Workshop 3: Writing A Financial Plan. Proudly sponsored by:

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1 Workshop 3: Writing A Financial Plan Proudly sponsored by:

2 Writing a Financial Plan Presented by: Kenneth C. Bennett Head, Work Integrated Learning Griffith Business School This presentation contains information adapted from online and original sources and may not be duplicated without the written permission of the author. Copyright 2005

3 Business Planning Contest The Griffith Innovation Challenge is a university-wide business plan competition, which has received initial financial support via a grant from the Australian Government's National Innovation Awareness Strategy. Aims are to encourage multi-disciplinary teams of students to work on new ideas and to foster innovation, develop new entrepreneurs and create new opportunities and businesses for the benefit of Queensland and Australia.

4 The really nice thing about not planning is that failure comes as a complete surprise and is not preceded by long periods of worry and depression!

5 A Business Plan focuses on the overall operations of the business. The contents of a business plan can vary depending upon the purpose of the plans, the nature of the products and services, and the relationship between business activities and the other operations of the business.

6 Basic elements of a Business Plan: Description of the Business Management Plan Production/Operations Plan Marketing Plan Financial Plan

7 Financial plan: The financial plan typically consists of a cash flow budget or budgeted net income statement that summarizes projected revenues and expenses (expenditures).

8 Capital employed in a business consists of owners' equity (including retained earnings) and net non-current liabilities. - To finance net non-current assets (eg plant and machinery) - Working capital to run a business Note: Working capital is the difference between current assets and current liabilities (eg purchases not yet paid for). Business income is derived from selling a products to a customer. A part of this income goes to meeting costs of acquiring and/or production (cost of goods of sold). The difference between sales income and cost of goods sold is the gross profit. Costs may be variable ie vary directly to the volume of production or fixed ie are relatively fixed and do not vary with the level of production. Profitability measures the price a product or service is able to command over its cost of manufacture. It measures a business' ability to achieve highest possible price while producing at the least cost. Profitability focuses on marketing and sales effectiveness.

9 The purpose of the Financial Plan: Present the financial potential of the business or product and to specify capital requirements and timing. In developing any Financial Plan, three basic financial statements should always be included: Profit and Loss projection Cash Flow projection Balance Sheet projection

10 What is a Financial Plan Two Key Components 1) A Financial Analysis 2) Preparation of Projected Financial Statements (two-to-five years) for your business Analysis of financial position and performance Levels of finance required for start-up or growth Sources of finance Break-even analysis Anticipated growth in sales and profits

11 Writing the Financial Plan Elements Sources and Uses Describe the project to be financed. State where the money to pay for the project will come from (sources) and show in detail how it will be used (uses). The most common uses are equipment, leasehold improvements, inventory and working capital. Statements - Historical and Projected Financial statements can include: Balance Sheet Income Statement Accounts Receivable and Aging Accounts Payable and Aging Debt Schedule Reconciliation of Net Worth

12 For both existing and new business, projecting the below financial statements for the next three-to-five years (monthly for first year, annual for second and third to fifth) are normal: Operating (or Income) Statement with explanation (sales, expenses, profit) Balance Sheet Reconciliation of Net Worth Cash Flow (with explanation) Break-Even Analysis

13 Writing a Financial Plan The Explanation A detailed discussion of the assumptions used to develop the sales forecast is essential. Factors such as market growth, market share, new product introduction, and inflationary and non-inflationary price changes should be noted. Factors used in the profit and loss statement -- such as cost of goods sold, general and administrative expenses, and depreciation expense should be discussed. Cost of goods sold assumptions should include detail regarding key inputs such as raw materials, direct labour and factory overhead. General and administrative assumptions should include staffing and respective salaries as well as a detailed cost estimate of marketing or research activities.

