Simple Steps for Starting Your Business. Financial Projections

Transcription

1 Simple Steps for Starting Your Business Financial Projections

2 Simple Steps for Starting Your Business Session 4: Financial Plan & Projections

3 Agenda Importance of financial planning Building your financial model Start-up funds Fixed operating expenses Forecasting sales units and prices Understanding financial statements: Income statement Cash flow statement Balance sheet

4 Benefits of Financial Planning & Goal Setting Match business concept with personal income goals Gain a better understanding of financial risks and rewards Identify early development and start-up costs, ongoing operations expenses and funds needed to finance the business Have a plan to help guide business decisions and monitor results

5 Why is a Financial Plan Important? Helps you examine the feasibility of your numbers Organizes your business finances A modeling tool that helps you evaluate variable factors A benchmark for tracking progress A blueprint you can adjust to achieve your financial goals

6 Financial Projection Model Common Concerns: The spreadsheets look complicated. I don t think I can do this on my own. I don t understand all the figures and math. This is overwhelming. Can I start my business without a financial projection model? Businesses don t plan to fail they often fail to plan!

7 Financial Model Template The first five worksheets are: 1. Salaries and Wages 2. Fixed Operating Expenses 3. Projected Sales Forecast(s) 4. Cash Receipts Disbursements 5. Required Start-Up funds

8 Required Start-Up Funds How much do you need? What will it be used for? Also consider starting costs for employees: salaries, taxes, benefits. This develops Assets part of opening Balance Sheet.

9 Sources of Funding What are your expected sources of capital? Amount financed by owners vs. outside sources. Need to ensure funding exceeds start-up costs.

10 Salaries and Wages Include wages for employees AND business owner(s) Mandatory and voluntary fringe benefits should total about 15% Include about 4% of base compensation for benefit programs so that all benefits total about 15% Data is automatically copied to P&L and Cash Flow statements

11 Fixed Operating Expenses There are fixed costs They need to be understood, and minimized.

12 Forecasting Sales Units What unit categories make sense for your business? You need to figure out what you re selling (product, services) Determine what makes up your unit of sale Determine your direct unit cost Determine your unit price

13 Sales Unit Data Sources Sales unit category or grouping Product, service, package, volume, customer type Unit cost and price Build up from sources Subcontract Competition Sales volume in units Estimate from market Competition Number to make business profitable

14 Gross Profit Margin What is gross profit margin? Sales ($) minus direct cost of sales Why is it important? Requires you to cost out what you re selling Helps you determine adequacy of gross price for what you re selling

15 Projected Sales Forecast Forecast sales units by category of sale: product, service or hours Examples: o o o Retailer (products) Hairdresser (service) Computer repair (hours) Can have multiple categories (i.e. repair service that sells parts) Who is the first customer, and what is the projected growth rate?

16 Cash Receipts and Disbursements Payment terms: o 0 to 30 days o 31 to 60 days o 60 or more days Dependent on industry Speed them up with discounts, credit card payments

17 Understanding Financial Statements Income Statement Gross profit margin & overhead expense management Cash Flow Statement Funds management, seasonality Balance Sheet A/R, Inventory & A/P management Breakeven Analysis Use of industry comparison ratios

18 Why 3 Financial Statements? 1. Income statement How long to reach profitability? Do I make a profit or loss? 2. Cash flow statement Do I have enough sources of funds to operate, sustain & grow the business? Seasonality, and soft sales 3. Balance sheet What are my assets & liabilities? How much am I worth?

19 Income and Expense Statement (P&I) Operating results for a period of time: Sales Expenses Net Profit or Loss (Bottom Line)

20 Cash Flow Projection Differs from income and P&L: o P&L reports billings and accrued expenses o Cash flow reports collections and payments Has cash payments for capital purchases and payments on loan principal: o The P&L does not show these Cash flow, sources and uses of funds are the most important documents in the loan package Seasonality issues The financial sheet that quickly shows business issues.

21 Cash Flow Projection Cash Flow Statements Show: 1. Cash inflow and cash outflow 2. Like checkbook register 3. How much cash is generated and when 4. When cash is needed for major purchases 5. If enough cash is generated for loan payment 6. Do I have the cash to grow the next business step?

22 Balance Sheet Your financial position at a point in time (snapshot of the moving train) What you own (assets) What you owe (liabilities) Your net worth (assets minus liabilities)

23 Breakeven Analysis Breakeven is where: Gross Profit Margin = Total Expenses OR Sales Volume = 0 Profit Breakeven Sales $ = Fixed Cost / GM% The spread between breakeven and sales forecast is very important (the wider the better).

24 Benchmarking & Financial Ratios Test the feasibility of your plans by conducting research: RMA annual statement studies Industry norms and key business ratios (Dun & Bradstreet) Financial ratios, business statistics & benchmarks:

25 Review Importance of financial planning Building your financial model Start-up funds Fixed operating expenses Forecasting sales units and prices Understanding financial statements: Income statement Cash flow statement Balance sheet

26 Simple Steps for Starting Your Business Testing Your Business Ideas Session 1 Session 2 Session 3 Session 4 Session 5 Start-up Basics Business Concept Marketing Plan Financial Projections Funding Sources

27 Contact SCORE Contact: Call: SE CT Chamber: We will help you..