MBA6090 Entrepreneurship Creativity and Innovation

MBA6090 Entrepreneurship Creativity and Innovation

Financial plans and projection

For determining the viability of the Fast Tailoring Services and to know about the future its prospects, it is keen to develop a financial plan for the business. After making its business plan to know its consistency and attract investment a conversion of the business idea via financial statements a financial plan is being developed for the Fast Tailoring Services. A basic financial plan includes the cash flow projections, income statement and balance sheet of the firm; and in new business, a startup cost analysis is being made to ascertain the cost and expenses incurred in the startup.

The financial plan made it easy to bifurcate, different expenses and cost of needed in running the business by dividing it into categories i.e. start-up expenses and operating expenses (Brigham & Ehrhardt, 2013). Another important part which analyses and projected by the financial plan is estimating and recognising the cash flow of the business for meeting its daily working capital requirements.

The projected financial plan of Fast tailoring services comprising of the start-up cost, cash flow statement, profit and loss or income statement and balance sheet with an acknowledging break-even analysis. All these will the guide the three owners Preet, Jagt and Dhendup summarize their business plan with a supporting projected financial plan; which will determine the performance level and estimate budget for the business to grow in future. All the statements act as a tool to determine the overall performance of the business and take an effective decision guided by the statements (Lowe & Tinker, 2015).  

Startup cost

To commence business from a primary phase till its full build up; an initial costing or funding is required to meet out the first and foremost expenses of setting up business also called as start-up cost or expenses. It majorly involves various registration cost like licenses and permits for the business; initial stock or raw material, rents and rates and an important for the running of business i.e. utility expenses which involve electricity and another set up fees (Investopedia, 2017). Other than startup expenses the statement also includes start-up assets and financing i.e. funds procured or invested. In the financial plan of Fast Tailoring Services, all these elements are covered and shown in the below statement of start-up cost.

The start-up expenses of Fast Tailoring Services include registration fees for the business name, acquiring licenses for the business and permits; various fixed expenses like fees to accountant and solicitor and rental cost etc (Investopedia, 2017). The start-up assets that are possessed by the business while staring up the business are furniture and fittings, sewing machines and shop fittings etc. for giving an initial start to the business the three owners i.e. Preet, Jagt and Dhendup have equally contributed towards the capital of company by funding it with $ 30,000 each and borrowed $45,000 from the outside investors. The total fund capitalised by the owners and investors is $ 135,000. The borrowed fund of $45,000 is backed up for only one year and will be paid by the end of 2018; and will attract an interest of $450 i.e. rate of interest of loan is 10% p.a.  The projected expenses that will be incurred in the set up of Fast Tailoring Services is $120,000 and the surplus remaining out of the total capital after expenses will be $14,400, which can be used by the business in future or for other purposes.

While setting up the business there were many issues such as it was difficult to find keen investors who will be able to understand the business plan and add his capital by attracting an unsecured backed up risk by lending the money. This made the cost of procuring fund at an interest rate of 10% p.a. The main issue concerned with the set up is finding a right source of financing at lower costing. Normally at the early phase or preliminary phase of the business the business incur a loss or the funds are in negative value (Investopedia, 2017); but the financial planning backed up by strong business plan made the Fast Tailoring Services to add up its start-up plan with a surplus fund or cash of $14,400, in its first and initial; year of start.  

Cash Flow Statement

The running cost of business is analysed and evaluated through the cash flow statement of that company. The cash flow statement of a company calculate the flow of cash in the business and gives an outline if the total running cost of the business that basically combines three common activities that every business involves in it i.e. operating, investing and financing cost. The running cost termed as operating cost in the cash flow statement determines the overall working capital or functional requirements of the business to meet out its daily demand and needs (Accounting Coach, 2017).

