FINANCIAL PROJECTIONS

LEARNING OBJECTIVE
I will be able to acquire a theorical notion of different financial concepts for the development of a
business plan.
We will be able to develop the financial projections of our business idea.

SUCCESS CRITERION:
• I can define and explain different financial concepts
• I can identify differences between financial concepts.
• I can describe financial concepts in my own words
• I can exemplify financial concepts.
 GLOSSARY ACTIVITY
INSTRUCTIONS
• According to your list number, identify the new concept assigned to you.
• Investigate this concept: what it is, what is it for, give examples. Consider using reliable
sources.
• What is it? Define in a complete but synthesized way the given concept.
• What is it for? Explain what the purpose of that concept is, why the concept is
important applied to a business.
• Examples: Illustrate this concept with three examples.
• In one or two slides, clearly, with Good spelling and writing, create a mini-presentation
of your concept. Include images, color, etc., that attract attention.
• Study this concept to prepare yourself and explain it to your classmate's next class.
Time of presentation 3 min max.
• PPT presentation must be uploaded by the end of the class in virtual classroom activity.
 GLOSSARY
1. Budget 18. Leasing 27. Raw material
2. Cash Flow 19. Bank Loan 28. Taxes
3. Loans
20. Sales and leaseback 29. B2B
4. Capital Investment
21. Venture Capital 30. B2C
5. Income Statements
22. Franchising
6. Revenue 31. Benchmarking
23. Crowd-funding
7. Direct or variable costs 32. Break-even point
8. Indirect or fixed costs 24. Liquidity
33. Cash Flow: inflows and outflows
9. Overheads 25. Profit
10. Costs – fixed costs 26. Wages and salaries
11. Retained profit
12. Working capital
13. Sales of assets
14. Overdraft
15. Trade credit
16. Debt
17. Equity
BUDGET– A business budget is a spending plan for your business based on your income and expenses. It identifies your
available capital, estimates your spending, and helps you predict revenue.
CASH FLOW: The money that a business have available to plan the day-to-day running of a business. Without sufficient
cash a business cannot pay its bills; if it is a long-term problem, then the business will eventually fail.
Cash inflows: Money coming into the business. Revenue/sales, Loan, Share Capital.
Cash outflows – Money going out of a business. Salaries, mortgages, suppliers.
LOAN – Amount of money that is borrowed, often from banks and has to be paid back, usually together with an extra
amount of money that you have to pay as a charge for borrowing.
CAPITAL INVESTMENT – Money that is spent on building and equipment to increase the effectiveness of a business.
INCOME STATEMENTS – formal statement that details the profit a business makes over a particular period (usually a
year). Potential investors and current investors use the income statement to see how much money the company is
making and how much it is prepared to pay them, in the form of dividends.
REVENUE – Money that a company receives, especially from selling goods and services
DIRECT AND VARIABLE COSTS
Direct costs
• Costs that are directly related to the creation of a product and can be directly associated with that product. Direct
material is an example of a direct cost. Direct costs are almost always variable because they are going to increase
when more goods are produced. An exception to this is labor. Employee salaries may be fixed and unlikely to change
over the course of a year. However, if the employees are hourly and not on a fixed salary then the direct labor costs
can increase if more products are manufactured.
Indirect costs
• Not directly related to a specific cost object like a function, product or department. They are costs that are needed for
the sake of the company’s operations and health. Some other examples of indirect costs include security costs,
administration costs, etc.
OVERHEADS – The regular and necessary costs, such as rent that are involved in operating a business.
COSTS – The production department of a business splits costs into:
- Variable costs: the ones that are directly linked with the production. These are costs such as raw material, packaging
and direct labor. The more a company produces, the more variable costs it must pay.
- Fixed costs: costs that are not linked to production. Are all the other costs that a business must pay. These are fixed in
the sense they do not change with production. Internet, rent, marketing.
RETAINED PROFIT- is money that your business has earned after you've taken costs and other payments into account.
WORKING CAPITAL - indicates the liquidity levels of businesses for managing day-to-day expenses and covers inventory,
cash, and short-term debt. It is an indicator of the short-term financial position of an organization and is also a measure
of its overall efficiency.
SALE OF ASSTES - When companies let. go of some assets in exchange for needed cash or other forms of compensation,
this term only applies when a company is selling part of their assets and not when all of them are for sale.
OVERTRAFT - when there isn't enough money in an account to cover a transaction or withdrawal, but the bank allows
the transaction anyway. It's an extension of credit from the financial institution that is granted when an account reaches
zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it
or has insufficient funds to cover the amount of the withdrawal.
TRADE CREDIT - is a type of commercial financing in which a customer is allowed to purchase goods or services and pay
the supplier at a later scheduled date.
B2B: A situation where one business makes commercial transaction with another business. Example: An accounting
company is an example for business-to-business services.
B2C: Business or transaction conducted directly between a company and a customer. Example: McDonald’s
LIQUIDITY – Is the extent to which a business can meet its short-term debts. It is the extent to which the business can
pay its bills.
TAXES - VAT (IVA) is in general due when goods and/or services are sold. It applies to most goods and services that are
bought and sold for use or consumption in Colombia. It is a consumption tax because it is ultimately borne by the final
consumer.
FRANCHISING
One other way of reducing the need for finance is for a business to grow through franchising. In return for an initial fee
and share of profit, the franchisor allows other firms (franchisees) to use its brand and sell its products. The franchisor is
therefore able to grow its business without the need for significant capital investment.
CROWD-FUNDING
Based on Micro-donations, crowd-funding uses the social power of the internet to help small firms launch creative
projects or environmentally friend products.
RAW MATERIAL
The unprocessed materials that are needed to produce a product. input goods or inventory that a company needs to
manufacture its products. The price of supplies will have a direct effect on how much it costs the company to produce a
product. A higher cost of raw materials will lead to a higher cost of production . If a company can find a cheaper supplier,
it could lead to increased profit.
BENCHMARKING: is a process of measuring the performance of a company's products, services, or processes against
those of another business considered to be the best in the industry, aka “best in class.” The point of benchmarking is to
identify internal opportunities for improvement.
PROFIT – Is the money that a business makes over a particular period of time. It is the difference between the selling
price and the cost of supplying that product.
Profit = sales revenue – costs
WAGES AND SALARIES
Wages: is compensation paid to employees for work for a company during a period of time. Are always paid based on a
certain amount of time. This is usually an hourly basis. This is where the term hourly worker comes from.
Salary: is the money that someone is paid each month by their employer, especially when they are in a profession such as
teaching, law, or medicine.
INTERNAL AND EXTERNAL SOURCE OF CAPITAL
Where a business gets its money from.
Internal finance – Money obtained from within the business
External finance – Money obtained from sources outside of the business.

