Business Plan: Financial Statements
The financial statements (or the "economics of the business") are one of the most closely scrutinized sections of any business plan and the most difficult aspects of the business plan as required in MGMT 4380. This should give you a good head start for that course.
Investors sometimes go from the executive summary straight to the financial statements to judge the merit of a business plan, so your plan must address the financial issues of cash flow, start-up capital, and profit.
For each of the financial statements, I recommend utilizing the Small Business Administration’s guide, beginning on page 14 - https://www.sba.gov/sites/default/files/How to Write a Business Plan.pdf I have also included links to some good templates, although, you will need to add, delete, and change the items in the spreadsheet to meet the requirements of your individual business plan. You can use whatever templates that you want to complete your assignment.
What Is a Financial Plan?
Other sections of the business plan define what the business intends to produce and how it will do so. The financial plan estimates the monetary resources and flows that the business will require to carry out the business plan. The financial plan also indicates when and by how much the business intends to be profitable. Finally, the financial statements tell a lot about the entrepreneur in terms of business commitment and financial wherewithal to make the business a profitable success.
In addition to the financial statements, a financial plan includes a list of assumptions upon which the financial statements are based. Clearly stating your financial assumptions serves two purposes: It allows investors to know what is behind the numbers, and it helps you to know the financial impact when the basis of your assumptions changes.
Assumptions are most important in "soft numbers," such as projected sales and interest rate projections. You can estimate "hard numbers," such as rent, computers, and Web site hosting costs, with some certainty after a reasonable amount of research. The trick to creating realistic, credible financial statements is to make reasonable and conservative projections of the soft numbers and to understand the assumptions upon which they are based.
A financial plan should also contain a set of key financial ratios. Financial numbers aren't always enough to convince an investor that the business is a viable firm. To solve this problem, investors use financial ratios, as well as comparison charts and graphs.
The Financial Statements
The financial statements section begins with a start-up budget that details expected investment before the business starts to operate (i.e., before it makes the first sale). Next, a series of financial statements—income and expense statement, balance sheet, cash flow statement—that project the financial future of the company for the first three to five years after start-up are presented.
Start-up Budget Because your business is a new one, you will need to prepare a budget that defines the expenses required to start the business before it can begin to generate revenue through sales. For almost every business this includes items such as office furnishings, legal fees, product development, manufacturing equipment, and vehicles.
Your start-up budget should show these figures from a snapshot of time (e.g., as of opening day, Jan 2022).
Here is a good start-up budget template for your use. You will have to modify it to accommodate your business requirements.
Income and Expense Statement An income and expense statement (I&E) is an accounting term for what most people call a budget. The I&E statement includes income items such as revenue from sales and interest income. It also includes all anticipated expense items, usually grouped into logical categories such as cost of goods sold, administration expenses, interest, and taxes. The statement concludes with various profit figures—operating profit, profit before taxes, and net profit.
Your income and expense statement should show these figures over a period of time – monthly for the first year (e.g., monthly for the period January to December 2022) and yearly as projected several years into the future (e.g., 2023, 2024, and 2025 for a three-year projection).
Here is a good  income and expense statement template for your use. You will have to modify it to accommodate your business requirements.
Cash Flow Statement Even if the income and expense statement shows profits, and the balance sheet shows positive owner's equity, you may still not have a viable business. Why not? Because a business needs cash on hand in order to pay bills. The purpose of the cash flow statement is to monitor changes in the cash position of a business over a period of time.
The top portion of the cash flow statement records cash coming in (inflow), and the bottom portion records expenses for cash going out (outflow). The categories are similar to those that appear in the income and expense statement, but the numbers are more "honest" because a business records income only when it makes a deposit, and it records expenses when it makes out the checks (or sends the e-payments).
The "bottom line" here is the ending cash balance. If this number is negative for two consecutive periods, warning bells are likely to go off in the investor's mind.
Your Statement of Cash Flows should show these figures yearly as projected several years into the future (e.g., 2022, 2023, 2024, and 2025).
Here is a good cash flow statement template for your use. You will have to modify it to accommodate your business requirements.
Summary and Analysis
After your financial statements are created, you are to write up a summary of these statements (at least one paragraph per statement) that highlights key points of interest to prospective investors (e.g., when the business becomes profitable, how much invested capital it requires, where the capital will come from). Also include a list of key assumptions that support the numbers in the statements (e.g., pricing decisions, economic data from the region, assumed increases in profits or costs, calculated demand, opportunity costs).
Finally, you should include a table of key financial ratios and/or supplemental charts or graphs as appropriate. Table 8.4 (pg. 289) of the ENTREPRENEURSHIP textbook contains a comprehensive list of ratios, but a few of the most important in assessing business plans are:
Debt-to-equity ratio: Long-term liabilities/Owner's equity
Net profit margin: Net profit/Gross revenue on sales
Return on investment: Net profit/Total assets
Return on equity: Net profit/Equity
You can add credibility to your financial ratios if you provide the potential investor with comparative data from successful companies in the industry in which the business will compete. Financial data services such as Standard and Poor's,  HYPERLINK "http://www.mergentonline.com/" \t "newwindow" MergentOnline, and Dun & Bradstreet publish this data. The textbook lists some additional sources.

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  • Posted on : March 02nd, 2022
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