NORCAT Entrepreneurship 101 - "Financial Planning & Budgetting" featuring Freelandt Caldwell Reilly

Presented by

Joel Humphrey CPA, CA, CISA

Why is financial planning important?

Basic components of the financial plan

Forecasting and budgeting for your

start-up

Overview of financial statements

Financing your business start-up

Tools and resources

Business

Plan

Executive

Summary

Mission

Statement

Company

Analysis

Product

Description

and CVP

Human

Resource

Planning

SWOT

Analysis

Industry

Analysis

Competitor

Analysis

Operations

Planning

Marketing

Strategy

Financial

Plan

Importance

of Financial

Planning

Financial

Viability

Manage

Cash Flow

Trend

Analysis

Long-Term

Planning

Plan

Spending

Measure

Progress

Evaluate

ROI

Determine

Financing

Needs

“Good plans shape good decisions. That’s why good planning helps to make

elusive dreams come true”.

Critical part of the business plan – the

numbers have to make sense!

A good financial plan has all of these

components.

Integrate with business plan.

Typical timeframe 3-5 years.

The first year should be broken down

by month.

Should be consistently updated with

new and more reliable information.

Sales Forecast

Expense Budget

Capital Asset Budget

Cash Flow Budget

Forecasting sales and your sale pattern is the most

fundamental component of the financial plan – and

the most difficult!

A financial budget is only as accurate as the sales

forecast.

Use market data to establish realistic targets (e.g.

Greater Sudbury Statistics Guide).

Consider order backlog, probability of securing

contracts.

Understand the cyclicality of your sales pattern

(months of high or low demand). Use historical data

to identify trends.

Review your budget with your accountant to get

feedback on assumptions.

A sales forecast allows you to determine the timing and volume of cash and

credit sales.

Revenue

Forecasting

Volume

Forecasting

• Initial inventory

• Incorporation fees, licenses, permits

• Employee recruitment, training

• Down payments on equipment

• Marketing materials, advertising

Start-Up Costs / Expenses

• Salaries and benefits

• Cost of goods sold

• Rent, interest on mortgage and loans

• Marketing

• Office supplies

• Utilities

Ongoing Expenses

Fixed Expenses◦ Expenses that are paid

independent of business

activity (e.g. rent)

Variable Expenses◦ Expenses that change in

direct proportion to

production or service

volume (e.g. direct labour)

An expense budget will help you plan for where the money is going. Budgeting and

tracking expenses will lend perspective to “want” versus “need”.

How to determine what your business expenses are.

Start with fixed expenses that are predictable

(rent, property taxes etc).

Variable expenses can be identified by thinking

through the production, sales and delivery

processes (labour, cost of goods sold,

transportation etc).

Cost of goods sold can often be expressed as a

percentage of sales (gross margin).

Build in a contingency for unplanned expenses

– there will be!

Be conservative but realistic.

Capital budgeting is a process by which a business determines whether investing in

property and equipment is worth pursuing.

Criteria Categories

Hardware/software

Leasehold

improvements

Equipment/furniture

Land and buildings

Generates profits

Acquired for

continuous use

Not intended for sale in

ordinary operations

Useful life extends over

years

Capital assets are long-term assets that are

typically owned for a number of years.

Contribute to the business’s ability to generate

a profit (e.g. manufacturing equipment to

produce widgets).

Typically the biggest cash outlay in any business

start-up.

Debt financing should be matched with life of

the asset to align cash flows (e.g. building with

a 25 year mortgage, equipment with a 5 year

term loan).

Cash is King!

A company can be profitable but have negative cashflow (profits do not necessarily coincide with cash inflow and outflows).

One of the most common causes of business failure is a cash crisis.

Start-up companies need cash for investment and have a longer initial cash cycle (“cash sponges”).

Companies in the growth stage need to manage the cash cycle to avoid a cash crisis. It’s not all about revenue growth!

Understanding your cash flow is key to making decisions on how to manage cash, making investment decisions and to matching financing to cash needs.

A cash flow budget will tell you if you have enough cash to make ends meet.

A cash flow budget represents the amount and timing of a company’s cash disbursements and cash receipts over time.

Basic formula: Beginning cash + cash receipts – cash disbursements = ending cash.

Will help to identify cash peeks and valleys that can be used to predict cash needs and to arrange financing.