14 The balance sheet forecast is used to show the assets required in the start-up and operation of the business, and how these assets are to be financed. Projected balance sheet can contain information: debt to equity ratios working capital current and quick ratios inventory and fixed asset turnover ratios Cash flow forecast should provide the following analysis: working capital requirements and assumptions; capital expenditures depreciation schedules capital infusion from debt or equity sources

15 Writing a Financial Plan Validation Calculation of the cash flow forecast, balance sheet items such as accounts receivable, inventory, fixed assets, accounts payable and accrued expenses should be analyzed by means of various ratios (i.e., fixed asset turnover, receivables turnover, inventory turnover, etc.). Ratios should be consistent with projected profit and loss statements.

16 Writing the Financial Plan Elements Key Note: Assumptions used in the cash flow forecast should be clearly presented with a valid explanation as to why the specific asset levels or turnover ratios were chosen (i.e., industry average, comparable company, contractual terms, etc.).

17 Business Plan Start-Up Considerations Growth Planning (Potential): What are your intentions, where do you think your opportunities are, and to what extent do they really exist (as far as you can substantiate)? Investigation of the marketplace Competitive/competitor analysis Environmental Scan SWOT Analysis

18 Market Analysis: Projected Market Growth & Market Share Objectives

19 Product/Service: Research and Development Patents, Trademarks, Intellectual Property Protection Quality Improvement Process (QIP)

20 Financial Plan and Analysis: Estimated Income Estimated Costs Cash Flow Planning Financial Requirements (inc. Personal) Financing Options Risk Management

21 Business Plan Risk Management Effective business plans manage risks to people, property, business continuity and reputation.

22 Getting There: Time Cost Control Risk What combinations suit you, suit others, suit the situation, or suit the future?

23 Samples

24 E s t i m a t e d S t a r t - U p C a p i t a l M o n t h l y C a s h N e e d e d % o f E x p e n s e s t o S t a r t T o t a l M O N T H L Y C O S T S S a l a r y o f o w n e r - m a n a g e r $ 0 # N / A A l l o t h e r s a l a r i e s a n d w a g e s 0 # N / A R e n t 0 # N / A A d v e r t i s i n g 0 # N / A D e l i v e r y e x p e n s e 0 # N / A S u p p lie s 0 # N / A T e l e p h o n e 0 # N / A O th e r u t ilit ie s 0 # N / A In s u r a n c e 0 # N / A T a x e s, i n c l u d i n g s o c i a l s e c u r i t y 0 # N / A In t e re s t 0 # N / A M a i n t e n a n c e 0 # N / A L e g a l a n d o t h e r p r o f e s s i o n a l f e e s 0 # N / A M i s c e l l a n e o u s 0 # N / A S u b to ta l $ 0 # N / A O N E - T I M E C O S T S F i x t u r e s a n d E q u i p m e n t # N / A D e c o r a t i n g a n d r e m o d e l i n g # N / A I n s t a l l a t i o n c h a r g e s # N / A S t a r t i n g i n v e n t o r y # N / A D e p o s its w ith p u b lic u tilitie s # N / A L e g a l a n d o t h e r p r o f e s s i o n a l f e e s # N / A L i c e n s e s a n d p e r m i t s # N / A A d v e r t i s i n g a n d p r o m o t i o n f o r o p e n i n g # N / A C a s h # N / A O t h e r # N / A S u b to ta l $ 0 # N / A T O T A L E S T I M A T E D S T A R T - U P C A P I T A L $ 0

25 Financial Highlights Liquidity Current Ratio #N/A #N/A #N/A #N/A #N/A Acid-Test Ratio #N/A #N/A #N/A #N/A #N/A Leverage Debt Ratio #N/A #N/A #N/A #N/A #N/A Debt/Equity Ratio #N/A #N/A #N/A #N/A #N/A Tim es Interest Earned #N/A #N/A #N/A #N/A #N/A Efficie n cy Inventory Turnover #N/A #N/A #N/A #N/A #N/A Average Collection Period #N/A #N/A #N/A #N/A #N/A Total Asset Turnover #N/A #N/A #N/A #N/A #N/A P rofita bility Gross M argin #N/A #N/A #N/A #N/A #N/A Return on A ssets #N/A #N/A #N/A #N/A #N/A Return on Equity #N/A #N/A #N/A #N/A #N/A

