Kwame Nkrumah University of Science & Technology, Kumasi

ME 492 Management & Entrepreneurship Development College of Engineering

KWAME NKRUMAH UNIVERSITY OF SCIENCE AND
TECHNOLOGY, KUMASI

COLLEGE OF ENGINEERING
B.Sc. ENGINEERING

ME 492 MANAGEMENT AND ENTREPRENEURSHIP

DEVELOPMENT

[Credit: 2]

Prof. S. H. M. AIKINS

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 Kwame Nkrumah University of Science & Technology, Kumasi

ME 492 Management & Entrepreneurship Development College of Engineering

Course Outline
Entrepreneurship and Free Enterprise; Business Planning; Product and service concepts for new
ventures; Organising and financing new ventures; Current trends (Internet commerce, e-
commerce); Business Law/ Law of Contract.

List of References
1. Edmonds, T.P., Edmonds, C.D. and Tsay, Bor-Yi. (2000). Fundamental Managerial
Accounting Concepts, Irwin McGraw-Hill, Boston.
2. Hisrich, R.D. and Peters, M.P. (2002). Entrepreneurship, 5th Edition, McGraw Hill/Irwin,
Sydney.
3. Holt, D.H. (1992). Entrepreneurship: New Venture Creation, Prentice Hall Inc., New Jersey.
4. Kuratko, D.F. and Hodgetts, R.M. (1998). Entrepreneurship: A Contemporary Approach,
4th Edition, The Dryden Press, Fort Worth.
5. Nickels, W.G., McHugh, J.M. and McHugh, S.M. (1996). Understanding Business, 4th
Edition, Irwin, Chicago.
6. Borton, W. (2008). Principles of Entrepreneurship, Available online:
http://www.wepapers.com/course_view/51/Principles_of_Entrepreneurship/Courses/530/

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 Kwame Nkrumah University of Science & Technology, Kumasi

ME 492 Management & Entrepreneurship Development College of Engineering

ORGANISING AND FINANCING THE NEW VENTURE
ORGANISING THE NEW VENTURE
The Concept of an Entrepreneurial Team and the Roles of Founders and team Members
The entrepreneurial team is more than the official founder(s) and close staff members. It comprises
those who have the enthusiasm and commitment to help, and to be part of, the new venture. The
team is the heart of the enterprise It sets the pace of development, instils a philosophy of leadership,
and provides the inspiration to transform entrepreneurial dreams into commercial realities. The
founders’ role is to define the enterprise and the team needed to make it a successful venture. Team
members have functional roles, management duties, or director’s responsibilities, but they are also
adventurers bound to the new enterprise, not eight-to-fivers.

The Nature of a Board of Directors and the Roles of Directors

A board of directors is required by law for corporations and is the chief decision maker. The board
is accountable to shareholders (stockholders) for performance and for appointing executives, and
it is therefore liable for business conduct. Directors fulfil important roles beyond their decision-
making duties. These include roles as mentors, professional advisers, and members of an expanded
social network. Directors often provide important access to resources, investors, professionals, and
industry groups that are crucial to a venture’s success.

The Importance of Personal and Social Networking in New Ventures

Personal networks consist of family, close friends, and acquaintances within a person’s immediate
circle of daily relationships. These networks may consist of “strong ties,” such as family members
who will provide direct help to the entrepreneur or ‘weak ties,’ such as people affiliated with a
church who will not provide direct help yet may be able to introduce entrepreneurs to their friends
for assistance. Social networks are described in terms of community and industry contacts that can
open channels for entrepreneurs to necessary resources, suppliers, customers, and investors.
Networking is crucial because it opens channels that entrepreneurs need in their industries and
markets to succeed.

Organisational Chart
An organisational chart (often called organisation chart or organigram(me) or
organogram(me)) is a diagram that shows the structure of an organisation and the relationships
and relative ranks of its parts and positions/jobs. The term is also used for similar diagrams, for
example ones showing the different elements of a field of knowledge or a group of languages.
Organisational structure refers to the division of authority, responsibility, and duties among
members of an organisation.

An organisational chart of a company usually shows the managers and sub-workers who make up
an organisation. It also shows the relationships between the organisation's staff members which
can be one of the following:

Line - direct relationship between superior and subordinate.

Lateral - relationship between different departments on the same hierarchical level.
Staff - relationship between a managerial assistant and other areas. The assistant will be able to
offer advice to a line manager. However, they have no authority over the line manager actions.

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ME 492 Management & Entrepreneurship Development College of Engineering

Functional - relationships between specialist positions and other areas. The specialist will
normally have authority to insist that a line manager implements any of their instructions.

In many large companies the organisation chart can be large and incredibly complicated and is
therefore sometimes dissected into smaller charts for each individual department within the
organisation.

There are three different types of organisation charts: Hierarchical, Matrix and Flat.

Limitations of an Organisational Chart

There are several limitations with organisational charts:
1. It only shows 'formal relationships' and tells nothing of the pattern of human (social)
relationships which develop.
2. It shows nothing about the managerial style adopted (e.g. autocratic, laissez faire or democratic)
3. It very quickly becomes out-of-date, especially in large organisations which change their staff
regularly.

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 Kwame Nkrumah University of Science & Technology, Kumasi

ME 492 Management & Entrepreneurship Development College of Engineering

BASIC FORMS OF BUSINESS OWNERSHIP
One key to success in a new business is knowing how to get the resources you need to start. You
may need to take on partners or find other ways of obtaining money. To stay in business, you may
need help from someone with more expertise than you have in certain areas, or you may need to
raise more money to expand. How you form your business can make a tremendous difference in
your long-term success. You can form a business in several ways. The three major forms of
business ownership are sole proprietorships, partnerships, and corporations.

It’s easy to get started in your own business. You can begin a word processing service out of your
home, open a car repair workshop, start a restaurant, or go about meeting other wants and needs of
the community on your own. An organisation that is owned, and usually managed, by one person
is called a sole proprietorship. That is the most common form of business ownership.
Many people lack the money, time, or desire to run a business on their own. They prefer to have
someone else or some group of people get together to form the business. When two or more people
legally agree to become co-owners of a business, the organisation is called a partnership.
There are advantages to creating a business that is separate and distinct from the owners. A legal
entity with authority to act and have liability separate from its owners called a corporation or
company.

Advantages of Sole Proprietorships

1. Ease of starting and ending the business: All you have to do to start a sole proprietorship is
buy or lease the needed equipment (for example, a saw, word processor, tractor, or lawn mower)
and generate some form of an announcement that you are in business. It’s just as easy to get out of
business; you simply stop. There’s no one to consult or to disagree with about such decisions. You
may have to get a permit or license from the local government, but that’s often no problem.

