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MGT602 - Entrepreneurship - Lecture Handout 30

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  1. To understand why positive profits can still result in a negative cash flow.
  2. To understand the role of budgets in preparing pro forma statements.
  3. To learn how to prepare monthly pro forma cash flow, income, balance sheet, and sources and uses of funds statements for the first year of operation.
  4. To explain the application and calculation of the break-even point for the new venture.
  5. To illustrate the alternative software packages that can be used for preparing financial statements.


A. The financial plan provides a complete picture of:

  1. How much and when the funds are coming into the organization.
  2. Where the funds are going.
  3. How much cash is available?
  4. The projected financial position of the firm.

B. The financial plan provides the short-term basis for budgeting and helps prevent a common problem-lack of cash.

C. The financial plan must explain how the entrepreneur will meet all financial obligations and maintain its liquidity.

D. In general, the financial plan will need three years of projected financial data for outside investors.


A. Before developing the pro forma income statement, the entrepreneur should prepare operating and capital budgets.

  1. If the entrepreneur is a sole proprietor, he or she will be responsible for the budgeting decisions.
  2. In a partnership, or where employees exist, the initial budgeting process may begin with one of these individuals.
  3. Final determination of budgets will ultimately rest with the owners or entrepreneurs.

B. In the preparation of the pro forma income statement, the entrepreneur must first develop a sales budget, an estimate of the expected volume of sales by month.

  1. From sales forecasts, the entrepreneur will determine the cost of these sales.
  2. Estimated ending inventory will also be included.

C. Production or Manufacturing Budget.

  1. This budget provides a basis for projecting cash flows for the cost of goods produced.
  2. The important information in this budget is the actual production required each month and the needed inventory to allow for changes in demand.
  3. This budget reflects seasonal demand or marketing programs, which can increase demand and inventory.
  4. The operating budget is an important document, as the pro forma income statement will only reflect the actual costs of goods.

D. Operating Budget.

  1. Next the entrepreneur can focus on operating costs.
  2. Fixed expenses (incurred regardless of sales volume) include rent, utilities, salaries, interest, depreciation, and insurance.
  3. The entrepreneur will need to calculate variable expenses, which may change from month to month depending on sales volume, such as advertising and selling expenses.

E. Capital budgets are intended to provide a basis for evaluating expenditures that will impact the business for more than one year.

  1. A capital budget may project expenditures for new equipment, vehicles, or new facilities.
  2. These decisions can include the computation of the cost of capital and the anticipated return on investment using present value methods.
  3. The entrepreneur should enlist the assistance of an accountant.

Related Content: MGT602 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Entrepreneurship