Creating a Successful Financial Plan.ppt

8/9/2019 Creating a Successful Financial Plan.ppt

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Creating aCreating aSuccessfulSuccessful

Financial PlanFinancial PlanVolume is vanity; proftability is sanityVolume is vanity; proftability is sanity

Brad SkeltonBrad Skelton

It is better to solve problems than crisesIt is better to solve problems than crisesJohn GuintherJohn Guinther


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Financial ManagementFinancial Management

A process that providesA process that provides

entrepreneurs with relevantentrepreneurs with relevant

fnancial inormation in anfnancial inormation in aneasy!to!read ormat on aeasy!to!read ormat on a

timely basis; it allowstimely basis; it allows

entrepreneurs to know notentrepreneurs to know not

only how their businessesonly how their businessesare doin" fnancially# butare doin" fnancially# but

also why they arealso why they are

perormin" that way$perormin" that way$


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Basic FinancialBasic Financial

StatementsStatementsThe Balance SheetThe Balance Sheet

a nancial statement thata nancial statement that

provides a snapshot of aprovides a snapshot of abusinesss nancialbusinesss nancialposition, estimate itsposition, estimate itsworth on a given date it isworth on a given date it isbuilt on the fundamentalbuilt on the fundamentalaccounting e!uation"accounting e!uation"

#ssets $#ssets $

%iabilities & 'wners%iabilities & 'wners(!uit)(!uit)


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Statements *contd+Statements *contd+ current assetscurrent assetsassets such as cash and otherassets such as cash and other

items to be converted into cash within oneitems to be converted into cash within one)ear or within the compan)s normal)ear or within the compan)s normal

operating c)cle-operating c)cle- .ed assets.ed assetsassets ac!uired for longtermassets ac!uired for longterm

use in a business-use in a business-

liabilitiesliabilitiescreditors claims against acreditors claims against acompan)s assets-compan)s assets-

current liabilitiescurrent liabilitiesthose debts that must bethose debts that must bepaid within one )ear or within the normalpaid within one )ear or within the normaloperating c)cle of a compan)-operating c)cle of a compan)-

longterm liabilitieslongterm liabilitiesliabilities that come dueliabilities that come dueafter one )ear-after one )ear-

owners e!uit)owners e!uit)the value of the ownersthe value of the ownersinvestment in the business-investment in the business-


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Statements *contd+Statements *contd+The /ncome StatementThe /ncome Statement a nancial statement thata nancial statement that

represents a 0movingrepresents a 0movingpicture1 of a business,picture1 of a business,comparing its e.pensescomparing its e.penses

against its revenue over aagainst its revenue over aperiod of time to show itsperiod of time to show itsnet prot *or loss+-net prot *or loss+-

cost of goods soldcost of goods soldthethetotal cost, includingtotal cost, includingshipping of the merchandiseshipping of the merchandise

sold during the accountingsold during the accountingperiod-period-

gross prot margingross prot margingrossgrossprot divided b)e net salesprot divided b)e net salesrevenue-revenue-

operating e.pensesoperating e.pensesthosethosecosts that contributecosts that contribute

directl) to the manufacturedirectl) to the manufactureand distribution of goods-and distribution of goods-


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Statements *contd+Statements *contd+The Statement of CashThe Statement of Cash

FlowsFlows

a nancial statementa nancial statement

showing the changes inshowing the changes ina compan)s wor2inga compan)s wor2ing

capital from thecapital from the

beginning of the )earbeginning of the )ear

b) listing both theb) listing both thesources and the uses ofsources and the uses of

those funds-those funds-


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Creating Pro3ectedCreating Pro3ected

Financial StatementsFinancial Statements

Pro Forma Statements for the SmallPro Forma Statements for the SmallBusinessBusiness

Pro Forma /ncome StatementPro Forma /ncome Statement

Pro Forma Balance SheetPro Forma Balance Sheet


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*contd+*contd+Pro Forma /ncome StatementPro Forma /ncome Statement

