This chapter introduces several financial projection techniques. A single fictitious example of a new venture (MPP Plastics Inc.) is used to illustrate how to prepare each pro forma statement. Each of the planning tools is designed to provide the entrepreneur with a clear picture of where funds come from, how they are disbursed, the amount of cash available, and the general financial well-being of the new venture.

The pro forma income statement provides a sales estimate in the first year (monthly basis) and projects operating expenses each month. These estimates are determined from the appropriate budgets, which are based on marketing plan projections and objectives.

Cash flow is not the same as profit. It reflects the difference between cash actually received and cash disbursements. Some cash disbursements are not operating expenses (e.g., repayment of loan principal); likewise, some operating expenses are not a cash disbursement (e.g., depreciation expense). Many new ventures have failed because of a lack of cash, even when the venture is profitable.

The pro forma balance sheet reflects the condition of the business at the end of a particular period. It summarizes the assets, liabilities, and net worth of the firm. The break-even point can be determined from projected income. This measures the point where total revenue equals total cost.

The pro forma sources and applications of funds statement helps the entrepreneur to understand how the net income for the year was disposed of and the effect of the movement of cash through the business. It emphasizes the interrelationship of assets, liabilities, and stockholders' equity to working capital.

Software packages to assist the entrepreneur in accounting, payroll, inventory, billing, and so on are readily available. The cost of these packages will vary depending on the size and type of business.