financial planning jh v2 100202
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Business Planning
Financial Budgets
Financial Accounts
Why bother with accounts / accounting? Money is a company resource – just like stock Accounting is a filing system for money Make sure you are 'making' money = business Compare performance
Previous with present, present with projected Competition
Report performance for Taxation
Financial Metrics
Measuring Wealth
How do you know if you're rich?
Types of Wealth
INCOMEEarn £150k+ / annum
ASSETS Own £1m house
Ferrari
LIQUIDITY£20k Now or £100k Trust fund?
Measures of Wealth
Profit (Loss) = Income - Expenses
Net Worth (Debt) = Assets - Liabilities
Liquidity = Availability of funds
3 Basic Financial Statements Profit - Profit & Loss Account (P&L)
Trading statement of Income & Expenditure
Net Worth - Balance Sheet Statement of Assets (owned) & Liabilities (owed)
Liquidity - Cashflow Expected Real Money flows WITH TIMINGS Most business start-ups fail within 3-5 years, often due to
lack of cashflow
Financial Statements
Balance Sheet Snapshot of what the company owns & owes
categorized by liquidity We own - Assets
Fixed (buildings, fixtures, fittings) Current (Cash, Bank Balances, Customer debts – 1yr
horizon) We owe – Liabilities
Long term (Finance loans, mortgage) Current (Bank overdraft, Debts to suppliers, 1 yr horizon)
Show how company is financed – “Debt vs Equity”- Read in conjunction with P&L – profitability vs gearing
Simple Example Balance SheetBlankCo Balance Sheet
£ £Fixed Assets (FA) 1000Buildings Fixtures & Fittings
Current Assets (CA)Stock 600Debtors (Customers' debt to us) 1300Cash @ Bank 500Cash in Hand 50
2450Less Current Liabilities (CL)Bank overdraft 85Creditors (our debts to others) 840
925Net Current Assets (NCA) 2525
Long-term LiabililtiesLong-term loan 100NET ASSETS 2425
Financed By:
Capital Account 3125less Drawings 700
2425
as at 30th November 2009
Profit & Loss Statement
Assessment of ability to “make money” Summary of activity to date Different versions:
Management Accounts Financial vs Tax Accounts Budget Annual vs Monthly
Simple P&L Statement Example
BlankCo Trading Profit & Loss Statementdated 30th November 2009
£ (000)
INCOME 100
less Cost of Sales (COGS) 25
Gross Profit 75
less General Expenses (Overheads) 62
Net Profit 13
Budgeting
Forecasting 1 – 5 years ahead Balance Sheet – annually P&L – monthly Cashflow
Weekly Monthly Quarterly
Budget P&L
Purpose Establish targets
Break-even sales = minimum sales needed to cover costs (profit = 0)
Target profitability Cost controls
State assumptions
Monitor progress towards achieving targets Sales Profitability
Monitor key performance indicators
Building a Budget P&L
SalesPrices & Volumes
Wages
Expenses / Overheads
Cost of Sales / Stock Movements
Profit & Loss
Separate Spreadsheets
Sales Forecasting
Revenue = Price x No. of Sales Be as specific as possible
Estimate revenues by product & client Use Sales Funnel where possible Estimate of total market share
Identify separate revenue types / streams Be realistic & prepared to justify your estimates! Sales commission (may calculate here) Transfer totals to P&L by revenue type
Cost of Sales
Often proportional to sales If so calculate in the same spreadsheet Calculate by product type / revenue type (not client) Design for amendments to establish B/E costs Transfer totals to P&L
Wages
Estimate staff wages By employee name / position Aggregate by department Allow for Employers' NIC (13% approx)
Allow for your own income! Get advice about how best to extract it (accountant)
Transfer totals to P&L by department
Expenses & Overheads
Not proportional to Sales Print, post, stationery Heat, light, rent, rates Travel & Entertainment - subsistence
Use a standard business plan for general expense categories
Estimate expense by category Transfer category totals to P&L
Review of P&L Model
Be prepared to amend the model to assess Breakeven sales volumes & costs Acceptable profitability
Assess key performance / investment measures % Net profit = Net Profit / Sales x 100 Return on Investment
ROTA Return on Total Assets = Profit(BIT) / Total Assets RoE Return on Equity = Profit After Tax / Net Worth
Scenario Planning – what happens if....
Budget Cashflow
Purpose - To avoid insolvency! To ensure adequate funds for continued ops Built on Budget P&L but differentiated by:
Payment timings – not Invoices (P&L) Includes Tax payments & receipts
Cashflow includes VAT & recognises payment dates Ignores non-cash items (depreciation etc)
Budget annually - (review day-to-day / weekly)
Building Cashflow
Start with P&L Delay sales by avg. settlement (debtor days) Delay costs until due for payment VAT Tip:
Group VATable sales together – add one line for VAT
Group VATable costs together – add one line for VAT
Aggregate quarterly
Add Monthly Net Cashflow to previous balance
Review Cashflow
Cashflow is difficult to predict for startups Allow for contingencies (20%) Identify periods of shortage and PLAN for them Watch out for cyclicality Consider factoring etc if necessary Credit Control is critical to cashflow
Conclusion
Remember!You can ignore accounts but not the taxman
Advice always costs more in retrospect
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