Business plan...balance sheet problems...?

Question

I am presently writing a business plan with cash flow, profit/loss, balance sheet forecasts. I am having probs with the balance sheet forecast.

Proposed project is to develop, manufacture and sell an item of technology. The forecasts are for first 6 years. Y1-2 is development and testing, y3-6 is tooling, manufacturing and sales. The problem is that for the first 3 years the funding section is larger than the assets-minus liabilities. So to balance these years I put a value on the Intelectual property (to justify investment in this). But now that sales have kicked in (y3-6) and we would be more cash-rich the assets-liabilities is higher than the financing. The only thing I could do would be to reduce the IP value or introdue a spurious liability like trade creditors. I know its probably impossible to comment on this without seeing it but maybe there are common error sthat non-accountants make!? Thanks. (Any qs please email)

(Response to 1st answer)...Thanks, thats very informative..yes, we have costed for as much as we can figure out including the cost of compliance with BSI etc (for CE mark) and for insurance. I think we are doing this in the 'real world'. The plan is to redesign, then make 25 and hire these out for a year as a field test exercise...that will 'perfect' the design, create interest and also provide our first set of buyers who will upgrade to the manufactured items and return the hired versions. It will also provide marketing data to justify tooling and manufacturing. We have made two prototypes and demoed to a major company in the Uk.. Our sales forecast is modest as well, allowing fro problems...I just need help I want to get the plan realistic before I hand over to my accountant.

(Response to second answer)....Thanks...Yes as a Ltd co I calculated a reserve in Y4 when we break even : total profits minus total losses. But that doesn't give enough financing....I have to give the IP a value because we (will) have invested in patents and development but with nothing to show for it until later...

Answer 1

You've prepared Profit and Loss accounts which presumably show a loss for the first few years and a profit later on. What have you done with these losses and profits? Where are they in the Balance Sheets?

If you are a limited company there should be a reserves account in the BS which will comprise the cumulative balances on the P & L account. If a sole trader then this will comprise part of your capital account.

If you are starting the business from scratch you would not need to have a value for IP unless you have actually paid cash for it. (It could be entered at a value but then there would be a corresponding entry on the capital side)

Can't think of anything else. You may need to provide more info.

Answer 2

Are you allowing for contingencies in years 3-6. For example tech development falling behind schedule. Initial market rejection which is very common in tech industries. Poor performing sales personnel and marketing. Product failures under guarantee.have you even costed for losses under your guarantee, or costed for insurance to cover these possible losses. Hey I bet you didn't cost for CE mark compliance? Risk assessments etc.

Your whole project seems to be based on the fact that you are going to develop, produce and sell a tech product, no problem. So your only problem is a technical accounting problem. Not in the real world. Have you any idea how many inspectors from different departments can interfere in this great business of yours. I'll tell you. Over 300. The Inland Revenue and Vat Office are not your only problem I can assure you.

And did you know that these inspectors have the right of arrest, not just the Police. Hey, bet you didn't know that your local Trading Standards Officer has the power of arrest and can question you under caution and record said interview and use what you say against you in a court of law.

Oh well, welcome to the real world when you get there. And I hope you get a more technical accounting answer from someone. Good Luck

Answer 3

Very funny Next time you use a pair of rubber gloves, you're going to smile when you think of this: A dentist noticed that his next patient, a little old lady, was nervous so he decided to tell her a little joke as he put on his gloves. 'Do you know how they make these gloves?' he asked. 'No, I don't,' she replied. 'Well,' he spoofed, 'there's a building in Canada with a big tank of latex and workers of all hand sizes walk up to the tank, dip in their hands, let hem dry, then peel off the gloves and throw them into boxes of the right size.' She didn't crack a smile. 'Oh, well. I tried,' he thought. But five minutes later, during a delicate portion of the procedure, she burst out laughing. 'What's so funny?' he asked 'I was just envisioning how condoms are made!' Gotta watch those little old ladies! Their minds are always working!