Sohar University, Faculty of Business

L3/S1 (2022-2023)
BUBS3401 Small Business Management
Financial Plan: Pro Forma Financial Statements, Ratio Analysis and Break-even Point

Three important financial statements assist entrepreneurs to assess the financial status of their business: the balance
sheet, income statement, and statement of cash flows. These three financial statements will be different according to
the type and nature of the business. You are requested to create them for your business idea. Sample of these
statements is provided to you in SULMS.
Balance Sheet:
As we know it is built on the fundamental accounting equation, Assets = Liabilities + Owner’s Equity, therefore we need
to prepare these accounts to use them in preparing the balance sheet.
1. Assets:
• Current assets: (cash, account receivables, prepaid expenses, inventory, etc.)
• First you need to prepare the list of required current assets for your project or business idea.
SN Items Quantity Cost per unit Total cost
1
2
3
.. Total

• Second part to prepare the Fixed assets: (land, building, furniture, equipment, computer, cash machine,
etc.)
• You need to prepare the list of required fixed assets for your project or business venture. You can use the
table below for the same:
SN Item Units needed Cost/unit Total cost Life expectancy Depreciation
1
2
3
4
.. Total

2. Liabilities:
• Current liabilities are those debts that must be paid within one year or within the normal operating cycle
of a company.
o Account payable
o Unearned revenues,
o Notes payable
o Short term debt
o Etc.
• Long-term liabilities are liabilities that come due after one year.
o Long-term debt
o Etc.
3. Owner’s equity: is the value of the owner’s investment in the business.
o Equity capital
o Retained earnings
o Etc.

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You can use any of the well-known format to prepare your balance sheet e.g.:
DESCRIPTION YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
Assets:
Current Assets
Fixed Assets
Total assets
Liabilities:
Current Liabilities
Long-term liability
Total liabilities
Owners’ equity
Liabilities + Owners’ Equity

Income statement:
The income statement (also called the profit-and-loss statement) is a financial statement that represents a moving
picture of a business, comparing its expenses against its revenue over a period of time to show its net income (or loss).
It based on the equation says that (Net Income = Sales Revenue – Expenses).
Sales Revenue:
The sale revenue already you have from your sales forecasts for five years which you have calculated in your
marketing plan.
If we estimated an increase in sales each year 5%, then sales forecasts for the first five years of the business venture:
Year Year 1 (2022) Year 2 (2023) Year 3 (2024) Year 4 (2025) Year 5 (2026)
Estimated sales 120,000 126,000 132,300 138,915 145,861

Expenses:
To prepare the expenses you can start forecasting each item separately and then put them together.
Wages and salaries:
Here you can plan for your needed human resources and their expenses:
Salary/ Salary/Yea Increase/
SN Position No. Year2 Year3 Year4 Year5
month r1 year
1
2
3
..

Utilities:
SN Item Monthly Year1 % increase Year2 Year3 Year4 Year5
1 Water
2 Electricity
3 Telephone
4 Internet
5 Maintenance
..

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Costs of goods sold:
SN Item Expenses
1 Beginning inventory
2 + Purchases
3 = goods available for sales
4 - ending inventory
5 = cost of goods sold

Marketing expenses:
Item Year1 Year 2 Year3 Year4 Year5
Website expenses
Search engine advertising
Publication advertising
Flyers & Posters
Other marketing
Total Marketing

Inventory:
Item Quantity Cost per unit Total cost

Total

Other General and Administrative expenses:

Item Year1 Year2 Year3 Year5 Year5
Parts for repairs
Petrol
Rent
Maintenance
Liability insurance
Cell phone expense
Other G&A expenses
Total G&A expenses

Working capital:
Item Costs
Salaries
Utilities
Costs of goods sold
Marketing expenses

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 Item Costs
General and administrative expenses
Inventory
Depreciation
Total

Initial costs (registration and licensing expenses)

Item Costs
Commercial Registration (CR)
Membership for Oman Chamber of Commerce and Industry
Adding the business activities on CR
Company Name and Trade Mark
Municipality Contract fee
Municipality License fee for two branch
PACDA approval for two office branch
license from PACDA for installation, maintenance, Extinguisher Refilling and LPG
license from PACDA for our sales products (Expected 10 certificates) 250 each
Applying for 10 Visa (Assuming Riyada is available)
Other governments expenses for 10 Visa (Considering 150 Rials each)
Legal Contract (Internal)
Total

Estimated capital required for the project:

Item Value
Initial costs (registration and licensing expenses)
Fixed assets
Working capital (one production cycle)
Total

Sources of finance:
Source Total contribution
Loan
Equity
Other source(s)

Total

If its loan, then we need to calculate the loan expenses: if we are taking loan for 10 years with two years’ grace
period, then

Year Residual loan Installment Interest rate Total payment

Y1 20000 2000 0 2000
Y2 18000 2000 0 2000
Y3 16000 2000 ?

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 Y4 14000 2000 ?
… … 2000 ?
… … 2000 ?
Y10 2000 2000 ?