Requires forecasted sales, cash receipts (collection of receivables etc.) and cash disbursements (suppliers, payroll etc.).

Be mindful of the timing of CRA payments (HST, payroll source deductions, income taxes, tax installments).

Again, be realistic and conservative. Use best and worst case scenarios.

An important tool for managing cash flow.

As a result the following must remain true:

The balance sheet is a financial statement that serves as a snap shot of the

business at any point in time.

Assets

• Things a

business owns

Liabilities

• Debts a

business owes

Equity

• The owners

investment and

re-investment in

the business

Current Assets

Fixed Assets &

intangibles

Current Assets

Long-term Assets

Shareholder’s Equity

John's Manufacturing Company Statement of Financial Position

Projected Statement of Financial Position

As at May 31, 2014

(unaudited - see notice to reader)

2014 2013

Assets

Current

Cash 516,115$ 433,027$

Accounts receivable 483,500 254,688

Inventory 195,788 195,788

1,195,403 883,503

Equipment and leasehold improvements 202,355 164,875

Financing charges 7,650 7,650

Goodwill 350,000 350,000

1,755,408$ 1,406,028$

Liabilities and shareholder's equity

Current

Accounts payable and accrued liabilities 306,122$ 222,086$

Income taxes payable 91,200 79,800

Current portion of long-term debt 40,879 37,369

438,201 339,255

Due to shareholder 25,076 25,073

Long-term debt 355,362 444,710

818,639.00$ 809,039$

Shareholder's equity

Share capital 200 200

Retained earnings (deficit) 936,569 596,789

936,769 596,989

1,755,408$ 1,406,028$

The income statement is a financial statement that measures a company’s

financial performance over a specific accounting period.

Revenue

• Value of goods

and services

sold

Expenses

• Costs incurred

by the business

to generate

income

Net Income

• Bottom line

used as

indicator of

profitability

Revenue/Sales

-Less: Cost of sales

=Equals: Gross profit

-Less: operating expenses

=Equals: Net income before tax

Net income before tax

-Less: income taxes

=Net income

A summary of revenues and expenses for a given

period of time…John's Manufacturing Company Statement of Earnings

Projected Statement of Earnings

For the years ended May 31

2014 2013

[Note 1]

Revenue 2,417,500$ 2,037,500$

Cost of Sales 1,296,000$ 1,079,875$

Gross Profit 1,121,500$ 957,625$

46% 47%

Expenses

Salaries and benefits 108,000$ 90,000$

Office and general 152,000 127,000

Vehicle 53,000 44,000

Professional fees 46,000 38,000

Travel 43,000 36,000

Rent 41,000 34,000

Shop supplies 28,000 23,000

Insurance 23,000 19,000

Interest on long-term debt 23,000 19,000

Marketing and promotion 16,000 13,000

533,000$ 443,000$

Earnings before amortization and income taxes 588,500$ 514,625$

Amortization 37,520 20,763

Earnings before income taxes 550,980 493862.1

Income tax provisions 91,200 79,800

Net earnings 459,780$ 414,062$

Retained earnings (deficit), beginning of year 596,789$ 272,727$

Dividends paid (120,000) (90,000)

Retained earnings (deficit), end of year 936,569$ 596,789$

The statement of cash flows is a financial statement that shows the amount of

cash generated and used by a business in a given period.

Cash Flows from

Operations

• measurement of the

amount of cash

generated by a

company’s normal

business operations

Cash Flows from Investing

Activities

• change in a company’s

cash resulting from

buying and selling

investments and

investing in capital assets

Cash Flows from Financing

Activities

• change in cash resulting

from issuing stocks,

taking or repaying loans

and paying dividends

John's Manufacturing Company Statement of Cash Flows

Statement of Cash Flows

Twelve months ended May 31, 2014

2014 2013

Cashflows from (to) operating activities

Cash receipts from customers 2,188,688$ 2,266,313$

Cash paid to suppliers (1,744,961) (1,606,911)

Income taxes (79,800)

363,927$ 659,401$

Cash flows from (to) investing activities

Acquisition of equipment and leasehold improvements (75,000) (150,000)

Acquisition of goodwill - (350,000)

(75,000)$ (500,000)$

Cash flows from (to) financing activities

Proceeds on issuance of long-term debt - 850,000

Repayment of long-term debt (85,839) (565,839)

Dividends paid to shareholders (120,000) (90,000)

(205,839)$ 194,161$

Increase in cash 83,088$ 353,562$

Cash (bank indebtedness), beginning of year 869,677 516,115

Cash (bank indebtedness), end of year 952,765$ 869,677$

Statement of Cash Flows

Projected or estimated financial statements that attempts to present a reasonably

accurate picture of the financial plan.

