setting financial strategy seminar

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Welcome

Introduction to Seminar

What do you hope to learn in the next two hours:

Burning issues?

Topics of interest?

Opportunity to network

Have fun!

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Setting Financial Strategy

Do you have a road map to drive your business to where you want it to be?

When planning a holiday we:

Decide where we want to go

Decide when we want to go

Work out how will we get there

Work out how much will it cost

Decide if we can afford to pay for the type of holiday we want

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Did you have a plan when you first started in business?

Do you want your business to be the best it can be?

Financial strategy supports the strategic objectives of the business

The tools you learn today when utilised effectively will assist to evaluate and monitor the effectiveness

of your strategic plans as they are implemented

Setting Financial Strategy

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Topics for today’s seminar

Good practice business strategy

Aligning your finances to your business strategy

How to develop a profit budget that works

The importance of forecasting cash flow

Cash flow forecasting made easy

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Improved business performance = stronger financial results

You need to plan where you want your business to be in order for your business to get there

Don’t over think it, and don’t make it too long – a one page plan will work just a well as a 100 page document

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Identifies performance issues

Identifies long-term objectives

Recognises capabilities and resources needed Documents activities required to achieve the objectives within a specific time frame

Objectives need to be:Clear, concise and achievableFocusing on the key drivers in businessMonitored and measured

What does business success look like and what needs to be done to achieve it?

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Your annual business plan should include:

What worked and what didn’t

Are there any changes to your:MarketCustomersCompetition

Your objectives and goals for the year How will you measure these?What are the changes you want to make?Any operational changes/resource requirements

Let’s spend a little time completing the table on page 6 to help you set some goals for the next year.

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Aligning finance & business strategy

Your financial strategy should be a continuous process of directing and allocating financial resources of the business to meet your strategic goals and objectives.

Need to regularly review the potential future financial position to assess the ability of your business to meet the business strategy.

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Aligning finance & business strategy

Budgets and forecasts are critical tools that will predict the future financial position of your business.

Budget vs Forecast:

Budget: sets out the financial goals of the business in line with the strategic plan

Forecast: tracks the actual financial outcomes in line with budget predictions, providing a valuable tool to assess the likelihood of the achievement of the budget

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Good Financial Strategy

Realistic targets that align with:Strategic business plansHistorical trading activities

Credible assumptions and targets in line with industry trends.

Documented assumptions, including source of information.

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Good Financial Strategy

Budgeted timelines aligning to:Strategic business plansFinancial statements timelines

Regular comparison of budgets against actual financial results.

Scope to amend activities and targets where budgeted outcomes will not be met.

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Benefits of Good Financial Strategy

Clarity on the key drivers of your business

Tools to measure and monitor performance

Improved profitability

Increase efficiency in the use of resources and assets

Increase productivity

Increased market share

Improved cashflow

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A profit budget that works

Good practice budgeting requires the following:

Preparation of strategic goals

Budgeted timelines that align to financial statements

Regular comparison of budgets against actual financial results

Scope for amending activities and targets where actual results indicate that budgeted outcomes will not be met

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A profit budget that works

Profit budgets are one of the most important financial statements

They provide information on the predicted future financial performance of the business

Will be the central financial statement to monitor the financial impact of the implementation of your strategic plans.

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Profit and Loss Budget

Important tool for your business

Summary of expected income and expenses

Timeline usually one year

Monitor results regularly

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Profit and Loss Budget Hint

By preparing a profit and loss budget annually, you will be in a position to determine if your future business plans will support the ongoing activities of your business.

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Getting Started

Undertake in orderly manner

Involve key staff

Document all steps

Two types:

Incremental – using previous year’s activities

Zero-based – no consideration of past activities

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Getting Started

Review strategic plan and note activities for the budget

Separate activities into existing and new

Document all assumptions

Review prior year’s profit and loss statements

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Budgeting Tip

An independent profit and loss budget can be developed for separate projects to assess the financial viability of each project.

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Assumptions

Estimated events that will have a financial impact in the future

Use realistic targets that will be achievable

Use historic financial information

Look for any trends

Industry information will give your assumptions credibility

Document assumptions

Attach to budget

Let’s look at the assumptions table on page 9

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Profit and Loss Budget

Let’s look at the Profit and Loss Budget on page 10.

A template for a profit and loss budget can be found by searching “profit and loss budget”

at www.business.vic.gov.au

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Managing Profit and Loss Budget

Regularly compare actual to budget

Variances

Timing

Permanent

Can be positive as well as negative

Enables you to 'drill-down' to problem areas

Is the budget wrong e.g. have trading conditions changed?