4- 5et Sales 6 options"4- 5et Sales 6 options"

a+ 5et Prot */ndustr)+$a+ 5et Prot */ndustr)+$

5et Prot 7anted85et Sales5et Prot 7anted85et Sales

oror

b+ 5et Sales$Sales Forecastb+ 5et Sales$Sales Forecast

7hich one is Most %i2el)9 'ptimistic97hich one is Most %i2el)9 'ptimistic9Pessimistic9Pessimistic9

Tip" Compute for #verage :ail) SalesTip" Compute for #verage :ail) Sales

6- (stimated Monthl (. enses see a es ;


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*contd+*contd+Pro Forma Balance SheetPro Forma Balance Sheet#ssets#ssets

Cash"Cash"Cash ?e!uirement$Cash (.penses8#/T?@Cash ?e!uirement$Cash (.penses8#/T?@

@#verage /nventor) Turnover@#verage /nventor) Turnover?atio?atio

/nventor)"/nventor)"

#/T?$Cost of Aoods Sold8/nventor) %evel#/T?$Cost of Aoods Sold8/nventor) %evel


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*contd+*contd+

Pro Forma Balance SheetPro Forma Balance Sheet

%iabilities%iabilities

#ccounts Pa)able *supplier#ccounts Pa)able *supplier

nancing+nancing+

Shortterm 5otes Pa)ableShortterm 5otes Pa)able

%ongterm 5otes Pa)able%ongterm 5otes Pa)able


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?atio #nal)sis?atio #nal)sis

# method of e.pressing the# method of e.pressing the

relationship between a ) tworelationship between a ) twoaccounting elements that allowsaccounting elements that allows

business owners to anal)e theirbusiness owners to anal)e their

companies nancial performancecompanies nancial performance


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?atio #nal)sis?atio #nal)sis%i!uidit) ?atios%i!uidit) ?atios" tell whether a small" tell whether a small

business will be able to meet its shortbusiness will be able to meet its short

term obligations as the) come dueterm obligations as the) come due

Current ?atioCurrent ?atio" measures a small rms" measures a small rms

solvenc) b) indicating its abilit) to pa)solvenc) b) indicating its abilit) to pa)current liabilities out of current assetscurrent liabilities out of current assets

$Current #ssets8Current %iabilities$Current #ssets8Current %iabilities

$DED,


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?atio #nal)sis?atio #nal)sis%i!uidit) ?atios *contd+%i!uidit) ?atios *contd+ Iuic2 ?atioIuic2 ?atio" a conservative measure of a" a conservative measure of a

rms li!uidit), measuring the e.tent to whichrms li!uidit), measuring the e.tent to which

its most li!uid assets *minus inventor)+ coverits most li!uid assets *minus inventor)+ cover

its current liabilitiesits current liabilities

$*Current #ssets/nventor)+8Current$*Current #ssets/nventor)+8Current

%iabilities%iabilities

$*DED,GH>,+8;DG,EH$*DED,GH>,+8;DG,EH $$H-D4"4H-D4"4

Aood" 4"4 /ndustr)" H-H"4Aood" 4"4 /ndustr)" H-H"4


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%everage ?atios%everage ?atios" measure the nancing" measure the nancingsupplied b) a rms owners against thatsupplied b) a rms owners against thatsupplied b) its creditors the) are a gaugesupplied b) its creditors the) are a gaugeof the depth of a compan)s debtof the depth of a compan)s debt

:ebt ?atio:ebt ?atio" measures the percentage of" measures the percentage oftotal assets nanced b) a compan)stotal assets nanced b) a compan)screditors compared to its ownerscreditors compared to its owners

