Business Plan Financcial Plan

1. Business PlanFinanccial Plan Patricia SALGUERO Departemen Teknik Informatika Institut Teknologi Bandung

2. 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)

3. Financial Plan Important 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

4. Financial Plan 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.

5. Financial Plan 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: (Number of units) FC : Fixed Cost P : Price VC : Variable cost

6. Bsv = FC + VC(Q) Financial Plan Break - Even analysis Sales Volume :

7. FE BEP CM = Financial Plan Break - Even analysis 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 = Break Even Point FE = Fixed expenses CM = Contribution margin per unit (unit sale price – variable expenses per unit)

8. FE = = BEP ; C C SP Financial Plan Break - Even analysis Computing the Break-Even point in sales: CM BEP = Break Even point in units FE = Fixed Expenses CM = Contribution margin per unit (SP – VC) SP = Selling price per unit

9. Financial Plan Break - Even analysis Graph

10. Financial Plan 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).

11. Financial Plan 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

12. Financial Plan • 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)

13. Financial Plan Sales: 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. 

14. Financial Plan 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)

15. Financial Plan Gross Profit Margin or Operating margin: Many financial officers convert the currency (dollar, rupiah, etc) amount to a percentage of revenues. The Selling, General and Administrative (SG&A) : This category contains expenses such as: • Salaried personnel • Travel and entertainment • Rent • Utilities • Postage • Printing • Insurance • Interest • Depreciation • Dues/Subscriptions • Advertising

16. Financial Plan The Discretionary Expenses : 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. • Officers' Salaries • Interest Expense • Depreciation • Rent

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

18. Financial Plan Income taxes: These are calculated only after all other expenses have been deducted. Net Income: 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.

19. Financial Plan • 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

20. Financial Plan 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.

21. Financial Plan The basic formula for the cash flow statement is: Beginning cash +/- Cash from or to operations, investments, or financing Ending cash

22. Financial Plan 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

23. Financial Plan 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?

24. Financial Plan 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)

25. Financial Plan 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.

26. Financial Plan 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.

27. Financial Plan A more detailed look at the Balance sheet reveals the following format:

28. Financial Plan 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.

29. Financial Plan 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.

30. Financial Plan 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.

31. Financial Plan 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;

32. Financial Plan 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.

33. Financial Plan 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.

34. Financial Plan 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.

35. Financial Plan The Ratios Table • ACTIVITY RATIOS. • DEBT RATIOS. • PROFITABILITY RATIOS. • LIQUIDITY RATIOS. • ADDITIONAL RATIOS.

36. Financial Plan PROFITABILITY RATIOS: • Gross Margin: sales minus cost of sales, expressed as a percentage. • Net Profit Margin: net profit divided by sales, as a percentage. • Return on assets: net profit divided by the total assets. • Return on Equity also return on investment (ROI). This ratio divides net profit by net worth.

37. Financial Plan ACTIVITY RATIOS: • AR turnover: Accounts receivable turnover; sales on credit divided by accounts receivable. This is a measure of how well your business collects its debts. • Collection Days: Accounts receivable multiplied by 360, and then divided by annual credit sales is another measure of debt collection and value of receivables.

38. Financial Plan • Inventory Turnover: Cost of sales divided by the average balance of inventory. • 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. • Total Asset turnover: Sales divided by total assets.

39. Financial Plan DEBT RATIOS: • Debt to Net Worth: Total liabilities divided by total net worth. • Short Term Debt to liability: Short-term debt divided by total liabilities.

40. Financial Plan LIQUIDITY RATIOS: • Current Ratio: Short-term assets divided by short-term liabilities. • 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.

41. Financial Plan • Net Working Capital: Subtract short-term liabilities from short-term assets. • Interest Coverage: Profit before interest and taxes (operating profit) divided by total interest payments.

42. Financial Plan ADDITIONALRATIOS: • Assets to Sales: Assets divided by sales. • Debt/ Assets: Total liabilities divided by total assets. • Current Debt/ Total Assets: Divides total assets by short-term (current) liabilities.

43. Financial Plan • Acid Test: short-term assets (minus accounts receivable and inventory), divided by short-term liabilities. • Sales/ Net Worth: total sales divided by net worth. • Dividend Payout: Dividends divided by net profit.