Financial Modelling

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Financial Modelling
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Part 1

• Business Structures

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What Are We Creating ?

• Mechanism for Future Profits
• Business Asset to be Sold

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Stakeholders

• The initial stakeholders in a developing business
  are generally the individuals who are creating
  the business.
• They will share in the profits of the company
  through the distribution of profits.
• Realise their hard work by selling the business
  above the acquisition/cost price.

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Which Structure Why ?

• It is important to select the correct structure
  to operate a business so that costs can be
  minimised and the potential for liability
  reduced.

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Which Structure Why ?

• Sole Trader - Individual Tax Rates - CGT
  Concessions - Personally Liable for Debts
• Partnership - Individual Tax Rates - CGT
  Concessions - Joint Several Liability

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Which Structure Why ?

• Trusts - Separate Legal Entity -
  Beneficiaries (Individual v Company) - Access
  to Individual Tax Rates - CGT Concessions -
  Limited Liability (Unless Individual Trustee)

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Which Structure Why ?

• Companies - Separate Legal Entity -
  Shareholders - Taxed at 30 - Reduced CGT
  Concessions - Limited Liability

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In Practice

• Large businesses that are not family orientated
  generally operate through a private company that
  can later be floated on the stock exchange.
• The main reason for this is the limited liability
  of the shareholders in the event of litigation
  the admission of new investors.

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How to Create a Company ?

• Engage a Solicitor / Shelf Company
• Replaceable Rules / Constitution
• Nominate Shareholders
• Appoint Directors / Secretary
• Cost approximately 800 - 1,000

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Part 2

• Financial Reporting

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Profitability ?

• Now we have our structure how do we record and
  monitor the financial affairs of the business.

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Record Keeping

• Invoices Receipts need to be recorded and
  summarised in a meaningful format.
• This enables potential users to analyse the
  financial affairs of the business.

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In Practice

• Ledger Book
• Various software packages - Cashflow Manager
  - Quicken - MYOB
• Timely information is essential !

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Reports

• Profit Loss StatementStatement of income
  expenses for a period of timeProfit is the
  excess of revenue over expenses

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Reports P L
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Reports

• Balance SheetStatement of financial position at
  a specific point in timeReflects assets,
  liabilities and owners equity

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Reports Balance Sheet
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Interpretation

• What are these financial statements telling us
  and how do we make use of them.

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Interpretation - P L
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Interpretation - B/S
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Trends / Ratio Analysis
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Dont Forget Cash Flow

• Cash flow is the actual cash that flows into and
  out of a business
• Profitable businesses can fail if cash flows are
  not managed
• Can be managed by preparing a Statement of Cash
  Flows and monitoring debtors creditors

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Part 3

• Forecasting

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Where do we start ?

• Using historical information from the Profit
  Loss, Balance Sheet, and Ratio Analysis we need
  to prepare assumptions
• We then use these assumption to forecast future
  events

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Business / Product Lifecycle
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Assumptions - Income

• What level of sales are we expecting given
  current market conditions and historical
  information ?
• Is the income cyclical and what months do we
  expect to receive the income ?

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Assumptions - Expenses

• Review expense relationship to income /
  productivity
• Factor in increases in costs (Electricity)
• Timing of expense payments (Insurances)
• R D Project (Cost Timing)

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Forecasted Profit Loss
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Forecasted Cash Flow
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Forecasted Balance Sheet
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Compare

• Dont forget to compare actual performance with
  forecasted performance
• This will provide information as to why you are
  performing better or worse than predicted.

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Business Development Tip

• 4 ways to Grow your Business1. Increase the
  number of customers2. Increase the times they
  come back3. Increase the value of each
  sale4. Increase the effectiveness of
  each process in the business

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Conclusion

• A good investment vehicle combined with good
  information and professional advice will result
  in the optimal financial outcome

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Thank You