Financial Planning & Sustainability

Transcription

1 Financial Planning & Sustainability

2 Course Objectives i. Introduce Participants to the concept of financial planning and analysis ii.introduce Participants to terminologies as it relates to the course iii.budget planning and forecasting iv.participants are introduced to ratio analysis as a tool for performance evaluation

3 Course Outline 1. Financial Planning and Forecasting 2. Break-even and Ratios

4 What is Financial Planning? A financial plan is a series of steps that are performed, or goals that are accomplished, which relate to a business's financial affairs. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term. Financial Planning is the process of producing your business financial plan.

5 Key Financial Statements Balance Sheet Income Statement Cash flow Projection Financial Planning

6 Key Financial Statements contd i. Balance Sheet: this is also known as the statement of the financial position of a company and consists of assets, liabilities and owner equity. Asset Liabilities Owners Equity

7 ii. Key Financial Statements contd Income Statement (Profit & Loss): It reports on a company's income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. Income Expenses Profit

8 Key Financial Statements contd iii. Cash Flow Statement: these reports on a company's cash inflow (cash & receipts) or revenue activities, operating (expenses e.g. Salaries, fuel/diesel etc), investing and financing activities. It is important that explanatory notes accompany financials. Cash inflow Operating Cash flow Other Expenses Cash Balance

9 Key Financial Statements contd Forecasting Financial planning is enabled by creating pro forma income statements and balance sheets. Since different income statement and balance sheet items grow at different rates, in order for a balance sheet to really balance, we may have to play with a plug variable, such as future debt financing, equity issues, dividend payout rates.

10 Steps in Financial Planning Step 1: Gather the needed financial data you'll use to prepare these financial statements for your business plan by examining your expenses. Step 2: think of your business expenses as broken into two categories; (a) your start up expenses (the cost of all the items you ll use to start business) and, (b) your operating expenses( costs of keeping your business running).

11 Steps in Financial Planning contd Step 3: list all your start up cost and add them together. Step 4: list all your monthly operating cost e.g. salaries, raw materials, PHCN/Fuel etc., once you have your operating expenses list complete, the total will show you what it will cost you to keep your business running each month.

12 Steps in Financial Planning contd Step 5: Multiply this number by 6, and you have a six month estimate of your operating expenses. Step 6: Then add this to the total of your start up expenses list, and you'll have a ballpark figure for your complete start up costs (the amount you ll need to start and run the business). Step 7: Prepare your first year income statement on a monthly basis( see attached template).

13 A. Break-even analysis Break-even and Ratios A technique to identifying the point where the total revenue is just sufficient to cover the total cost. The breakeven point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even". Revenue Expenses Zero

14 Ratio Analysis Ratio analysis establishes the relationships between quantities in the financial statements. The goal is to determine the strengths and weaknesses of a business through evaluation of its financial statements and also to understand the relationship between management strategy and financial results.

15 Ratio Analysis contd... i. Profitability: return on firm s investment ii.liquidity: ability to satisfy short-term obligations when due. iii.efficiency: productivity of firm s assets iv.leverage: how deeply the company is in debt

16 Profitability Ratios i. Gross Profit Margin: Gross Profit / Sales that is what % of sales is gross profit ii. Operating Profit Margin: EBIT or Operating Profit / Sales this is what % of sales is operating profit iii. Net Profit Margin: Net Profit / Sales that is What % of sales is net profit

17 Liquidity Ratio i. Current Ratio i. Current Assets / Current Liabilities ii.quick Ratio or Acid Test i. Current Assets minus Inventory / Current Liabilities ii. A more precise measure of liquidity, especially if inventory is not easily converted into cash.

18 Leverage Ratio i. Debt Ratio: Total Debt / Total Assets i. The higher the ratio, the more of other people s money that is being used to generate profits. ii. Times Interest Earned: EBIT or Operating Profit / Interest Expense i. This coverage ratio shows the firm s ability to service its debt.

19 How to conduct Breakeven Analysis i. Fixed Costs divided by (Revenue per unit - Variable costs per unit) ii. Fixed costs are costs that must be paid whether or not any units are produced. These costs are "fixed" over a specified period of time or range of production.

20 How to conduct Breakeven contd iii.variable costs are costs that vary directly with the number of products produced. For instance, the cost of the materials needed and the labour used to produce units isn't always the same.

21 Breakeven Analysis - Class example i. Suppose that your fixed costs for producing 100,000 plantain chips were N30,000 a year. ii. Your variable (operating) costs are N2.20 materials, N4.00 iii. iv. labour, and N0.80 overhead, for a total of N7.00. If you selling price of N12.00 for each plantain chips, then: N30,000 divided by (N ) equals 6000 units. v. This is the number of plantain chips that have to be sold at a selling price of N12.00 before your business will start to make a profit.

22 Benefits of Financial Planning i. It helps determines whether or not your business idea is viable. ii. It helps in the process of managing your business finance. iii.it helps you to manage your cash flow. iv.it gives financial direction in your business.