2. Being your own boss: “Working for others simply doesn’t have the same excitement as working
for yourself,” many sole proprietors say. You may make mistakes, but they’re your mistakes - and
so are the many small victories each day.

3. Pride of ownership: People who own and manage their own businesses are rightfully proud of
their work. They deserve all the credit for taking the risks and providing needed goods or services.

4. Retention of profit: Other than the joy of being your own boss, there’s nothing like the pleasure
of knowing that you can make as much as you can and don’t have to share that money with anyone
else (except the government, in taxes).

5. No special taxes: All the profits of a sole proprietorship are taxed as the personal income of the
owner, and he or she pays the normal income tax on that money.

Disadvantages of Sole Proprietorships

1. Unlimited liability: - the risk of losses. When you work for others, it’s their problem if the
business isn’t profitable. When you own your own business, you and the business are considered
one. You have unlimited liability; that is, any debts damages incurred by the business are your

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debts and you must pay them, even if it means selling your home, your car and so forth. This is a
serious risk - one that requires thought and discussion with a lawyer, insurance agent, and others.

2. Limited financial resources: Funds available to the business are limited to the funds that the
one (sole) owner can gather. Since there are serious limits to how much money one person can
raise, partnerships and corporations have a greater probability of recruiting the needed financial
backing to start a business and keep it going.

3. Difficulty in management: Most businesses need some management; that is, someone must
keep inventory records, accounting records, tax records, and so on. Many people who are skilled
at selling things or providing a service aren’t so skilled in keeping records. Sole proprietors may
have no one to help them. It’s often hard to find good, qualified people to help run the business.

4. Overwhelming time commitment: It’s hard to own a business, manage it, train people, and
have time for anything else in life. The owner must spend long hours working. The owner of a
store, for example may put in 12 hours a day at least six days a week - almost twice the hours
worked by a salaried labourer. Imagine how this time commitment affects the sole proprietor’s
family life.

5. Few fringe benefits: If you’re your own boss, you lose the fringe benefits that come from
working for others. You have no health insurance, disability insurance, no sick leave, no vacation
pay, and so on. These benefits may add up to 30 percent or more of a worker’s income.

6. Limited growth: If the owner becomes incapacitated, the business often comes to a standstill.
Expansion is often slow since a sole proprietorship relies on its owner for most of its creativity,
business know-how, and funding.

7. Limited life span: If the sole proprietor dies or retires, the business no longer exists unless it’s
sold or taken over by the sole proprietor’s heirs.

Partnerships
A partnership is a legal form of business with two or more owners. There are several types of
partnerships: 1. general partnerships, 2. limited partnerships, and 3. master limited partnerships. A
general partnership is a partnership in which all owners share in operating the business and in
assuming liability for the business’s debts. A limited partnership is a partnership with one or
more general partners and one or more limited partners. A general partner is an owner (partner)
who has unlimited liability and is active in managing the firm. A limited partner risks an
investment in the firm, but enjoys limited liability and cannot legally help manage the company.
Limited liability means that limited partners aren’t responsible for the business’s debts beyond the
amount of their investment - their liability (debts they must pay) is limited to the amount they put
into the company; their personal assets aren’t at risk.

A new form of partnership, the master limited partnership (MLP), is much like a corporation in
that it acts like a corporation and is traded on stock exchanges like a corporation, but is taxed like
a partnership and thus avoids the corporate income tax.

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ME 492 Management & Entrepreneurship Development College of Engineering

Advantages of Partnerships
1. More financial resources: Naturally, when two or more people pool their money and credit, it’s
easier to pay the business’s rent, utilities, and other bills. A limited partnership is specially designed
to help raise capital (money). As mentioned earlier, a limited partner invests money in the business,
but can’t legally have any management responsibility and has limited liability.

2. Shared management and pooled knowledge: It’s simply much easier to manage the day-to-
day activities of a business with carefully chosen partners than to do it alone. Partners give each
other free time from the business and provide different skills and perspectives. Many people find
that the best partner is a spouse. That’s why you see many husband-wife teams managing
restaurants, service shops, and other businesses.

3. Longer survival: Partnerships may be more likely to succeed than sole proprietorships. Having
a partner helps a businessperson to become more disciplined because someone is watching over
him or her.

Disadvantages of Partnerships
Any time two people must agree on anything, there’s the possibility of conflict and tension.
Partnerships have caused splits among families, friends, and marriages. Let’s explore four
disadvantages of partnerships:

1. Unlimited liability: Each general partner is liable for the debts of the firm, no matter who was
responsible for causing those debts. You’re liable for your partners’ mistakes as well as your own.
Like a sole proprietor, general partners can lose their homes, cars, and everything else they own if
the business is sued by someone.

2. Division of profits: Sharing the risk means sharing the profit, and that can cause conflicts. For
example, two people form a partnership; one puts in more money and the other puts in more hours.
Each may feel justified in asking for a bigger share of the profits. Imagine the resulting conflicts.

3. Disagreements among partners: Disagreements over money are just one example of potential
conflict in a partnership. Who has final authority over employees? Who hires and fires employees?
Who works what hours? What if one partner wants to buy expensive equipment for the firm and
the other partner disagrees? Potential conflicts are many. Because of such problems, all terms of
partnership should be spelled out in writing to protect all parties and to minimise misunderstanding
in the future.
4. Difficult to terminate: Once you’ve committed yourself to a partnership, it’s not easy to get out
of it. Sure, you can end a partnership by just saying, “I quit.” However, questions about who gets
what and what happens next are often difficult to solve when the business is closed. Surprisingly,
law firms often have faulty partnership agreements and find that breaking up is hard to do. How do
you get rid of a partner you don’t like? It’s best to decide that up front - in the partnership
agreement.

The best way to learn about the advantages and disadvantages of partnerships is to interview people
with experience doing such agreements. They’ll give you insights and hints on how to avoid
problems.

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 Kwame Nkrumah University of Science & Technology, Kumasi

ME 492 Management & Entrepreneurship Development College of Engineering

How to Form a Partnership
It’s not hard to form a partnership, but it’s wise for each prospective partner to get the counsel of
a lawyer experienced with such agreements. Lawyers’ services are usually expensive, so would-be
partners should read all about partnerships and reach some basic agreements before calling a
lawyer.