$Total :ebt *%iabilities+8Total #ssets$Total :ebt *%iabilities+8Total #ssets

$*;DG,EH&646,4H+8E>G,D$*;DG,EH&646,4H+8E>G,D

$$H-DE4"4H-DE4"4

Aood" 4"4 /ndustr)" H-D>"4Aood" 4"4 /ndustr)" H-D>"4


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?atio #nal)sis?atio #nal)sis%everage ?atios *contd+%everage ?atios *contd+ :ebt to 5et 7orth ?atio:ebt to 5et 7orth ?atio" e.presses the" e.presses the

relationship between the capitalrelationship between the capitalcontributions from creditors and thosecontributions from creditors and thosefrom owners and measures how highl)from owners and measures how highl)leveraged the compan) isleveraged the compan) is

$Total :ebt *%iabilities+8Tangible 5et$Total :ebt *%iabilities+8Tangible 5et7orth7orth

$*;DG,EH&646,4H+8*6DG,D;,HH+$*;DG,EH&646,4H+8*6DG,D;,HH+

$$6-6H"4 /ndustr)" 4-


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'perating ?atios'perating ?atios" help an entrepreneur" help an entrepreneur

evaluate a small compan)s overallevaluate a small compan)s overall

performance and indicate how eJectivel)performance and indicate how eJectivel)

the business emplo)s its resourcesthe business emplo)s its resources #verage /nventor) Turnover ?atio#verage /nventor) Turnover ?atio""

measures the number of times its averagmeasures the number of times its averag

inventor) is sold out, or turned overinventor) is sold out, or turned over

during an accounting periodduring an accounting period

$Cost of Aoods Sold8#verage /nventor)$Cost of Aoods Sold8#verage /nventor)

$4,6&>,>+86$4,6&>,>+86

$$6-H times8)ear6-H times8)ear /ndustr)" >-H times8)ea/ndustr)" >-H times8)ear


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'perating ?atios *contd+'perating ?atios *contd+ #verage Collection Period ?atio#verage Collection Period ?atio*:S'+"*:S'+"

measures the number of da)s it ta2esmeasures the number of da)s it ta2esto collect accounts receivableto collect accounts receivable

$:a)s8?eceivables Turnover ?atio$:a)s8?eceivables Turnover ?atio

$;D8Credit Sales8#ccounts ?eceivable$;D8Credit Sales8#ccounts ?eceivable

$;D84,;H


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'perating ?atios *contd+'perating ?atios *contd+ #verage Pa)able Period ?atio#verage Pa)able Period ?atio""

measures the number of da)s it ta2es ameasures the number of da)s it ta2es acompan) to pa) its accounts pa)ablecompan) to pa) its accounts pa)able

$;D8Pa)ables turnover ratio$;D8Pa)ables turnover ratio$;D8Purchases8#ccounts Pa)able$;D8Purchases8#ccounts Pa)able

$;D8


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'perating ?atios *contd+'perating ?atios *contd+

5et Sales to Total #ssets ?atio5et Sales to Total #ssets ?atio""

measures a compan)s abilit) tomeasures a compan)s abilit) to

generate sales in relation to its assetgenerate sales in relation to its assetbasebase

$5et Sales85et Total #ssets$5et Sales85et Total #ssets

$4,EGH,E>48E>G,D$4,EGH,E>48E>G,D

$$6-64"46-64"4

/ndustr)" 6-G"4/ndustr)" 6-G"4


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?atio #nal)sis?atio #nal)sisProtabilit) ?atiosProtabilit) ?atios" indicate how" indicate how

eKcientl) a small compan) is beingeKcientl) a small compan) is being

managedmanaged

5et Prot on Sales ?atio5et Prot on Sales ?atio" measures a" measures acompan)s prot per dollar of salescompan)s prot per dollar of sales

$5et Prot85et Sales$5et Prot85et Sales

$DH,D64$DH,D64$$;-6>L;-6>L

/ndustr)" G-DL/ndustr)" G-DL


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Protabilit) ?atios *contd+Protabilit) ?atios *contd+ 5et Prot to #ssets ?atio5et Prot to #ssets ?atio""

measures how much prot ameasures how much prot acompan) generates for eachcompan) generates for eachdollar of assets that it ownsdollar of assets that it owns

