Financial Planning: Making Sense of the Numbers

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Financial Planning Making Sense of the Numbers
Dr Robert A. Phillips Manchester Science
Enterprise Centre
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Your Costs

• Raw materials and equipment
• Wages
• Taxes
• Utility bills gas, electric, telephone, postage
  etc
• Premises (Rental or Mortgage)
• Delivery costs
• Loan repayment
• Marketing and advertising costs

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Your Cash Inflows

• Investments
• Sales of goods
• Subscriptions to services
• Sale of Intellectual Property rights
• Money from royalties
• Sale of assets

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Break even analysis

• Need to sell enough product to cover costs
  Break even point
• Variable costs e.g. raw materials
• Fixed costs e.g. Rent, wages
• Fixed costs make less of a contribution when you
  make more products !

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Working Capital Cycle
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Three main statements

• Balance Sheet A snap shot of the companies
  financial situation at a point in time (e.g. end
  of year)
• Assets, Liabilities, Owners Equity
• Profit and Loss Statement From..to.
• Income (Revenue) and Expenses
• Cash flow Statement From .to.
• Cash in and Cash out

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Flow of Cash Through a Business
Owners Investment
Sale of Fixed Assets
Borrowed Funds
Cash Sales
Collection of Accounts Receivable
Cash
Purchase of Fixed Assets
Payment of Expenses
Payment for Stock
Payment of Dividends

• Small Business Management, 11th edition
• Longenecker, Moore, and Petty
• 2000
• South-Western College Publishing

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Cash Flow

• The flow of cash in to and out of a business
• Can be net positive or negative
• Continuously moving picture
• Especially important for a new start-up company-
  may update daily!
• NOT simply sales minus expenditure

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Cash Flow
Positive Cash Flow
Essential
Essential
Profits
Desirable
Essential
Long Term
Short Term
Cash is King
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Analysing Cash Flow

• Net Cash Flow ve or ve? What are the problems?
• Determine main causes of problem costs or
  income?
• Profitable companies with full order books can
  still fail !
• Use the Pareto (8020) Rule

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Profit and Loss Statement

• Reports on expenses and income over a period of
  time.
• Displays Profit.
• How does that relate to cash?
• Some Terms
• Sales/Turnover
• Cost of Goods sold
• Gross Profit
• Net Profit

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Profit and Loss Details

• Sales
• - Cost of Goods sold
• Gross Profit
• Operating Expenses
• Operating Profit or Earning before interest and
  Tax (EBIT)
• -Interest
• Earnings before Tax (EBT)
• -Tax
• Net Profit

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Balance Sheet
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Why do this ?

• To show investors you are profitable (or to
  forecast profitability)
• To identify areas where the company could improve
  and identify potential problems
• To show investors you are efficient
• To show customers and suppliers you will still be
  around next year !
• It may be required by law !

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What do we expect

• Three years of projected financial statements
  Cash Flow, Profit and Loss, Balance sheet
• A break even analysis how well do you need to
  do before you make a profit ?
• Estimation of costs and how much money you would
  ask from investors

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Happy Financial Planning