Crafting a Comprehensive Financial Plan for My Entertainment Business Venture

The assignment content highlights the importance of financial planning and preparation in starting a business. Students are advised to keep in mind that friends, family, and other investors will need to be repaid with a return on investment commensurate with the risk taken. The exercise involves creating a pro forma income statement projection for an entertainment business venture, including monthly interest payments if borrowing from traditional sources such as banks or leases. The assignment also serves as a starting point for students to prepare a comprehensive financial plan and business thesis in their Master of Science degree program.

Entertainment
Business Finance
Pro Forma Resources
Creating Your Pro Forma
Income Statement
Copyright 2016 Full Sail University

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Introduction
In preparing your Pro Forma Income Statement, you are faced with several immediate
and obvious questions. How can I predict what my company’s sales will be the first year
for my new business? How do I know what my rent will be? What types of insurance
coverage will I need for my business, and what will be the cost of that coverage? How
can I estimate utility and other expenses? So many questions! So little time!
Part of the purpose of this exercise is for you to think through these and other questions
relating to starting your business. If you were not attending Full Sail and taking this
course, how would you identify the costs associated with
starting your business? Naturally, you would do some
research regarding the area where you intend to locate, talk to
commercial leasing agents regarding potential office
locations, check utility rates, talk to other small business
owners, and so on. That is precisely the process you should
be in right now. The purpose of this handout is to provide
you with additional information that may be useful in
preparing your pro forma income statement and to allow you
sufficient time to complete your draft for submission.
Be sure that your name and the company name are stated clearly on the worksheet
submission.
The Mission
You have been asked to create a pro forma income statement for your new company, with
the assumption that you will complete all required pre-planning activities this year, so
that you can open for business in January. For this exercise, you have been asked to
create a pro forma income statement by month. You have been provided a sample
income statement format in the form of an Excel worksheet. This is only a sample. It
should be modified as necessary to reflect the needs of your company and include your
important revenue and expense categories. Be sure to add your company name and
change any revenue and expense headings to include descriptions that best communicate
your company’s sales and operating expenses.

Research Requirement
For the Pro-Forma Financial Statement Project, you will be required to conduct extensive
research in order to address each of the issues listed below. In addition to the research
resources provided in this project assignment and resources document, students are
expected to utilize all available reference sources, including company and other websites,
the EBSCO Host database and other similar available database resources, industry trade
association and other publications, filings with the Securities and Exchange Commission
(SEC), relevant business periodicals, and other electronic and printed materials.
If referenced in your formal report presentation, you must provide the proper citation
(using APA format). In your submission, you must:
 Identify and separate the costs associated with starting and operating your
business
 Establish a break even point for your business that includes the recovery of
the appropriate startup expenses
 Determine and account for all the necessary operating expenses for your
company, including both administrative expenses and cost of goods sold
 Identify your company’s operating cash requirements for the first year of
operation and up until the time your company reaches the break even point
 Determine the most appropriate sources and forms of financing given the
nature of your company
 Identify what portion of equity in your company, if any, you are willing to
offer an investor or investors in exchange for their substantial equity
investment in your new business
 Properly account for your company’s cost of debt based on the determined
financial structure of the company
 Generate a forecast for future demand by identifying a target market
 Establish price estimates that incorporate how your customers will pay for
your product or service
 Compare your company’s financial performance measures to your
competitors and the industry average to fine tune profitability, efficiency,
and management effectiveness, and liquidity
 Consider the real-world implications of a failure to adequately plan for the
expenses you will encounter in your business
Please read the accompanying document for detailed resources and information
that will be crucial in preparing your pro forma income statement in a format
that is considered the industry standard.

Start-Up Costs
Virtually all new businesses require considerable planning and preparation prior to
actually opening for business. In fact, one reason some
small businesses fail is their failure to complete proper
financial planning, including the creation of pro forma
financial statements such as the pro forma income
statement, which is the subject of this exercise. Even
the simplest online virtual business may likely require
that at least some initial start-up expenses be incurred
prior to the business securing its first customer and
generating any sales revenue. With that in mind, and
for the purpose of this exercise in particular, you are
asked to identify and separate your start-up business
costs from your first year financial statement, such that these costs do not distort your
ongoing operating expenses.
Start-up costs are those expenses that are incurred and which must be paid prior to the
business actually opening and accepting customers. Examples include legal fees relative
to business formation, marketing expenses prior to opening, and so on. You must isolate
any such projected expenses and develop a detailed listing and budget for these costs that
will be presented in summary form.
We separate these costs since, because the business is not yet actually operating, we are
unable to match revenues and expenses, a key goal of business accounting. Just because
they are separated to prevent distortion in future financial comparisons, they are not
simply set aside and forgotten! In business, these costs must be the subject of our
constant focus and attention, such that they are properly accounted for in our calculation
of breakeven and are paid off as the business begins to show a profit. Generally, we will
reflect the recovery of these pre-opening start-up expenses below the Net Income (profit)
line and identify their recovery as amortization of start-up costs. These expenses must be
fully-recovered prior to any distributions to business stakeholders. Just as we are always
careful to repay our debts promptly, we must also “repay” these start-up expenses by
accounting for their complete recovery prior to claiming a true profit for our business.
For the purpose of this exercise you must establish a breakeven point for your business
that includes the recovery of all startup expenses, with the exception of any assets
acquired via a mortgage or other long-term debt. For those assets, your calculation of
breakeven must include the current interest payment as a fixed expense, which must be
covered before profits can be claimed.