After you prepare all the required tables of individual expenses; then you can prepare your income statements as
follows:
Item Year1 Year2 Year3 Year4 Year5
1. Sales
2. Expenses:
…
…
…
…
…
…
….
Net income before interest rate and taxes
Interest rate
Taxes
3. Net income (loss)
Accumulated net income

Payback period:
Calculates when we will pay back the initial capital invested for starting-up.
• The first step in calculating the payback period is determining the initial capital investment for example
20000 OR
• The next step is calculating/estimating the annual expected after-tax net income over the useful life of the
investment. Example: Y1: 8000 OR, Y2: 6000 OR, Y3: 6000 OR, Y4: 2000 OR, Y5: 5000 OR
• Accumulated NI= Y1: 8000; Y2= (8000 + 6000) = 14000, Y3 = (14000+6000) = 20000 which equal the initial
investment i.e. the payback period is 3 years.

Statement of Cash Flow:

This is mainly reflecting the ability of the firm to meet its short term liabilities:
SN Details Year1 Year2 Year3 Year4 Year5
1. Opening balance
2. Cash in

Total cash in
3. cash out

Total cash out

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 SN Details Year1 Year2 Year3 Year4 Year5
4. ending balance

Financial Analysis Using Ratios:

Now you are ready to do your financial analysis through ratio analysis.
Liquidity ratios indicate whether the business will be able to meet its short-term financial obligations as they come due.
The primary measures include:
1. Current ratio – Measures a small firm’s solvency by indicating its ability to pay current liabilities out of
current assets.
2. Quick ratio – a conservative measure of a firm’s liquidity, measuring the extent to which its most liquid
assets cover its current liabilities.
Leverage ratios measure the financing supplied by a firm’s owners against that supplied by its creditors; they are a
gauge of the depth of a company’s debt.
3. Debt ratio – Measures the percentage of total assets financed by a company’s creditors compared to its
owners.
4. Debt-to-net-worth ratio – Expresses the relationship between the capital contributions from creditors and
those from owners and measures how highly leveraged a company is.
5. Times interest earned ratio – Measures a small firm’s ability to make the interest payments on its debt.
Operating Ratios help an entrepreneur evaluate a small company’s overall performance and indicate how effectively
the business employs its resources.
6. Average inventory-turnover ratio – Measures the number of times its average inventory is sold out or
turned over during an accounting period.
7. Average-collection-period ratio – Measures the average number of days it takes to collect accounts
receivables.
8. Average-payable-period ratio – Measures the number of days it takes a company to pay its accounts
payable. Float refers to the net number of days of cash flowing into or out of a company; float = days
payables outstanding (DPO) – days sales outstanding (DSO).
9. Net-sale- to-total-assets ratio (also called the total-asset-turnover ratio) – Measures a company’s ability
to generate sales in relation to its asset base.
Profitability Ratios indicate how efficiently a small company is being managed and provide information about a
company’s ability to use its resources to improve its bottom line.
10. Net profit on sales ratio – Measures a firm’s profit per dollar of sales.
11. Net-Profit-to-Assets Ratio – Tells how much profit a company generates for each dollar of assets that it
owns.
12. Net-profit-to-equity ratio – Measures the owner’s rate of return on investment.
Interpreting Business Ratios
Interpretation of ratio analysis is equally important and to do so you can compare to the rule of thumb as follows:
Your business Variance
Ratio Rule of thumb interpretations
venture (%)
Current ratio 2:1
Quick ratio 1:1
Debt ratio 1:1
Debt-to-net-worth ratio 1:2
Times-Interest-Earned Ratio 3:1
Average-Inventory-Turnover Ratio 5 times a year

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 Your business Variance
Ratio Rule of thumb interpretations
venture (%)
Average-Collection-Period Ratio 20 days
Average-Payable-Period Ratio 20 days
Net-Sales-to-Total-Assets Ratio 4:1
Net-Profit-on-Sales Ratio 5%
Net-Profit-to-Assets Ratio 5%
Net-Profit-to-Equity Ratio 20%

Break Even Analysis:

Now you are ready to calculate your break-even point. You can follow the following step to calculate it:
1. Step 1: Forecast the expenses the business can expect to incur.
2. Step 2: Categorize the expenses estimated in step 1 into fixed expenses and variable expenses.
3. Step 3: Calculate the ratio of variable expenses to net sales.
4. Step 4: Compute the break-even point by inserting this information into the following formula:
Break-even sales (OR) = Total fixed cost/Contribution margin expressed as a percentage of sales

Exit strategy:
Family-owned businesses make up more than 80 percent of businesses throughout the world. Family owned
businesses in the Oman account for 70 to 90 percent of sector contribution in GDP. The primary causes of lack of
continuity among family businesses in Oman are failure to create a management succession plan, and sibling
rivalries, fights over control of the business, and personality conflicts. You need to decide on an exit strategy either
to sell to outsiders, or sell to insiders who are not family members. Or prepare an adequate management succession
plan following the right procedure.