For your protection, be sure to put your partnership agreement in writing. The following may be
included in a written partnership agreement:
1. The name of the business.
2. The names and addresses of all partners.
3. The purpose and nature of the business, the location of the principal offices, and any other
locations where the business will be conducted.
4. The date the partnership will start and how long it will last. Will it exist for a specific length of
time or will it stop when one of the partners dies or when the partners agree
to discontinue?
5. The contributions made by each partner: Will some partners contribute money, while others
provide real estate, personal property, expertise, or labour? When are the contributions due?
6. The management responsibilities: Will all partners have equal voices in management or will
there be senior and junior partners?
7. The duties of each partner.
8. The salaries and drawing accounts of each partner.
9. Provision for sharing of profits or losses.
10. Provision for accounting procedures. Who’ll keep the accounts? What bookkeeping and
accounting methods will be used? Where will the books be kept;?
11. The requirements for taking in new partners.
12. Any special restrictions, rights, or duties of any partner.
13. Provision for a retiring partner.
14. Provision for the purchase of a deceased or retiring partner’s share of the business.
15. Provision for how grievances will be handled.
16. Provision for how to dissolve the partnership and distribute the assets to the partners.

One fear of owning your own business or having a partner is the fear of losing everything you own
if the business loses a lot of money or someone sues the business. Many businesspeople try to avoid
this and the other disadvantages of sole proprietorships and partnerships by forming corporations.

Corporations
Although the word corporation makes people think of big businesses, it’s not necessary to be big
in order to incorporate (start a corporation). Obviously, many corporations are big. However,
incorporating may be beneficial for small businesses also. A conventional corporation is a state-
chartered legal entity with authority to act and have liability separate from its owners. What this
means for the corporation’s owners (shareholders) is that they aren’t liable for the debts or any
other problems of the corporation beyond the money they invest. Owners no longer have to worry
about losing their house, car, and other property because of some business problem - a significant
benefit. A corporation not only limits owners’ liability, it enables many people to share in the
ownership (and profits) of a business without working there or having other commitments to it.

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Advantages of Corporations
Most people aren’t willing to risk everything to go into business. Yet, for businesses to grow and
prosper and create abundance, many people would have to be willing to invest their money in
businesses. The way to solve this problem was to create an artificial entity, one that exists only in
the eyes of the law - a corporation. Let’s explore some of the advantages:

1. More money for investment: To raise money, a corporation sells ownership (share or stock) to
anyone who’s interested. This means that millions of people can own part of the Company. If a
company sold 10 million shares for $50 each, it would have $500 million available to build plants,
buy materials, hire people, build products, and so on. Such a large amount of money would be
difficult to raise any other way. Corporations may also find it easier to obtain loans since lenders
find it easier to place a value on the company when it can review how the share (stock) is trading.

2. Limited liability: A major advantage of corporations is the limited liability of owners.

Corporations in England and Canada often have the letters Ltd. after their name, as in British
Motors, Ltd. Ltd. stands for limited liability, which is probably the most significant advantage of
corporations. Remember, limited liability means that the owners of a business are responsible
for losses only up to the amount they invest.

3. Size: That one word summarises many advantages of corporations. Because they have large
amounts of money to work with, corporations can build large, modern factories with the latest
equipment. They can also hire experts or specialists in all areas of operation. Furthermore, they can
buy other corporations in other fields to diversify their risk. (This means that a corporation can be
involved in many businesses at once so that if one fails, the effect on the total corporation is
lessened.) In short, a major advantage of corporations is that they have the size and resources to
take advantage of opportunities anywhere in the world. Corporations don’t have to be large to enjoy
the benefits of incorporating. Many doctors, lawyers, and individuals and partners in a variety of
businesses have incorporated.

4. Perpetual life: Because corporations are separate from the people who own them, the death of
one or more owners doesn’t terminate the corporation.
5. Ease of ownership change: It’s easy to change the owners of a corporation. Simply sell the
share to someone else.
6. Ease of drawing talented employees: Corporations can attract skilled employees by offering
such benefits as stock options (the right to purchase shares of the corporation for a fixed price).
7. Separation of ownership from management: Corporations can raise money from many
different investors without getting them involved in management (See the corporate hierarchy).

Owners/shareholders (elect board of directors)

Board of directors (hire officers)
Officers (set corporate objectives and select managers)
Managers (supervise employees)
Employees
The Corporate Hierarchy: How owners affect management (Source: Nickels et al., 1987)

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ME 492 Management & Entrepreneurship Development College of Engineering

The Corporate Hierarchy Table shows that the owners/shareholders are separate from the managers
and employers. The owners elect a board of directors. The directors select the officers. They, in
turn, hire managers and employees. The owners thus have some say in who runs the corporation,
but no control.

Disadvantages of Corporations
1. Initial cost: Incorporation may be costly and involve expensive lawyers and accountants.
2. Paperwork: The papers to be filed to start a corporation are just the beginning. Tax laws demand
that a corporation prove all its expenses and deductions are legitimate. A corporation, therefore,
must process many forms. A sole proprietor or partnership may keep rather broad accounting
records; a corporation, on the other hand, must keep detailed records, the minutes of meetings, and
more.
3. Two tax returns: If an individual incorporates, he or she must file both a corporate tax return
and an individual tax return. The corporate return can be quite complex.
4. Size: Size may be one advantage of corporations, but it can be a disadvantage as well. Large
corporations sometimes become too inflexible and too tied down in red tape to respond quickly to
market changes.
5. Difficulty of termination. Once a corporation is started, it’s relatively hard to end.
6. Double taxation. Corporate income is taxed twice. First, the corporation pays tax on income
before it can distribute any to stockholders. Then the stockholders pay tax on the income
(dividends) they receive from the corporation.

How to Form a Corporation

1. The corporations name (Choose an available business name that complies with your country’s
corporation rules). The name of your corporation must comply with the rules of your country’s
corporation division. The following guidelines generally apply:
The name cannot be the same as the name of another corporation on file with the corporations
office. The name must end with a corporate designator, such as "Corporation," "Incorporated,"
"Limited," or an abbreviation of one of these words (Corp., Inc., or Ltd.).
The name cannot contain certain words prohibited by the country, such as Bank, Cooperative,
Federal, National, or Reserve.
2. The names of the people who incorporated it.
3. Its purposes.
4. Its duration (usually perpetual).
5. The number of shares that can be issued, their voting rights, and any other rights the share
have.
6. The corporations minimum capital.
7. The address of the corporation’s office.
8. The name and address or the person responsible for the corporation’s legal service.
9. The names and addresses of the first directors.
10. Any other public information the incorporators wish to include.

