Chapter 11

An entrepreneur of a new company should project the profits of a new company at least how many years into the future?

3

What are practical suggestions about making financial forecasts?

Be certain that the numbers reconcile—and not by simply plugging in figures. Develop realistic sales projections. Do not use unrealistic profit margins.

What are some truths about cost of goods sold?

It can be fixed. It is the cost of producing a firm's products and services. It can be variable.

To forecast a company's financing needs effectively, a small business owner must understand certain basic principles that govern the financing of firms. What are the basic principles?

Some types of short-term debt—specifically, accounts payable and accrued expenses—maintain a relatively constant relationship with sales. The amount of money that a firm can borrow is dependent in part on the amount of money the owners put into the business in the form of owners' equity. A company should finance its growth in such a way as to maintain adequate liquidity.

In gathering needed information for financial forecasting, an entrepreneur should search for relevant information from a variety of sources. What are some resources that are great sources for relevant information?

The Risk Management Association, trade associations, Dun and Bradstreet

A pro forma cash flow statement shows all but which of these items?

a cash budget

What equals the price of the product or service times the number of units sold or the amount of service rendered?

amount of sales

To forecast profitability, an entrepreneur needs to know what that determine the drivers of a firm's profits?

amount of sales, cost of goods sold, operating expenses

What are some factors that drive profits?

amount of sales, taxes, operating expenses

What is a listing of cash receipts and cash disbursements usually for a relatively short time period, such as a week or a month called?

cash budget

What is a listing of cash receipts and cash disbursements, usually for a relatively short time period, such as a week or a month?

cash budget

What is the most important planning document in the life of a small company?

cash budget

The conventional method of measuring a firm's liquidity is what?

current ratio

What is measured by dividing current assets by current liabilities?

current ratio

If you are an entrepreneur creating a pro forma income statement, what would you list as the operating expenses?

depreciation expenses, interest expense, taxes

For every dollar of assets, there must be a corresponding dollar of what?

financing

What are some tactics that represent bootstrapping?

leasing instead of buying, utilizing "just-in-time" inventory strategy, collecting the money owed the firm prior to having to pay its bills

A short-term loan to help with temporary needs, such as seasonal increases in inventory, is called what?

line of credit

What is a short-term loan, usually from a bank?

line of credit

Net working capital is a measure of a company's what?

liquidity

What measures the degree to which a firm has sufficient working capital available to meet maturing short-term debt?

liquidity

What is a method of forecasting asset requirements using a ratio of assets to sales?

percentage of sales technique

Which technique is a method to forecast asset investments and financing requirements?

percentage-of-sales

What are statements that project a firm's financial position, including its projected profits, assets and financing requirements, and cash flows called?

pro forma financial statements

When investors are attempting to value your company based on the numbers, what do you provide to them?

pro forma financial statements

What is a firm's primary force driving future asset needs?

sales

If a business is seasonal, the company needs to pay close attention and plan accordingly when working on which financial statement?

statement of cash flows

When seeking financing, an entrepreneur must be able to give informed answers about the firm's needs, including what?

the purpose for which the money will be used, the amount of money required, when and how the lender or investor will be paid back

What are some purposes of pro forma financial statements?

to project how much and what type of financing (debt or equity) will be needed to finance a firm's assets, to project how profitable a firm can expect to be given the projected sales levels and the expected sales-expenses relationships, to project a firm's cash flow and where it will come from

What are good suggestions for financial forecasting?

using clear assumptions about marketing and pricing plans when creating the financial forecast for the current year, avoid providing too much financial data, avoiding the use of unrealistic profit margins

When looking at a cash budget, what are considered operating cash disbursements?

wages and salaries, inventory purchases, advertising