Module 5 - Assignment 2 - Creating, Refining and Preparing your Financials

Creating, refining, and preparing your financials overview

This week, you will create a formal set of financial documents including, a startup budget, a three month projected profit and loss statement, a three month projected statement of cash flows, and a projected balance sheet. These four documents  should be included with your final project (Lean Feasibility Plan). You are going to find this assignment difficult on some fronts. Do not worry. Finance and accounting is all about taking educated guesses when you are in the concept stage. This will feel a bit uncomfortable because you will ask yourself questions like... how am I supposed to know what business expenses I will have? How do I find out what those expenses will be? How do I project revenue?  Like anything finance and accounting requires practice. If you are already in business you will find this assignment far less challenging because you have gone through this process at some level already.

Assignment Resources - Download this Excel Financial Dashboard spreadsheet Download Download this Excel Financial Dashboard spreadsheet that contains all of the financials you will need (and more) for the course. The different financial statements are located in the bottom of the spreadsheet, in separate "sheets." Each financial spreadsheet has an "example" followed by a blank spreadsheet for you to fill in with your best guesses. Below is an index of spreadsheets you will be working on.

For this assignment, you will do your best to populate the "Your Startup Budget", the "6 Month Income Statement", the "PERT Sales Forecast" (completed last week in Module 4), the "Balance Sheet", and one month of the "Cash Flow Statement."  Use the resources below to learn about these financial statements as well as the textbook, pages 331-352.

If you are not familiar with financials at all, a good place to begin is to watch this "Crash Course" video about "Understanding Financial Statements" (12:43)

Continue by reviewing the resources below

What is the difference between operational and financial budgeting?

OPERATING BUDGETS: An operating budget is a statement that presents the financial plan for each operating activity that involves revenues and expenses. The most common types of operating budgets are expense, revenue, and profit budgets.

FINANCIAL BUDGETS:  Financial Budgets outline how an organization is going to acquire its cash and how it intends to use the cash. Three important financial budgets are the cash budget, capital expenditure budget and the balance sheet budget.

You will need the following documents to work on, and complete this assignment. Please make sure you download the files and save them to your device.

Download this Excel Financial Dashboard spreadsheet Download Download this Excel Financial Dashboard spreadsheet (same as above)

Step 1: Lets begin with the startup budget

1. In the Financial Dashboard Excel Download Financial Dashboard Excel file you downloaded above, you can review the "Example Startup Budget" and then create your own. 
2. Open the Startup Budget Worksheet. This worksheet has two sections with sample data included. One section (left side) includes the one time costs needed to start the business. Some of the fields will apply to your business, while others will not. This worksheet is editable, so you should change the expense category fields and amounts accordingly. The other section of this worksheet (the right side) includes monthly operating expenses. Begin populating this as best as you can.
3. Take the information from the worksheet and fill out the Startup Budget
   • Determine the number of months the startup period will cover. In other words, how long do you anticipate it will take to have enough paying customers where you can meet your monthly expenses, i.e. six months. The answer to this guesstimate will depend greatly on the type of business you are starting. For example, if you are going to launch a mobile tutoring business for k-12 students, you may be able to reach a point where you are able to meet your monthly operating expenses sooner when compared with a technology startup. Why? Because a mobile tutoring business is relatively inexpensive to start, and typically will involve customers paying at the time they receive the service (cash sales) if you hustle to get paying customers, you should be able to generate enough sales to meet your monthly expenses relatively quickly. Whereas, if you are launching a new technology business that requires money to pay for the development of the technology, and then more money to pay for acquiring customers, the period of time you may need to go through before generating enough revenue to meet your expenses could be significant. This is not to say one business type is preferable to another, but knowing what kind of business you are starting, and how long it might be before you break even or become profitable, will weigh heavily on the startup budgeting process.
     
   • Please note that some of the items on the startup budget will apply to your business, while other items will not. You can also rename cells on the Excel spreadsheet to align with your type of business.
   • Save this file, so it can be uploaded as part of this assignment.

Step 2: The Profit and Loss Statement

Overview: A profit and loss statement is one of a business' main financial statements, along with the balance sheet and cash flow statement. A profit and loss statements, also known as income statements or statements of financial performance, are a summary of the income and expenses of a business that determine the profit (or loss) made in a given time period. Profit and loss statements are usually performed periodically, annually, quarterly or monthly. They inform us about what has happened. In the case of a startup, you must create projected profit and loss statements to determine what you think is going to happen. 