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Managing Profit and Loss Budget Hint

The more regular the reports, the quicker operations can be reviewed for financial impact and action can be implemented immediately where required.

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BUDGET is where we would like to be:

Based on annual business plan

With intervention built in to achieve objectives

Usually once a year

To provide a planned outcome

A budget should not be amended unless the goals and objectives have changed.

Budget versus Forecast

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Forecast is planned events translated into financial statements based on actual events

Without intervention

Real cash movements

Continually updated

A monitoring tool where the actual results are recorded to provide a “forecast” of the planned outcomes based on how the business is currently operating.

Let’s look at Sofie’s example on page on page 12.

Budget versus Forecast

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Cashflow Forecasting

Planning future cashflows

Important for business planning:

Support business operations

Business expansion

Essential for financial survival

Usually over a twelve month period

‘Rolling plan’ is the most useful

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Profit versus Cash

PROFIT DOES NOT EQUAL CASH!

A profitable business can still have cashflow issues.

Profit - is the amount remaining after total sales value less costs for stock and all other expenses.

Cash - is generated from all cash inflows less all cash outflows.

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Profit versus Cash

Profit Cash

GST

Principle loan repayments

Interest loan repayments

Proceeds from sale of assets

Depreciation

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Cashflow Forecasting Hint

Remember that cashflow is all about timing and the flow of cash, so when preparing your cashflow forecast, make sure you are as accurate as possible on the timing of the cashflows.

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Five step approach:

1. Prepare a list of assumptions

2. Prepare the anticipated income or sales for the business – sales forecast

3. Prepare detail on any other estimated cash inflows

4. Prepare detail on all estimated cash outflows

5. Put all information together – cashflow forecast

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Sales Forecast

Estimating sales is difficult

Influencing factors:

Types of customers

Terms for customers

Influence of economic factors

Competitive pressures

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Turn credit sales into cash receipts using accounts receivable history or terms on offer.

Let’s look at an example on page on page 16

Sales receipts collected in month following sale 60%

Sales receipts collected in 2nd month following sale 30%

Sales receipts collected in 3rd month following sale 10%

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Applying the percentages on the previous slide to his estimated sales for the next year, Joe has been able to calculate the estimated actual cash receipts from sales.

See page 17 of your workbook.

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GST rebates

Additional equity contribution

Tax refunds

Grants

Loan proceeds

Proceeds from sale of assets

Other sources of income not included in sales, such as royalties, franchise fees, license fees

Other cash inflows:

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Payroll

Tax (BAS, payroll)

Rent

Utilities (phone, electricity etc.)

Insurances

Council rates

Bank Fees

Superannuation

Work cover

Advertising

Interest charges on loans

Cash outflows – expenses:

Don’t forget to include purchase of stock in your cash outflows!

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Other cash outflows:

Purchase of assets

‘One off’ bank fees (i.e. establishment fees)

Principal repayments of the loan

Payments to the owner/s

Investment of surplus funds

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See page 20 for an example of Joe’s cashflow forecast

The template for this cashflow forecast can be found on Business Victoria’s website – page 19

has the link.

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Cashflow Forecasting Tip

Once the forecast is completed, you can run some “what if” scenarios to measure how reactive your business cashflows will be to certain changes in events, such as decrease in sales, increase in fuel costs etc. This will show you how quickly you may run out of cash if any of these events occur.

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Todays Top Tips

Effective business planning will determine what business success looks like and what needs to be done to achieve it

Start with an annual business plan

Develop a profit and loss budget to confirm that your plans are financially viable

Do a cashflow forecast based on your plans to ensure that you will have adequate cashflow

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List 3 actions you will follow through with as a result of this

workshop

Then

List 3 things that you’ve learned in this seminar

List 3 actions you will follow through with as a result of this

seminar

List 3 things that you’ve learned in this seminar

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Business mentors help you to identify a clear direction for you and your business.

Business mentors can also advise you on how to:conduct market researchwork out your break-even pointprice and/or cost your products or servicesdevelop an effective marketing strategyuse other business management tools

To arrange a free mentoring session with a business mentor complete the evaluation form and select FREE Mentoring Session on page 2. You will then receive an email with details on claiming

your free mentoring session.

FREE mentoring session

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Questions?

Thank you for attending

Check outbusiness.vic.gov.au/events

for more workshop information