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 Kwame Nkrumah University of Science & Technology, Kumasi

ME 492 Management & Entrepreneurship Development College of Engineering

FINANCING THE NEW VENTURE
One of the most difficult problems in the new venture creation is obtaining financing. For the
entrepreneur, available financing needs to be considered from the perspective of debt versus equity
and using internal versus external funds as the funding source.

Sources of Funding
Debt and Equity Financing
Two types of financing need to be considered: debt financing and equity financing. Debt
financing is a method involving an interest-bearing instrument, usually a loan, the payment of
which is only indirectly related to the sales and profits of the venture. Typically debt financing
(also called asset-based financing) requires that some asset (such as a car, house, plant, machine or
land) be used as collateral.
Debt financing requires the entrepreneur to pay back the amount of funds borrowed, plus a fee
expressed in terms of the interest rate and sometimes points for using or being able to use the
money.

If the financing is short-term (less than one year), the money is usually used to provide working
capital to finance inventory, accounts receivable, or the operation of the business. The funds are
typically repaid from the resulting sales and profits during the year.

Long term debt (lasting more than one year) is frequently used to purchase some asset such as a
piece of machinery, land, or a building, with part of the value of the asset (usually from 50 to 80
percent of the total value) being used as collateral for the long-term loan. Particularly when interest
rates are low, debt (as opposed to equity) financing allows the entrepreneur to retain a larger
ownership portion in the venture and have a greater return on equity. The entrepreneur needs to be
careful that the debt is not so large that regular interest payments become difficult if not impossible
to make, and growth and development are inhibited or bankruptcy results.

Equity financing does not require collateral and offers the investor some form of ownership
position in the venture. The investor shares in the profits of the venture, as well as any disposition
of its assets on a pro rata basis. Key factors favouring the use of one type of financing over another
are the availability of funds, the assets of the venture, and the prevailing interest rates. Usually
an entrepreneur meets financial needs by employing a combination of debt and equity financing.

All ventures will have some equity, as all ventures are owned by someone in a market economy.
Although the owner may sometimes not be directly involved in the day-to-day management of the
venture, there is always equity funding involved that is provided by the owner. The amount of
equity involved will vary by the nature and size of the venture. In some cases, the equity may be
entirely provided by the owner. Larger ventures may require multiple owners, including private
investors and/or venture capitalists. This equity funding provides the basis for debt funding, which
makes up the capital structure of the venture.

Internal or External Funds

From another perspective, financing is available from internal or external funds. The type of funds
frequently employed is internally generated funds. Internally generated funds can come from
several sources within the company: profits, sale of assets, reduction in working capital, extended

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payment terms, and accounts receivable. In every new venture, the start-up years involve putting
all the profits back into the venture; even if outside equity investors do not expect payback in these
early years. Sometimes, the needed funds can be obtained by selling little-used assets. Assets,
whenever possible, should be on a rental basis (preferably on a lease with an option to buy), not an
ownership basis, as long as there is not a high level of inflation and the rental terms are favourable.
This will help the entrepreneur conserve cash, which is particularly critical during the start-up
phase of the company’s operation.
A short-term, internal source of funds can be obtained by reducing short-term assets: inventory,
cash, and other working capital items. Sometimes an entrepreneur can generate the needed cash for
a period of 30 to 60 days through extended payment terms from suppliers. Although care must be
taken to ensure good supplier relations and continuous sources of supply, taking a few extra days
in paying can generate needed short-term funds. A final method of internally generated funds is
collecting bills (accounts receivable) more quickly. Care should be taken not to irritate key
accounts when implementing this practice, as customers have established payment practices. Mass
merchandisers, for example pay their bills to supplying companies in 60 to 90 days regardless of a
supplying company’s accounts receivable policy, the size of the company, or the discount for
prompt payment offered. If a company wants this mass merchandiser to carry its product, it will
have to abide by this payment schedule.
The other general source of funds is external to the venture. Alternative sources of external
financing need to be evaluated on three bases: the length of time the funds are available, the costs
involved, and the amount of company control lost.

Personal Funds
Few, if any, new ventures are started without the personal funds of the entrepreneur. Not only are
these the least expensive funds in terms of cost and control, but they are absolutely essential in
attracting outside funding, particularly from banks, private investors, and venture capitalists. These
outside providers of capital feel that the entrepreneur may not be sufficiently committed to the
venture if he or she does not have the money invested. As one venture capitalist succinctly said “I
want the entrepreneurs so financially committed that when the going gets tough, they will work
through the problems and not throw the keys to the company on my desk.”
This level of commitment is reflected in the percentage of total assets available that the
entrepreneur has committed, not necessarily in the amount of money committed. An outside
investor wants an entrepreneur to have committed all available assets, an indicator that he or she
truly believes in the venture and will work all the necessary hours so that the venture succeeds.
Family and Friends
After the entrepreneur, family and friends are the next most common source of capital for a new
venture. They are most likely to invest due to their relationship with the entrepreneur as well as
their being accessible. This knowledge helps overcome one portion of uncertainty felt by
impersonal investors – knowledge of the entrepreneur. Family and friends provide a small amount
of equity funding for new ventures, reflecting in part the small amount of capital needed for most
new ventures. Even though it is relatively easy to obtain money from family and friends, like all
sources of capital, there are positive and negative aspects. Even though the amount of money
provided may be small, if it is in the form of equity financing, the family member or friend then
has an ownership position in the venture and all rights and privileges of that position. This may

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make them feel they have a direct input into the operations of the venture, which may have a
negative effect on employees, facilities, or sales and profits. Although this possibility must be
guarded against to the extent possible, frequently family and friends are not problem investors and
in fact are more patient than other investors in desiring a return on their investment.
In order to avoid potential future problems, the entrepreneur must present the positive aspects and
the future of the risks of the investment opportunity to try to minimise the negative impact on the
relationships with family and friends should problems occur. One thing that helps minimise any
future problems is to keep the business arrangements strictly business. Any loan or investments
from family or friends should be treated in the same businesslike manner that would occur if the
financing was from an impersonal investor. Any loan should specify the rate of interest and the
proposed repayment schedule of interest and principal. The timing of any future dividends must be
disowned in terms of an equity investment. If the family or friend is treated the same way as any
investor, potential future conflicts can be avoided. Another thing for the entrepreneur to do is to
settle everything up-front and in writing. It is amazing how short memories become when money
is involved. All the details of the financing must be agreed on before the money is put into the
venture. Such things as the amount of money involved, the terms of the money, the rights and
responsibilities of the investor, and what happens if this business fails must all be agreed on and
written down. A formal agreement with all these items helps avoid future problems.
Finally, the entrepreneur should carefully consider the impact of the investment on the family
member or friend before it is accepted. Particular concern should be paid to any hardships that
might result should the business fail. Each family member or friend should be investing in the
venture because they think it is good investment; not because they feel obliged.

