Financial Planning Jh V2 100202

• 1. Business Planning Financial Budgets

2. 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

3. Financial MetricsMeasuring Wealth How do you know if you're rich? 4. Types of Wealth INCOME Earn 150k+ / annum ASSETSOwn 1m house Ferrari LIQUIDITY 20k Now or 100k Trust fund? 5. Measures of Wealth Profit(Loss) = Income - Expenses Net Worth(Debt) = Assets -Liabilities Liquidity= Availability of funds 6.

• 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 flowsWITH TIMINGS

• • • Most business start-ups fail within 3-5 years, often due to lack of cashflow

Financial Statements 7. 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

8. Simple Example Balance Sheet 9. 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

10. Simple P&L Statement Example BlankCo Trading Profit & Loss Statement dated 30th November 2009 (000) INCOME 100 lessCost of Sales (COGS) 25 Gross Profit75 lessGeneral Expenses (Overheads) 62 Net Profit13 11. Budgeting

• Forecasting 1 5 years ahead

• • Balance Sheet annually

• • P&L monthly

• • Cashflow

• • • Weekly

• • • Monthly

• • • Quarterly

12. 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

13. Building a Budget P&L Sales Prices & Volumes Wages Expenses / Overheads Cost of Sales / Stock Movements Profit & Loss Separate Spreadsheets 14. 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

15. 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

16. 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

17. 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

18. 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....

19. 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

• • • CashflowincludesVAT & recognises payment dates

• • Ignores non-cash items (depreciation etc)

• Budget annually

• • - (review day-to-day / weekly)

20. 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

21. 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

22. Conclusion Remember! You can ignore accounts but not the taxman Advice always costs more in retrospect