Business Plan Financcial Plan

IF-ITB/PAT/03/03Aug09IS7074 - Business Plan

Business PlanFinanccial Plan

Patricia SALGUERO Departemen Teknik Informatika

Institut Teknologi Bandung


Financial Plan

There may be a few activities in which one can read a textbook and then “do it”but financial management is not one of them. That is why finance is worth studying. Who wants to work in a field where there is no room for experience, creativity, judgement, and a pinch of luck?

“Don’t find a fault, find a remedy” (Henry Ford)


Financial PlanImportant assumptions

• The most significant aspect of the forecasts is the set of assumptions supporting your numbers.

• Make sure your discussion sufficiently communicates the basis of your assumptions.

• Your assumptions must be realistic, logical and attainable. Inflation Currency Personnel Costs Capacity utilization Taxes rates Dividend payments Short term, long term interest rate, etc


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Key Financial indicators

• Name the Indicator values for the most important financial variables,

• Compare projected results to actual past results,

• Explain the projected performance in light of the past performance and specific business activities planned.


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Break - Even analysis

Is a simple tool to identify the point at which a business becomes profitable.BEA has the major advantage of simplicity in providing the business owner with reliable information concerning profit generation.

Quantity:VCP

FCBq

(Number of units)

FC : Fixed Cost P : Price VC : Variable cost


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Sales Volume : Bsv = FC + VC(Q)


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Break-even analysis is a useful management tool to measure the effects of pricing decisions, and demand and costs on potential revenue.Using it, managers can estimate the total sales volume in dollars and/or units needed to cover total expenses plus any profit.

Computing production needs: =BEP

FE

CM

BEP = Break Even PointFE = Fixed expensesCM = Contribution margin per unit (unit sale price – variable expenses per unit)


Financial PlanBreak - Even analysis

Computing the Break-Even point in sales:

CMBEP

FE

C= C

SP=;

BEP = Break Even point in unitsFE = Fixed Expenses CM = Contribution margin per unit (SP – VC)SP = Selling price per unit


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Break - Even analysis Graph


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Projected Profit and Loss

The profit and loss account looks at how well the firm has traded over the time period concerned (usually the last 6 months or year).


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Profit and loss statement format

The categories of a profit and loss statement are arranged in a specific order regardless of the legal form of the business (i.e., sole proprietor, C corporation, etc.). Within each category, revenues and expenses may be listed separately or grouped. Financial reporting needs to remain consistent over a period of time.

The basic formula for the profit-and-loss statement is:

Revenues – expenses = Net Profit


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•Sales revenue – Cost of Goods sold (variable) = Gross Profit Margin

•Gross Profit Margin – Selling & Gen.Adm. (fixed period) = Operating Profit

•Operating Profit – Discretionary Expenses +/- Other income/expenses = Pre-tax Income

•Pre-tax Income – Income tax = Net Income (after taxes)


Sales:

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is the money you receive for your services. Note that this is the gross amount before you pay drivers or freight brokers.

Cash basis accounting counts revenue when the check is deposited to the bank or when it arrives in the mail. Most companies use accrual basis accounting, however, meaning that you count the revenue when the haul is completed, even if your customer takes 30 to 60 days to pay.


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The Cost of Goods Sold (COGS) :

is the general category for all production related expenses, which is subtracted first from sales. COGS is defined as:

COGS = (Beginning Inventory) + (Purchases of Inventory) - (Ending Inventory)


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The Selling, General and Administrative (SG&A) :This category contains expenses such as:

Many financial officers convert the currency (dollar, rupiah, etc) amount to a percentage of revenues.

Gross Profit Margin or Operating margin:

•Salaried personnel •Travel and entertainment •Rent •Utilities •Postage •Printing

• Insurance • Interest• Depreciation• Dues/Subscriptions• Advertising


The Discretionary Expenses :

• Officers' Salaries • Interest Expense • Depreciation • Rent

The National Development Council, specialists in economic development finance and business credit analysis training, proposes a third type of expense classified as "discretionary." Discretionary expenses are those, which the business owner may control in order to decrease the reported profits.

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Pre-Tax income: is just that, i.e. income before federal and state government take their share

Other Income or Expenses:Generally don’t relate to the operating side of the business, rather to how the management finances the business. It may contain non-operating revenue (interest or dividends from company investments, for example) or non-operating expense (for example, costs of borrowing, interest, factoring charges on accounts receivables advances or penalties). By separating these out, the accountant tries to isolate managers’ performance by separating revenues and expenses they can’t control.


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Is the final amount on most profit-and-loss statements. It simply represents the net total profit earned by the business during the period, above and beyond all related costs and expenses.

Net Income:

These are calculated only after all other expenses have been deducted.

Income taxes:


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• The statement of Retained Earnings:

Net Income (after Taxes) – Dividends paid +/- Prior period adjustments =

Net Change in retained earnings for the year

NCIRE + Retained earnings at the beginning of the year = Retained earnings at the end of the

year


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Cash Flow

Shows the movement of money through the business, the cash position and gives a indication as to whether the business is likely to have enough cash to see it through a specified period.


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The basic formula for the cash flow statement is:

Beginning cash +/- Cash from or to operations, investments, or financing

Ending cash


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A closer look at a cash flow statement reveals the following format :

Net income+/- Changes in working capital items

= Cash flows from (or to) operating activities+/- Cash flows from (or to) investing activities+/- Cash flows from (or to) financing activities

= Change in cash during the year+ Cash at the beginning of the year

= Cash at the end of the year


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Cash flows from (to) operating activities:

Tell whether your company’s day-today activities generated or consumed cash.

