CH 11: Financial Preparation for Entrepreneurial Ventures

Despite the drawbacks of the payback method, why should the entrepreneur continue to use it?

(1) It is very simple to use in comparison to other methods (2) projects with a faster payback period normally have more favorable short-term effects on earnings. (3) if a firm is short on cash, it may prefer to use the payback method because it provides a faster return of funds.

Principle objective of capital budgeting is to

- A technique the entrepreneur can use to help plan for capital expenditures. - Principal objective of capital budgeting is to maximize the value of the firm - Identify the cash flows and their timing. - With depreciation added back, as represented by the following formula: Expected Returns 5 X(1 - 2T)1 Depreciation X is equal to the net operating income, and T is defined as the appropriate tax rate. An illustration follows. 1. Which of several mutually exclusive projects should be selected? (Mutually exclusive projects are alternative methods of doing the same job. If one method is chosen, the other methods will not be required.) 2. How many projects, in total, should be selected?10

A manufacturing firm needs to establish which of the following budgets?

- a material purchases budget - production budget, a material purchases budget based on the production budget, and the corresponding direct labor budget. calculated by subtracting the period's beginning inventory from the inventory needed for that period.

Number of units needed in inventory in production budget for a manufacturing firm is determined by:

- the sum of the desired ending inventory and the number of units to be sold. - determine how many of these units will be accounted for by the beginning inventory (which is the prior month's ending inventory) and how many units will have to be produced. - subtract the period's beginning inventory from the inventory needed for that period.

how many periods are required using trend line analysis?

5

contribution margin approach

Contribution margin is the difference between the selling price and the variable cost per unit. 0 5 (SP 2 VC) S 2 FC or FC 5 (SP 2 VC)S where SP 5 Unit selling price VC 5 Variable costs per unit S 5 Sales in units FC 5 Fixed cost

The set of assumptions on which financial projections are based have little meaning.

False

What's needed in preparing a pro forma balance sheet?

The last balance sheet prepared before the budget period began, the operating budget, and the cash-flow budget are needed to prepare it.

Pro forma statement

f a firm's financial position during a future period

Preparation steps of the cash-flow budget:

identification and timing of cash inflows. Typical business, cash inflows will come from 3 sources: (1) cash sales (2) cash payments received on account (3) loan proceeds

Horizontal analysis

looks at financial statements and ratios over time.

fixed cost

one that does not change in response to changes in activity for a given period of time; rent, depreciation, and certain salaries are examples.

regression analysis

the entrepreneur will draw conclusions about the relationship between, for example, product sales and advertising expenditures.

1st Step in the Operating budget:

the preparation of the sales forecast.