Revenue (Sales)
Creating your pro forma income statement begins with a basic forecast. A forecast is a
quantifiable estimate of future demand. An estimate of the demand for your product or
service begins with a few logical questions:
 What is your target market? Identifying your specific target market, including a
narrow focus on the customer demographics for the market that will most
logically need and want your products and services, will help to quantify potential
demand. Identifying how you will position and distinguish yourself within your
defined target is essential in estimating what you can accomplish in terms of
market penetration.
 How will you price your products? You must establish
price estimates, considering issues such as pricing
versus the competition, quantity and other discounts,
special offers and packages, and so on. In other courses
during your EBMS curriculum, you will learn a variety
of very detailed pricing methods, considerations and
other factors. For now, your basic pricing
considerations should include covering the costs
associated with providing your product or service (such
that your gross profit is at least sufficient to cover your
operating expenses) and proper positioning against
customer expectations and competitive pressures.
 How will your customers pay for your products? Will you extend credit, or will
customers be expected to pay at the time an order is placed? Remember – we
extend credit to customers only in situations where doing so may increase our
sales. There is no other reason for extending credit. Of course, if our competitors
offer credit and we do not, obviously our sales will be adversely impacted.
As you wrestle with these and other issues relative to forecasting your sales, also keep in
mind that sales for most new businesses generally see a “ramp-up” period during the
initial year, as customers in your identified market begin to find and recognize your
company and “the word gets out”. One would logically expect to see sales growth from
month to month during the first year (allowing for any seasonal factors), with customer
trial and eventual acceptance fueling sales increases following the business’s inception.

Fixed vs. Variable Expenses
Any operating business has numerous operating expenses, from the basic Cost of Goods
Sold (COGS) related directly to the production of goods and services to a variety of fixed
and variable costs, some of which may be unique to the particular business. In
determining your cost of goods sold, keep in mind that these are expenses related directly
to the production of your product, and which are only incurred when one or more units of
the product are produced. These expenses include the cost of
any raw materials, product packaging, the cost of shipping to
get the raw materials to us for further production, and so on.
In cases where we can isolate the cost of the labor to
assemble our product and where we would not have incurred
the labor cost had we not produced the item, direct
“assembly-line wages” are also considered part of COGS.
Other examples might also include commission-only
salespeople who are only paid if a sale is made; this would
not apply to regular salaried sales personnel. If the labor is not directly tied to the
production of the product (manager’s salary, accounting or human resource staff, etc.)
those salaries and wages are shown under operating expenses as Salaries & Wages.
In looking at the various expense categories applicable to your business, first consider
which expenses are fixed, and which will likely vary based on your sales volume. Fixed
expenses are those costs we incur regardless of whether we sell one item or 100.
Examples include our rent (or mortgage payment), insurance, utilities and any other
expense where we are contractually committed to payment regardless of sales (vehicle or
equipment lease payments, etc.).
Variable expenses include line items such as marketing, travel, entertainment, office
supplies, printing of promotional materials, postage and other costs that we control and
which we would logically expect to increase as we sell more products and services to
more customers. Think about it this way: if you sell twice as much in your second month
as you did in the first, which expenses will need to be increased and by what amounts?
In order to sell more of your product or service and in addition to increases in your cost
of goods sold, will attracting more customers mean more advertising, going to more
industry trade shows and mailing out more proposals? For that reason, your expenses
may fluctuate month to month.

