Most costs are a mixture of variable and fixed costs. Cost behavior determines how much a cost will change in relation to the unit volume of production or selling activity of a business.
The cost of purchasing a patent can be capitalized as a long term asset in the balance sheet and amortized over its useful life. Research and development costs incurred in developing a product which is later patented are normally not capitalized and are treated as an expense in the income statement.
The accounting equation may be expressed as Assets = Liabilities + Equity and is the basis for all accounting using the double entry bookkeeping system. One side of the equation shows the assets of the business whereas the other shows how those assets are funded. The basic accounting equation underlies all financial projections based on the three statement financial model.
The financial projections template produces an income statement, balance sheet and cash flow statement for the business. These 3 financial statements appear initially to be unconnected; however, closer investigation shows that they are linked and a change in one statement substantially impacts the other statements. The entrepreneur need to understand these connections in order to be able to understand the financial performance of the business.
As part of the process of producing financial projections for a start-up business it may be necessary to undertake a simple financial statement analysis of competitor businesses. This process will help the entrepreneur understand what drives the financial model and assist in generating reasonable assumptions for the business plan.
The reorder quantity formula can be used to calculate the minimum level of inventory a business should maintain to be able to satisfy customer demand for its products. The calculation takes into account supplier lead times and customer demand and helps a business to operate at its optimum level of working capital.
This inventory carrying cost formula can be used to calculate the economic lot size (EOQ) which a business should use to place purchase orders with suppliers. The total inventory cost calculated can be used in the financial projections template by adjusting the inventory days assumption.
Financial projections require cost forecasts to be made based on key cost drivers. Most costs are mixed in that they contain both a variable and a fixed cost component. Excel linear regression analysis can be used to identify both of these components based on past data to enable a cost forecast equation to be developed.
The customer acquisition cost is calculated by dividing the sales and marketing costs by the number of new customers acquired during an accounting period. To make economic sense the lifetime value of the new customer must be greater that the cost to acquire the customer.
For the purposes of the financial projection template other liabilities are defined as amounts owed by a business at the year end arising from operating expenses, finance costs, and income tax expenses. The year end value of other liabilities is calculated using the other liabilities days assumption.
The opening day other liabilities balance forms part of the opening balance sheet of the business. For the purposes of the financial projections. other liabilities are amounts which are owed by the business in respect of operating expenses, finance costs and income tax expenses.
The working capital over total assets ratio is a financial ratio used by a business to give an indication of it’s liquidity or financial distress. The ratio is calculated by taking the difference between the current assets and current liabilities and dividing this by the total assets of the business.