As shown in the below cash flow statement of the Fast Tailoring Services the cash income and outflow is being projected for the three years considering all the operating costs and in the year 2018 financing cost as the payment of loan of $ 45,000 with interest of $ 450 has been paid off in the first year (Investopedia, 2017). There are not any investing activities as the owners are not investing elsewhere in the initial stage of business growth and securing their money for future needs. The business has been projected with a positive operating income of $ 18,927 that too after paying the loan amount in the first year. And for the further year the business is showing sufficient cash inflow for meeting its operating activities and expenditures.

Profit and Loss Account

The income statement presents the projection for the earnings and assesses the profitability of the business that is ascertained after paying off the interest and tax amount. The sales are anticipated in the income statement which helps in determining the projected revenue capability of the business after meeting all the operating expenses and taxes as well (Accounting explanations, 2017). As shown in the below profit and loss account the anticipated sale of the Fast Tailoring Services for the three consecutive years are $ 125,000 in 2018, $ 175,000 in 2019 and $236,000 in 2020 (Investopedia, 2017); for which the company targets approx. 25,000 customers in 2018, and 40,000 and 60,000 in the year 2019 and 2020 respectively. The total amount of expenses incurred in the three consecutive years is $68,500, $72,730 and $74,440; before paying tax. The net income has been projecting a growth with every year.

Balance Sheet

The balance sheet of the company highlights and represents the overall performance of the business for the stakeholders. It analyses the financial stability of the company and serves as an integral part of the financial statements of the company (Accounting Coach, 2017).  The Fast Tailoring Services balance sheet for the year 2018 projects a positive cash flow of $18,927 which is carried forward in the next year as presented in the cash flow statement. The balance sheet of Fast Tailoring shows a positive growth rate by expertise in managing its expenses and cost bearing capabilities (Investopedia, 2017). The second year 2019 has shown an immense increase in the projection of cash followed in the third year 2020 as well; which shows the stability and payable capacity of the firm.

Break-Even Analysis

The break-even point analyses the firm’s capacity to attain a no profit and loss situation i.e. the critical point which is mandatory for the company to achieve, to show its strength in generating profit by preferably meeting all its expenses and cost. The break-even analysis of the Fast Tailoring Services is shown below in the table by considering the following factors (The Balance, 2017):

Break-Even Point (in $) = Fixed Cost/Gross Profit Margin

Fixed Cost = $ 50,000

Gross Profit Margin = 110000/125000 = 88%

Break-Even Point (in Units) = Fixed Cost/Contribution

Form the calculations the Break-even point of Fast Tailoring Services is arising at serving 12500 customers i.e. 12500 units or earning $ 56,818 to achieve the break even. This means that after serving the 12501 or above customers the firm will start earning the profit and diverted on the growth path.

References

1. Accounting Coach. (2017). Balance Sheet (Explanation). [Online available at: https://www.accountingcoach.com/balance-sheet/explanation  Last accessed on: 20 October, 2017].

2. Accounting Coach. (2017). Cash Flow Statement (Explanation). [Online available at: https://www.accountingcoach.com/cash-flow-statement/explanation Last accessed on: 20 October, 2017].

3. Accounting explanations. (2017). Profit and Loss Account. ). [Online available at: http://www.accountingexplanation.com/profit_and_loss_account.htm Last accessed on: 21 October, 2017].

4. Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

5. Investopedia. (2017). Business Plan: Your Financial Plan. [Online available at: http://www.investopedia.com/university/business-plan/business-plan7.asp  Last accessed on: 20 October, 2017].

6. Investopedia. (2017). Business Startup Costs: It's In The Details. [Online available at: http://www.investopedia.com/articles/pf/09/business-startup-costs.asp  Last accessed on: 20 October, 2017].

7. Lowe, T., & Tinker, T. (2015). The information content of financial Management , financial plans, and MCS: an integration. International Journal of Critical Accounting, 7(5-6), 427-439.

8. The Balance. (2017). How to Do a Breakeven Analysis. [Online available at: https://www.thebalance.com/how-to-do-a-breakeven-analysis-1200834 Last accessed on: 21 October, 2017].