Al Fikra, Qatar's National Business Plan Competition 2014 Financial Projections January 2014

1. Al Fikra, Qatar's National Business Plan Competition 2014 Financial Projections January 2014 Prepared by Professor George White and S. Thomas Emerson, Distinguished Career Professor of Entrepreneurship at Carnegie Mellon University Qatar

2. Agenda • Introducing Financial Statements • Sales Forecasting • Guide – Al Fikra Financials Template • Financial Ratios • Financing • Measuring Internal Rate of Return

3. Major Financial Statements • Income Statement (P & L) • Statement of Owner’s Equity/Retained Earnings • Balance Sheet • Statement of Cash Flows

4. Al Fikra2014 Inflows of assets in exchange for products andservices provided tocustomers.

5. Al Fikra2014 Costs incurred or the usingup of assetsfrom generating revenue

6. Computing Net Income Merchandiser Service Company Net Sales Revenue Cost of Goods Sold Cost of Sales Gross Profit Gross Profit Operating Expenses Operating Expenses Net Income Net Income

7. Al Fikra 2014 Covers a period of time. From the Income statement.

8. Statement of Retained Earnings For Year Ended December 31,2005 ABC Corportation Retained Earnings, January 1 $0 Add: Net Income 48 Total $48 Less: Dividends 40 Retained Earnings, December 31 $8

9. Al Fikra 2014 Properties or economic resources owned by a business

10. Al Fikra 2014 Debts or Obligations of the business

11. Al Fikra 2014 Owner’s claim on the assets of a business From the Statement Of Owner’s Equity

12. Partial Balance Sheet December 31,2005 ABC Corportation Shareholders’ Equity Share Capital $500 Retained Earnings 8 Total Shareholders’ Equity $508

13. Al Fikra 2014 From the balance sheet

14. Sales Forecasting • Estimate your market size - # of potential customers - Average amount spent per customer - Total Industry Sales • Evaluate Competition • Estimate Your Share of the Market • Don’t estimate over your capacity !!

15. Sales Forecasting Template

16. B to B Sales Forecasting Template

17. Al Fikra Financials Template • Follow the instruction sheet given to you • Cells highlighted in BLUE can be changed to reflect your company’s situation • Cells highlighted in YELLOW contain formulas that can be altered to reflect your company’s situation • It is NOT recommended to change any cells that are not colored

18. Sales and Cost of Goods Sold Forecasting

19. Payroll forecasting

20. Payroll Tax and Benefit Assumptions

21. Expense Assumptions

22. Expense Assumptions

23. Capital Asset Additions

24. Interest Rate, Income Tax Rate, Financing Injections - Summaries

25. Financial Ratios • Working Capital • Current Ratio • Return on Assets • Return on Equity • Gross Margin % • Net Income/Profit Margin %

26. Working Capital • The difference between current assets and current liabilities. Working Capital =Current Assets - Current Liabilities

27. Current Ratio • Measures the short-term debt paying ability of the company. Current Assets Current Liabilities Current Ratio =

28. Return on Assets • Return made on the assets employed for a given period Net Income Total Assets Return on Assets =

29. Return on Equity • Return made on the Owner’s Equity in the business Net Income Total Shareholders’ Equity Return on Equity =

30. Gross Margin % • Gross Margin earned as a percentage of Sakes Gross Margin Sales Revenue Gross Margin % =

31. Net Income / Profit Margin % • Net Income earned as a percentage of Sales Net Income Sales Revenue Net Income Margin % =

32. Equity Financing • Pros • Cons • Less risk than debt as no legal obligation to pay dividends or buy back shares • Give up ownership and control

33. Debt Financing • Pros • Cons • Retain full ownership and control • Leverage can enhance shareholder returns • Legal obligation to pay interest and principal when due

34. Investor Return Calculation - Example • You are a new start up company with an innovative product. You invest QR 1,500,000 in your company and wish to sell a 25% equity stake in your company to other non-active investors for QR 2,000,000. You would issue 100,000 shares of which you would own 75,000 shares and the other investors would own 25,000 shares. You plan to pay out 20% of the profits each year in the form of dividends. Investors have the opportunity to sell their shares any time after 3 years.

35. Investor Return Example (cont’d) You prepare your financial projections and annual net profits show as follows: • Year 1 QR 200,000 • Year 2 QR 900,000 • Year 3 QR 2,000,000 • Year 4 QR 4,000,000 • Year 5 QR 6,000,000 • You estimate that the company will be worth 5 times the following year’s estimated earnings (P/E Ratio = 5) after 3 years.

36. Question 1 • What is the estimated value of the company after 3 years? Price/Earnings = 5 times Price/QR 4,000,000 = 5 Price = QR 20,000,000

37. Question 2 • What share of this amount would the non active investors be entitled to? QR 20,000,000 X 25% = QR 5,000,000

38. Question 3 • How much would the non active investors receive in dividends for the first 3 years. Y1. QR 200,000 X 20% payout X 25% share = QR 10,000 Y2. QR 900,000 X 20% payout X 25% share = QR 45,000 Y3. QR 2,000,000 X 20% payout X 25% share = QR 100,000

39. Question 4 • What would the non active investors Internal Rate of Return (IRR) be if they sold their shares after 3 years?

40. Solution - Question 4

42. Enterprise Qatar www.eq.gov.qa www.alfikra.qa Tel: 40125000 Fax: 40125001