Financial Planning Jh V2 100202

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John Haftke’s presentation to ravensbourne for Financial Planning

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Financial Planning Jh V2 100202

  1. 1. Business Planning Financial Budgets
  2. 2. Financial Accounts <ul><li>Why bother with accounts / accounting? </li></ul><ul><ul><li>Money is a company resource – just like stock </li></ul></ul><ul><ul><li>Accounting is a filing system for money </li></ul></ul><ul><ul><li>Make sure you are 'making' money = business </li></ul></ul><ul><ul><li>Compare performance </li></ul></ul><ul><ul><ul><li>Previous with present, present with projected </li></ul></ul></ul><ul><ul><ul><li>Competition </li></ul></ul></ul><ul><ul><li>Report performance for Taxation </li></ul></ul>
  3. 3. Financial Metrics Measuring Wealth How do you know if you're rich?
  4. 4. Types of Wealth INCOME Earn £150k+ / annum ASSETS Own £1m house Ferrari LIQUIDITY £20k Now or £100k Trust fund?
  5. 5. Measures of Wealth Profit (Loss) = Income - Expenses Net Worth (Debt) = Assets - Liabilities Liquidity = Availability of funds
  6. 6. <ul><li>3 Basic Financial Statements </li></ul><ul><ul><li>Profit - Profit & Loss Account (P&L) </li></ul></ul><ul><ul><ul><li>Trading statement of Income & Expenditure </li></ul></ul></ul><ul><ul><li>Net Worth - Balance Sheet </li></ul></ul><ul><ul><ul><li>Statement of Assets (owned) & Liabilities (owed) </li></ul></ul></ul><ul><ul><li>Liquidity - Cashflow </li></ul></ul><ul><ul><ul><li>Expected Real Money flows WITH TIMINGS </li></ul></ul></ul><ul><ul><ul><li>Most business start-ups fail within 3-5 years, often due to lack of cashflow </li></ul></ul></ul>Financial Statements
  7. 7. Balance Sheet <ul><li>Snapshot of what the company owns & owes categorized by liquidity </li></ul><ul><ul><li>We own - Assets </li></ul></ul><ul><ul><ul><li>Fixed (buildings, fixtures, fittings) </li></ul></ul></ul><ul><ul><ul><li>Current (Cash, Bank Balances, Customer debts – 1yr horizon) </li></ul></ul></ul><ul><ul><li>We owe – Liabilities </li></ul></ul><ul><ul><ul><li>Long term (Finance loans, mortgage) </li></ul></ul></ul><ul><ul><ul><li>Current (Bank overdraft, Debts to suppliers, 1 yr horizon) </li></ul></ul></ul><ul><ul><li>Show how company is financed – “Debt vs Equity” </li></ul></ul><ul><ul><ul><li>- Read in conjunction with P&L – profitability vs gearing </li></ul></ul></ul>
  8. 8. Simple Example Balance Sheet
  9. 9. Profit & Loss Statement <ul><li>Assessment of ability to “make money” </li></ul><ul><li>Summary of activity to date </li></ul><ul><li>Different versions: </li></ul><ul><ul><li>Management Accounts </li></ul></ul><ul><ul><li>Financial vs Tax Accounts </li></ul></ul><ul><ul><li>Budget </li></ul></ul><ul><ul><li>Annual vs Monthly </li></ul></ul>
  10. 10. Simple P&L Statement Example BlankCo Trading Profit & Loss Statement dated 30th November 2009 £ (000) INCOME 100 less Cost of Sales (COGS) 25 Gross Profit 75 less General Expenses (Overheads) 62 Net Profit 13
  11. 11. Budgeting <ul><li>Forecasting 1 – 5 years ahead </li></ul><ul><ul><li>Balance Sheet – annually </li></ul></ul><ul><ul><li>P&L – monthly </li></ul></ul><ul><ul><li>Cashflow </li></ul></ul><ul><ul><ul><li>Weekly </li></ul></ul></ul><ul><ul><ul><li>Monthly </li></ul></ul></ul><ul><ul><ul><li>Quarterly </li></ul></ul></ul>
  12. 12. Budget P&L <ul><li>Purpose </li></ul><ul><ul><ul><li>Establish targets </li></ul></ul></ul><ul><ul><ul><ul><li>Break-even sales = minimum sales needed to cover costs (profit = 0) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Target profitability </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cost controls </li></ul></ul></ul></ul><ul><ul><ul><li>State assumptions </li></ul></ul></ul><ul><ul><ul><li>Monitor progress towards achieving targets </li></ul></ul></ul><ul><ul><ul><ul><li>Sales </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Profitability </li></ul></ul></ul></ul><ul><ul><ul><li>Monitor key performance indicators </li></ul></ul></ul>
