Financial Planning and Budgeting for Small Business Start-Ups

Presented byJoel Humphrey CPA, CA, CISA

Agenda 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

Cornerstone of Your Business Plan

Business Plan

Executive Summary

Mission Statemen

t

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

PlanningPlan

Spending

Measure Progress

Evaluate ROI

Determine

Financing Needs

Why is Financial Planning Important?“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

Components of a Financial Plan

Forecasting and Budgeting For Your Startup

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.

Sales ForecastA sales forecast allows you to determine the timing and volume of cash and credit sales.

Revenue Forecastin

g

Volume Forecastin

g

• 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)

Expense BudgetAn expense budget will help you plan for where the money is going. Budgeting and tracking expenses will lend perspective to “want” versus “need”.

Expense Budget (cont…)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 Asset BudgetCapital 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.

Cash Flow BudgetA cash flow budget will tell you if you have enough cash to make ends meet.

Sources and Uses of Cash

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.

Cash Flow Budget (cont…)An important tool for managing cash flow.

Overview of Financial Statements

As a result the following must remain true:

Balance SheetThe 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

Assets – Liabilities = Shareholder’s Equity

Current Assets

Fixed Assets &

intangibles

Current liabilities

Long-term liabilities

Shareholder’s Equity

John's Manufacturing Company Statement of Financial PositionProjected Statement of Financial PositionAs at May 31, 2014

(unaudited - see notice to reader)2014 2013

Assets

CurrentCash 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

CurrentAccounts 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 equityShare capital 200 200 Retained earnings (deficit) 936,569 596,789

936,769 596,989 1,755,408$ 1,406,028$

John’s Manufacturing CompanyProjected Statement of Financial PositionAs at May 31, 2015

2015 2014

Income StatementThe 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

Income Statement

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 EarningsProjected Statement of EarningsFor 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%

ExpensesSalaries 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$

2015 2014

Cash Flows StatementThe 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

Cash Flow StatementJohn's Manufacturing Company Statement of Cash FlowsStatement of Cash FlowsTwelve months ended May 31, 2014

2014 2013

Cashflows from (to) operating activitiesCash 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 activitiesAcquisition 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

2015 2014

John’s Manufacturing CompanyStatement of Cash FlowsAs at May 31, 2015

Pro Forma Financial StatementsProjected 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.

Financial Statement Recap

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 Your Business Start-Up

Financing Alternativ

es

Bootstrapping

Traditional Lending

Equity Injection

Leasing

PersonalLoans

Canada Small

Business Financing

Loan Program

Grants (NOHFC, FedNor)

Angel / Venture Capital

Financing Your Business Start-Up

Sources of FinancingThere 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

What Do Lenders Look For?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).

Matching Financing to Needs

Matching Financing to Needs

Cash Flow Example

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.

John’s Manufacturing Start-Up

John’s Revenue Projection

Jan Feb Mar Apr May Jun JulRevenue -$ 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 CompanyMonthly Income Statement

January - June 2013

John’s Manufacturing CompanyMonthly Income Statement

January – June 2015

John’s Cash Flow Projection

Jan Feb Mar Apr May Jun JulRevenue -$ 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 CompanyMonthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun JulStarting 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

John’s Manufacturing CompanyMonthly Income Statement

January – June 2015

John’s Cash Flow Projection

Jan Feb Mar Apr May Jun JulRevenue -$ 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 CompanyMonthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun JulStarting 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

John’s Manufacturing CompanyMonthly Income Statement

January – June 2015

John’s Cash Flow Projection

Jan Feb Mar Apr May Jun JulRevenue -$ 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 CompanyMonthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun JulStarting 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

John’s Manufacturing CompanyMonthly Income Statement

January – June 2015

John’s Cash Flow Projection

Jan Feb Mar Apr May Jun JulRevenue -$ 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 CompanyMonthly Income Statement

January - June 2013

Jan Feb Mar Apr May Jun JulStarting 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

John’s Manufacturing CompanyMonthly Income Statement

January – June 2015

Tools and ResourcesThe 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

Follow us on LinkedIn!FCR | Freelandt Caldwell Reilly LLP

Questions/CommentsJoel Humphrey, CPA, CA, CISA

Partnerjhumphrey@fcrca.com

705.675.2200