BMO2005 - Session 8 - Slides

BMO2005 Innovation &
Entrepreneurship
Session 8: Financial Considerations
Dr Sol Abdulhak
Entrepreneurship: Successfully Launching
New Ventures
Sixth Edition
Chapter 10
Getting Financing
or Funding
Copyright © 2019, 2016, 2012 Pearson Education, Inc. All Rights Reserved.
Learning Objectives (1 of 2)
10.1 Describe the importance of financing for entrepreneurial
success.
10.2 Explain why most entrepreneurial ventures need to
raise money during their early life.
10.3 Identify and describe the three sources of personal
financing available to entrepreneurs.
10.4 Identify and explain the three steps involved in properly
preparing to raise debt or equity financing.
10.5 Explain the three most important sources of equity
funding that are available to the entrepreneurial firm.
10.6 Describe common sources of debt financing
entrepreneurial firms use.
10.7 Describe several creative sources of financing
entrepreneurial firms may choose to use.
The Importance of Getting Financing
or Funding
• The Nature of the Funding and Financing Process
– Few people deal with the process of raising investment
capital until they need to raise capital for their own firm.
▪ As a result, many entrepreneurs go about the task
of raising capital haphazardly because they lack
experience in this area.
• Why Most New Ventures Need Funding
– There are three reasons most new ventures need to
raise money during their early life.
▪ The three reasons are shown on the following slide.
Why Most New Ventures Need Financing
or Funding
Figure 10.1 Three Reasons Start-Ups Need Funding
Alternatives for Raising Money for a
New Venture
• Personal Funds
• Debt Financing
• Equity Capital
• Creative Sources
Sources of Personal Financing (1 of 2)
• Personal Funds
– The vast majority of founders contribute personal
funds, along with sweat equity, to their ventures.
▪ Sweat equity represents the value of the time
and effort that a founder puts into a new venture.
• Friends and Family
– Friends and family are the second source of funds
for many new ventures.
Sources of Personal Financing (2 of 2)
• Bootstrapping
– A third source of seed money for a new venture is
referred to as bootstrapping.
– Bootstrapping is finding ways to avoid the need for
external financing or funding through creativity,
ingenuity, thriftiness, cost cutting, or any means
necessary.
– Many entrepreneurs bootstrap out of necessity.
Examples of Bootstrapping Methods (1 of 2)
• Buy used instead of new equipment.
• Coordinate purchases with other businesses.
• Lease equipment rather than buying.
• Obtain payments in advance from customers.
• Minimize personal expenses.
• Avoid unnecessary expenses, such as lavish office space
or furniture.
Examples of Bootstrapping Methods (2 of 2)
• Buy items cheaply, but prudently, through discount outlets
or online auctions such as eBay, rather than at full-price
stores.
• Share office space or employees with other businesses.
• Hire interns.
Preparing to Raise Debt or Equity
Financing (1 of 3)
Figure 10.3 Preparation for Debt or Equity Financing
Financing (2 of 3)
Two Most Common Alternatives
Equity Funding Debt Financing

• Means exchanging partial • Is getting a loan.
ownership in a firm, usually
in the form of stock, for
funding.
Financing (3 of 3)
Table 10.2 Matching an Entrepreneurial Venture’s Characteristics with
the Appropriate Form of Financing or Funding
Characteristics of the Venture Appropriate Source of Financing or Funding
The business has high risk with an uncertain return: Personal funds, friends, family, and other forms of
Weak cash flow bootstrapping
High leverage
Low-to-moderate growth
Unproven management
The business has low risk with a more predictable Debt financing
return:
Strong cash flow
Low leverage
Audited financials
Good management
Healthy balance sheet
The business offers a high return: Equity
Unique business idea
High growth
Niche market
Proven management
Preparing an Elevator Speech (1 of 2)
Purpose
• An elevator speech is a brief, carefully constructed
statement that outlines the merits of a business
opportunity.
• There are many occasions when a carefully constructed
elevator speech might come in handy.
• Most elevator speeches are around 60 seconds long.
Preparing an Elevator Speech (2 of 2)
Table 10.3 Guidelines for Preparing an Elevator Speech
Describe the opportunity or problem

