PRO FORM A CASH FLOWA. Cash flow is not the same as profit.1.2.3.Profit is the result of subtracting expenses from sales.Cash flow results from the difference between actual cash receipts and cash payments.Cash flows only when actual payments are made or received.B. For an Internet start-up, the same transaction would involve the use of a credit cardin which a percentage of the sale would be paid as a fee to the credit card company.C. On many occasions, profitable firms fail because of lack of cash; therefore, usingprofit as a means of success may be deceiving.D. There are two standard methods used to project cash flow.1. In the indirect method some adjustments are made to the net income based on the factthat actual cash may not have actual been receive or disbursed.2. The direct method, a simple determination of cash in less cash out, gives a fast indicationof the cash position of the new venture at a point in time.E. It is important for the entrepreneur to make monthly projections of cash, pro formacash flow.1. If disbursements are greater than receipts in any time period, funds will have to beborrowed or cash reserve tapped.2.3.Large positive cash flows may need to be invested in short term sources.Usually the first few months of start-up will require external cash in order to cover cash.B. The break-even formula is: B/E (Q) = TFC SP-VC/unit (marginal contribution)1. As long as the selling price is greater than the variable costs per unit, some contributioncan be made to cover fixed costs.2. The major weakness in calculating the break-even is determining whether a cost is fixedor variable.3.4.Costs such as depreciation, salaries and wages, rent, and insurance are usually fixed.Materials, selling expenses, and direct labor are most likely variable costs.C. When the firm produces more than one product, break-even may be calculated foreach product.D. The entrepreneur can try different states of nature, such as different selling pricesto see the impact on break-even and profits