  13. 13. Building a Budget P&L Sales Prices & Volumes Wages Expenses / Overheads Cost of Sales / Stock Movements Profit & Loss Separate Spreadsheets
  14. 14. Sales Forecasting <ul><li>Revenue = Price x No. of Sales </li></ul><ul><li>Be as specific as possible </li></ul><ul><ul><li>Estimate revenues by product & client </li></ul></ul><ul><ul><li>Use Sales Funnel where possible </li></ul></ul><ul><ul><li>Estimate of total market share </li></ul></ul><ul><li>Identify separate revenue types / streams </li></ul><ul><li>Be realistic & prepared to justify your estimates! </li></ul><ul><li>Sales commission ( may calculate here ) </li></ul><ul><li>Transfer totals to P&L by revenue type </li></ul>
  15. 15. Cost of Sales <ul><li>Often proportional to sales </li></ul><ul><ul><li>If so calculate in the same spreadsheet </li></ul></ul><ul><ul><li>Calculate by product type / revenue type (not client) </li></ul></ul><ul><ul><li>Design for amendments to establish B/E costs </li></ul></ul><ul><ul><li>Transfer totals to P&L </li></ul></ul>
  16. 16. Wages <ul><li>Estimate staff wages </li></ul><ul><ul><li>By employee name / position </li></ul></ul><ul><ul><li>Aggregate by department </li></ul></ul><ul><ul><li>Allow for Employers' NIC (13% approx) </li></ul></ul><ul><li>Allow for your own income! </li></ul><ul><ul><li>Get advice about how best to extract it (accountant) </li></ul></ul><ul><li>Transfer totals to P&L by department </li></ul>
  17. 17. Expenses & Overheads <ul><li>Not proportional to Sales </li></ul><ul><ul><li>Print, post, stationery </li></ul></ul><ul><ul><li>Heat, light, rent, rates </li></ul></ul><ul><ul><li>Travel & Entertainment - subsistence </li></ul></ul><ul><li>Use a standard business plan for general expense categories </li></ul><ul><li>Estimate expense by category </li></ul><ul><li>Transfer category totals to P&L </li></ul>
  18. 18. Review of P&L Model <ul><li>Be prepared to amend the model to assess </li></ul><ul><ul><li>Breakeven sales volumes & costs </li></ul></ul><ul><ul><li>Acceptable profitability </li></ul></ul><ul><li>Assess key performance / investment measures </li></ul><ul><ul><li>% Net profit = Net Profit / Sales x 100 </li></ul></ul><ul><ul><li>Return on Investment </li></ul></ul><ul><ul><ul><li>ROTA Return on Total Assets = Profit(BIT) / Total Assets </li></ul></ul></ul><ul><ul><ul><li>RoE Return on Equity = Profit After Tax / Net Worth </li></ul></ul></ul><ul><li>Scenario Planning – what happens if.... </li></ul>
  19. 19. Budget Cashflow <ul><li>Purpose - To avoid insolvency! </li></ul><ul><li>To ensure adequate funds for continued ops </li></ul><ul><li>Built on Budget P&L but differentiated by: </li></ul><ul><ul><li>Payment timings – not Invoices (P&L) </li></ul></ul><ul><ul><li>Includes Tax payments & receipts </li></ul></ul><ul><ul><ul><li>Cashflow includes VAT & recognises payment dates </li></ul></ul></ul><ul><ul><li>Ignores non-cash items (depreciation etc) </li></ul></ul><ul><li>Budget annually </li></ul><ul><ul><li>- (review day-to-day / weekly) </li></ul></ul>
  20. 20. Building Cashflow <ul><li>Start with P&L </li></ul><ul><li>Delay sales by avg. settlement (debtor days) </li></ul><ul><li>Delay costs until due for payment </li></ul><ul><li>VAT Tip: </li></ul><ul><ul><li>Group VATable sales together – add one line for VAT </li></ul></ul><ul><ul><li>Group VATable costs together – add one line for VAT </li></ul></ul><ul><ul><li>Aggregate quarterly </li></ul></ul><ul><li>Add Monthly Net Cashflow to previous balance </li></ul>
  21. 21. Review Cashflow <ul><li>Cashflow is difficult to predict for startups </li></ul><ul><li>Allow for contingencies (20%) </li></ul><ul><li>Identify periods of shortage and PLAN for them </li></ul><ul><li>Watch out for cyclicality </li></ul><ul><li>Consider factoring etc if necessary </li></ul><ul><li>Credit Control is critical to cashflow </li></ul>
  22. 22. Conclusion Remember! You can ignore accounts but not the taxman Advice always costs more in retrospect

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