Step 1 20 seconds
that needs to be solved.
Describe how your product meets the
Step 2 20 seconds
opportunity or solves the problem.
Step 3 Describe your qualifications. 10 seconds
Step 4 Describe your market. 10 seconds
Total blank 60 seconds
Sources of Equity Funding
• Business Angels
• Venture Capital
• Initial Public Offerings
Business Angels (1 of 4)
• Are individuals who invest their personal capital directly
in start-ups.
• The prototypical business angel is about 50 years old,
has high income and wealth, is well educated, has
succeeded as an entrepreneur, and invests in companies
that are in the region where he or she lives.
• Angel investors generally invest between $10,000 and
$500,000 in a single company and are looking for
companies that have the potential to grow 30 to 40
percent per year before they are acquired or go public.
• Many well-known companies, including Apple and
Google, received their initial investment from one or more
angel investors.
• The number of angel investors in the United States, which
is estimated to be around 304,900, has increased
dramatically over the past decade.
• Many angels are motivated by more than financial
returns: they enjoy the process of mentoring a new start-
up.
• Most angel investors remain fairly anonymous and are
matched up with entrepreneurs via referrals.
– To find a business angel, an entrepreneur should
discreetly work his/her network of acquaintances to
see if anyone can make an appropriate introduction.
– An advantage that college students have in regard to
finding business angels is that many judge college or
university-sponsored business plan or business model
competitions.
• There are organized groups of business angels.
• These groups typically consist of 10 to 150 angel
investors in a local area that meet regularly to listen to
business plan presentations.
– An example of an angel group is the Central Texas
Angel Network (CTAN) located in Austin, TX.
– It is a relatively large angel group, with 165 angel
investors with expertise in multiple sectors.
– The process the network follows to vet investment
opportunities is explained on its Web site.
Venture Capital (1 of 6)
• Venture capital is money that is invested by venture capital firms
in start-ups and small businesses with exceptional growth
potential.
• A distinct difference between angel investors and venture capital
firms is that angels tend to invest earlier in the life of a company,
whereas venture capitalists come in later.
• The majority of venture capital money goes to follow-on funding
for businesses that were originally funding by angel investors,
government programs, or by some other means.
• Venture capital firms are limited partnerships of money
managers who raise money in “funds” to invest in start-ups and
growing firms.
• The funds, or pools of money, are raised from high-net-worth
individuals, pension plans, university endowments, foreign
investors, and similar sources.
• The investors who invest in venture capital funds are called
limited partners. The venture capitalists are called general
partners.
• Because in the past venture capitalists have funded high-
profile successes such as Google, Facebook, Snap, and
Twitter, the industry receives a great deal of attention.
• In fact, venture capitalists fund less than 1 percent of new
firms.
• Many entrepreneurs become discouraged when they are
repeatedly rejected for venture capital funding, even though
they may have an excellent business plan.
• Venture capitalists are looking for the “home run.” The result is
that they do not fund the majority of the business plans they
receive and review.
• Still, for firms that qualify, venture capital is a viable alternative
to equity funding.
• An advantage to obtaining this funding is that venture capitalists
are extremely well-connected in the business world and can
offer a firm considerable assistance beyond funding.
• An important part of obtaining venture capital funding is going
through the due diligence process, which refers to the process
of investigating the merits of a potential venture and verifying
the key claims made in the business plan.
• Firms that prove to be suitable for venture capital funding