Salaries and Wages
Staffing a new business can quite an undertaking, especially if your business plan
requires employees beyond the business owners themselves.
In thinking of staffing and salaries and wages for your new business, one consideration
must be thoughtful discussion regarding the absolute minimum staffing requirements for
the company – the level at which we can produce and sell just one unit of our product or
service. The reason we do this is to establish a
“bare bones” approach to staffing the business and
to create a “zero-based” philosophy in evaluating
adding any payroll expense to the business. Each
additional payroll dollar must be expected to pay
for itself in additional sales, otherwise no
additional staffing should be considered.
Not too surprisingly, a new business that is well-staffed in anticipation of immediate sales
success may quickly find itself in a tough cash flow situation when salaries and wages
must be paid, while sales grow takes time to materialize and credit sales may see the
company receiving payment well after the sale is made. With these factors in mind, a
very cautious and conservative approach to staffing is recommended for a start-up
enterprise.
Should we, as owners, take a salary, or simply wait and take our share of profits when
they do finally come? This frequently asked question requires further study. If your
team of founding owners does not take a salary, how will you pay your (personal) bills?
Will you need outside investors to provide funding for your business, or will you use only
your own money to launch the new company? Simply put, if you expect to need outside
investment, it is wise for you to take a nominal salary, such that you are able to devote
100% of your time and attention toward making the business successful. In that situation,
your investor sees that as reasonable, provided the salary is not excessive and also
provided the investor receives an appropriate return on his or her investment prior to you
and the other owners taking any share of profits. This is also logical, since the investors’
cash infusion should entitle them to receive preferential treatment for the first profit
dollars from the successful business.
If, on the other hand, you intend to fund your business solely with your own personal
funds and/or a secured loan from a traditional lender (bank), forgoing a salary for
yourself and waiting to reap the rewards until a profit is available for distribution may
seem to make sense. But always remember that salaries for both you and your employees
are deductible expenses for tax purposes! If you are not taking a salary, then how are you
paying your personal bills?
For this exercise, be careful as you plug in payroll in the form of salaries for you and any
partner(s) you may have. Think of it as if you were starting the business on your own as
a sole proprietorship. Why allocate more salaries to manage the business than you might
have doing it as a single owner? Justify every payroll dollar you include in your plan.

Payroll Taxes and Employee Benefits
Often referred to as PT & EB in business parlance, payroll taxes and employee benefits
must be considered in any business where we have employees and their resulting payroll
expense. Federal law strictly regulates the definition of an “employee”, and wage and
hour laws preclude businesses from treating employees as “independent contractors” in
order to avoid payroll taxes or overtime compensation. For information on the Fair
Labor Standards Act (FSLA) and other important regulations regarding employment,
visit the U.S. Department of Labor and search the Wage and Hour Regulations.
Federal and state wage and hour laws regulate the payment of wages to employees and
have significant implications for payroll departments. These laws regulate the method of
payment of wages, the payment of wages upon termination of employment, allowable
deductions from employee paychecks, the withholding and payment of employment
taxes, wage garnishments, recordkeeping, and the
maintenance of payroll records. Employers must
withhold from employee paychecks certain tax
payments including federal and state income taxes
and FICA. To determine the proper withholding for
federal and state income taxes, employees must
complete a Form W-4 and provide the employer with
their Social Security Number. At the end of each year,
employers are required to report on a Form W-2 each
employee’s earnings and the taxes withheld.
Employers must also have an employer identification number for reporting and paying
federal and state unemployment and payroll taxes. In addition, since 1996, employers
have been required to report new hire information to a state directory as part of federal
legislation on welfare reform.
For the purpose of this exercise, you should assume that payroll taxes will be
approximately 10% of salaries and wages. Keep in mind that, while your business will
also withhold the employee’s portion of the payroll tax, your income statement will only
reflect the portion the company pays.
Source: Business and Legal Reports.com
You are not required to offer your employees specific benefits, although common
business practices include basic vacation and sick pay, holiday pay, and so on. In
addition, of course, many employers offer employer-subsidized medical and other
insurance coverage, 401K and other retirement plans, and so on. As a business just
starting out, generally it is advisable to limit the additional benefits for your employees
until such time as the business can reasonably afford to provide them, provided you are
able to attract and retain the staff you need.