Commercial Banks
Commercial banks are by far the most frequently used source of short-term funds by the
entrepreneur when collateral is available. The funds provided are in the form of debt financing, and
as such some tangible guaranty or collateral – some asset with value. This collateral can be in the
form of business assets (land, equipment, or the building of the venture), personal assets (the
entrepreneur’s house, car, land, stock, or bonds), or the assets of the co-signer of the note.

Venture Capital
Venture capital is a general term to describe a range of ordinary and preference shares where the
investing institution acquires a share in the business. Venture capital is intended for higher risks
such as start up situations and development capital for more mature investments. Replacement
capital brings in an institution in place of one of the original shareholders of a business who wishes
to realise their personal equity before the other shareholders.

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THE FINANCIAL PLAN
Planning for Profit and Cost Control
Planning is critical to the operation of a profitable business. The area of planning that is associated
with financial matters is commonly called budgeting, which is a process that involves co-
ordinating the finances of all areas of the new venture. The responsibility for the co-ordination of
budgeting activities rests with the entrepreneur or entrepreneurial team.

The Financial Planning Process

The nature of financial planning changes according to the length of the time period being
considered. Generally, the shorter the time period, the more specific the plans. The three levels of
financial planning for a new venture are called strategic planning, capital budgeting and operations
budgeting.

Strategic planning involves making long term decisions such as defining the scope of the new
venture, determining which products to develop, deciding which market niche should be profitable,
etc.

Capital budgeting deals with intermediate range planning. It involves making decisions such as
whether to buy or lease equipment, etc.

The operating budget involves the establishment of a master budget that will direct the new
venture’s activities over the short term. The master budget states objectives in specific quantities
and includes sales targets, production objectives and financing plans.

The master budget normally covers a one-year time span. It is frequently subdivided into quarterly
projections and often includes quarterly data subdivided by month. Obviously the entrepreneurial
team does not want to wait until year end to know whether it will meet its budget. Monthly data
provide the timely feedback necessary to take corrective action.

Many companies use a technique known as perpetual or continuous budgeting that utilises a 12-
month reporting period. At the completion of the current month, a new month is added to the end
of the budgeting period, resulting in a continuous 12-month budget. The advantage of the perpetual
budget is that it keeps management involved in the budget process.

Advantages of Budgeting
Budgeting is a costly, time-consuming activity; however, the sacrifices are more than offset by the
benefits. Budgeting encourages planning, co-ordination, performance measurement, and corrective
action.

The master Budget

The master budget consists of a series of detailed schedules and budgets that describe the new
venture’s overall financial plans for the coming accounting period. The three major budget
categories are:
1. Operating budgets
2. Capital budgets
3. Financial statement budgets

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The budgeting process normally begins with the preparation of the operating budgets. An operating
budget is prepared by individual sections within the new venture and becomes part of the venture’s
master budget. The number of operating budgets depends on the nature of the business entity. For
example, budgeting for the inventory needs of a manufacturing entity requires the preparation of a
raw materials budget, a labour budget, and an overhead budget. In contrast, a retail venture needs
only an inventory purchases budget. A retail sales company may use four operating budgets: sales
budget, an inventory purchases budget, a selling and administrative (S&A) budget and a cash
budget.

The sales, inventory, and selling and administrative budgets contain schedules that identify the
cash consequences associated with the various business activities.

The capital budget describes the new venture’s long term plans regarding investments in facilities,
equipment, new products, store outlets, and lines of business. The information from the capital
budget is input to several operating budgets. For example, acquisitions of equipment result in the
recognition of depreciation expense on the Selling and Administrative (S & A) budget. In addition,
the cash flows associated with capital investment appear on the cash budget.

Information contained in the operating budgets is used to prepare the financial statements budgets.
Again, the number of financial statement budgets, also called pro forma statements, depends on
the nature and needs of the budget entity.

Exhibit 1 is a graphic presentation of the information flows in a master budget.

Exhibit 1
Information Flows in the Master Budget
Starting Point

Cash receipts Operating Pro forma

and payments schedules Budgets Financial statements

Cash receipts Sales budget Income statement

Cash payments Inventory Balance

for inventory purchases budget sheet

Cash payments S&A Statement

for S & A Expense budget of cash flows

Cash budget

The Juicy Chicken Company, a new venture in sales retail is used to demonstrate the preparation
of the master budget. The venture uses four operating budgets:
(1) a sales budget,
(2) an inventory purchases budget,
(3) a selling and administrative (S & A) budget, and
(4) a cash budget.

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Sales Budget
The preparation of the master budget begins with the sales forecast. The accuracy of the sales
forecast is critical because it acts as the source data for all other budgets. If the sales figures are
unreliable, the entire budgeting process is a waste of time. Thus, it is easy to understand why every
available effort should be made to obtain estimates of projected sales.

The marketing department normally co-ordinates the effort to establish the sales forecast.
Frequently, the information flows from the bottom up the higher management levels. Sales
personnel are asked to prepare estimates of sales projections for the designated products and
geographic locations, and then to pass these estimates up the line where they are combined with
the estimates of other sales personnel to form the regional and national estimates. Using a variety
of information sources, upper level sales managers make appropriate adjustments to the estimates
generated by the sales persons. Some of the more common inputs to the adjustment process include
information gathered from industry periodicals and trade journals, analysis of economic conditions,
marketing surveys, historical sales figures, and assessments of changes in competitive forces. The
information may be assimilated through a system of computer programmes, statistical techniques,
and quantitative methods, or it may be subjected to the professional judgement of the upper level
sales managers.

To initiate the budgeting process for Juicy Chicken Company’s new venture, the sales manager
reviews the sales history of stores operating in locations similar to the proposed site. He then makes
adjustments for start up conditions. October is considered as an opportune time to start a new store
because customers would have time to become familiar with the store’s location during October
before the holiday season. He expects significant sales growth in November and December and
envisions the company’s chicken as the centrepiece of many Christmas dinner tables. Specifically,
he expects the new (venture’s) store’s sales to start in October at $160,000. Cash versus credit sales
(i.e. sales on account) are projected at $40,000 and $120,000, respectively, and sales are expected
to increase 20 percent per month during November and December. Based on these estimates, the
sales manager prepares the sales budget (See Exhibit 2).

