A. The financial plan provides a complete picture of:1. How much and when the funds are coming into the organization.2. Where the funds are going.3. How much cash is available?4. The projected financial position of the firm.B. The financial plan provides the short-term basis for budgeting and helps prevent acommon problem-lack of cash.C. The financial plan must explain how the entrepreneur will meet all financialobligations and maintain its liquidity.D. In general, the financial plan will need three years of projected financial data foroutside investors.OPERATING AND CAPITAL BUDGETSA. Before developing the pro forma income statement, the entrepreneur should prepareoperating and capital budgets.1.2If the entrepreneur is a sole proprietor, he or she will be responsible forthe budgeting decisions.In a partnership, or where employees exist, the initial budgeting processmay begin with one of these individuals.3. Final determination of budgets will ultimately rest with the owners orentrepreneurs.B. In the preparation of the pro forma income statement, the entrepreneur must firstdevelop a sales budget, an estimate of the expected volume of sales by month.1.2.From sales forecasts, the entrepreneur will determine the cost of thesesales.Estimated ending inventory will also be included.C. Production or Manufacturing Budget.1.2.3.4.This budget provides a basis for projecting cash flows for the cost ofgoods produced.The important information in this budget is the actual productionrequired each month and the needed inventory to allow for changes indemand.This budget reflects seasonal demand or marketing programs, which canincrease demand and inventory.The operating budget is an important document, as the pro forma income.D. Operating Budget.1.2.3.Next the entrepreneur can focus on operating costs.Fixed expenses (incurred regardless of sales volume) include rent,utilities, salaries, interest, depreciation, and insurance.The entrepreneur will need to calculate variable expenses, which maychange from month to month depending on sales volume, such asadvertising and selling expenses.E. Capital budgets are intended to provide a basis for evaluating expenditures that willimpact the business for more than one year.