Owners’
funds
Sales of
assets
INTERNAL
Working
Capital
SOURCES Retained Trade credit
OF CAPITAL profit Overdraft
Debt factoring
Short term
EXTERNAL Leasing
Bank loans
Long term Sales and leaseback
Venture Capital
DEBT AND EQUITY
Sources of finance can also be categorized as debt or equity.
DEBT: This involves using money that must be repaid, plus interest
EQUITY: This most commonly refers to raising money by selling shares in the company. It can also refer to owners’
funds (known as private equity).
Whether a firm uses debt capital or equity will depend on the owners’ willingness to share ownership of the
business.

OWNERS’ FUNDS Members of a partnership may inject more of their own money into a business
INTERNAL SOURCE OF FINANCE

Once a business starts to make profit, it can use this profit as a source of finance.
RETAINED PROFIT
Putting back profit into a business has the advantage of avoiding the cost of
external finance.

Money available for immediate use to fund day-to-day operations. Reducing

WORKING CAPITAL inventory, delaying payment, can help to increase the amount of working capital
available.

A firm could sell buildings, vehicles or even parts of its business as a way of
SALES OF ASSETS
generating funds. To help it reduce debts.
 OVERDRAFT Short term bank loan. A bank allows a business to draw out of its
account more money than it has deposited. Is often used to cover
cash shortage and may only be overdrawn for a matter of days.
SHORT TERM

Most business-to-business transactions are completed on a credit

TRADE CREDIT basis. A business does not pay immediately for the goods it
Used to fund purchases; it may be given 30, 60 or 90 days to pay.
revenue
expenditure and This credit period gives the firm time to dell the goods and
EXTERNAL SOURCE OF FINANCE

are usually therefore generate funds to pay the supplier.

repaid within
one year.
By leasing an asset instead of purchasing it, a business reduces the
LEASING amount of finance it needs to raise. A business pays a set fee to
ease an asset for a period of time.

Are usually repaid on a monthly basis over a number of years. The

LONG TERM BANK LOANS
bank charges interest on the loan amount.

SALES AND Business use sale and leaseback to resolve short-term cash flow
LEASEBACK crisis. The business sells an asset (usually a building) and the lease
Used to fund it back from its owner. This generates an immediate inflow of cash
capital at the expense of long-term lease payment.
expenditure and
is usually repaid Are specialist finance providers. Where a start-up is unable to
VENTURE
over a period raise sufficient funds, it often uses venture capital. It invest in
CAPITAL
longer than one smaller, risky ventures and do not ask for security. They loan
year. money in return for a share of the business or for a share of any
eventual profits.
BREAK-EVEN POINT
The concept refers to the point where a product’s income is equal to its costs
To calculate the break-even point, you need to know the product’s selling price, the variable costs and the fixed costs