Entertainment Business Finance: Research
Added on 2019-10-18
24 Pages8569 Words197 Views
EntertainmentBusiness FinancePro Forma ResourcesCreating Your Pro FormaIncome StatementCopyright 2016 Full Sail University
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IntroductionIn 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 tocommercial 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 MissionYou have been asked to create a pro forma income statement for your new company, withthe 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 yourimportant 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 RequirementFor the Pro-Forma Financial Statement Project, you will be required to conduct extensiveresearch 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 expensesDetermine and account for all the necessary operating expenses for your company, including both administrative expenses and cost of goods soldIdentify your company’s operating cash requirements for the first year of operation and up until the time your company reaches the break even pointDetermine the most appropriate sources and forms of financing given the nature of your companyIdentify 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 businessProperly account for your company’s cost of debt based on the determined financial structure of the companyGenerate a forecast for future demand by identifying a target marketEstablish price estimates that incorporate how your customers will pay for your product or serviceCompare your company’s financial performance measures to your competitors and the industry average to fine tune profitability, efficiency, and management effectiveness, and liquidityConsider the real-world implications of a failure to adequately plan for the expenses you will encounter in your businessPlease 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 CostsVirtually all new businesses require considerable planning and preparation prior to actually opening for business. In fact, one reason somesmall businesses fail is their failure to complete properfinancial planning, including the creation of pro formafinancial statements such as the pro forma incomestatement, which is the subject of this exercise. Eventhe simplest online virtual business may likely requirethat at least some initial start-up expenses be incurredprior to the business securing its first customer andgenerating any sales revenue. With that in mind, andfor the purpose of this exercise in particular, you areasked to identify and separate your start-up businesscosts 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 befully-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 potentialdemand. 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 coursesduring 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 competitorsoffer 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.
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