Rent
In starting a business, it is not uncommon for an individual or team to simply work from
home initially in order to save money and especially if the business does not require
direct customer contact that requires a specific central office location. Zoning and other
local legal restrictions, however, may preclude you from running an active business from
your home, particularly in cases where direct customer
traffic may increase beyond residential community
tolerance, product deliveries or outgoing shipments are
frequent, and so on. While these restrictions may not
typically apply to a web-based, virtual company
environment, always consult local regulations regarding
business licensure just to be safe. Once you decide an office location is needed, naturally
it is up to you to determine the optimal location to best serve your needs and still keep
your initial expenses to a minimum.
Of course, you may want to weigh available options for actually purchasing and owning
your business location or office instead of leasing. Since that is generally not a viable
option for many new businesses, this document will focus predominantly on leased space,
at least during the first few years of operation.
In order to estimate rent for your office, you will need to first estimate the square footage
you will require. Consider the intended use for the space. Will you be meeting
customers at the office, conducting business face-to-face with clients, or just using the
office as a base of operations? Will manufacturing or storage space be required? The
level of potential direct customer contact at an office location will help you determine the
need for facilities such as conference rooms, convenient and available parking, restroom
facilities and so on.
Once you have an estimate of your square footage requirement and concept for the
optimal layout (floor plan) for the space, you may consider contacting a commercial real
estate broker in the area where you wish to locate to check current typical lease rates and
terms. You will want to learn what the annual lease rate might be on a square foot basis
and whether there are any additional fees involved (charges for “common area
maintenance”, trash collection, and so on). What does the lease include? Are any
utilities included? Are there any restrictions regarding access, parking, signage, hours of
operation, etc.?
NOTE: IN MAKING RESEARCH CALLS TO LEASING AGENTS OR ANY
OTHER OUTSIDE SOURCE RELATIVE TO SCHOOL PROJECTS, ALWAYS
IDENTIFY YOURSELF AS A STUDENT LOOKING FOR ASSISTANCE ON A
CLASS PROJECT. NEVER POSE AS A SERIOUS POTENTIAL PROSPECT
UNLESS IT IS REALLY YOUR INTENTION TO PURSUE THE PROJECT
FOLLOWING GRADUATION. THIS IS JUST PROFESSIONAL COURTESY.

To Lease or Not to Lease: Things to Know
As you consider the proper location for your business and the alternatives for purchasing
or leasing an office or other facility, you will need to consider your budget and
availability of funds to purchase or lease your office
space. Naturally, if your business plan requires a
purpose-built facility or other unique requirements
where modifying an existing or standard office structure
simply does not make sense, you may want to consider a
purchase option. Otherwise, generally leasing space
may be the best alternative for a new business.
If you will be looking to lease space for your business,
here are some helpful tips in negotiating your lease.
Get the Answers
Here are some questions to ask before signing a lease:
1. Does the lease specifically state the square footage of the premises? The total
rentable square footage of the building?
2. Is the tenant's share of expenses based on total square footage of the building or
the square footage leased by the landlord? Your share may be lower if it's based
on the total square footage.
3. Do the base year expenses reflect full occupancy or are they adjusted to full
occupancy (i.e., base year real estate taxes on an unfinished building are lower
than in subsequent years)?
4. Must the landlord provide a detailed list of expenses, prepared by a CPA, to
support increases?
5. Does the lease clearly give the tenant the right to audit the landlord's books or
records?
6. If use of the building is interrupted, does the lease define the remedies available to
the tenant, such as rent abatement or lease cancellation?
7. If the landlord does not meet repair responsibilities, can the tenant make the
repairs, after notice to the landlord, and deduct the cost from the rent?
8. Is the landlord required to obtain non-disturbance agreements from current and
future lenders?
9. Does the lease clearly define how disputes will be decided?
Source: 327 Questions to Ask Before You Sign a Lease, by B. Alan Whitson (B. Alan
Whitson Co.

Learn the Lingo
Lease terms you should know:
Lessor Landlord
Lessee Tenant
Right of First
Refusal
Before vacant space is rented to someone else, landlord must offer it
to the current tenant with the same terms that will be offered to the
public.
Gross Lease Tenant pays flat monthly amount; landlord pays all operating costs,
including property taxes, insurance and utilities.
Triple Net Lease Tenant pays base rent, taxes, insurance, repairs and maintenance.
Percentage Lease Base rent, operating expenses, common area maintenance, plus
percentage of tenant's gross income (most common for retailers in
shopping malls).
Sublet Tenant rents all or part of space to another business; tenant is still
responsible for paying all costs to landlord.
Assign Lease Tenant turns lease over to another business, which assumes payments
and obligations under the lease.
Anchor Tenant Major store or supermarket that attracts customers to a shopping
center.
Exclusivity
Provision
Shopping center can't lease to another who provides the same product
or service that existing tenant does.
CAM Common area maintenance charges including property taxes, security,
parking lot lighting and maintenance; may not apply to anchor tenants
in retail leases.
Non-disturbance
Clause
Tenant cannot be forced to move or sign a new lease if building or
shopping center is sold or undergoes foreclosure.
Source: Small Business Administration

