Basic Financial Projections

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Basic Financial Projections

  1. 1. Financial Planning: Making Sense of the Numbers Dr Robert A. Phillips Manchester Science Enterprise Centre
  2. 2. Your Costs <ul><li>Raw materials and equipment </li></ul><ul><li>Wages </li></ul><ul><li>Taxes </li></ul><ul><li>Utility bills – gas, electric, telephone, postage etc </li></ul><ul><li>Premises (Rental or Mortgage) </li></ul><ul><li>Delivery costs </li></ul><ul><li>Loan repayment </li></ul><ul><li>Marketing and advertising costs </li></ul>
  3. 3. Your Cash Inflows <ul><li>Investments </li></ul><ul><li>Sales of goods </li></ul><ul><li>Subscriptions to services </li></ul><ul><li>Sale of Intellectual Property rights </li></ul><ul><li>Money from royalties </li></ul><ul><li>Sale of assets </li></ul>
  4. 4. Break even analysis <ul><li>Need to sell enough product to cover costs = Break even point </li></ul><ul><li>Variable costs e.g. raw materials </li></ul><ul><li>Fixed costs e.g. Rent, wages </li></ul><ul><li>Fixed costs make less of a contribution when you make more products ! </li></ul>
  5. 5. Working Capital Cycle Cash Purchases Materials Accounts Payable Production Finished Inventory Sales Accounts Receivable Collections
  6. 6. <ul><li>Balance Sheet – A ‘snap shot’ of the companies financial situation at a point in time (e.g. end of year) </li></ul><ul><ul><li>Assets, Liabilities, Owner’s Equity </li></ul></ul><ul><li>Profit and Loss Statement – From…..to…. </li></ul><ul><ul><li>Income (Revenue) and Expenses </li></ul></ul><ul><li>Cash flow Statement – From ….to…. </li></ul><ul><ul><li>Cash in and Cash out </li></ul></ul>Three main statements
  7. 7. <ul><li>Small Business Management , 11th edition </li></ul><ul><li>Longenecker, Moore, and Petty </li></ul><ul><li>2000 </li></ul><ul><li>South-Western College Publishing </li></ul>Flow of Cash Through a Business Owner’s Investment Borrowed Funds Sale of Fixed Assets Cash Sales Purchase of Fixed Assets Payment of Expenses Collection of Accounts Receivable Payment of Dividends Payment for Stock Cash
  8. 8. Cash Flow <ul><li>The flow of cash in to and out of a business </li></ul><ul><li>Can be net positive or negative </li></ul><ul><li>Continuously moving picture </li></ul><ul><li>Especially important for a new start-up company- may update daily! </li></ul><ul><li>NOT simply sales minus expenditure </li></ul>
  9. 9. Cash Flow Long Term Short Term Positive Cash Flow Profits Essential Essential Desirable Essential Cash is King
  10. 10. Analysing Cash Flow <ul><li>Net Cash Flow +ve or –ve? What are the problems? </li></ul><ul><li>Determine main causes of problem – costs or income? </li></ul><ul><li>Profitable companies with full order books can still fail ! </li></ul><ul><li>Use the Pareto (80:20) Rule </li></ul>
  11. 11. Profit and Loss Statement <ul><li>Reports on expenses and income over a period of time. </li></ul><ul><li>Displays Profit. </li></ul><ul><li>How does that relate to cash? </li></ul><ul><li>Some Terms: </li></ul><ul><ul><li>Sales/Turnover </li></ul></ul><ul><ul><li>Cost of Goods sold </li></ul></ul><ul><ul><li>Gross Profit </li></ul></ul><ul><ul><li>Net Profit </li></ul></ul>
  12. 12. Profit and Loss Details <ul><li>Sales </li></ul><ul><li>- Cost of Goods sold </li></ul><ul><li>= Gross Profit </li></ul><ul><li>Operating Expenses </li></ul><ul><li>= Operating Profit or Earning before interest and Tax (EBIT) </li></ul><ul><li>-Interest </li></ul><ul><li>= Earnings before Tax (EBT) </li></ul><ul><li>-Tax </li></ul><ul><li>= Net Profit </li></ul>
  13. 13. Balance Sheet
  14. 14. Why do this ? <ul><li>To show investors you are profitable (or to forecast profitability) </li></ul><ul><li>To identify areas where the company could improve and identify potential problems </li></ul><ul><li>To show investors you are efficient </li></ul><ul><li>To show customers and suppliers you will still be around next year ! </li></ul><ul><li>It may be required by law ! </li></ul>
  15. 15. What do we expect <ul><li>Three years of projected financial statements – Cash Flow, Profit and Loss, Balance sheet </li></ul><ul><li>A break even analysis – how well do you need to do before you make a profit ? </li></ul><ul><li>Estimation of costs and how much money you would ask from investors </li></ul>
  16. 16. Happy Financial Planning

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