dr robert a. phillips manchester science enterprise centre financial planning: making sense of the...

Dr Robert A. PhillipsManchester Science Enterprise Centre

Financial Planning: Making Sense of the Numbers

Manchester Science Enterprise Centre

Your Costs• Raw materials and equipment• Wages• Taxes• Utility bills – gas, electric, telephone, postage

etc• Premises (Rental or Mortgage)• Delivery costs• Loan repayment• Marketing and advertising costs


Your Cash Inflows

• Investments• Sales of goods • Subscriptions to services• Sale of Intellectual Property rights• Money from royalties• Sale of assets


Break even analysis

• Need to sell enough product to cover costs = Break even point

• Variable costs e.g. raw materials• Fixed costs e.g. Rent, wages• Fixed costs make less of a contribution

when you make more products !


Working Capital CycleCashCash

PurchasesPurchases

MaterialsMaterials

AccountsPayable

AccountsPayable

ProductionProduction

FinishedInventory

FinishedInventory

SalesSales

AccountsReceivable

AccountsReceivable

CollectionsCollections


• Balance Sheet – A ‘snap shot’ of the companies financial situation at a point in time (e.g. end of year)– Assets, Liabilities, Owner’s Equity

• Profit and Loss Statement – From…..to….– Income (Revenue) and Expenses

• Cash flow Statement – From ….to….– Cash in and Cash out

Three main statements


Small Business Management, 11th editionLongenecker, Moore, and Petty© 2000South-Western College Publishing

Flow of Cash Through a BusinessOwner’s

InvestmentBorrowed

FundsSale of Fixed

Assets

Cash Sales

Purchase of Fixed Assets

Payment of Expenses

Collection of Accounts

Receivable

Payment of Dividends

Payment for Stock

Cash


Cash Flow

• The flow of cash in to and out of a business

• Can be net positive or negative• Continuously moving picture• Especially important for a new start-up

company- may update daily!• NOT simply sales minus expenditure


Cash Flow

Long TermShort Term

Positive Cash Flow

Profits

Essential Essential

Desirable Essential

Cash is King


Analysing Cash Flow

1. Net Cash Flow +ve or –ve? What are the problems?

2. Determine main causes of problem – costs or income?

3. Profitable companies with full order books can still fail !

Use the Pareto (80:20) Rule


Profit and Loss Statement

• Reports on expenses and income over a period of time.

• Displays Profit.• How does that relate to cash?• Some Terms:

– Sales/Turnover– Cost of Goods sold– Gross Profit– Net Profit


Profit and Loss DetailsSales- Cost of Goods sold= Gross Profit- Operating Expenses= Operating Profit or Earning before

interest and Tax (EBIT)-Interest=Earnings before Tax (EBT)-Tax= Net Profit


Balance SheetAssets: (everything the business OWNS) Current Assets Cash Debtors Stock Fixed Assets Equipment Premises

Liabilities/Debt: (Everything the business OWES) Current Liabilities Creditors Short-term loans Long-term Liabilities Loans Overdraft

Total Assests

Equity: Value of owners’ share of the business Owners initial Investments Retained profits/Loss


Why do this ?• To show investors you are profitable (or

to forecast profitability)• To identify areas where the company

could improve and identify potential problems

• To show investors you are efficient• To show customers and suppliers you

will still be around next year !• It may be required by law !


What do we expect• Three years of projected financial

statements – Cash Flow, Profit and Loss, Balance sheet

• A break even analysis – how well do you need to do before you make a profit ?

• Estimation of costs and how much money you would ask from investors


Happy Financial Planning

dr robert a. phillips manchester science enterprise centre financial planning: making sense of the...

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