“Forward looking” financial statements (balance

sheet, income statement and statement of cash

flows).

A tool used by businesses to evaluate the

feasibility of a financial plan.

Often a requirement to obtain loans from banks

and other lenders.

Based on the sales, expense, capital and cash

budgets.

You may need the help of an accountant to

prepare these statements.

Balance Sheet

• Snapshot • A - L = E • summary of

financial

position

Income Statement

• Period of

time

• Revenues

and gains v.

expenses and

losses

• summary of

profitability

Statement of Cash Flow

•Period of

time

• Operating v.

investing v.

financing

activities

• summary of

actual flow of

cash in and

out of

business

FS Relationships FS Summary

Financing

Alternatives

Bootstrapping

Traditional

Lending

Equity

Injection

Leasing

Personal

Loans

Canada Small

Business

Financing Loan

Program

Grants

(NOHFC,

FedNor)

Angel /

Venture

Capital

There are many types of loans you can use to finance aspects of your business

start-up.

Operating line of credit used to fund short-

term cash needs.

Terms loans used to buy capital assets

(equipment, vehicles).

Mortgages term loan for land and building.

Leases equipment, machinery and vehicles.

Shareholder loans startup capital.

Make sure to get advice from a lawyer or

accountant before signing any banking or loan

agreement

Securing small business financing can be challenging.

A well thought out business plan to establish

feasibility.

Depth of management, experience,

professionalism.

Creditworthiness.

Earnings potential, pro forma financial

statements.

Owner investment (at least 10%).

Pledge of security (GSA, charge on assets,

personal guarantee).

Ability to repay debt (ratio of debt to equity,

free cash flow to service principle and interest).

Background

John has developed an innovative product.

John incorporated a company on January 1st.

Assumptions

John did his market analysis and believes he can earn a 50% gross profit on his sales.

He expects “hockey stick” growth over the next 6 months.

Revenue is collected 30 days after sales are made.

Due to the manufacturing lead time, John has to pay for goods one month ahead of

sales.

John plans to draw $2,500 per month as a salary until the business gets going.

John has $50,000 in cash to start his business.

A family member has offered to loan him $25,000 but John doesn’t think he needs it.

Jan Feb Mar Apr May Jun Jul

Revenue -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$ 170,000$

Cost of Sales -$ 6,250$ 18,750$ 31,250$ 50,000$ 68,750$ 85,000$

Gross Margin -$ 6,250$ 18,750$ 31,250$ 70,000$ 81,250$ 85,000$

SG&A 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

Net Income (2,500)$ 3,750$ 16,250$ 28,750$ 67,500$ 78,750$ 82,500$

John's Manufacturing Company

Monthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun Jul

Revenue -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$ 170,000$

Cost of Sales -$ 6,250$ 18,750$ 31,250$ 50,000$ 68,750$ 85,000$

Gross Margin -$ 6,250$ 18,750$ 31,250$ 70,000$ 81,250$ 85,000$

SG&A 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

Net Income (2,500)$ 3,750$ 16,250$ 28,750$ 67,500$ 78,750$ 82,500$

John's Manufacturing Company

Monthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun Jul

Starting Cash 50,000$ 41,250$ 20,000$ (1,250)$ (16,250)$ (25,000)$ 7,500$

Plus: Revenue (1 Month Delayed) -$ -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$

Minus: Cost of Sales(1Month Ahead) (6,250)$ (18,750)$ (31,250)$ (50,000)$ (68,750)$ (85,000)$ (90,000)$

Minus: SG&A (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$

Cash Gain/(Loss) (8,750)$ (21,250)$ (33,750)$ (52,500)$ (71,250)$ (87,500)$ (92,500)$