Legal Fees
In order to secure the services of an attorney, a new business will retain legal services by
entering into an agreement with an attorney to represent the company in all matters going
forward. Retainer fees range from $1,500 - $15,000 depending on the area of law and
skills of the particular attorney.
Generally the retainer should be paid after the initial meeting with your attorney but
before work commences on your company’s case/file. The retainer is used as a down-
payment of sorts, with the hourly rate being deducted as time is spent on the file. Clients
should receive statements on regular intervals showing work that was done, time spent
and remaining balance.
Hourly rates vary by geography. In Florida, rates range from $150 - $500/hr. In
NYC/LA, expect rates to range from $300 - $750/hr.
If the legal need is filling out a basic form, such as copyright, the client can always ask to
spend an hour or so with a paralegal ($75 - $150/hr) to learn how to fill out the form.
Once the client learns the process, they will not need as much assistance with each filing
and can save some cash.
Regarding hiring an attorney: Ask questions! You are paying for a service so do your
homework! If you had an eye issue you wouldn't go to a
podiatrist, so do your homework! Search the web for some
information about the attorney-- how long has he/she been
practicing/what field(s) are covered, his/her educational
background, etc. Also, do not be afraid to ask what areas/fields
they have worked in and some representative examples
regarding projects they have done. Do they write or speak at
any professional conferences? Have they dealt with something
similar to your case? (Note: The Bar Association forbids
attorneys from giving you a guarantee on results or history/record of wins/losses)
As far as the need to use an attorney initially and/or on an ongoing basis, although it is
never a requirement, you should always seek legal advice on any important agreements --
a business name and an occupational license do not a freelancer make! If you will be
doing business with others on a formal, professional basis, having a contract will actually
save you money in the long run.
Above all: Read and seek advice BEFORE you sign any agreement.
Regarding the need to seek protection for the business NAME, if you will be seeking a
trademark - yes, seek advice and secure protection. When starting your business, you
need to protect your name via a standard business registration. In addition, some simple
agreements can lend protection to your name as well.

Occupational and other Business Licenses
Most municipalities require anyone conducting business with the public to have a
business license. Requirements vary widely by location, but are generally relatively easy
to meet, provided your proposed business does not conflict with zoning or other
established community standards.
For example, many cities or
counties restrict the location of
bars and nightclubs relative to
residential neighborhoods, schools,
churches and so on. Businesses
requiring manufacturing and/or
extensive warehouse space may be
limited to certain locations. As previously noted, local ordinances typically restrict using
a residence for an active business, especially if direct customer contact creates additional
traffic, delivery vehicles, or noise.
In some cities (such as Orlando), a business license or permit may be required by both
City and County governments, so be sure to check with the appropriate department in
each jurisdiction. Below is an example of a typical business license application.
Generally, license fees vary based on the number of employees, projected sales volume
and other factors.
http://www.cityoforlando.net/permits/pdfs/BUS%20Business%20License%20app.pdf
Other Licenses, Permits and Fees
Generally an occupational license is all that is required for a small business to begin
operation. It serves notice to the public that you are conducting business at a specific
location, ensures compliance with applicable zoning and other ordinances, and provides
governmental authorities all pertinent information should they need to contact you for
any reason. Beyond that, there may be licenses and permits required for your particular
business type, such as a liquor license for a bar, a health department inspection and
certification for a restaurant, professional licenses for contractors, lawyers, doctors, etc.
and others as may be dictated by local or state laws and ordinances. Some are annual and
require inspections and/or renewals. Fees vary widely based on the nature on the license
or permit.
Improvements to your office or other business location generally require permits from the
local building authority, even if the project is relatively minor or limited solely to interior
upgrades. Check with your local city or county building officials regarding requirements
for life safety (fire protection, ingress/egress requirements, etc.), Americans with
Disabilities Act (ADA) compliance, parking, exterior signage or other issues that may fall
under their purview.

Insurance
All businesses, no matter how small, need insurance coverage to protect from loss.
You've invested so much in your business to get it where it is today. Insurance is like a
silent partner who watches your back so you can focus on the business of doing business.
In some cases, insurance may be required in order to comply with state and federal laws.
As the size of your business grows, your focus shifts, and activities change, insurance
coverage must be evaluated. So, where to start? To some extent the form of business
ownership (sole proprietorship, partnership, corporation, Limited Liability Company,
etc.) will help to determine the types of coverage that should be secured for your
business.
First, you should to consider some of the basic types of insurance available:
Business Owners Policy
This type of policy combines property and liability coverage
in one policy and generally includes additional coverage at
no additional premium.
 Business Property Coverage: Get solid protection
for your buildings, equipment and other business
property.
 Business Liability Coverage: Prevent personal
injury or other liability claims from interrupting your
business. Use business liability coverage to manage your exposure.
Workers' Compensation Insurance
Workers’ Compensation provides income and medical benefits for most workers who are
injured on the job. It can pay for rehabilitation and recovery costs, medical bills, and lost
work time. In addition, workers’ compensation includes death benefits that are provided
to surviving spouses and dependent children of workers who are killed on the job.
Workers’ compensation is not a substitute for health or medical insurance; employees are
only covered for on-the-job injuries.
Business Auto Insurance
This type of insurance provides coverage for automobiles, trucks, and vans used for
business purposes. Major policies are the same as personal auto insurance coverage. Auto
insurance policies pay for damages due to an accident, or damages cause by fire, theft,
flood, and vandalism. Also included is liability coverage for injuries you cause to other
people and damages you cause to other property when you are at fault in an accident.