$5et Prot8Total #ssets$5et Prot8Total #ssets

$DH,D6G,D$DH,D6G,D

$$G-4LG-4L

/ndustr)" -L/ndustr)" -L


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Protabilit) ?atios *contd+Protabilit) ?atios *contd+ 5et Prot to (!uit) ?atio5et Prot to (!uit) ?atio""

measures the owners rate ofmeasures the owners rate ofreturn on investmentreturn on investment

$5et Prot8'wners (!uit)$5et Prot8'wners (!uit)

$DH,D6


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/nterpreting Business/nterpreting Business

?atios?atiosCritical numbersCritical numbers""indicators thatindicators thatmeasure 2e) nancialmeasure 2e) nancialand operationaland operational

aspects of a compan)saspects of a compan)sperformance whenperformance whenthese numbers arethese numbers aremoving in the rightmoving in the rightdirection, a business isdirection, a business is

on trac2 to reach itson trac2 to reach itsob3ectivesob3ectives


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Brea2even #nal)sisBrea2even #nal)sis Brea2even pointBrea2even point" the level of" the level of

operation *sales dollars or productionoperation *sales dollars or production

!uantit)+ at which a compan) neither!uantit)+ at which a compan) neither

earns a prot or incurs a lossearns a prot or incurs a loss Fi.ed e.pensesFi.ed e.penses" e.penses that do not" e.penses that do not

var) with changes in the volume ofvar) with changes in the volume of

sales or productionsales or production

ariable e.pensesariable e.penses" e.penses that" e.penses that

var) directl) with changes in thevar) directl) with changes in the

volume of sales or productionvolume of sales or production


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Brea2(ven #nal)sisBrea2(ven #nal)sis

Calculating the Brea2(ven PointCalculating the Brea2(ven Point Step 4Step 4" :etermine (.penses e.pected to be" :etermine (.penses e.pected to beincurred *D>D,HHH&6;D,HH+incurred *D>D,HHH&6;D,HH+

Step 6Step 6" Categorie the e.penses into .ed and" Categorie the e.penses into .ed andvariable *4GG,;G&GH,46+variable *4GG,;G&GH,46+

Step ;Step ;" Calculate ratio of variable e.penses to" Calculate ratio of variable e.penses tonet sales *GH,468L,net sales *GH,468L,Contribution margin is 6DL$Contribution margin is 6DL$

Step >Step >" Compute Brea2even Sales"" Compute Brea2even Sales"

$Total Fi.ed Cost8Contribution Margin as L of$Total Fi.ed Cost8Contribution Margin as L ofsalessales

$4GG,;G8H-6D$4GG,;G8H-6D$$DED,646DED,646


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Brea2even #nal)sisBrea2even #nal)sis

Better than Brea2even SalesBetter than Brea2even Sales

$*Total Fi.ed (.penses & :esired$*Total Fi.ed (.penses & :esired

Prot+8Contribution Margin as LProt+8Contribution Margin as Lof salesof sales

$*4GG,;G&EH,HHH+8H-6D$*4GG,;G&EH,HHH+8H-6D

$$


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Brea2even point in unitsBrea2even point in units

$Total Fi.ed Costs8*Sale Price8unit$Total Fi.ed Costs8*Sale Price8unit

ariable cost8unit+ariable cost8unit+

$;


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Constructing a Brea2even ChartConstructing a Brea2even Chart Step 4Step 4" Noriontal a.is, mar2 a scale" Noriontal a.is, mar2 a scale

to plot sales volumeto plot sales volume

Step 6Step 6" ertical a.is, mar2 a scale to" ertical a.is, mar2 a scale toplot income and e.pense in dollarsplot income and e.pense in dollars Step ;Step ;" :raw .ed e.pense line" :raw .ed e.pense line Step >Step >" :raw a total e.pense line" :raw a total e.pense line

Step Step " :raw the revenue line" :raw the revenue line Step DStep D" %ocate brea2even point"" %ocate brea2even point"intersection of revenue line and totalintersection of revenue line and totale.pense linee.pense line

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Creating a Successful Financial Plan.ppt