FINC6025 · Entrepreneurial Finance
Projecting Financial Statements & the Financial Plan
Weeks 4-5 of University of Sydney FINC6025 Entrepreneurial Finance build the financial plan from an explicit assumptions pack — revenue model, cost structure, growth, headcount and milestones — into integrated pro-forma statements. It teaches top-down and bottom-up revenue forecasting with a market-share cross-check, the sustainable growth rate, and the Additional Funds Needed (AFN) 'plug' that balances the projected statements, plus the unit economics (LTV and CAC) that justify the value proposition. This is the quantitative core of the 30% group funding proposal and a heavily examined case-analysis skill.
What this chapter covers
- 01Role and contents of the financial plan; the assumptions pack (revenue model, cost structure, CapEx, growth, headcount, milestones)
- 02Revenue forecasting: top-down (TAM x share x timing) vs bottom-up (price x min(adoption, capacity)); the realistic-market-share cross-check
- 03Sustainable (internal) growth rate: g = ROE x retention = ROE x (1 - payout)
- 04Cost and investment modelling: COGS and OpEx, change in net working capital, CapEx, taxes, depreciation and NOLs
- 05Additional Funds Needed (AFN) = increase in assets - spontaneous funds (payables + accruals) - increase in retained earnings
- 06Integrated pro-forma statements (income statement, balance sheet, cash-flow statement) with AFN as the balancing plug
- 07Making projections robust: scenario, survivability, sensitivity and unit analysis; probability-weighted growth
- 08Unit economics: LTV = GML x R/(1 + D - R), CAC, and the LTV > 3 x CAC rule of thumb
Additional Funds Needed for a growth year
- +1Increase in retained earnings = net income x retention rate = net income x (1 - payout). Retention = 1 - 0.50 = 0.50, so retained earnings increase = 1.0 x 0.50 = 0.5 million dollars.
- +1State the balance-sheet AFN definition: AFN = required increase in assets - spontaneously generated funds - increase in retained earnings.
- +1Substitute: AFN = 4.0 - 0.6 - 0.5 = 2.9 million dollars of external financing needed for the year.
- +1Interpret: high growth needs external funding because internal sources (retained earnings and spontaneous liabilities) cannot cover the asset build. In the projected statements AFN is the plug that makes total assets equal total liabilities plus equity; it shrinks when growth slows, margins rise, or asset utilisation improves.
Key terms
- Assumptions pack
- The explicit set of inputs behind a financial plan: the revenue model and pricing, cost structure and CapEx, growth rates, headcount and critical milestones. Every projected number should trace back to a stated, defensible assumption.
- Top-down vs bottom-up revenue
- Top-down estimates revenue as TAM x equilibrium market share x timing; bottom-up estimates it as price per unit x the smaller of customer adoption and production capacity. Best practice is to do both and reconcile with a realistic-market-share cross-check.
- Sustainable growth rate
- The growth a firm can fund purely from retained profits without new external finance or changed margins: g = ROE x (1 - payout ratio) = ROE x retention. It is often used as the long-run terminal growth rate in later valuation.
- Additional Funds Needed (AFN)
- External financing required in a period: increase in assets - spontaneously generated funds (payables + accruals) - increase in retained earnings. It is the balancing plug that ties the projected balance sheet together and rises with growth.
- Customer Lifetime Value (LTV)
- The total value from a customer before they churn: LTV = GML x R / (1 + D - R), where GML is average gross margin per customer per period, R is the retention rate and D is the discount rate. Healthy unit economics require LTV to exceed about three times CAC.
- Customer Acquisition Cost (CAC)
- The average cost to acquire one new customer (sales and marketing spend divided by customers acquired). Compared against LTV, it tests whether growth creates or destroys value and how fast the venture must scale to cover fixed costs.
Projecting Financial Statements & the Financial Plan FAQ
Why do I forecast revenue both top-down and bottom-up?
Because each method has a blind spot. Top-down (market size times share) can flatter you when the TAM is vaguely defined; bottom-up (price times feasible capacity) can ignore market and competitor dynamics. Doing both and computing the implied market share as a cross-check catches errors: an implied share below about 5% suggests the TAM is too broad or the plan too timid, while a share above roughly 30% suggests capacity is overstated or competitor responses are underestimated.
What exactly is the AFN plug?
AFN is the external money a plan needs so that projected assets equal projected liabilities plus equity. Only two internal sources offset the asset build — the increase in retained earnings and the spontaneous rise in payables and accruals — and whatever the asset growth exceeds those two must be raised externally. In the pro-forma statements it literally 'plugs' the balance sheet, and it is generally positive and rising for high-growth startups.
How do LTV and CAC support a valuation?
They make the source of value visible and comparable. LTV = GML x R/(1 + D - R) discounts a customer's recurring gross margin over their expected life, and comparing it to CAC (the LTV > 3 x CAC rule of thumb) shows whether each acquired customer creates value. Strong unit economics let you defend growth spending and the revenue ramp inside your projections and pitch, which is why the chapter ties them to the value proposition.
Can AI help me build the FINC6025 financial plan?
Yes, as a study aid. Sia can walk you through the assumptions pack, the top-down/bottom-up cross-check, the AFN plug and the LTV/CAC calculations, and check the internal consistency of your projected statements. It supports your own work on the group proposal and exam preparation; it does not complete graded assessment, and the University of Sydney academic-integrity policy applies.
Exam move
Weeks 4-5 reward a clean, internally consistent model, so practise building one from an assumptions pack end to end: forecast revenue two ways and reconcile the implied market share, drive costs and working capital off sales, roll net income into retained earnings, and let AFN plug the balance sheet. Memorise the three formulas that keep reappearing — sustainable growth g = ROE x retention, AFN = increase in assets - spontaneous funds - increase in retained earnings, and LTV = GML x R/(1 + D - R) with the LTV > 3 x CAC rule. Use your group funding proposal as deliberate rehearsal for the exam's case analysis, and stress-test it with scenario and sensitivity checks. Confirm the assignment deadline and exam coverage on Canvas.
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