Umbrella Liability Insurance
Umbrella Liability Insurance provides additional protection for your business against
catastrophic losses that are covered under liability
policies, such as the Business Auto Insurance
policy, commercial general liability policy,
watercraft, and employer’s liability coverage. If a
claim payment on an underlying policy exceeds the
limit of the policy, or if the total of claims on a
policy exceeds the annual aggregate limit, umbrella
liability policies can provide excess limits. It can
also protect against some claims that are not
covered by the underlying insurance policies.
Protect your business. Obtain proper insurance coverage for your business by consulting
with a local insurance agent.
Source: Wells Fargo Small Business Services
For the purposes of this exercise, determine what coverage your business will need,
conduct research online and through conversations with insurance providers, and provide
an estimate of the annual cost in your pro forma projections, with the first year separated
in equal monthly installments.
Utilities
As with rent, you will be able to gain insight into local
utility rates by consulting with commercial real estate
agents in your market and by speaking with other small
businesses of similar size by “playing the student card”,
making it clear that you are looking for assistance and
asking questions regarding their experience with electric
and other utility costs in the neighborhood. Your local
utility company may also be of some assistance, but your
best bet will be to speak with operating businesses with
office sizes and hours of operation most similar to what
you are proposing. Following your first year of
operation, you can expect your utilities to increase
annually at least in line with the overall inflation rate,
possibly greater depending on your location.

Depreciation
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or
other basis of certain property, such as equipment, vehicles and other business assets
which have a useful life in excess of one year. It is an annual allowance for the wear and
tear, deterioration, or obsolescence of the property.
Most types of tangible property (except, land), such as buildings, machinery, vehicles,
furniture, and equipment are depreciable. Likewise, certain intangible property, such as
patents, copyrights, and computer software is depreciable.
In order for a taxpayer to be allowed a depreciation deduction for a property, the property
must meet all the following requirements:
 The taxpayer must own the property. Taxpayers may also depreciate any capital
improvements for property the taxpayer leases.
 A taxpayer must use the property in business or in an income-producing activity.
If a taxpayer uses a property for business and for personal purposes, the taxpayer
can only deduct depreciation based only on the business use of that property.
 The property must have a determinable useful life of more than one year.
Even if a taxpayer meets the preceding requirements for a property, a taxpayer cannot
depreciate the following property:
 Property placed in service and disposed of in same year.
 Equipment used to build capital improvements. A taxpayer must add otherwise
allowable depreciation on the equipment during the period of construction to the
basis of the improvements.
 Certain term interests.
Depreciation begins when a taxpayer places property in service for use in a trade or
business or for the production of income. The property ceases to be depreciable when the
taxpayer has fully recovered the property’s cost or other basis or when the taxpayer
retires it from service, whichever happens first.
A taxpayer must identify several items to ensure the proper depreciation of a property,
including:
 The depreciation method for the property
 The class life of the asset
 Whether the property is “Listed Property”
 Whether the taxpayer elects to expense any portion of the asset
 Whether the taxpayer qualifies for any “bonus” first year depreciation
 The depreciable basis of the property
The Modified Accelerated Cost Recovery System (MACRS) is the proper depreciation
method for most property. Additional information about MACRS, and the other
components of depreciation are in IRS Publication 946, How to Depreciate Property.
Source: IRS.gov

