Prepare A Financial Plan For The Company ✓ Solved
preparea Financial Plan For The Company
Prepare a financial plan for the company you select for your business plan. This financial plan will be included in your final business plan in your capstone course. Describe the business, including the type of business. Create the business case.
Determine why funding is needed for the company.
Determine the sources of funding.
Consider self-funding, borrowing, equity, venture capital, etc.
Evaluate the requirements of each funding source you determined appropriate.
Analyze the associated risks of each funding source.
Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs (Annual Percentage Rates) for your selected sources of funding. Consider creating a table or chart to display this information.
All the above items should be submitted via an MS Word document (700 to 1050 words is the minimum range) Cite a minimum of three references with in-text citations.
Create a profit-and-loss statement for a 3-year period. Project revenue, stating realistic assumptions, such as growth per year, in your projections.
Estimate direct costs, including capital, marketing, labor, and supply costs.
Spreadsheet -- the above two items should be done via a MS Excel Spreadsheet (please show your work in the cell background when calculations are involved). Format your citations according to APA guidelines. Submit your assignment (one spreadsheet and one document -- no pdf files please).
Sample Paper For Above instruction
Introduction
The financial planning process is a critical component of establishing a successful business. It involves articulating the business’s financial needs, identifying funding sources, assessing risks and costs, and projecting future revenue and expenses. For this sample, we will consider a hypothetical company, EcoInnovate, which specializes in eco-friendly consumer goods. The following financial plan encompasses the business description, funding requirements, sources, risks, cost of capital, and financial projections over three years.
Business Description and Case
EcoInnovate is a startup focusing on sustainable, eco-friendly household products. The company's mission is to promote environmentally sustainable living by providing consumers with alternatives to traditional household goods that are biodegradable and non-toxic. The business operates within the consumer goods industry, targeting environmentally conscious customers. The startup aims to capture a niche market that increasingly values sustainability, with projected steady growth due to rising environmental awareness.
Funding Requirement and Rationale
In initial stages, EcoInnovate requires $500,000 for product development, marketing, initial inventory, and operational costs. The funding is essential to cover capital expenses, such as manufacturing equipment, raw materials, and staffing, as well as marketing campaigns to build brand awareness. The business case hinges on capturing a specific segment of eco-conscious consumers, leveraging the increasing demand for sustainable products. This initial funding will help secure market entry and build an operational infrastructure.
Sources of Funding and Evaluation
EcoInnovate considers multiple sources of funding:
- Self-funding (personal savings)
- Bank loans (debt financing)
- Angel investors (equity investment)
- Venture capital (VC funding)
Self-funding, while reducing external dependencies, is limited to personal savings and may not suffice for scale. Bank loans offer lower interest rates but require collateral and creditworthiness. Angel investors provide equity capital, with the advantage of mentorship, but dilute ownership. Venture capital offers significant funding but expects high growth returns and involves giving up some control.
Each funding source’s requirements, risks, and suitability are evaluated. Bank loans entail repayment risks, especially if sales projections do not meet expectations. Equity investments, while dilutive, provide capital without immediate repayment obligations, although they may lead to loss of control. Venture capitalists seek rapid growth and will require an exit strategy, posing strategic risks but enabling substantial capital infusion.
Cost of Capital Analysis
The estimated cost of capital varies among funding sources:
- Bank loans: approximately 6.5% APR (based on current market rates for small business loans)
- Angel investors: typically expect an equity return of 20-30% annually, representing a higher implicit cost of capital
- Venture capital: similar to angel investment, but often involves preferred stock with an expected return of around 25% annually
| Funding Source | Estimated APR / Return Rate | Notes |
|---------------------|----------------------------|-------------------------------------------|
| Bank Loan | 6.5% | Short-term debt, secured |
| Angel Investment | 25-30% return | Equity stake, high risk |
| Venture Capital | 25%+ | Equity, high growth expectation |
These figures help compare the costs and risks associated with each source and guide strategic decisions in funding.
Financial Projections and Profit & Loss Statement
Based on market analysis and growth assumptions, EcoInnovate projects revenues increasing at 20% annually over three years. Initial Year 1 revenue is estimated at $200,000, growing to $240,000 in Year 2, and $288,000 in Year 3. The projections assume successful marketing campaigns and growing consumer adoption.
Direct costs are estimated at 50% of revenue, including raw materials, manufacturing, labor, and marketing. Capital costs include equipment purchases, estimated at $100,000 in Year 1. Operating costs include salaries, rent, and supplies, totaling approximately $70,000 annually.
Projected Profit & Loss statements:
Year 1:
- Revenue: $200,000
- Cost of Goods Sold: $100,000
- Gross Profit: $100,000
- Operating Expenses: $70,000
- Operating Income: $30,000
- Interest Expense (on loans): $4,600 (6.5% on $70,000)
- Net Income: ~$25,400
Year 2:
- Revenue: $240,000
- Cost of Goods Sold: $120,000
- Gross Profit: $120,000
- Operating Expenses: $75,000
- Operating Income: $45,000
- Interest Expense: ~$4,600
- Net Income: ~$40,400
Year 3:
- Revenue: $288,000
- Cost of Goods Sold: $144,000
- Gross Profit: $144,000
- Operating Expenses: $80,000
- Operating Income: $64,000
- Interest Expense: ~$4,600
- Net Income: ~$59,400
These projections account for growth, cost assumptions, and interest expenses, providing a realistic financial outlook.
Conclusion
Developing a comprehensive financial plan requires understanding the company’s funding needs, exploring various funding sources, evaluating their requirements and risks, and estimating costs. The projections assist in strategic planning, investor pitching, and operational decisions. The integration of detailed financial statements and capital costing affirms the company’s capacity for sustainable growth within its target market.
References
- Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
- U.S. Small Business Administration. (2023). Funding Options for Small Businesses. https://www.sba.gov
- Investopedia. (2023). Cost of Capital. https://www.investopedia.com
- Gallo, A. (2016). A Refresher on Business Financing. Harvard Business Review. https://hbr.org