should conduct their own due diligence to make sure they
end up with a venture capital firm that is a good fit.
• They should ask the following questions before accepting
funds from a particular venture capital firm.
– Do the venture capitalists have experience in our
industry?
– Do they take a highly active or passive management
role?
– Are the personalities on both sides of the table
compatible?
• They should ask the following questions before accepting
funds from a particular venture capital firm (continued):
– Does the firm have deep enough pockets or sufficient
contacts within the venture capital industry to provide
follow-on rounds of financing?
– Is the firm negotiating in good faith in regard to the
percentage of our firm they want in exchange for their
investment?
Initial Public Offering (1 of 3)
• An initial public offering (IPO) is a company’s first sale of stock
to the public. When a company goes public, its stock is traded
on one of the major stock exchanges.
• Most entrepreneurial firms that go public trade on the NASDAQ,
which is weighted heavily toward technology, biotech, and small-
company stocks.
• An IPO is an important milestone for a firm. Typically, a firm is
not able to go public until it has demonstrated that it is viable
and has a bright future.
Reasons that Motivate Firms to Go Public
Reason 1 Reason 2
• Is a way to raise equity • Raises a firm’s public profile,
capital to fund current and making it easier to attract
future operations. high-quality customers and
business partners.
Reasons that Motivate Firms to Go Public
Reason 3 Reason 4
• Is a liquidity event that • Creates a form of currency
provides a means for a that can be used to grow the
company’s investors to company via acquisitions.
recoup their investments.
Sources of Debt Financing
• Commercial Banks
• SBA Guaranteed Loans
Commercial Banks (1 of 2)
• Historically, commercial banks have not been viewed as a
practical source of financing for start-up firms.
– This sentiment is not a knock against banks; it is just
that banks are risk averse, and financing start-ups is a
risky business.
▪ Banks are interested in firms that have a strong
cash flow, low leverage, audited financials, good
management, and a healthy balance sheet.
▪ Although many new ventures have good
management, few have the other characteristics, at
least initially.
Commercial Banks (2 of 2)
• The good news is that despite these historical precedents,
some banks are starting to engage start-up entrepreneurs.
• When it comes to start-ups, some banks are rethinking
their lending standards and are beginning to focus on cash
flow and the strength of the management team rather than
on collateral and the strength of the balance sheet.
• Entrepreneurs should follow developments in this area
closely.
SBA Guaranteed Loans (1 of 2)
• The SBA Guaranteed Loan Program
– The most notable SBA program available to small
businesses is the 7(A) Guaranty Program.
– The program operates through private-sector lenders
who provide loans that are guaranteed by the SBA.
– The loans are for small businesses that are unable to
secure financing on reasonable terms through normal
lending channels.
– Almost all businesses are eligible to apply for and
SBA loan.
SBA Guaranteed Loans (2 of 2)
• Size and Types of Loans
– The SBA can guarantee as much as 85% on loans up
to $150,000 and 75% on loans for more than $150,000.
– An SBA guaranteed loan can be used for almost any
legitimate business purpose.
– Although SBA guaranteed loans are utilized more
heavily by existing small businesses than start-ups,
they should not be dismissed as a possible source of
financing.
Other Sources of Debt Financing (1 of 3)
• Online Lenders
– There is a group of online lenders, including OnDeck,
Kabbage, and BlueVine that provide loans to
businesses.
– Depending on the company, loans are available from
$2,000 to $2 million.
– Interest rates are normally higher than charged by a
commercial bank, so it is advisable to check the terms
carefully.
• Peer-to-Peer Lenders
– Peer-to-peer lenders underwrite borrowers but don’t
fund the loans directly.
– Instead, they act as intermediaries between borrowers
