Using The Same Business You Started In Assignment 1

Using The Same Business You Started In Assignment 1 You Will Continue

Using the same business you started in Assignment 1, you will continue to build a financial plan for the business. Write a four to five (4-5) page paper in which you: Prepare a pro forma balance sheet for the first twelve (12) months of your business. Include the assumptions on which it is based. Justify your balance sheet. Prepare a pro forma income statement for the first twelve (12) months of your business. Include the assumptions on which it is based. Justify your income statement. Prepare a pro forma cash budget for the first twelve (12) months of your business. Include the assumptions that you have made when creating the budget. Justify your budget. Scrutinize the costs (both tangible and intangible costs) of obtaining financial capital for your business start-up to determine whether the costs justify implementation of the funding source. Your business is five (5) years old and running profitably. You are now ready to look outward five (5) more years to take the business to the next level. Determine the specific details that would make the equity approach to valuing your business worthwhile. Provide a rationale with your response.

Paper For Above instruction

The task of constructing a comprehensive financial plan for an established business encompasses several critical components, including the development of pro forma financial statements, analysis of funding costs, and valuation strategies for future growth. This paper will outline these elements focusing on a business that has been operational for five years and is poised for expansion.

Pro Forma Balance Sheet for the First Twelve Months

The pro forma balance sheet projects the financial position of the business at the end of the first year, based on initial assumptions such as sales growth, expense levels, asset acquisition, and financing structure. For this projection, assume the business will experience a moderate sales increase of 10% over the previous year, with costs proportionally aligned to sales. Asset purchases will include new equipment to support increased production capacity, financed through a mix of retained earnings and a short-term business loan. Equity remains stable, reflecting reinvested earnings and no new external equity infusion.

The key assumptions include: a 10% sales growth rate, a gross profit margin of approximately 50%, operating expenses increasing proportionally with sales, and capital expenditures financed through internal funds and credit. The balance sheet justifies that the business maintains sufficient liquidity to meet short-term obligations, with assets primarily comprising cash, receivables, inventory, and fixed assets. Liabilities include current debt and accounts payable, while equity is driven by accumulated earnings.

Pro Forma Income Statement for the First Twelve Months

The income statement forecasts revenues, costs, and profitability over the period. Based on the sales assumptions, revenue is expected to increase from the previous year's $500,000 to approximately $550,000. Gross profit, accounting for a 50% profit margin, is projected at $275,000. Operating expenses include marketing, administrative, and operational costs, which are estimated to rise by 10% aligned with sales. The net income before taxes is projected at around $50,000, assuming stable interest expenses and depreciation. These projections justify the company's profitability and growth strategy, supporting further investments and operational scaling.

Pro Forma Cash Budget for the First Twelve Months

The cash budget models the inflows and outflows, including receipts from sales, payments for expenses, capital expenditures, and financing activities. Assuming collection of accounts receivable within 30 days and payment of accounts payable within 45 days, cash inflows and outflows are aligned with sales and expense cycles. The budget includes assumptions such as a $50,000 initial cash reserve, a planned capital expenditure of $20,000 for equipment, and modest financing costs from a short-term business loan. Justifying this budget involves demonstrating that the business will generate sufficient cash flow to cover operations, debt obligations, and capital investments, while maintaining liquidity for unforeseen expenses.

Costs of Obtaining Financial Capital

Analyzing tangible costs like interest payments, arrangement fees, and potential equity dilution alongside intangible costs such as loss of control, potential covenants, and impact on creditworthiness is crucial. For a start-up or expanding business, debt financing involves interest expenses and possible restrictive covenants that could limit operational flexibility. Equity financing, while avoiding debt costs, could dilute ownership and control. Evaluating these costs against potential benefits reveals that debt might be justified if the cost of capital remains below the expected return on investment. Conversely, equity might be preferable if the business faces high risk or requires significant operational flexibility. The decision hinges on a cost-benefit analysis that considers both tangible and intangible factors, aligning with strategic growth objectives.

Valuation for Next Five Years: The Equity Approach

As the business matures, an equity-based valuation offers a comprehensive method to assess its worth, accounting for intangible assets such as brand value, customer relationships, and intellectual property, alongside tangible assets. Specific details that enhance the credibility of an equity valuation include consistent revenue growth, expanding profit margins, strong cash flow generation, and a robust customer base. A multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or discounted cash flow (DCF) analysis might be utilized to determine enterprise value.

In particular, the equity approach becomes worthwhile when the company's intangible assets contribute significantly to its competitive advantage. A detailed valuation that includes projected future earnings, market position, and industry comparables can justify a higher valuation multiple, attracting strategic investors or acquirers. It also supports decision-making regarding potential equity financing or strategic partnerships to fuel future growth strategies.

In conclusion, the continuation and expansion of a financially stable business require careful preparation of pro forma financial statements, a thorough understanding of funding costs, and strategic valuation methods. These tools enable the business to attract appropriate funding, allocate resources efficiently, and position itself for sustainable growth over the next five years.

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