Schedule

The first half of the schedule is here.

Objectives:

• Know how a cash budget is constructed, how it is used, and how it links to the income statement and the balance sheet.
• Understand how working capital affects the financial health of a business.

Cash Budgeting and Financial Planning

What is a cash budget? How is it constructed? What is it used for? What information is needed? How does it link to a balance sheet and income statement? How do you project pro-forma statements? How do you deal with uncertainty? How do you create a model in Excel? How do you make it look good?

Materials for this Section:

Work through the items below in order. Instructions are either in the item itself or listed below.

Introduction from Dr. Hawley (Articulate)

Financial Planning Presentation (Articulate)

Tyler Paints Example:
       Recorded walk-through (Captivate)
           NOTE: THESE WILL TAKE A FEW MINUTES TO LOAD!
             Part 1 - Calculations
             Part 2 - Formatting A
             Part 3 - Formatting B
        Setup spreadsheet (TylerPaintsRaw.xls)
        Finished spreadsheet (TylerPaintsDone.xls)
    
Working Capital example overview (Audio)
      The actual spreadsheet DWC.xls
      CFO Magazine's 2006 Working Capital Survey article
      and the PDF with the results for 2005

EVA Example: Captivate discussion and spreadsheet.

In Smart, read Chapter 21 and do ALL of the problems. My solutions are here. The authors' solutions are here.

Also read Chapter 22 Section 1 only, and do problems 1,2,6,8-11. The author's solutions are here.

Recorded audio from 03/21 Oxford class: Part 1   Part 2
Recorded audio from 03/28 Oxford class: Part 1  Part 2 (ran out of room before end)

Related Links, Materials, and Assignments:

Optional: Read this supplemental material (same stuff - different book).

Cash Budgeting with Simulation: Read this interesting article on how to put spreadsheet technology to good use in forecasting cash budgets for new ventures.

Project Assignment:

Create a cash budget MODEL for your business. Your model needs to list all input assumptions with appropriate justifications. All inputs must be able to be changed from one location. For this first-round part of the analysis you can set the inputs to your base-case (most likely) assumptions. Submit your cash budget in electronic format via email by Wednesday April 4 at 1:00 PM.

Project Update:

At this point, your marketing plan should be completed. If it isn't, you need to complete it immediately. Further refinement will be acceptable, but you won't have time to work on it much after this. Now you need to build the financial statements.

Start by building a cash budget MODEL. Think about all of the input assumptions concerning revenues (based on your marketing plan's sales forecast) and expenses and set up an entry page in your model for these inputs. Think about which expenses will be related to sales in the short and the long run. Build your cash budget from your inputs. Don't forget about start-up costs. The cash budget needs to be monthly for at least three years, but five is better. Think about all the things that might happen in five years. Your model needs to be able to handle ALL of those contingencies. Think about best-case, expected-case, worst-case scenarios and make sure your model can handle those scenarios. Be sure to include ALL expenses including taxes, insurance, utilities, phones, etc. Be very thorough. Also think about how these expenses will change as the company grows and changes. Pay particular attention to employee costs.

Build your cash budget model RIGHT in the beginning. This will save you a LOT of grief later and greatly improve your planning. Remember two things in setting up your model: (1) I am going to have to read it and have some idea how it works, and (2) you are going to have to print it so it can be included in your written business plan. That means that running 5 years of monthly numbers on one page in the spreadsheet won't work. It has to be broken up into annual pages at least. It also means that it needs to be clearly annotated, easy to use, and well formatted. Good formatting means it looks like you would expect a professional financial report to look.

In the first pass of your cash budget, don't assume any particular type of financing. Just let your cumulative cash deficit or surplus run. Also, do not assume any dividends to shareholders/owners but do include salaries for the active managers (you). Even though you are assuming these items are zero, you will need to build your model to include interest payments and dividend payments so you can add these later.

When you have completed the cash budget model, use it to conduct sensitivity and scenario analysis to test your best/expected/worse case assumptions. The results should show you how much external financing you will need and for how long.

Now build your income statements from your cash budget. This needs to be part of the same MODEL, since the income statements will depend on the settings of the inputs for the cash budget. It is easiest to build the income statements on a monthly basis since that is how the cash budget was constructed. Most of the line items in the income statement will come directly from the cash budget.

Then build the balance sheets, also as part of the same model. Balance sheet items will also depend on what is already in the cash budget and the income statements. As with the income statements, it is easiest to do the balance sheets on a monthly basis. Many items (sales, accounts receivable, inventory, accounts payable, cash) will depend directly on the cash budget and the income statement. Others will depend on your financing plan (loans, equity investors, dividends, etc.)

The final piece in the process will be to add risk analysis to assess the impact of changes in major assumptions. This will be done using scenario analysis in Excel.

CF 21, 22.1

WCBP 10

Objectives:

• Know how to project pro-forma statements using the percent-of-sales method.
• Begin to discuss risk in a spreadsheet model.

Materials:

Integrated example problem:
      Open this spreadsheet first and follow the instructions
      CH22PrC1-WORK.xls   
      The text for the problems is here.

If you need a refresher on accounting statements and their contents (or even if you think you don't need it), read this excellent article by Aswath Damodaran.

Related articles:

Read this great set of articles from the January 2006 Inc. Magazine special report: The Definitive Valuation Guide, including What's Your Company Worth Now? and Judgment Day.