and individuals or borrowers and institutional
investors.
– Funding Circle and Lending Club are examples of
peer-to-peer lenders.
– The thing to watch when considering peer-to-peer
loans is the annual percentage rate, which in many
cases is high.
• Vendor Credit
– Also known as trade credit, is when a vendor extends
credit to a business in order to allow the business to
buy its products and/or services up front but defer
payment until later.
• Factoring
– Is a financial transaction whereby a business sells its
accounts receivable to a third party, called a factor, at
a discount in exchange for cash.
Creative Sources of Financing or Funding
• Crowdfunding
• Leasing
• SBIR and STTR Grant Programs
• Other Grant Programs
• Strategic Partners
Crowdfunding (1 of 2)
• Crowdfunding is the practice of funding a project or new
venture by raising monetary contributions from a large
number of people (the “crowd”) typically via the Internet.
• Two Types of Crowdfunding Programs
– Rewards-based crowdfunding allows entrepreneurs
to raise money in exchange for some type of amenity
or reward.
– Kickstarter and Indiegogo are the most popular
rewards-based crowdfunding sites.
Crowdfunding (2 of 2)
– Equity-based crowdfunding helps businesses raise
money by tapping individuals and investors who
provide funding in exchange for equity in the business.
– The catalyst for the advent of equity-based
crowdfunding was the JOBS Act, which was passed in
April 2012.
– Four of the most popular equity-based crowdfunding
sites are MicroVentures, Fundable, Crowdfunder, and
CircleUp.
– Equity-based crowdfunding is gaining momentum.
Over $85 million has been invested through
MicroVentures since 2009.
Leasing (1 of 2)
• A lease is a written agreement in which the owner of a
piece of property allows an individual or business to use
the property for a specified period of time in exchange
for payments.
• The major advantage of leasing is that it enables a
company to acquire the use of assets with very little or
no down payment.
• Leases for facilities and leases for equipment are the
two most common types of leases that entrepreneurial
ventures undertake.
Leasing (2 of 2)
• Most leases involve a modest down payment and
monthly payments during the duration of the lease.
• At the end of an equipment lease, the new venture
typically has the option to stop using the equipment,
purchase it for fair market value, or renew the lease.
• Leasing is almost always more expensive than paying
cash for an item, so most entrepreneurs think of leasing
as an alternative to equity or debt financing.
SBIR and STTR Grants (1 of 5)
• SBIR and STTR Programs
– The Small Business Innovation Research (SBIR) and
the Small Business Technology Transfer (STTR)
programs are two important sources of early-stage
funding for technology firms.
– These programs provide cash grants to entrepreneurs
who are working on projects in specific areas.
▪ The main difference between the SBIR and the
STTR programs is that the STTR program requires
the participation of researchers working at
universities or other research institutions.
• SBIR Program
– The SBIR Program is a competitive grant program that
provides over $2.5 billion per year to small businesses
for early-stage and development projects.
– Each year, 11 federal departments and agencies are
required by the SBIR to reserve a portion of their R&D
funds for awards to small businesses.
– Guidelines for how to apply for the grants are provided
on each agency’s Web site.
• SBIR Program (continued)
– The SBIR is a three-phase program, meaning that firms that
qualify have the potential to receive more than one grant to
fund a particular proposal.
– Historically, less than 15% of all Phase I proposals are
funded. The payoff for successful proposals, however, is
high.
▪ The money is essentially free. It is a grant, meaning that
it doesn’t have to be paid back and no equity in the firm
is at stake.
▪ The small business receiving the grant also retains the
rights to any intellectual property generated as the result
of the grant initiative.
SBIR Three-Phase Grant Program
Table 10.5 Small Business Innovation Research: Three-Phase Program

