Welcome to the third week of finance for startups. In this week, we will first talk about the financial planning. Then we will begin to learn about the funding process. This is the balance sheet of PEN company in the beginning of the second year, which is the same as the balance sheet at the end of the first year we constructed before. To plan for the second year, we need to make some key assumptions for business in the second year. The company is expecting a new funding in Q1, meaning the first quarter. But the company does not yet know how much money it should raise. After this planning, we will know how much the company will need. So, let's go over these key assumptions for the second year. In Q1, the company will purchase raw materials worth $4,000 with cash. Do you remember that the company has accounts receivable of $2,500 from the previous year? The company will collect this money in Q1. In the beginning of the year, the company hires a production worker, and the annual salary is $1,200. In the second year, the company will produce a total of 12,000 pens and the remaining material inventory at the end of the year, will be $1,000. The equipment is depreciated by $800 just like the first year. The CEO's salary will be $2,000 or $500 per quarter. Other expenses are $250 per quarter. In the fourth quarter, 10 percent of interest on the loan will be paid. The company targets to sell a total of 10,000 pens with a unit price of $1 and the sales money is collected one quarter later. Based on these nine assumptions, let's make a financial plan for the second year of PEN company. The base of financial planning is a sales plan. This table shows the sales plan. In quarter one and two, the company will sell 2,000 pens each. In the second half of the year, 3,000 pens will be sold in each quarter. The unit price is $1. In the beginning of the year, there is no finished goods inventory, but the company feels that they should maintain a certain inventory level. So, it plans to maintain 1,000 pens in quarter one, and from quarter two, on 2,000 finished goods inventory. Based on this sales plan and inventory level, we can decide the production volume. For example, in quarter one, the company produces 3,000 pens, and 2,000 out of this 3,000 will be sold, and 1,000 will remain as inventory. So, now we have our sales plan, production plan, and target inventory level. Based on this, let's first estimate the cash flow. We know that in the beginning of the year, the beginning cash balance is at $600, and the accounts receivable from the last quarter will be collected in Q1. The sales money will be collected in the next quarter. So, the revenue collection will look like this. We know that in quarter one, the company will purchase raw materials worth $4,000 with cash. In the beginning of the year, the company hires a production worker with an annual salary of $1,200. So, the company pays $300 each to the production worker like this. The CEO's annual salary is $2,000, so minus $500, for each quarter. The other expenses are $250 per quarter like this. Let's first construct a table without Angel funding. Then the ending cash balance looks like this. So, at the end of the first quarter, the cash level is close to minus $2,000. This suggests that the company meets funding. So, how much money would you raise? I have seen many students answering I would raise $1,950, but I don't think this is a good answer as we are not solving a mathematical equation. Since this is a planning, we don't know exactly what will happen in reality. So, I would advise that you have some cushion when you raise the fund. If I were CEO of this company, I would raise at least $5,000. So, let's put 5,000 here. Then the resulting ending balance looks like this. Of course, you can raise more money and there's no single correct answer. With this Angel funding, we will construct other financial statements. In summary, based on plans for sales, inventories, production, hiring and expenses, we have constructed the cash flow statement. From this, we have determined the amount of funding.
