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Serving Existing & Start-up Entrepreneurs |
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Serving Existing & Start-up Entrepreneurs |
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FINANCIAL ANALYSIS & PROJECTIONS
It's
all about numbers. Start-ups cringe at the thought of having to develop
financial statements. Most are obligated to learn the basics of what
each financial statement represents, how it is used to analyze the
financial condition of the company and how to create them. Eventually,
they learn to use these documents as tools to measure levels of success
or failure. Properly learned and monitored on a regular basis, actual
financial statements can be used to compare performance with
projections, and to potentially identify wasted resources, as well as
factors of success. It is equally important to begin the projection process by overestimating expenses and underestimating sales. Decreasing expenses and increasing sales in the projections should come only with viable financial assumptions to justify your revisions. Cost
of Goods Sold (COGS) Cost of Goods Sold = Beginning Inventory + Purchases - End Inventory
The
formula can applied to one week, one month or a year, but must be the
same for each value of the formula. The formula for a manufacturer
includes raw goods and unfinished product in inventory. There is no
formula for a service firm, which relies exclusively on market research
of competitors and deciding a pricing strategy that allows
profitability. Breakeven
Analysis: Simply
stated, this formula indicates how much sales volume must be
accomplished in order to cover all costs (fixed and variable), and begin
generating a profit. In other words, it is the point in sales volume at
which you have no profit and no loss. This is most commonly applied to a
business that sells product. The following formula is applied: Breakeven = Fixed Costs / (Revenue – Variable Costs) The breakeven point equals fixed costs divided by the result of revenue minus variable costs. Go to www.dinkytown.net/java/BreakEven.html to apply company information and learn your breakeven point. Ratio Analysis: Ratio analysis is the use of a simple set of easily understood math formulas to measure your financial projections with the actual performance of other companies in your industry. Go to our Calculators page to learn some of those formulas. Go to Valuation Resources to locate sources of ratio analysis data and the SIC code for your company's industry. Projected
Profit & Loss (Income Statements): The
P&L, as it is commonly called, reflects how you use your resources
(assets) to generate sales. The use of the assets is reflected in the
form of expenses. View the simple retail profit and loss statement
below:
Projected
Cash Flow Statements: On
first glance, to the layperson, income statements and cash flow
statements can look so much alike. Understand the distinctions. Cash
flow statements reflect the flow of cash in and out of the company. Cash
in is reflected as revenue. Cash out is reflected as disbursements. On
the income statement, income is reflected when the sale is consummated.
It may or may not be the same time when the cash (revenue) is collected.
On an income statement expenses are recorded when incurred. On the cash
flow statement the disbursement is recorded when actually paying the
expense. View the first six months of a simple, retail cash flow
statement below:
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