26 I n c o m e S t a t e m e n t F o r t h e Y e a r s t h r o u g h ( a l l n u m b e r s i n $ ) R E V E N U E G r o s s s a l e s $ 0 $ 0 $ 0 $ 0 $ 0 L e s s r e t u r n s a n d a l l o w a n c e s N e t S a l e s $ 0 $ 0 $ 0 $ 0 $ 0 C O S T O F S A L E S T o t a l C o s t o f G o o d s S o l d $ 0 $ 0 $ 0 $ 0 $ 0 G r o s s P r o f i t ( L o s s ) $ 0 $ 0 $ 0 $ 0 $ 0 O P E R A T I N G E X P E N S E S S e llin g S a l a r i e s a n d w a g e s C o m m i s s i o n s A d ve rt is in g D e p r e c i a t i o n O t h e r T o t a l S e l l i n g E x p e n s e s $ 0 $ 0 $ 0 $ 0 $ 0 G e n e r a l & A d m i n i s t r a t i v e S a l a r i e s a n d w a g e s E m p l o y e e b e n e f i t s P a y r o l l t a x e s In s u r a n c e R e n t U t ilit ie s D e p r e c i a t i o n & a m o r t i z a t i o n O ffic e s u p p lie s T r a v e l & e n t e r t a i n m e n t P o s t a g e In t e r e s t F u r n i t u r e & e q u i p m e n t T o t a l G & A E x p e n s e s $ 0 $ 0 $ 0 $ 0 $ 0 T o t a l O p e r a t i n g E x p e n s e s $ 0 $ 0 $ 0 $ 0 $ 0 N e t I n c o m e B e f o r e T a x e s $ 0 $ 0 $ 0 $ 0 $ 0 T a x e s o n i n c o m e N e t I n c o m e A f t e r T a x e s $ 0 $ 0 $ 0 $ 0 $ 0 E x t r a o r d i n a r y g a i n o r l o s s I n c o m e t a x o n e x t r a o r d i n a r y g a i n N E T I N C O M E ( L O S S ) $ 0 $ 0 $ 0 $ 0 $ 0

27 B a l a n c e S h e e t F o r t h e Y e a r E n d t h r o u g h ( a l l n u m b e r s i n $ ) A S S E T S C u rre n t A s s e ts C a s h $ 0 $ 0 $ 0 $ 0 $ 0 N e t a c c o u n t s r e c e i v a b l e In v e n t o r y T e m p o r a r y i n v e s t m e n t P r e p a i d e x p e n s e s T o t a l C u r r e n t A s s e t s $ 0 $ 0 $ 0 $ 0 $ 0 F i x e d A s s e t s L o n g - t e r m i n v e s t m e n t s L a n d B u i l d i n g s ( n e t o f d e p r e c i a t i o n ) P l a n t & e q u i p m e n t ( n e t ) F u r n i t u r e & fi x t u r e s ( n e t ) T o t a l N e t F i x e d A s s e t s $ 0 $ 0 $ 0 $ 0 $ 0 T O T A L A S S E T S $ 0 $ 0 $ 0 $ 0 $ 0 L I A B I L I T I E S C u rre n t L ia b ilitie s A c c o u n t s p a y a b l e S h o rt-te rm n o te s C u r r e n t p o r t i o n o f l o n g - t e r m n o t e s A c c r u a l s & o t h e r p a y a b l e s T o t a l C u r r e n t L i a b i l i t i e s $ 0 $ 0 $ 0 $ 0 $ 0 L o n g - t e r m L i a b i l i t i e s M o r t g a g e O t h e r l o n g - t e r m l i a b i l i t i e s T o t a l L o n g - t e r m L i a b i l i t i e s $ 0 $ 0 $ 0 $ 0 $ 0 S h a r e h o l d e r s ' E q u i t y C a p i t a l s t o c k R e t a i n e d e a r n i n g s T o t a l S h a r e h o l d e r s ' E q u i t y $ 0 $ 0 $ 0 $ 0 $ 0 T O T A L L I A B I L I T I E S & E Q U I T Y $ 0 $ 0 $ 0 $ 0 $ 0