Exhibit 2
Juicy Chicken Company
Sales Budget and Schedule of Cash Receipts
For the Quarter Ended December 31 201X
Budget Pro Forma Statement
Line October November December Data
Panel 1 Sales Budget $ $ $
1 Budgeted cash sales 40,000 48,000 57,600
2 Budgeted sales on account 120,000 144,000 172,800 ---->$ 172,800
3 Total budgeted sales 160,000 192,000 230,400 $582,400

Panel 2 Schedule of Cash Receipts

4 Current month's cash sales 40,000 48,000 57,600
Accounts receivable from
5 previous month's credit sales 0 120,000 144,000
6 Total Budgeted Collections 40,000 168,000 201,600

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ME 492 Management & Entrepreneurship Development College of Engineering

Notice that the sales budget is subdivided into two panels, the first of which describes the projected
sales for each month. The sales forecast for November is computed by adding a 20 percent increase
to the amount of October sales. For example, cash sales for November are calculated as $48,000
($40,000 + [$40,000 x 0.20]) and for December as $57,600 ($48,000+ [$48,000 x 0.20]). Sales on
account are computed using the same mathematical procedures.

Schedule of Cash Receipts

Panel 2 in Exhibit 2 contains a schedule of the cash receipts associated with the expected sales.
This information is used to prepare the cash budget (Exhibit 5). The accountant prepares the
schedule under the assumption that accounts receivable from credit sales are collected in full in the
month following sale.
Total cash receipts are determined by adding the accounts receivable balance from the previous
month’s credit sales to the current month’s cash sales. Because the venture will begin in October,
no accounts receivable balance from September (i.e. the previous month’s credit sales) is available.
Accordingly cash receipts for October equal the amount of October’s cash sales. November
collections equal November’s cash sales plus the accounts receivable balance generated from
October’s credit sales ($48,000 + $120,000 = 168,000). December’s receipts equal December’s
cash sales and the accounts receivable balance generated from November’s credit sales ($57,600 +
$144,000 = $201,600).

Pro Forma Financial Statement Data

The column Pro Forma Statement Data contains two items that will appear on the end of quarter
(i.e. December 31) budgeted financial statements. The first item ($172,800) represents the amount
of the ending accounts receivable balance on the pro forma balance sheet (Exhibit 7). Since
December’s credit sales will be collected in January, the receivables account will have a $172,800
balance as of December 31, 201X.

The second item in the Pro Forma Statement Data column ($582,400) is the amount of sales
revenue reported on the company’s budgeted income statement. This amount is determined by
summing the amounts of the monthly sales. In other words, sales for the quarter equal the total
sales for each month of the quarter ($160,000 + $192,000 + $230,400 = $582,400).

Inventory Purchases Budget

After the amount of projected sales has been established, Juicy Chicken Company’s accountant
focuses on the amount of inventory that will be needed to satisfy the sales demand. Meeting the
sales demand requires having enough inventory to cover expected sales and future sales between
re-order points. Accordingly, the total amount of inventory needed for each month equals the
amount of budgeted sales plus the desired ending inventory. The total amount of inventory needed
can be obtained from two sources. First, the company can use existing stock. In other words,
customer demand can be satisfied with goods that are in beginning inventory. The difference
between the cost of goods needed and the beginning inventory is the amount of goods to be
purchased. Accordingly, the purchases budget follows a logical format that is summarised as
follows

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Cost of budgeted sales XXX
Plus: Desired ending inventory XXX
Inventory needed XXX
Less: Beginning inventory (XXX)
Amount to purchase XXX

Juicy Chicken Company’s cost of budgeted sales equals 70 percent of total budgeted sales (see
Line 3 in Exhibit 2). In addition, Juicy Chicken has the policy of maintaining an ending inventory
that equals 20 percent of the current month’s cost of budgeted sales. Based on this information and
the data contained in the sales budget, the accountant prepares the purchases budget shown in Panel
1 of Exhibit 3. The budgeted cost of sales for October is determined by multiplying October’s
budgeted sales times 70 percent ($160,000 x 0.70 = $112,000). Budgeted cost of sales for
November and December are computed in a similar fashion. The desired ending inventory for
October is computed by multiplying October’s budgeted cost of goods sold times ($112,000 x 0.20
= $22,400). Desired ending inventory for November and December is computed in a similar way.

Schedule of Cash Payments for Inventory Purchases

Panel 2 of Exhibit 3 contains the cash payments budget. All merchandise is purchased on account.
Because the chicken is perishable, the supplier demands that a significant portion of the accounts
payable be settled within the month of purchase. Specifically, 80 percent of the current payables
balance must be paid in the month goods are purchased. The remaining 20 percent is paid during
the following month. Because the venture (store) opens in October, no September balance exists.
Accordingly cash payments for October are 80 percent of October’s required purchases ([$134,400
x 0.80 = $107,520]. Cash payments for November amount to 80 percent of November purchases
plus 20 percent of October purchases ([$138,880x0.80 = $111,104] + [$134,400x0.20 =$26,880]
= $137,984). Similarly cash payments for December amount to 80 percent of December purchases
plus 20 percent of November purchases ([$166,656x0.80 = 133,325] + [$138,880x0.20 = $27,776]
= $161,101).

Exhibit 3
Juicy Chicken Company
Inventory Purchases Budget and Schedule of Cash Payments for Inventory
For the Quarter Ended December 31 201X
Budget Pro Forma
line October November December Statements Data
Panel 1 Purchases Budget
1 Budgeted cost of goods sold $112,000 $134,400 $161,280 ----> 407,680
2 Plus: Desired end inventory (line 1
x 0.20) 22,400 26,880 32,256 32,256
3 Inventory needed $134,400 $161,280 $193,536
4 Less: Beginning inventory 0 (22,400) (26,880)
5 Total required inventory $134,400 $138,880 $166,656 (20%) ---> 33,331

Panel 2 Schedule of Cash Payments for Inventory Purchases

6 Current purchases at 80 % $107,520 $111,104 $133,325
7 Prior month's purchases at 20% 0 26,880 27,776
8 Total budgeted payments for inventory $107,520 $137,984 $161,101

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ME 492 Management & Entrepreneurship Development College of Engineering

Pro Forma Financial Statement Data
The purchases budget contains three items that are relevant to the preparation of the pro forma
financial statements. First, the amount of cost of goods sold (see Exhibit 3, Budget Line 1) will be
shown on the budgeted income statements. The amount of the cost of goods sold for the quarter
equals the total of the monthly amounts ($112,000 + $134,400 + $161,280). The ending inventory
balance for December 31 also represents the ending inventory balance for the quarter. Accordingly,
the $32,256 ending inventory balance is shown in the pro forma balance sheet. Finally, the assumed
payments schedule results in a year end balance in the accounts payable account. Because 20
percent of December credit purchases will be collected in January, the payables account will have
a balance of $33,331 (from Line 5, December column, $166,656 x 0.20 = $33,331) as of December
31, 201X.