Accounting and Tax Services
As a small start-up company, your immediate needs and goals relative to accounting and
taxes are quite simple:
1. Make certain that your sales (revenues) are properly recorded
2. Collect payments from customers and make deposits into your business account
3. Pay your bills when due and record all expenses of the business
4. Pay your employees on time and make the required payroll tax filings
5. File and pay your taxes on time and as per IRS regulations
There are other services (outside audit of books or business processes, systems
installation and integration, etc.) you may wish to explore, but the basic components
listed above are those most critical to the success of your business initially.
Many Certified Public Accounting (CPA)
firms provide all of the services you might
require. Check with those in your area for a
list of services and fees.
For basic accounting functions, there are
numerous off-the-shelf accounting
applications for small businesses, such as
QuickBooks, Microsoft Small Business
Accounting and many others. All of these
applications provide simple, easy-to-use menu driven functions to assist small business
owners with accounts payable, receivables, expense tracking, and so on. Choose the one
that is right for you and your business, but the relatively low costs associated with such
comprehensive applications make them invaluable to a startup business.
Small businesses frequently outsource payroll processing, since there are strict
requirements for payroll tax deductions and filings, record keeping, issuing W2’s each
year, and so on. Many firms provide these services; an example is ADP
http://sbs.adp.com/
NOTE: AS WITH OTHER EXAMPLES IN THIS DOCUMENT, THIS IS NOT AN
ENDORSEMENT OR RECOMMENDATION FOR A SPECIFIC COMPANY –
JUST A REPRESENTATIVE EXAMPLE.
For this exercise, determine a cost estimate associated with your anticipated use of any
accounting and tax services as noted above. Like legal fees, these costs are generally
included under Professional Fees on the income statement.

Taxes
You’ve likely heard the saying “In this world nothing is certain but death and taxes.” As
a business owner, you are responsible for paying taxes on income you receive from your
business
Self-employed individuals, sole-proprietors, independent contractors and persons who
have net earnings of $400 or more are required to pay self-employment tax by filing
Schedule SE (PDF), attached to their Form 1040, U.S. Individual Income Tax Return.
As a self-employed individual (someone who owns an
unincorporated business) or an independent
contractor, you are required to report income and
expenses on a Schedule C (PDF) or C-EZ (PDF) and
subject to SE tax. The completed Schedule SE will be
attached to your Form 1040, U.S. Individual Income
Tax Return.
As a member of a partnership that carries on a trade or business, or as a member of a
Limited Liability Company (LLC) that chooses to be treated as a partnership, your
distributive share of its income or loss from that trade or business is included in your net
earning from self-employment. These entities must report the business income and
expenses on Form 1065, U.S. Return of Partnership Income, along with a Schedule K-1
reporting each partner's net income or loss. You must file a completed Schedule SE
attached to your Form 1040, U.S. Individual Income Tax Return.
If you have employees, you must pay employment taxes, including Federal income,
Social Security, and Medicare taxes.
If you manufacture or sell certain products, operate certain kinds of businesses, use
various kinds of equipment, facilities, or products, or receive payment for certain
services, you may need to pay excise taxes.
Estimated tax is the method used to pay taxes (including SE tax)
on income not subject to withholding. You generally have to make
estimated tax payments if you expect to owe taxes, including self-
employment tax, of $1,000 or more when you file your return. Use
Form 1040-ES (PDF) to figure and pay the tax.
This includes income from self-employment, interest, dividends,
alimony, rental property income, gains from the sale of assets,
prizes and awards. You also may have to pay estimated tax if the amount of income tax
being withheld from your salary, pension, or other income is not enough.
Estimated tax is used to pay both income tax and self-employment tax, as well as other
taxes and amounts reported on your tax return. If you do not pay enough through
withholding or estimated tax payments, you may be charged a penalty. If you do not pay
enough by the due date of each payment period you may be charged a penalty even if you
are due a refund when you file your tax return.
Source: IRS.gov

NOTE: Regarding Taxes for your Financial Presentation
For the purposes of this assignment and for your pro forma financial presentation, unless
you plan to become a corporation (a full C Corp, not a Sub S or Limited Liability
Company), you will not need to provide an estimate for your taxes. If you do plan to
create a corporation, you will need to provide an allowance for taxes on the pro forma
income statement using information available from the IRS in Publication 505,
Opening Your Business
There are many things that must be done before you are ready to open your business and
accept customers. Although it is not required for this assignment, in real life you will
find it extremely important to create a timetable and schedule
for opening your business in the form of a Gantt chart or
other project schedule. There are many types of project
scheduling applications, including Microsoft Project,
OmniPlan and others. A freeware version using Excel is
available from xl-EasyGantt and you can download it here:
Gantt Chart