Phase Purpose of Phase Duration Funding Available (Varies by Agency)
Phase I To demonstrate the proposed Up to 6 Up to $150,000
innovation’s technical feasibility. months
Phase II Available to successful Phase I Up to 2 Up to $1 million
companies. The purpose of a Phase years
II grant is to develop and test a
prototype of the innovation validated
in Phase I.
Phase III Period in which Phase II innovations Open No SBIR funding available; however,
move from the research and federal agencies may award non-SBIR-
development lab to the marketplace. funded follow-on grants or contracts for
products or processes that meet the
mission needs of those agencies, or for
further R&D.
• STTR Program
– Is a variation of the SBIR for collaborative research projects
that involve small businesses and research organizations,
such as universities or federal labs.
– The STTR program requires the company to have a
partnering research institution.
– More information about the SBIR and STTR can be
obtained at www.sbir.gov.
Other Grant Programs
• Private Grants
– There are a limited number of grant programs available to
entrepreneurs.
– Getting grants takes a little detective work.
– Granting agencies are low key, and must be sought out.
• Other Government Grants
– The federal government has grant programs beyond the
SBIR and STTR programs.
– The full spectrum of grants available is listed at
www.grants.gov.
– Be careful of grant-related scams.
Strategic Partners
• Strategic partners are another source of capital for new
ventures.
• Many partnerships are formed to share the costs of
product or service development, to gain access to
particular resources, or to facilitate speed to market.
• Strategic partnerships that capture these types of benefits
can help new ventures lessen their need for funding or
financing.
Entrepreneurship: Successfully Launching
New Ventures
Sixth Edition
Chapter 8
Assessing a New
Venture’s Financial
Strength and Viability
8.1 Learn about the importance of understanding the
financial management of an entrepreneurial firm.
8.2 Identify the four main financial objectives of
entrepreneurial firms.
8.3 Describe the process of financial management as used
in entrepreneurial firms.
8.4 Explain the difference between historical and pro forma
financial statements.
8.5 Describe the different historical financial statements and
their purpose.
8.6 Discuss the role of forecasts in projecting a firm’s future
income and expenses.
8.7 Explain the purpose of pro forma financial statements.
Financial Management (1 of 2)
• Financial Management
– Financial management deals with two things: raising
money and managing a company’s finances in a way
that achieves the highest rate of return.
– Chapter 10 focuses on raising money. This chapter
focuses primarily on:
▪ How a new venture tracks its financial progress
through preparing, analyzing, and maintaining past
▪ How a new venture forecasts future income and
expenses by preparing pro forma (or projected)
Financial Management (2 of 2)
The financial management of a firm deals with questions such as the
following on an ongoing basis:
• How are we doing? Are we making or losing money?
• How much cash do we have on hand?
• Do we have enough cash to meet our short-term obligations?
• How efficiently are we utilizing our assets?
• How do our growth and net profits compare to those of our industry
peers?
• Where will the funds we need for capital improvements come from?
• Are there ways we can partner with other firms to share risk and
reduce the amount of cash we need?
• Overall, are we in good shape financially?
Financial Objectives of a Firm (1 of 3)
Figure 8.1 Primary Financial Objectives of Entrepreneurial Firms
• Profitability
– Is the ability to earn a profit.
▪ Many start-ups are not profitable during their first one to
three years while they are training employees and building
their brands.
▪ However, a firm must become profitable to remain viable
and provide a return to its owners.
• Liquidity
– Is a company’s ability to meet its short-term financial
obligations.
▪ Even if a firm is profitable, it is often a challenge to keep
enough money in the bank to meet its routine obligations
in a timely manner.
• Efficiency
– Is how productively a firm utilizes its assets relative to its
revenue and its profits.
▪ Southwest Airlines, for example, uses its assets very
productively. Its turnaround time, or the time its airplanes
sit on the ground while they are being unloaded and
reloaded, is the lowest in the airline industry.
• Stability
– Is the strength and vigor of the firm’s overall financial posture.
▪ For a firm to be stable, it must not only earn a profit and
remain liquid but also keep its debt in check.
The Process of Financial
Management (1 of 4)
• Importance of Financial Statements
– To assess whether its financial objectives are being met,
