Page 149 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes A financial plan involves several forecasting techniques: the forecasting begins with
estimates for production and sale, followed by cash budget, working capital, projections
in relation to P&L account, cash flow and balance sheet.
From these projections the break-even of the company can be calculated and ratios can be
analyzed to study the financial feasibility of the proposed business venture.

It is important to mention that because of external and internal factors affecting business
the break-even and hence profit generation for the business begins only after the completion
of first year for most of the organization.
The projections are made for three consecutive years to give a better picture of the proposed
business in terms of financial viability.

Users of financial statement information do not necessarily need to know everything
about accounting to use the information in basic statements.

The Balance Sheet is a statement detailing what a company owns (assets) and claims
against the company (liabilities and owners’ equity) on a particular date.
An important concept in understanding the income statement is Earnings Per Share (EPS).
The EPS for a company is net income divided by the number of shares of common stock
outstanding. It represents the bottom line for a company.

9.6 Keywords

Assets and Claims on Assets: Debits increase assets or decrease claims on assets (liabilities and
owners’ equity). Credits increase claims on assets or decrease assets.
Balance Sheet: The Balance Sheet is a statement detailing what a company owns (assets) and
claims against the company (liabilities and owners’ equity) on a particular date.
Cash Flow: Cash flow is the movement of money into or out of a business, project, or financial
product.
Earnings Per Share (EPS): EPS for a company is net income divided by the number of shares of
common stock outstanding.

Expenses: The economic costs that a business incurs through its operations to earn revenue.
Financial Plan: A comprehensive evaluation of an investor’s current and future financial state
by using currently known variables to predict future cash flows, asset values and withdrawal
plans.
Income Statement: The Income Statement shows a firm’s revenues and expenses, and taxes
associated with those expenses for some financial period. Where the Balance Sheet may be
thought of in terms of the “left–right” orientation previously discussed, the income statement
would be thought of in “top–down” terms.
Profit and Loss Account: A financial statement that summarizes the revenues, costs and expenses
incurred during a specific period of time - usually a fiscal quarter or year.

9.7 Review Questions

1. Explain the necessity of understanding financial statement.
2. “Finance is the lifeblood of any enterprise.” Critically examine the statement.
3. What is the distinction between operating ratios and leverage ratios? Explain with suitable
examples.

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