Ending Cash 41,250$ 20,000$ (1,250)$ (16,250)$ (25,000)$ 7,500$ 65,000$

Cash Projection

Jan Feb Mar Apr May Jun Jul

Revenue -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$ 170,000$

Cost of Sales -$ 6,250$ 18,750$ 31,250$ 50,000$ 68,750$ 85,000$

Gross Margin -$ 6,250$ 18,750$ 31,250$ 70,000$ 81,250$ 85,000$

SG&A 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

Net Income (2,500)$ 3,750$ 16,250$ 28,750$ 67,500$ 78,750$ 82,500$

John's Manufacturing Company

Monthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun Jul

Starting Cash 50,000$ 41,250$ 20,000$ (1,250)$ (16,250)$ (25,000)$ 7,500$

Plus: Revenue (1 Month Delayed) -$ -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$

Minus: Cost of Sales(1Month Ahead) (6,250)$ (18,750)$ (31,250)$ (50,000)$ (68,750)$ (85,000)$ (90,000)$

Minus: SG&A (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$

Cash Gain/(Loss) (8,750)$ (21,250)$ (33,750)$ (52,500)$ (71,250)$ (87,500)$ (92,500)$

Ending Cash 41,250$ 20,000$ (1,250)$ (16,250)$ (25,000)$ 7,500$ 65,000$

Cash Projection

Jan Feb Mar Apr May Jun Jul

Revenue -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$ 170,000$

Cost of Sales -$ 6,250$ 18,750$ 31,250$ 50,000$ 68,750$ 85,000$

Gross Margin -$ 6,250$ 18,750$ 31,250$ 70,000$ 81,250$ 85,000$

SG&A 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

Net Income (2,500)$ 3,750$ 16,250$ 28,750$ 67,500$ 78,750$ 82,500$

John's Manufacturing Company

Monthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun Jul

Starting Cash 50,000$ 41,250$ 20,000$ (1,250)$ (16,250)$ (25,000)$ 7,500$

Plus: Revenue (1 Month Delayed) -$ -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$

Minus: Cost of Sales(1Month Ahead) (6,250)$ (18,750)$ (31,250)$ (50,000)$ (68,750)$ (85,000)$ (90,000)$

Minus: SG&A (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$

Cash Gain/(Loss) (8,750)$ (21,250)$ (33,750)$ (52,500)$ (71,250)$ (87,500)$ (92,500)$

Ending Cash 41,250$ 20,000$ (1,250)$ (16,250)$ (25,000)$ 7,500$ 65,000$

Cash Projection

Jan Feb Mar Apr May Jun Jul

Revenue -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$ 170,000$

Cost of Sales -$ 6,250$ 18,750$ 31,250$ 50,000$ 68,750$ 85,000$

Gross Margin -$ 6,250$ 18,750$ 31,250$ 70,000$ 81,250$ 85,000$

SG&A 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$ 2,500$

Net Income (2,500)$ 3,750$ 16,250$ 28,750$ 67,500$ 78,750$ 82,500$

John's Manufacturing Company

Monthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun Jul

Starting Cash 75,000$ 66,250$ 45,000$ 23,750$ 8,750$ -$ 32,500$

Plus: Revenue (1 Month Delayed) -$ -$ 12,500$ 37,500$ 62,500$ 120,000$ 150,000$

Minus: Cost of Sales(1Month Ahead) (6,250)$ (18,750)$ (31,250)$ (50,000)$ (68,750)$ (85,000)$ (90,000)$

Minus: SG&A (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$ (2,500)$

Cash Gain/(Loss) (8,750)$ (21,250)$ (33,750)$ (52,500)$ (71,250)$ (87,500)$ (92,500)$

Ending Cash 66,250$ 45,000$ 23,750$ 8,750$ -$ 32,500$ 90,000$

Cash Projection

The following organizations provide some excellent tools and resources for small

business start-ups

Regional Business Centre – www.regionalbusiness.ca

Northern Ontario Heritage Fund Corporation – www.nohfc.ca

Nickel Basin Federal Development Corporation – www.nickelbasin.com

FedNor – fednor.gc.ca

Canada Small Business Financing Program (CSBF) – www.ic.gc.ca/csbfa

Northern Ontario Angels – www.noeg.ca

Canadian Youth Business Foundation – www.cybf.ca

Business Development Bank of Canada – www.bdc.ca

Waubetek Business Development Corporation – www.waubetek.com

FCR | Freelandt Caldwell Reilly LLP