The Bottom line:

• Did your operating activities produce cash?• Did your accounts receivable grow?• Did you pay off old short term debts?


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Cash flows from (to) investing activities:

Reflect how much cash you invested in assets (example trucks, trailers, other equipment and even stocks, bonds and other securities).

• Should the Company build enough surplus surplus cash to begin a temporary investing program ?

• Use of cash (Stock, bonds, short term investments, etc)• Source of cash (liquidation of assets, etc)


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Cash flows from (to) financing activities:

show what funds were used to pay debts or dividends or what funds came in from new loan proceeds or owner investment.

• If you took out a new $1 million loan, it will show up as a positive cash inflow.

• If you repaid $200,000 on a loan, it will show up as a use of cash. • Many owner transactions will be reflected in this item, as will issuance of

stock.• Dividends and distributions will be a negative use of cash.


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Balance Sheet:

The Balance Sheet list everything that the Company owns and balances it against who owns what.

The General Formula:

Assets = Liability + Equity

The Balance sheet is the sum total of your Company’s financial condition on a particular date, such as the end of the year, a quarter or a month.


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A more detailed look at the Balance sheet reveals the following format:

Assets Liabilities& Equity

Current Assets Current Liabilities

+ Fixed Assets + Long-Term Liabilities

+ Other Assets+ Other Liabilities

+ Equity

TOTAL ASSETSTOTAL LIABILITIES AND EQUITY


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Current Assets:

Current Assets are those that are within one year, generally, of being turned into cash.

• Short term Investment,• Accounts receivable,• Advances to the employees, • Inventory of supplies,• Prepaid expenses (Such as insurance or tax deposit)• Any other asset that is expected to be liquidated within a year.


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Fixed Assets:

Fixed Assets are those that you will carry on the books for more than one year, and from with you will benefit in future years.

• Office equipment,• Shop equipment,• Buildings and land,• etc.


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Other Assets:

Other Assets are neither Fixed or current assets.

• Notes receivable for sale of old equipment where the maturity of the note stretches out over several years,

• Officer loans that have not stated maturity date,• Investment or advances to subsidiary companies,• The cost of franchises and the legal,• Other cost needed to start a business or acquire a

major bank loan,• etc.


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Current Liabilities:

Current Liabilities are those that you will pay in the next 12 months.

The goal is to determine whether there are enough current assets to liquidate all current liabilities at any given point in time.

Current liabilities include:

• Short-term bank notes and lines of credit; • Accounts payable to suppliers; • Taxes collected in the previous month but not paid until the next;


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Long Term Liabilities:

Long Term liabilities are debts that you expect to pay after 12 months from the report’s day.

• Bonds, debentures and any obligations of the Company that is not current,

• Deferred taxes,• etc

Other Liabilities:

May include loans and special debts not classified elsewhere.


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Equity:

Represent the amount owed to the owners that is not classified as shareholder debt.

The amount invested by owners is called capital stock or additional paid-in capital for corporations and capital invested for the other type of legal entities.


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Business Ratios:

There a number of Business Ratios which potential lenders and investors will use in order to assess the relative health of your business.

Ratio analysis is a useful management tool because it helps identify positive and negative trends in your business performance

The data for your ratio analysis comes from your balance sheet and income statement.

Your ratios should be compared to the ratios of similar businesses, which can be obtained from industry associations, business libraries, or your lender.


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The Ratios Table

ACTIVITY RATIOS. DEBT RATIOS. PROFITABILITY RATIOS. LIQUIDITY RATIOS. ADDITIONAL RATIOS.


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PROFITABILITY RATIOS:

I. Gross Margin:

sales minus cost of sales, expressed as a percentage.

II. Net Profit Margin:

net profit divided by sales, as a percentage.

III. Return on assets:

net profit divided by the total assets.

IV. Return on Equityalso return on investment (ROI). This ratio divides net profit by net worth.


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ACTIVITY RATIOS:

I. AR turnover:

Accounts receivable turnover; sales on credit divided by accounts receivable. This is a measure of how well your business collects its debts.

II. Collection Days:

Accounts receivable multiplied by 360, and then divided by annual credit sales is another measure of debt collection and value of receivables.


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III. Inventory Turnover:

Cost of sales divided by the average balance of inventory.

IV. Accounts payable Turnover:

A measure of how quickly the business pays its bills. It divides the total new accounts payable for the year by the average accounts payable balance.

V. Total Asset turnover:

Sales divided by total assets.


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DEBT RATIOS:

I. Debt to Net Worth:

Total liabilities divided by total net worth.

II. Short Term Debt to liability:

Short-term debt divided by total liabilities.


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LIQUIDITY RATIOS:

I. Current Ratio:

Short-term assets divided by short-term liabilities.

II. Quick Ratio:

This is the same as the current ratio, except that inventories are first subtracted from short-term assets before they are divided by short-term liabilities.


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III. Net Working Capital:

Subtract short-term liabilities from short-term assets.

IV. Interest Coverage:

Profit before interest and taxes (operating profit) divided by total interest payments.


Financial PlanADDITIONAL RATIOS:

I. Assets to Sales:

Assets divided by sales. II. Debt/ Assets:

Total liabilities divided by total assets. III. Current Debt/ Total Assets:

Divides total assets by short-term (current) liabilities.


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IV. Acid Test:

short-term assets (minus accounts receivable and inventory), divided by short-term liabilities.

V. Sales/ Net Worth:

total sales divided by net worth.

VI. Dividend Payout:

Dividends divided by net profit.

Business Plan Financcial Plan

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