Read about famous value bubbles and crashes here.

Assignment:

Take your cash budget model and extend it to include pro-forma income statements and balance sheets. The resulting model should be accurate, easy to use, and professional in appearance. This assignment is due by Wednesday April 9 at 1:00 PM in electronic format (email).
 

Presentations:

Overview of this section and general updates
General comparison of debt and equity and an overview of leverage
Equity and the equity issue process
Types of debt; what it takes to get a bank loan
Overview of venture capital (Added 4/16)

The straight PowerPoint files for the above are here:

General comparison of debt and equity and an overview of leverage
Equity and the equity issue process
Types of debt; what it takes to get a bank loan
Overview of venture capital

Audio from the Oxford class is here: Part 1    Part 2

Related Links:

Hoover's IPO Central
US Venture Capital Investments by Quarter and Year

Assigned Reading:

Chapter 11 (Read for basic overview only)
Chapters 16 and 17.1-17.4 NO MATH
Chapter 26 which is available here. (Read for a basic overview only. What we need most was covered in the presentation.)

For these chapters, concentrate the most on what was covered in the presentations.

Articles:

The True Costs of Raising Money
What Investors Look for in a Plan

Links (a few of many) for Venture Capital Sources:

Idea Cafe
Garage.com
National Venture Capital Association
Capital Connection's Venture Capital News

Also see the Venture Capital Directory at vFinance and the great information on raising start-up capital at Inc.com. Also, check the comprehensive list of links at Entrepreneur.com.

Links for information on IPOs:

Hoover's IPO Central
SEC-EDGAR IPO Portal

CF 11,16,17,26

WCBP 11

Captivate discussion of risk analysis:

Part 1
Part 2
Example spreadsheet  risk.xls

Wrapping up the Business Plan Project

Articles:

Cash In, Cash Out
The 10 Absolutely Must-Follow Cash Flow Rules

Assignments:

Finish your business plan and presentation.

Work on finishing your business plans and preparing your presentation.

Business Plan Write-up and Presentations Due -- Sunday, May 6, 6:00 PM

Presentations:

We will be very flexible on the format of the presentation. The important thing is that we can get the feel for what the presentation would have been like if your were all here together in the same room with us.

Here are some possible things to do, but we are open to others. Feel free to improvise or suggest.

• Make one PowerPoint presentation and make it as good as possible.

• Audio-record the speakers' parts, and just say when a slide is changing or when the mouse needs to be clicked. We can watch the presentation and play the audio at the same time. You don't need to merge the audios -- just tell us which one is first, second, etc. Put it all on a CD and send it to us.

• OR record video of you talking while the slides are going in the PowerPoint. Send us the tapes or CDs or DVDs. Tell us the order, and we will get it put together.

• OR if have access to a video projector and can use a camcorder to capture you standing by a screen and talking -- that would work, too. Send us the tape, we'll have the PowerPoint, and we'll figure it out.

• OR do a voice-over on the PowerPoint slides. I have to caution you that this is not a strong feature in PowerPoint and it doesn't work great, but it works. Files get big, so you might need to put them on a CD and mail or, of course, FedEx it to us.

• OR mix the above depending on what each of the three team members can do. Just give us all of the parts and a map and we'll put it together.

• The total time of the presentation should be limited to 20 minutes.

• The presentation should not contain every detail of your written business plan. Rather, it should highlight and summarize the important parts of the plan.

• The presentation should be targeted to a potential investor or lender depending on the needs of your company.

Other suggestions are welcome.

Other pointers for write-up:

Your final plan should be all in Word. 2003 format Any material that was done in Excel should be incorporated in the Word document in such a way that it will print on 8.5x11 paper. That is, embed images of your spreadsheets and graphs in the document. Landscape formatting is OK. Deliver your completed financial spreadsheet model and your presentation slides on CD with the write-up file. Give us two printed copies of the write-up.

It is best not to justify the right margins in Word documents unless you hyphenate. Word leaves big white spaces all over the document it you justify the right side and don't hyphenate. Left justification is fine.

Remember that a sizable portion of your project grade depends on the professionalism of your presentation and your write-up. Appearance has a lot to do with professionalism, as does spelling, punctuation, and grammar.

It is always best to show numbers in graphs rather than in tables whenever possible. Humans make much more sense our of pictures (graphs) than they do out of numbers in tables. Use graphs to summarize important number trends and results.

Format long tables of numbers in the write-up (the 3 or 5-year cash budgets and statements) by breaking them into smaller pieces (one year per page, for example) and or summarizing them by quarters and years.

Be sure to provide a good written justification for your assumptions, describe the results of your analysis, and state your strategy as part of the write-up.

Sample instructor evaluation Forms for the write-up and presentation:

Note: These are provided as examples only. The actual content of the forms used for your project may vary from these examples.

Dr. Sloan's Write-up Evaluation Form

Dr. Hawley's Write-up Evaluation Form

Dr. Hawley's Presentation Evaluation Form

Exam 2  -- Finance

Will be Take-Home with several days to complete.
It will be available by 5:00 PM on Friday, May 4th.

The Exam is Here

It will involve at the minimum:

      One cash budgeting problem to be completed in a spreadsheet model

      Some essay questions similar to ones found at the ends of the assigned chapters

      A few other short problems