Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Lecture Notes
Appendix 1: Financial Projections for Startups
Learning Objectives
• Explain the purpose of financial projections for startups.
• Describe financial statements as an essential part of financial projections.
• Clarify the relationship between the three financial statements.
• Describe the journey of cash through the cash conversion cycle.
• Discuss how to build a pro forma financial statement.
• Explain how to apply assumptions when building pro forma statements..
Why Do Startups Need Financial Projections?
• Lowers perceived risk
• Helps identify resources
• Shows allocation of resources
• Builds investor confidence
Notes:
Presenting carefully thought-out financial projections to investors is an exercise in lowering
perceived risk in both you as an entrepreneur and your idea. When you are able to frame the
Three Essential Financial Statements
• The Income Statement
• The Balance Sheet
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
• The Cash Flow Statement
Sample Income Statement
Sample Balance Sheet
Balance Sheet Equation
Possible Types of Assets
• Cash
• Machines
• Inventory
• Buildings
Sample Cash Flow Statement
Inflows and Outflows of Cash
• Sources (Inflows) of Cash
• Decrease in assets
• Increase in liability
• Increase in shareholder equity
• Profit from operations
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Linkages Between the Financial Statements
• See Figure A.3: Income Statement/Balance Sheet/Cash Flow Statement
Cash Conversion Cycle
• See Figure A.4: Cash conversion cycle
Notes:
The cash conversion cycle, or days that it takes for cash to return to the business, must be
funded. Any increase in sales usually results in an increase in working capital necessary to
DSO Equation
• DSO = Average Accounts Receivable/Revenue per day
DIO Equation
• DIO = (Average Inventory)/COGS per day
DPO Equation
• DPO = Average Accounts Payable/ COGS per day
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
CCC Equation
• CCC = DSO + DSO – DPO
• You will need:
• Income statement (revenue and COGS)
• Balance Sheet
Critical Policies When Considering Cash Conversion Cycle (CCC)
• Purchasing policy
• Pricing policy
Pro Forma Financial Statement
• Three scenarios of financial forecast