firms rely heavily on analysis of financial statements.
▪ A financial statement is a written report that quantitatively
describes a firm’s financial health.
▪ The income statement, the balance sheet, and the
statement of cash flows are the financial statements
entrepreneurs use most commonly.
• Forecasts
– Are an estimate of a firm’s future income and expenses,
based on past performance, its current circumstances, and
its future plans.
Management (2 of 4)
• Forecasts (continued)
– New ventures typically base their forecasts on an estimate
of sales and then on industry averages or the experiences
of similar start-ups regarding the cost of goods sold and
other expenses.
• Budgets
– Are itemized forecasts of a company’s income, expenses,
and capital needs and are also an important tool for financial
planning and control.
Management (3 of 4)
• Financial Ratios
– Depict relationships between items on a firm’s financial
statements.
– An analysis of its financial ratios helps a firm determine
whether it is meeting its financial objectives and how it
stacks up against industry peers.
• Importance of Financial Management
– Many experienced entrepreneurs stress the importance of
keeping on top of the financial management of the firm.
Management (4 of 4)
Figure 8.2 The Process of Financial Management
Financial Statements
• Historical Financial Statements
– Reflect past performance and are usually prepared on a
quarterly and annual basis.
▪ Publicly traded firms are required by the SEC to
prepare financial statements and make them available
to the public.
• Pro Forma Financial Statements
– Are projections for future periods based on forecasts and
are typically completed for two to three years in the future.
▪ Pro forma financial statements are strictly planning tools
and are not required by the SEC.
New Venture Fitness Drinks (1 of 2)
• New Venture Fitness Drinks
– To illustrate how financial statements are prepared, we
used New Venture Fitness Drinks, the fictitious sports drink
company introduced in Chapter 3.
▪ New Venture Fitness Drinks has been in business for
five years.
▪ Targeting sports enthusiasts, the company sells a line
of nutritional fitness drinks.
▪ It opened a single location in 2016, added a second
location in 2018, and plans to add a third in 2019.
New Venture Fitness Drinks (2 of 2)
• New Venture Fitness Drinks (continued)
– To illustrate how financial statements are prepared, we
used New Venture Fitness Drinks, the fictitious sports drink
company introduced in Chapter 3.
▪ The company’s strategy is to place small restaurants,
similar to smoothie restaurants, near large outdoor
sports complexes.
▪ The company is profitable and is growing at a rate of 25
percent per year.
Historical Financial Statements
Three types of historical financial statements
Financial Statement Purpose
Income Statement Reflects the results of the operations of a firm
over a specified period of time. It records all the
revenues and expenses for the given period
and shows whether the firm is making a profit
or is experiencing a loss.
Balance Sheet Is a snapshot of a company’s assets, liabilities,
and owner’s equity at a specific point in time.
Statement of cash Summarizes the changes in a firm’s cash
flows position for a specified period of time and
details why the changes occurred.
Historical Income Statements
Table 8.1 Consolidated Income Statements for New Venture Fitness Drinks, Inc.
Blank December 31, 2018 December 31, 2017 December 31, 2016
Net sales $586,600 $463,100 $368,900
Cost of sales 268,900 225,500 201,500
Gross profit 317,700 237,600 167,400
Operating expenses blank blank blank
Selling, general, and administrative 117,800 104,700 90,200
expenses
Depreciation 13,500 5,900 5,100
Operating income 186,400 127,000 72,100
Other income blank blank blank
Interest income 1,900 800 1,100
Interest expense (15,000) (6,900) (6,400)
Other income (expense), net 10,900 (1,300) 1,200
Income before income taxes 184,200 119,600 68,000
Income tax expense 53,200 36,600 18,000
Net income 131,000 83,000 50,000
Earnings per share 1.31 0.83 0.50
Ratio Analysis (1 of 2)
• Ratio Analysis
– The most practical way to interpret or make sense of a
firm’s historical financial statements is through ratio
analysis, as shown in the next slide.
• Comparing a Firm’s Financial Results to Industry Norms
– Comparing a firm’s financial results to industry norms
helps a firm determine how it stacks up against its
competitors and if there are any financial “red flags”
requiring attention.
Historical Ratio Analysis (1 of 2)
Table 8.4 Ratio Analysis for New Venture Fitness Drinks, Inc.
Ratio Formula 2018 2017 2016
Profitability ratios: associate the amount of Blank Blank Blank Blank
income earned with the resources used to
generate it
Return on assets ROA = net income/average 21.4% 18.7% 14.7%
total assetsa
Return on equity ROE = net income/average 35.0% 31.0% 24.9%

