financial planning jh v2 100202

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