IMPORTANT*** When creating projected financials, it is CRITICAL to think about best, worst, and most likely case scenarios. For example, if you think in the first six months of operating your business that you will generate $30,000 in revenue (sales), which is $5,000 per month, it is important for you to attach a probability of that projection being realized. A best case scenario projection might be $30,000 over six months. A worst case scenario (assume the economy goes into a recession and very few people purchase your product or service), may be $500 per month or $3,000 over a six month period. the midpoint between $30,000 (best case) and $3,000 (worst case) is $16,500 over six months or $2,750 per month. This might be your most likely scenario projection. The reason this is so important is that each of those scenarios will affect your profit and /or loss (bottom line.

For example, if you use the best case scenario of $30,000, lets assume your operating expenses (expenses to operate your business) is $19,000. So your six month profit would be $11,000 or a 37% net profit margin ($11,000 divided by $30,000). If you use the most likely case scenario ($16,500 in revenue for six months), you would have a net loss of ($2,500), or revenue $16,500 minus expenses $19,000.  

The profit and loss statement has a basic mathematical formula:

Income (Revenues Gains) - Expenses = Net profit

If income exceeds business expenses, the business will have effectively made a profit. On the other hand, if expenses exceed income, a loss would have been made.

A profit and loss statement is a great tool for identifying items of high expenditure or expenses that were unproductive in producing profit. By analyzing the profit and loss statement you can better control business expenditure and thereby potentially increase profits.

WATCH THESE VIDEOS THAT HELPS EXPLAIN THE INCOME STATEMENT (PROFIT AND LOSS STATEMENT, P&L)

 Introduction to the Income Statement Links to an external site.

When you feel you are ready to begin populating the profit and loss statement,  open up the Financial Dashboard Excel File (see above) and fill out at least three months of projected profit and loss for your business. You can begin by using the sic month Income Statement. If you feel up to projecting six months you can, but at a minimum, fill in three months.

STEP 3: Balance sheet overview

OVERVIEW: A balance sheet is one of a business' main financial statements, along with the income statement and cash flow statement. It summarizes the financial position of your business at a point in time, by providing a snapshot of how much you own and how much you owe.  A balance sheet tells you where you stand today. It does not project into the future, and can change quickly depending upon your business type.

There are three key sections to a balance sheet:

• Assets: items of future economic benefit belonging to the business. They are divided into two categories; current assets (assets that can easily be converted into cash) and non-current assets (assets that would take a while to convert into cash)
• Liabilities: future economic obligations that have been committed to by the business. Similarly to assets, liabilities are divided into current liabilities (money you will need to pay in one year or less) and long-term liabilities (money owed that will not be due for more than one year).
• Equity: (Assets minus Liabilities), the residual interest in the assets of a business after deduction of its liabilities. Equity is also divided into two categories, capital and retained earnings.

WATCH THIS VIDEO THAT HELPS EXPLAIN THE BALANCE SHEET

Introduction to Balance Sheets Links to an external site. 

STEP 3: STATEMENT OF CASH FLOWS OVERVIEW

OVERVIEW: A cash flow statement is one of a business' main financial statements, along with the balance sheet and income statement. It focuses on the sources and uses of cash through operating, investing and financing activities. Activities that result in the receipt of cash are cash inflows, and activities that result from the spending of cash are cash outflows.

A cash flow statement is divided into three sections:

• Cash flow from operating activities - cash inflows and outflows resulting from day-to-day business operations, including the collection of cash from sales and payment of expenses.
• Cash flow from investing activities - result from the purchase or sale of the business's non-current assets, that is, assets owned for longer than 12 months.
• Cash flow from financing activities - any financing activity that changes the size and composition of the business' long-term financing structure. This includes repayments of the principal on the business mortgage or capital contributions the business owner has made to the business.

WATCH THIS VIDEO ABOUT THE STATEMENT OF CASH FLOWS

 Statement of Cash Flows Explained Links to an external site.

**DELIVERABLE FOR STEP 3: Open up the Financial Dashboard (see link above) and first review the "Example Cash Flow Statement." Then populate your own. Fill in at least three months of data.

When you have completed filling out the Startup Budget, Profit and Loss Statement, Balance Sheet, and Statement of Cash Flows, please upload all four documents to this assignment. Please note that these documents will be included in the final feasibility plan project that is due September 29, 2021.