Setting Financial Strategy seminar

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Resources from Business Victoria's seminar explains the difference between a budget and a forecast and the key elements to a good financial strategy.

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Setting Financial Strategy seminar

  1. 1. UNCLASSIFIED UNCLASSIFIED
  2. 2. UNCLASSIFIED UNCLASSIFIED Welcome Introduction to Seminar What do you hope to learn in the next two hours: Burning issues? Topics of interest? Opportunity to network Have fun!
  3. 3. UNCLASSIFIED UNCLASSIFIED Setting Financial Strategy Do you have a road map to drive your business to where you want it to be? When planning a holiday we: Decide where we want to go Decide when we want to go Work out how will we get there Work out how much will it cost Decide if we can afford to pay for the type of holiday we want
  4. 4. UNCLASSIFIED UNCLASSIFIED Did you have a plan when you first started in business? Do you want your business to be the best it can be? Financial strategy supports the strategic objectives of the business The tools you learn today when utilised effectively will assist to evaluate and monitor the effectiveness of your strategic plans as they are implemented Setting Financial Strategy
  5. 5. UNCLASSIFIED UNCLASSIFIED Topics for today’s seminar Good practice business strategy Aligning your finances to your business strategy How to develop a profit budget that works The importance of forecasting cash flow Cash flow forecasting made easy
  6. 6. UNCLASSIFIED UNCLASSIFIED Good practice business strategy Improved business performance = stronger financial results You need to plan where you want your business to be in order for your business to get there Don’t over think it, and don’t make it too long – a one page plan will work just a well as a 100 page document
  7. 7. UNCLASSIFIED UNCLASSIFIED Good practice business strategy Identifies performance issues Identifies long-term objectives Recognises capabilities and resources needed Documents activities required to achieve the objectives within a specific time frame Objectives need to be: Clear, concise and achievable Focusing on the key drivers in business Monitored and measured What does business success look like and what needs to be done to achieve it?
  8. 8. UNCLASSIFIED UNCLASSIFIED Good practice business strategy Your annual business plan should include: What worked and what didn’t Are there any changes to your: Market Customers Competition Your objectives and goals for the year How will you measure these? What are the changes you want to make? Any operational changes/resource requirements Let’s spend a little time completing the table on page 6 to help you set some goals for the next year.
  9. 9. UNCLASSIFIED UNCLASSIFIED Aligning finance & business strategy Your financial strategy should be a continuous process of directing and allocating financial resources of the business to meet your strategic goals and objectives. Need to regularly review the potential future financial position to assess the ability of your business to meet the business strategy.
  10. 10. UNCLASSIFIED UNCLASSIFIED Aligning finance & business strategy Budgets and forecasts are critical tools that will predict the future financial position of your business. Budget vs Forecast: Budget: sets out the financial goals of the business in line with the strategic plan Forecast: tracks the actual financial outcomes in line with budget predictions, providing a valuable tool to assess the likelihood of the achievement of the budget
  11. 11. UNCLASSIFIED UNCLASSIFIED Good Financial Strategy Realistic targets that align with: Strategic business plans Historical trading activities Credible assumptions and targets in line with industry trends. Documented assumptions, including source of information.
  12. 12. UNCLASSIFIED UNCLASSIFIED Good Financial Strategy Budgeted timelines aligning to: Strategic business plans Financial statements timelines Regular comparison of budgets against actual financial results. Scope to amend activities and targets where budgeted outcomes will not be met.
  13. 13. UNCLASSIFIED UNCLASSIFIED Benefits of Good Financial Strategy Clarity on the key drivers of your business Tools to measure and monitor performance Improved profitability Increase efficiency in the use of resources and assets Increase productivity Increased market share Improved cashflow
  14. 14. UNCLASSIFIED UNCLASSIFIED A profit budget that works Good practice budgeting requires the following: Preparation of strategic goals Budgeted timelines that align to financial statements Regular comparison of budgets against actual financial results Scope for amending activities and targets where actual results indicate that budgeted outcomes will not be met
  15. 15. UNCLASSIFIED UNCLASSIFIED A profit budget that works Profit budgets are one of the most important financial statements They provide information on the predicted future financial performance of the business Will be the central financial statement to monitor the financial impact of the implementation of your strategic plans.
  16. 16. UNCLASSIFIED UNCLASSIFIED Profit and Loss Budget Important tool for your business Summary of expected income and expenses Timeline usually one year Monitor results regularly
  17. 17. UNCLASSIFIED UNCLASSIFIED Profit and Loss Budget Hint By preparing a profit and loss budget annually, you will be in a position to determine if your future business plans will support the ongoing activities of your business.
  18. 18. UNCLASSIFIED UNCLASSIFIED Getting Started Undertake in orderly manner Involve key staff Document all steps Two types: Incremental – using previous year’s activities Zero-based – no consideration of past activities
  19. 19. UNCLASSIFIED UNCLASSIFIED Getting Started Review strategic plan and note activities for the budget Separate activities into existing and new Document all assumptions Review prior year’s profit and loss statements
  20. 20. UNCLASSIFIED UNCLASSIFIED Budgeting Tip An independent profit and loss budget can be developed for separate projects to assess the financial viability of each project.
  21. 21. UNCLASSIFIED UNCLASSIFIED Assumptions Estimated events that will have a financial impact in the future Use realistic targets that will be achievable Use historic financial information Look for any trends Industry information will give your assumptions credibility Document assumptions Attach to budget Let’s look at the assumptions table on page 9