Selling and Administrative Expense Budget

The selling and administrative (S & A) expense budget for Juicy Chicken Company’s new venture
is shown in Exhibit 4. It is assumed that the opening of the new store will require a significant
investment in store fixtures including refrigeration equipment. Total investment in fixtures, which
are expected to have an average useful life of 10 years and a salvage value of $10,000 is expected
to be $130,000. Depreciation is determined on a straight line basis, resulting in an annual charge
of $12,000 ([$130,000 - $10,000]  10). Monthly depreciation expense is $1,000 ($12,000 annual
charge  12 months). Notice that the Juicy Chicken Company’s S & A expense budget does not
contain a provision for interest expense; the amount of interest expense cannot be determined until
the amount of expected borrowing has been established through the preparation of the cash budget.
Exhibit 4
Juicy Chicken Company
S & A Expense Budget and Schedule of Cash Payments for S & A Expense
For the Quarter Ended December 31 201X
Budget Pro Forma
Line October November December Statement Data
Panel 1 Selling & Administrative Expense Budget $ $ $
1 Salary expense 24,000 24,000 24,000
2 Sales commissions (2 percent of sales) 3,200 3,840 4,608 ---->$ 4,608
3 Supplies expense (1 percent of sales) 1,600 1,920 2,304
4 Utilities 1,400 1,400 1,400 ---->$ 1,400
5 Depreciation on store equipment 1,000 1,000 1,000 3,000
6 Rent 3,600 3,600 3,600
7 Miscellaneous 900 900 900
8 Total S & A before interest $35,700 $36,660 $37,812 $110,172

Panel 2 Schedule of Cash Payments for Selling and Administrative Expenses

9 Salary expense paid monthly as incurred 24,000 24,000 24,000
10 Prior month's sales commissions, 100 % 0 3,200 3,840
11 Supplies expense paid monthly as incurred 1,600 1,920 2,304
12 Prior month's utilities, 100 % 0 1,400 1,400
13 Rent paid monthly as incurred 3,600 3,600 3,600
14 Miscellaneous paid monthly as incurred 900 900 900
15 Total cash payments for S & A expenses $30,100 $35,020 $36,044

Schedule of Cash Payments for Selling and Administrative Expenses

Panel 2 of Exhibit 4 contains the schedule of cash payments associated with S & A expenses.
Differences between expense recognition and cash flow result from several conditions. First, cash

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payments for sales commissions and utilities are expected to be paid in the month following their
occurrence.

Pro Forma Financial Statement Data

The assumed schedule results in a year end balance in the sales commissions and utilities payable
accounts. Because December’s payments for commissions and utilities will be paid in January, the
commissions and utilities payable accounts will have balances of $4,608 and $1,400, respectively,
as of December 31 (see Pro Forma Statement Data column amounts for Budget Lines 2 and 4,
Exhibit 4). The items will appear on the pro forma balance sheet. The total amount of S & A
expenses before interest is determined by summing the monthly amounts of ($35,700 +$36,660 +
$37,812 = $110,172). This amount appears on Budget Line 8 under the Pro Forma Statement
column. The S & A expense is shown on the pro forma income statement.

Cash Budget
The effective management of cash is important to the success of a new venture. If excess cash is
permitted to accumulate, the business will lose the opportunity to earn investment income or to
repay debt, thereby reducing interest costs. On the other hand, if cash shortages occur, the business
will be unable to pay its debts and may be forced into bankruptcy. A cash budget is prepared to
advise management of anticipated cash shortages or excessive cash balances. Management uses
this information to plan its financing activities. It makes arrangements with creditors to ensure that
anticipated shortages can be covered by borrowing. It also plans to repay past borrowings and to
make appropriate investments in the periods in which excess amounts of cash are expected.

The cash budget is composed of three major components including

1. A cash receipts section,
2. A cash payments section, and
3. A financing section.

Most of the raw data needed to prepare the cash budget are included in the cash receipts and
payments schedules (see Exhibits 2, 3, 4). Further refinements of these data are sometimes
necessary. The complete cash budget is shown in Exhibit 5.

Cash Receipts Section

The cash receipts for Juicy Chicken Company is shown in the schedule of cash receipts (Budget
Line 6 in Panel 2, Exhibit 2). The amounts in this schedule are transferred to Budget Line 2 of the
cash budget (Exhibit 5). The expected cash receipts are added to the beginning cash balance to
determine the amount of cash available for use (Budget Line 3 in Exhibit 5).

Cash Payments Section

Cash payments include expected cash outflows for inventory purchases, S & A expenses, and
investments. The cash payments for inventory purchases are shown in the schedule of cash
payments for inventory purchases (Budget Line 8 in Panel 2 of Exhibit 3). The amounts in the
inventory payments schedule have been transferred to Budget Line 4 of the cash budget (Exhibit
5). The cash payments for S & A expenses shown in the schedule of cash payments for S & A
expenses (Budget Line 15 in Panel 2 of Exhibit 4). The amounts in the receipts schedule are
transferred to Budget Line 5 of the cash budget (Exhibit 5). Recall that the Juicy Chicken Company

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is to spend $130,000 on fixtures to equip the new store. This amount is shown on Budget Line 6
on the cash budget (Exhibit 5) and the total expected cash payments is displayed on Budget line 7.

