This document provides guidance on preparing financial plans and statements for investors. It discusses the importance of understanding financials to manage a business. The main sections include financial planning, estimating revenues and costs, developing pro forma income statements and balance sheets, determining cash flows, and completing full financial projections for 3-4 years. Key elements that investors want to see are identified, such as 3-4 year forecasts and clear exit strategies. The importance of realistic but not overly conservative estimates is also emphasized.
2. INDEX
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1. Why do you need to know Financials?
2. Financial Planning
3. Main Financial statements
1. Income statement
2. Balance sheet
3. Cash flow
4. FINANCIALPLANNING
WHAT INVESTOR WANTS TO SEE FROM PROJECTIONS?
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• 3-4 year forecast
• Neither conservative; nor aggressive
• How investment will be spent
• High returns SOON
• Having idea on how to exit
5. FINANCIALPLANNING
WHAT WE NEED TO AWARE OF?
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• Returns can take longer than estimations
• Cost can be higher than estimations
• No entrepreneur thinks of everything
7. FINANCIALPLANNING
The components of Financial Section
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• Start with sales forecast
• Create an expenses of budget
• Income projections
• Deal with assets and liabilities
• Develop cash flow statements
• Break-even analysis
8. FINANCIALPLANNING
Revenues Estimation
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Revenue Estimation
• Identify all sources of revenues
• Estimate future revenues after establishment per day (or month, depending on industry)
• Understand revenue drivers
• Number of customers
• Number of products / average ticket per customer
• Average Revenue per customer (net, after VAT)
Methodologies
- Top down
- «Market is known to be 200m USD. The leader has 15%. We can get 5% of it.
- Bottom- up
- We will start with 1 restaurant in the first year. It will have 50 covers. Occupancy will go
from 40% - 80% over a period of 12 months. We’ll make 200USD per cover per day. So we
will generate 50*60%* 200* 365=2,19MUSD. Next year, I will open 2 additional branches.
9. FINANCIALPLANNING
Seasonality and Sales Growth
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Seasonality
• The monthly profile of sales, profits and cash flow will depend on
the industry, e.g. ice-cream manufacturer (high sales in the
summer)
• Seasonality is important for our work due to
• Understand cash flow profile
• Review of current trading
• Working capital requirements of the business
• Different industries will have different trends
J F M A M J J A S O N DJ F M A M J J A S O N D
10. FINANCIALPLANNING
Cost Estimation
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• There are a variety of ways we can analyse costs:
• Absolute change year-on-year and monthly
• As a percentage of sales/unit/site, etc
• Fixed vs. variable
• Recurring vs. non-recurring
• We need to understand the cost structure/drivers of the company
Fixed vs. variable costs
• Variable costs are those that vary with business activity (e.g. sales)
• Fixed costs are those that are not variable in the short term
• Variable costs
• e.g. material costs, selling and distribution costs
• Fixed costs
• e.g. personnel, rent, audit fees
• An analysis of fixed vs. variable costs is key for our analysis of projections.
12. FINANCIALPLANNING
Contribution Margin
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SALES – VARIABLE COSTS = CONTRIBUTION
• Common metrics include contribution per unit or contribution margin %
(contribution/sales)
• Contribution margin is a measure of profit margin that focuses on what proportion of sales
revenue is left over after paying associated variable costs
• This is the amount that is left over to cover fixed costs, or to add to profits
• Businesses often calculate the contribution of an individual product line or department
13. FINANCIALPLANNING
Margins
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• Typical margins we review are:
• Contribution margin (Contribution / sales)
• Gross margin (Gross profit / sales)
• EBITDA margin (EBITDA / sales)
• We use margins since absolute figures can be misleading
• We can compare margins to prior periods or peer group companies
• Margin analysis helps us gain an understanding of the performance of
the business and identifies areas we want to investigate further
• The understanding we gain here will also be helpful in building a profit
bridge.