  22. 22. UNCLASSIFIED UNCLASSIFIED Profit and Loss Budget Let’s look at the Profit and Loss Budget on page 10. A template for a profit and loss budget can be found by searching “profit and loss budget” at www.business.vic.gov.au
  23. 23. UNCLASSIFIED UNCLASSIFIED Managing Profit and Loss Budget Regularly compare actual to budget Variances Timing Permanent Can be positive as well as negative Enables you to 'drill-down' to problem areas Is the budget wrong e.g. have trading conditions changed?
  24. 24. UNCLASSIFIED UNCLASSIFIED Managing Profit and Loss Budget Hint The more regular the reports, the quicker operations can be reviewed for financial impact and action can be implemented immediately where required.
  25. 25. UNCLASSIFIED UNCLASSIFIED BUDGET is where we would like to be: Based on annual business plan With intervention built in to achieve objectives Usually once a year To provide a planned outcome A budget should not be amended unless the goals and objectives have changed. Budget versus Forecast
  26. 26. UNCLASSIFIED UNCLASSIFIED Forecast is planned events translated into financial statements based on actual events Without intervention Real cash movements Continually updated A monitoring tool where the actual results are recorded to provide a “forecast” of the planned outcomes based on how the business is currently operating. Let’s look at Sofie’s example on page on page 12. Budget versus Forecast
  27. 27. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Planning future cashflows Important for business planning: Support business operations Business expansion Essential for financial survival Usually over a twelve month period ‘Rolling plan’ is the most useful
  28. 28. UNCLASSIFIED UNCLASSIFIED Profit versus Cash PROFIT DOES NOT EQUAL CASH! A profitable business can still have cashflow issues. Profit - is the amount remaining after total sales value less costs for stock and all other expenses. Cash - is generated from all cash inflows less all cash outflows.
  29. 29. UNCLASSIFIED UNCLASSIFIED Profit versus Cash Profit Cash GST Principle loan repayments Interest loan repayments Proceeds from sale of assets Depreciation
  30. 30. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Hint Remember that cashflow is all about timing and the flow of cash, so when preparing your cashflow forecast, make sure you are as accurate as possible on the timing of the cashflows.
  31. 31. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Five step approach: 1. Prepare a list of assumptions 2. Prepare the anticipated income or sales for the business – sales forecast 3. Prepare detail on any other estimated cash inflows 4. Prepare detail on all estimated cash outflows 5. Put all information together – cashflow forecast
  32. 32. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Sales Forecast Estimating sales is difficult Influencing factors: Types of customers Terms for customers Influence of economic factors Competitive pressures
  33. 33. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Turn credit sales into cash receipts using accounts receivable history or terms on offer. Let’s look at an example on page on page 16 Sales receipts collected in month following sale 60% Sales receipts collected in 2nd month following sale 30% Sales receipts collected in 3rd month following sale 10%
  34. 34. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Applying the percentages on the previous slide to his estimated sales for the next year, Joe has been able to calculate the estimated actual cash receipts from sales. See page 17 of your workbook.
  35. 35. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting GST rebates Additional equity contribution Tax refunds Grants Loan proceeds Proceeds from sale of assets Other sources of income not included in sales, such as royalties, franchise fees, license fees Other cash inflows:
  36. 36. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Payroll Tax (BAS, payroll) Rent Utilities (phone, electricity etc.) Insurances Council rates Bank Fees Superannuation Work cover Advertising Interest charges on loans Cash outflows – expenses: Don’t forget to include purchase of stock in your cash outflows!
  37. 37. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Other cash outflows: Purchase of assets ‘One off’ bank fees (i.e. establishment fees) Principal repayments of the loan Payments to the owner/s Investment of surplus funds
  38. 38. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting See page 20 for an example of Joe’s cashflow forecast The template for this cashflow forecast can be found on Business Victoria’s website – page 19 has the link.
  39. 39. UNCLASSIFIED UNCLASSIFIED Cashflow Forecasting Tip Once the forecast is completed, you can run some “what if” scenarios to measure how reactive your business cashflows will be to certain changes in events, such as decrease in sales, increase in fuel costs etc. This will show you how quickly you may run out of cash if any of these events occur.
  40. 40. UNCLASSIFIED UNCLASSIFIED Todays Top Tips Effective business planning will determine what business success looks like and what needs to be done to achieve it Start with an annual business plan Develop a profit and loss budget to confirm that your plans are financially viable Do a cashflow forecast based on your plans to ensure that you will have adequate cashflow
  41. 41. UNCLASSIFIED UNCLASSIFIED List 3 actions you will follow through with as a result of this workshop Then List 3 things that you’ve learned in this seminar List 3 actions you will follow through with as a result of this seminar List 3 things that you’ve learned in this seminar
  42. 42. UNCLASSIFIED UNCLASSIFIED Business mentors help you to identify a clear direction for you and your business. Business mentors can also advise you on how to: conduct market research work out your break-even point price and/or cost your products or services develop an effective marketing strategy use other business management tools To arrange a free mentoring session with a business mentor complete the evaluation form and select FREE Mentoring Session on page 2. You will then receive an email with details on claiming your free mentoring session. FREE mentoring session
  43. 43. UNCLASSIFIED UNCLASSIFIED Questions? Thank you for attending Check out business.vic.gov.au/events for more workshop information

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