Exhibit 5
Juicy Chicken Company
Cash Budget
For the Quarter Ended December 31 201X
Budget Pro Forma
Line October NovemberDecemberStatement Data
Cash Receipts
1 Beginning cash balance $ 0 $ 7,624 $ 7,550
2 Add cash receipts (Exhibit 2) 40,000 168,000 201,600 $409,600
3 Total cash available 40,000 175,624 209,150

Less: Cash Payments

4 For inventory purchases (Exhibit 3) 107,520 137,984 161,101 406,605
5 For S & A expenses (Exhibit 4) 30,100 35,020 36,044 101,164
6 To purchase store fixtures 130,000 0 0 130,000
7 Total cash payments 267,620 173,004 197,145

Cash Needs
Shortage (surplus of cash (Line
8 7 - Line 3) 227,620 (2,620) (12,005)
9 Plus desired cash cushion 10,000 10,000 10,000

Financing Activity
10 Amount borrowed (repaid) 237,620 7,380 (2,005) 242,995
11 Interest expense at 1% per month (2,376) (2,450) (2,430) 7,256
Ending cash balance
12 (Line 3 - 7 + 10 + 11) $7,624 $7,550 $7,570 ----> $ 7,570

Financing Section
In October, Juicy Chicken Company expects to have a cash deficit of $227,620 (Budget Line 8,
October column, Exhibit 5). Accordingly, Juicy Chicken will need to borrow money to finance the
establishment and operation of the new store. If the company were to borrow only $227,620, it
would have an insufficient amount of funds available to pay interest and to maintain a reasonable
minimum ending cash balance. For this reason, Juicy Company decides to borrow a cash cushion
amounting to $10,000 more than the amount of the expected cash shortage. This amount is shown
on Budget Line 9 of Exhibit 5. The total amount borrowed is $237,620 ($227,620 cash shortage +
$10,000 cash cushion), shown on Budget Line 10.
The interest rate on the line of credit is assumed to be 1 percent per month. Accordingly, interest
expense (Budget Line 11, Exhibit 5) for October is $2,376 ($237,620 amount borrowed x 0.01).
The ending cash balance is determined by adding the cash available (Budget Line 3) plus the funds
borrowed (Budget Line 10) minus total cash payments for S & A expense (Budget Line 7 minus
cash paid for interest expense (Budget Line 11). The result appears on Budget Line 12. The ending
cash balance becomes the beginning cash balance for the following month.
The computation for the amount borrowed in November begins with the cash surplus of $2,620
(Budget line 8). This surplus is insufficient to maintain the $10,000 desired cash cushion.
Accordingly, Juicy Chicken Company must borrow an additional $7,380 ($10,000 - $2,620).

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Interest expense is calculated as 1 percent of the outstanding debt ([$237,620 October borrowings
+ $7,380 November borrowings] x 0.01 = $2,450).
In December, the company produces enough surplus cash to make a partial repayment of the
principal balance. The amount available for repayment is $2,005 ($12,000 – 10,000 cash cushion).
The interest expense for December is $2,430 ([$237,620 + $7,380 -$2,005] x 0.01).

Pro Forma Financial Statement Data

The pro forma statement of cash flows is shown in Exhibit 8. The total of the cash receipts and the
totals of the cash payments for inventory and S & A expenses are shown in the Cash Flow from
Operating Activities section of the pro forma statement of cash flows. The totals of the cash receipts
and payments are determined by summing the monthly amounts. For example, the total cash
receipts ($409,600) shown on the cash budget (Exhibit 5, Budget Line 2) is computed by adding
the amounts for October, November, and December. Totals for the cash payment items on Budget
Lines 4 and 5 are computed in a similar fashion.
The $130,000 purchase price of the store fixtures appears in the Cash Flow from Investing
Activities section of the statement of cash flows and in the Assets section of the pro forma balance
sheet. The amount borrowed ($242,995, Budget Line 10, Exhibit 5) is determined by adding the
borrowings in October and November minus the repayment made in December ($237,620 + $7,380
- $2,005 = $242,995) and is shown in the Cash Flow from Financing Activities section of the pro
forma statement of cash flows (Exhibit 8) and in the Liabilities section of the pro forma balance
sheet (Exhibit 7). The total amount of interest expense shown in Exhibit 6 is also determined by
summing the monthly amounts on Line 11 of Exhibit 5 ($2,376 + $2,450 + $2,430 = $7,256).
Because the interest is paid in cash, the interest expense is shown in the Cash Flow from Operating
Activities section of the pro forma statement of cash flows (Exhibit 8) and on the pro forma income
statement (Exhibit 6). Finally, the ending cash balance ($7,570) for December also constitutes the
ending balance for the quarter. This amount is shown on the pro forma balance sheet and as the last
item on the pro forma statement of cash flows.

Pro Forma Income Statement

The budgeted income statement for Juicy Chicken Company is shown in Exhibit 6. The information
needed to prepare this statement is contained in Exhibits 1, 2, 3 and 4. The budgeted income
statement provides insight into the new venture’s expected profitability. If expected profitability is
unsatisfactory, the entrepreneur or the entrepreneurial team may decide to abandon the project or
to alter planned activity.

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Exhibit 6
Juicy Chicken Company
Pro Forma Income Statement
For the Quarter Ended December 31, 201X
Data Source
Sales Revenue $582,400 Exhibit 2
Cost of Goods Sold (407,680) Exhibit 3
Gross Margin 174,720
Selling and Administrative 110,172 Exhibit 4
Expenses
Operating Income 64,548
Interest Expense (7,256) Exhibit 5
Net Income $57,292

Pro Forma Balance Sheet

The new store venture has no contributed capital because its operations are fully financed through
debt and retained earnings.

Exhibit 7
Juicy Chicken Company
Pro Forma Balance Sheet
For the Quarter Ended December 31, 201X
Assets $ $
Cash 7,570 Exhibit 5
Accounts Receivable 172,800 Exhibit 2
Inventory 32,256 Exhibit 3
Store Fixtures & Equipment 130,000 Exhibit 4
Accumulated Depreciation (3,000) Exhibit 4
Book Value of Equipment 127,000
Total Assets 339,626
Equity
Retained Earnings 57,292
Liabilities
Accounts Payable 33,331 Exhibit 3
Utilities Payable 1,400 Exhibit 4
Sales Commission Payable 4,608 Exhibit 4
Line of Credit Borrowings 242,995 Exhibit 5
Total Equity and Liabilities 339,626

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Pro Forma Statement of Cash Flows
The pro forma statement of cash flows is shown in Exhibit 8. All the information used to prepare
this statement was drawn from the cash budget shown in Exhibit 5.

Exhibit 8
Juicy Chicken Company
Pro Forma Statement of Cash Flows
For the Quarter Ended December 31, 201X
Cash Flow from Operating Activities $ $
Cash Receipts from Customers 409,600
Cash Payments for Inventory (406,605)
Cash Payments for S & A Expenses (101,164)
Cash Payments for Interest Expense (7,256)
Net Cash Flow from Operations (105,425)

Cash Flow from Investing Activities

Cash Outflow to Purchase Fixtures (130,000)
Cash Outflow from Financing Activities
Inflow from Borrowing on Line of 242,995
Credit
Net Change in Cash 7,570
Plus Beginning Cash Balance 0
Ending Cash Balance 7,570

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