15. FINANCIALPLANNING
Margins (continued)
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• Falling gross margin, possible reasons:
• Pressure on prices / price war
• Discounts offered
• Rise in costs (e.g. raw materials)
• Change in product mix
• Inefficiency in production
• Rising gross margin, possible reasons:
• Economies of scale
• Price increase
• Cost cuttings / savings
• Increase in sales with certain element of costs fixed
• Change in product mix
• Efficiency improvements
16. FINANCIALPLANNING
Completion of Pro-Forma Income Statements
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• Other Operating Expenses (indirect production cost, marketing + sales, gen.admin.cost)
• Personnel cost
• Other time-dependent operating expenses
• Set up costs
• Depreciation / amortization based on investment plan / depreciation plan
• Cost on monthly basis for years 1-3
• Other Operating Income
• Other operating income positions
• Gross margin – operating expenses + other operating income = EBIT
• EBITDA = EBIT + depreciation / amortization
• Calculation of financial result
• Consideration of interest expenses for long-term loans or other types of debt
• If applicable, calculation of other regular financial income / financial expenses
• EBIT +/- financial result = EBT (earnings before taxes)
• Calculation of taxes on income
• Normally in % of EBT, if applicable consideration of losses carried forward
• Net Profit / Loss = EBT ./. Taxes on income
17. INCOMESTATEMENTS
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Statutory Income Statements - Summary
TL k
Budget Actual PY Actual CY
Dıfference
BU-CY
Dıfference
PY-CY Budget Actual PY Actual CY
Dıfference
BU-CY
Dıfference
PY-CY
Sales, net
Direct COS
Contribution Margin I
Indirect COS
Gross profit (CM II)
Other operating income
Other operating expenses
EBIT (CM III)
Finance income
Finance expense
Contribution Margin IV (CM IV)
Extraordinary income
Extraordinary expense
Profit before tax (CM V)
Provision for tax
Net profit
Depr. & Amor.
EBITDA
Contribution margin I (CM I) %
Gross profit margin (CM II) %
EBIT margin (CM III) %
EBITDA margin %
PBT margin %
OPEX / net sales %
YTDPrevıous Month Current year
18. BALANCESHEET
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Summary Balance Sheet
TL k 31-Dec-13 Month
Cash and cash equivalents
Trade receivables
Inventories
Other current assets
Total current assets
Tangible fixed assets
Intangible fixed asset
Non-current assets
Total non-current assets
Total assets
Borrowings short terms
Trade payables
Other current liabilities
Total current liabilities
Borrowings Long terms
Total non-current liabilities
Capital
Total liabilities and equity
Assets: What you got
Liabilities: What you owe
Equity: What’s left over
19. FINANCIALPLANNING
Completion of Pro-Forma Financial Statements
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• Balance sheet at beginning of venture
• Normally only initial equity + cash
• Balance sheet at end of each period
• Consideration of income statement for period
• Consideration of changes in working capital (accounts receivables, inventories, accounts
payables) in balance sheet at end of period
• Consideration of investments and depreciation in balance sheet at end of period
• Consideration of loan repayments / additional loans in balance sheet at end of period
• Consideration of equity measures / dividend payouts in balance sheet at end of period
20. CASHFLOWSTATEMENT
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Cash flow analysis
TL 31- Dec-13 31-Jan-2014 28-Feb-2014
EBITDA
Non-cash items
Cash EBITDA
Change in Net Working Capital
- Change in trade receivables
- Change in inventories
- Change in trade payables
- Change in other current assets
-Change in other current liabilities
Operational Cash Flow
Investing activities
Capex
Gain on sales fixed assets
Other
Investing activities
Cash Flow after Investing activities
Financing activities
Change short term bank loans
Change in long term bank loans
Changes in equity
Change in other financial activities
Financing activities
Free cash flow
Cash and cash equivalents- Previous month
Cash and cash equivalents - end of period
Where cash comes
from;
Where cash goes to
21. FINANCIALPLANNING
Determination of Operative Cash Flow
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• Indirect calculation of operative cash flow: Starting point net profit / loss of period
• + adding back: depreciation / amortization of that period
• +/- changes in working capital
• - increases in accounts receivables
• - increases in inventories
• + increases in accounts payables
• Alternative: direct calculation of operative cash flow
• Consideration of cash-effective revenues in month of cash effectiveness
• Example: 70% cash, 20% credit card = 1 month later, 10% per invoice with 5% payment
within one month, 5% payment within two months after purchase
• Consideration of cash-effective expenses in month of cash effectiveness
• Example: standard payment term for suppliers of 30 days = consideration of cash
outflow one month after purchase
• No consideration of non-cash-effective expenses, e.g. depreciation
• = Operative cash flow
Working Capital
22. FINANCIALPLANNING
Working capital
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• What is working capital ?
• Comprises items relating to normal trading activity that will
crystallise into cash inflows and outflows in the short-term
• Working capital = current assets - current liabilities
23. FINANCIALPLANNING
Determination of Complete Cash Flow Statements
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• Calculation of investment plan
• Calculation of all investments in fixed assets for full five-year period (material,
immatierial, financial investments)
• If applicable, consideration of desinvestments
• All investments / desinvestments with full cash amounts
• Calculation of financing plan
• Consideration of long-term loans for financing the venture
• Consideration of interest expenses in income statement
• Consideration of principal repayments
• Consideration of equity measures (increases / decreases)
• Consideration of dividend payouts
• Cash Flow Statement Structure
• Cash at beginning of period
• +/- Operative cash flow
• +/- Cash flow from investment activities
• +/- Cash flow from financing activities
• = Cash at end of period
• Cumulative cash flow statement (for full five years) is used for iterative funds required
calculation / funds planning