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FIN510 - Chapter #6.docx

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ECN 204
Christopher Gore

Chapter 6 – Financial Planning: Short Term and Long Term Venture Life Cycle: Surviving in the Short Term – cash in the lifeblood of an entrepreneurial venture – without sufficient cash, a venture dies – short-term financial planning usually involves projecting monthly financial statements and concentrating on a venture’s cash needs – young and growing entrepreneurial ventures seldom, if ever, have access to these markets (short-term lending markets) and cash management techniques – early-stage ventures: firms in their development stage, startup stage, survival stage, or just entering their rapid- growth stage – young venture—restricted in its access to bank credit lines, limited in its access (if any) to short-term lending markets, and faced with months of preparation and negotiation before the next financing round—can easily choke on its own success Short-term Cash Planning Tools – Sales Schedule – Purchase Schedule – Wages and Commission Schedule – Cash Budget – task 1: budget PDC’s cash and borrowing position for the next four months (through July 31) – implementation plan: o (a) use the sales forecast to determine the monthly cash collections from the current month’s cash sales and collections of receivables on the previous month’s credit sales, o (b) use the inventory policy to determine the inventory expenses and schedule for their payments, o (c) schedule the wages payments according to the semimonthly pay arrangements, o (d) put these items together with the other assumptions and determine cash needs before financing, o (e) complete the cash budget by determining the necessary borrowing and repayment provisions, including interest payments PDC Operating and Cash Budget Projected Monthly Financial Statements ­ another common way to express the venture’s anticipated cash needs is to project the balance sheet and income statement into the future and produce the statement of cash flows (this is easiest to do when we have already calculated the interest expenses for the four months) – task 2: prepare PDC’s pro forma income statement for the four months o implementation plan: use the summaries of the revenue and expense items to create four months of income statements that include the interest expenses determined in task 1 – task 3: prepare PCD’s pro forma balance sheet for July 31 o implementation plan:  adjust the initial balance sheet, excluding the cash account, for each of the four months of changes;  make sure the equity account reflects each month’s net income,  calculate the cash account balance, which is consistent with total assets = total liabilities + equity,  verify that the resulting cash account balance agrees with that from the cash budget – task 4: prepare PDC’s statements of cash flows for the four-month period o implementation plan:  refer to our discussion of the construction of the statement of cash flows in Chapter 4 and the presentation of cash flow statements in Chapter 5,  apply the cash flow from operations, investing activities, and financing activities to the data for PDC,  verify that the resulting ending cash flow agrees with the cash budget and the cash account balance on the pro forma balance sheets Cash Planning from a Projected Monthly Balance Sheet – task 5: calculate the change in the account balance in a spreadsheet that uses only the beginning and ending balance sheets and net income o implementation plan:  create a spreadsheet with the balance sheets for March 31 and July 31 as columns,  find the difference of the values in the columns and adjust the sign to reflect the change in cash flow, placing these signed differences in a third column,  add the values in the third column to calculate the change in PDC’s cash position directly Beyond Survival: Systematic Forecasting Forecasting Sales for Seasoned Firms Year
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