shareholders’ equityb
Profit margin Profit margin = net 22.3% 17.9% 13.6%

income/net sales
Liquidity ratios: measure the extent to Blank Blank Blank Blank
which a company can quickly liquidate
assets to cover short-term liabilities
Current Current assets/current 3.06 2.26 2.35
liabilities
Quick Quick assets/current 2.58 1.89 1.96
liabilities
Historical Ratio Analysis (2 of 2)
Table 8.4 (continued)
Ratio Formula 2018 2017 2016
Overall financial stability ratio: measures Blank Blank Blank Blank
the overall financial stability of a firm
Debt Total debt/total assets 39.7% 37.4% 42.3%
Debt to equity Total liabilities/owners’ 65.8% 59.8% 73.2%
equity
a Average total assets = beginning total assets + ending total assets ÷ 2.
b Average shareholders’ equity = beginning shareholders’ equity + ending shareholders’ equity ÷ 2.
Forecasts (1 of 4)
• Forecasts
– The analysis of a firm’s historical financial statements
are followed by the preparation of forecasts.
– Forecasts are predictions of a firm’s future sales,
expenses, income, and capital expenditures.
▪ A firm’s forecasts provide the basis for its pro forma
▪ A well-developed set of pro forma financial
statements helps a firm create accurate budgets,
build financial plans, and manage its finances in a
proactive rather than a reactive manner.
Forecasts (2 of 4)
• Sales Forecast
– A sales forecast is a projection of a firm’s sales for a
specified period (such as a year).
– It is the first forecast developed and is the basis for most of
the other forecasts.
▪ A sales forecast for a new firm is based on a good-faith
estimate of sales and on industry averages or the
experiences of similar start-ups.
▪ A sales forecast for an existing firm is based on (1) its
record of past sales, (2) its current production capacity
and product demand, and (3) any factors that will affect
its future production capacity and product demand.
Forecasts (3 of 4)
Figure 8.3 Historical and Forecasted Annual Sales for New
Venture Fitness Drinks
Insert new Figure 8.3
Forecasts (4 of 4)
• Forecast of Costs of Sales and Other Items
– Once a firm has completed its sales forecast, it must
forecast its cost of sales (or cost of goods sold) and the
other items on its income statement.
– The most common way to do this is to use the percent-of-
sales method, which is a method for expressing each
expense item as a percentage of sales.
▪ If a firm determines that it can use the percent-of-sales
method and it follows the procedures described in the
textbook, then the net result is that each expense item
on its income statement will grow at the same rate as
sales (with the exception of items that can be individually
forecast, such as depreciation).
Pro Forma Financial Statements
• Pro Forma Financial Statements
– A firm’s pro forma financial statements are similar to
its historical financial statements except that they look
forward rather than track the past.
– The preparation of pro forma financial statements
helps a firm rethink its strategies and make
adjustments if necessary.
– The preparation of pro forma financials is also
necessary if a firm is seeking funding or financing.
Types of Pro Forma Financial Statements
Financial Statement Purpose

Pro Forma Income Shows the projected financial results of the
Statement operations of a firm over a specific period.
Pro Forma Balance Shows a projected snapshot of a company’s
Sheet assets, liabilities, and owner’s equity at a
specific point in time.
Pro Forma Statement Shows the projected flow of cash into and out
of Cash flows of a company for a specific period.
Pro Forma Income Statements
Table 8.6 Pro Forma Income Statement for New Venture Fitness Drinks, Inc.
blank 2018 Actual 2017 Projected 2016 Projected
Net sales $586,600 $821,200 $1,026,500
Cost of sales 268,900 390,000 487,600
Gross profit 317,700 431,200 538,900
Operating expenses blank blank blank
Selling, general, and 117,800 205,300 256,600
administrative expenses
Depreciation 13,500 18,500 22,500
Operating income 186,400 207,400 259,800
Other income blank blank blank
Interest income 1,900 2,000 2,000
Interest expense (15,000) (17,500) (17,000)
Other income (expense), net 10,900 20,000 20,000
Income before income taxes 184,200 211,900 264,800
Income tax expense 53,200 63,600 79,400
Net income 131,000 148,300 185,400
Earnings per share 1.31 1.48 1.85

BMO2005 - Session 8 - Slides

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BMO2005 - Session 8 - Slides

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BMO2005 Innovation &

Equity Funding Debt Financing

Describe the opportunity or problem

Step 4 Describe your market. 10 seconds

Total blank 60 seconds

Table 10.5 Small Business Innovation Research: Three-Phase Program

Return on equity ROE = net income/average 35.0% 31.0% 24.9%

Profit margin Profit margin = net 22.3% 17.9% 13.6%

Insert new Figure 8.3

Financial Statement Purpose

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