Funding
As the legendary comedian Bob Hope tells us: “A bank is a place that will lend you
money if you can prove that you don’t need it.”
For most start-up businesses in the entertainment or any other industry, traditional
sources of equity and debt financing will not be your most likely options for funding your
business. Why? As we will discuss in this course, banks and other lending institutions
will look very critically at you and any partners with a focus on the “6 C’s” of credit –
Character, Collateral, Capacity, Capital, Circumstances and Coverage. Do you already
have a large percentage of your overall capital needs in the form of available cash or
substantial personal assets? Is your credit rating near perfect? Can you offer a lender a
large down-payment and collateral that the lender can claim should you fail to make your
monthly loan payments? Probably not.
With that said, it doesn’t mean there are not a variety of funding options available to
finance your business and make your dream a reality. In fact, we will spend an entire
class session reviewing available options and discussing specifically how you may
identify and approach investors and lenders.
For the purpose of this exercise, it is important for you to identify several key funding
requirements, as follows:
1. Total start-up costs, as we have defined them
2. Your operating cash requirements for the first year of operation and up until the
time you achieve breakeven (including the start-up costs)
3. A contingency fund of about 10%, just in case you missed something
In addition, as an aspiring entrepreneur you must decide what portion of the equity in
your company, if any, you are willing to offer an investor or investors in exchange for
their substantial equity investment in your new business. This is an extremely important
discussion and ultimate decision – one that will potentially impact your life forever, so
think carefully.
Investors, lenders, friends, family – whatever the source of funding your business – these
people need to be paid back, with a return on their investment commensurate with the
risk they have taken. Keep that in mind as you prepare your financial plan.
For this exercise, if you do anticipate a traditional bank loan, mortgage, equipment lease
or any other form of borrowing, it is essential that you include the monthly interest
payment in your operating expenses under the applicable interest expense line item and
be prepared to explain your assumptions and payment calculation, including the term of
the loan, expected interest rate, and any required down-payment. As noted previously,
any such interest payments must be included in your fixed expenses for the purpose of
calculating your break even. Please note that the entry on your income statement is only
the interest portion of the loan, NOT the entire payment, which includes principal and
interest.

Only the Beginning
Students in Entertainment Business Finance should note that this exercise and this course
overall are intended to assist you in the preparation of a much more comprehensive
financial presentation in the last month of your Master of Science degree program. Over
the next few months and then ultimately in your final business plan and thesis class, you
will take this initial rough draft income statement projection, correct it, refine it and
expand it to include the other essential financial plan elements, including staffing,
balance sheet, cash flow, and other critical reports and analyses. In addition, you will
take many of the concepts you have learned in your leadership, marketing, project
management, and other courses to create a complete, comprehensive business plan thesis,
which may then form the basis for a presentation to potential investors. This exercise is a
great first start toward identifying potential financial problems and dealing with them
early-on.
Other Questions
Students are reminded that, while a key purpose of creating
a pro forma income statement for your business is to better
prepare you for your business plan thesis, an important
aspect is the requirement for you to use your own thought
process and research to identify those factors you believe
will most impact your business. For many students, the
true value of this undertaking is the realization that starting
a business requires considerable research and planning.
Consider the “real world” implications of a failure to
adequately plan for the expenses you will encounter in your
business. If the true answer to the question of whether you
will fail in your entertainment business venture is genuinely
to be “Hell no!” the financial research and planning you do
in advance of opening for business may well prove to be
the deciding factor.
The following pages include a list of helpful online resources to assist
you in researching issues and answering questions relative to your
financial pro forma presentation. As you find other helpful online or
other resources, please be sure to email your Course Director.

Helpful Online Resources
www.sba.gov
Small Business Administration
Tips for starting and financing a small business
http://www.irs.gov/businesses/small/article/0,,id=99336,00.html
Internal Revenue Service
Some useful tips and links to a variety of small business resources
http://www.entrepreneur.com/bizstartups
Entrepreneur.com
A collection of great startup tips and articles including funding ideas
http://www.startupnation.com
Startup Nation
Simple, ten-step checklist, articles, audio/video clips, etc.
http://www.businessownersideacafe.com/
BusinessOwnersIdeaCafe.com
A collection of articles on a wide variety of business issues including startups
http://sbinformation.about.com/od/insurance/
About.com
Insurance information for small business
http://sbinformation.about.com/od/bizopportunities/a/startup101.htm
About.com
Starting a Small Business 101 – the basics of starting a business
http://smallbusiness.yahoo.com/r-mainCat-m-1-getting_started-i?
mcid=1&getting_started=i
Yahoo! Small Business
A comprehensive menu of business startup resources
http://www.startupjournal.com/
The Wall Street Journal
Good articles, pod casts and listing of resources
http://www.allbusiness.com/business_advice/StartingBusiness/index-25.html

AllBusiness.com
Collection of articles and listing of online and other resources
http://www.dol.gov/dol/topic/wages/index.htm
U.S. Department of Labor
Information regarding wage and hour laws and other labor regulations
http://hr.blr.com/
Business and Legal Reports.com
A good source for human resource issues including federal and state requirements
http://www.bison.com/
Bison.com
Information regarding franchising and opportunities in a variety of business sectors
http://www.download.com/XL-EasyGantt/3000-2076_4-10592254.html?tag=lst-0-3
xl-EasyGantt
Freeware project management application using Excel