28 Cash Budget For the Year 1998 (all numbers in $000) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Beginning cash balance $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Cash from operations Total Available Cash $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Less: Capital expenditures Operating Expenses Interest Dividends Debt retirement Other Total Disbursements $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Cash Surplus (Deficit) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Add: Short-term loans Long-term loans Capital stock issues Total Additions $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Ending Cash Balance $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

29 Break-Even Analysis Product costs: Average Cost of Product Fixed Costs Variable Costs Monthly Selling expenses: Sales salaries & com m issions A dvertising M iscellaneous selling expense Monthly General expenses: O ffic e salaries Supplies M iscellaneous general expense Totals $0 $0.00 Average Selling price per unit R e su lts: Contribution m argin per unit $0.00 M onthly unit sales at break-even point 0 M onthly Sales Dollars at break-even point $0

30 Getting Started: ng/basic.html Business Plan Template Sample Business Plans Business Plan Designer Free trial software

31 Business plan and financial planning software, as well as white papers on business planning, financial planning and strategy development. Range of freeware and shareware business financial planners for Excel to make financial forecasts, business planning, appraisals and financial modeling.

32 My Export Coach MY EXPORT COACH is a free online service that allows companies with limited experience in international markets to make a fast decision about their likely success. It helps answer basic questions such as what you can export, where the best opportunities await, how to export, and what assistance is available. This portal site also provides links to other assistance and information about opportunities just opening up with FREE TRADE AGREEMENTS recently signed with the United States of America and other countries.

33 Resource Book Managing for Profits Taking financial control of your business

34 Getting There: How you are going to finance your business?

35 Investors In the beginning.. The Three F s Family, Friends and other Fools

36 Other Options: Venture Capital These investors look for a high return in a timeframe of approximately 3-7 years. They work almost exclusively with companies that may go public or can be sold for a significant profit going public is very rare and is unattainable for most companies. Angel Investor These investors typically are looking for a high return but are more flexible in their timeframe. Angels are typically less sophisticated than venture capitalists or institutional investors, and will become involved in your business because of a personal relationship with you.

37 Other Options: Government Grants/Incentives Loans Key Note: Venture capital (grants, loans or investment from F s) cannot be used to pay back YOUR initial investments (including time, effort or cash)! Investment is meant to grow the business!

38 Leaving: Entrepreneurs live for the struggle of launching their businesses. But one thing they often forget is that decisions made on day one can have huge implications down the road. You see, it's not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get the money back out. Stever Robbins June 27, 2005 Entrepreneur.com

39 Getting There And Leaving: Investors In order to attract investment dollars, it's critical to supply an exit plan to investors so they can get their money back (hopefully with a healthy return) and exit your business. The exit strategy section of your business plan should also outline your longterm plans for your business. Begin by asking yourself why you are getting into business. It's important to think through these issues and decide what you intend to do with your business before you can adequately answer the questions, and address the issues, concerning how you/your investor will exit the business. Note: The requirements of each investor will vary in terms of return and exit strategy they seek.

40 Possible exit strategies to consider: Initial Public Offering (rare for start-ups) Merger/Acquisition Buyout by partner in business Franchise the business Hand down the business to another F Close up shop

41 Failing to plan is planning to fail

42 Information on Writing an Effective Business Plan Queensland Government Smart Skills Website (Online Assistance) Writing a Business Plan and Business Plan Templates Business Plan Guide (Small Business Counseling Service Inc)

43 Check your Online Tutorials From Resource Book Managing for Profits Taking financial control of your business