Business Plan Financial Projections 1 — Questions and Answers
Question 1: What does a pro forma income statement show in a business plan?
- Historical profits only
- Projected revenues, expenses, and net income (Correct answer)
- Current cash on hand
- Break-even point only
Correct answer: Projected revenues, expenses, and net income
A pro forma income statement shows projected revenues, expenses, and net income over a future period.
Question 2: Which financial statement tracks the flow of cash in and out of a business?
- Balance sheet
- Income statement
- Cash flow statement (Correct answer)
- Equity statement
Correct answer: Cash flow statement
The cash flow statement tracks cash inflows and outflows, showing liquidity over time.
Question 3: What is a break-even analysis used for in a business plan?
- To show total revenue
- To determine when revenue equals total costs (Correct answer)
- To calculate tax liability
- To project market share
Correct answer: To determine when revenue equals total costs
Break-even analysis determines the sales volume at which total revenue equals total costs and the business neither profits nor loses.
Question 4: What does 'burn rate' mean in financial projections?
- The rate at which a startup spends its capital (Correct answer)
- Annual revenue growth
- Cost of goods sold per unit
- Interest paid on loans
Correct answer: The rate at which a startup spends its capital
Burn rate refers to how quickly a startup spends its available capital before becoming profitable.
Question 5: Which ratio measures a company's ability to meet short-term obligations?
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Gross margin ratio
- Return on investment
Correct answer: Current ratio
The current ratio (current assets divided by current liabilities) measures a company's ability to cover short-term obligations.
Question 6: What is working capital in a business plan context?
- Total long-term assets
- Current assets minus current liabilities (Correct answer)
- Owner's equity
- Net profit after tax
Correct answer: Current assets minus current liabilities
Working capital is calculated as current assets minus current liabilities and represents the funds available for day-to-day operations.
Business Plan Financial Projections 1
What does a pro forma income statement show in a business plan?