How to Prepare Financial Plans

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  2. 2. INDEX 16.04.2015 2BIC Angels Investments 1. Why do you need to know Financials? 2. Financial Planning 3. Main Financial statements 1. Income statement 2. Balance sheet 3. Cash flow
  4. 4. FINANCIALPLANNING WHAT INVESTOR WANTS TO SEE FROM PROJECTIONS? 16.04.2015 4BIC Angels Investments 3-4 year forecast Neither conservative; nor aggressive How investment will be spent High returns SOON Having idea on how to exit
  5. 5. FINANCIALPLANNING WHAT WE NEED TO AWARE OF? 16.04.2015 5BIC Angels Investments Returns can take longer than estimations Cost can be higher than estimations No entrepreneur thinks of everything
  6. 6. FINANCIALPLANNING BEST REPORT MODEL 16.04.2015 6BIC Angels Investments Easy to understand Well documented Easy to update GVE DECISION IDEA!!
  7. 7. FINANCIALPLANNING The components of Financial Section 16.04.2015 7BIC Angels Investments Start with sales forecast Create an expenses of budget Income projections Deal with assets and liabilities Develop cash flow statements Break-even analysis
  8. 8. FINANCIALPLANNING Revenues Estimation 16.04.2015 8Entrepreneurship Revenue Estimation Identify all sources of revenues Estimate future revenues after establishment per day (or month, depending on industry) Understand revenue drivers Number of customers Number of products / average ticket per customer Average Revenue per customer (net, after VAT) Methodologies - Top down - Market is known to be 200m USD. The leader has 15%. We can get 5% of it. - Bottom- up - We will start with 1 restaurant in the first year. It will have 50 covers. Occupancy will go from 40% - 80% over a period of 12 months. Well make 200USD per cover per day. So we will generate 50*60%* 200* 365=2,19MUSD. Next year, I will open 2 additional branches.
  9. 9. FINANCIALPLANNING Seasonality and Sales Growth 16.04.2015 9Entrepreneurship Seasonality The monthly profile of sales, profits and cash flow will depend on the industry, e.g. ice-cream manufacturer (high sales in the summer) Seasonality is important for our work due to Understand cash flow profile Review of current trading Working capital requirements of the business Different industries will have different trends J F M A M J J A S O N DJ F M A M J J A S O N D
  10. 10. FINANCIALPLANNING Cost Estimation 16.04.2015 10Entrepreneurship There are a variety of ways we can analyse costs: Absolute change year-on-year and monthly As a percentage of sales/unit/site, etc Fixed vs. variable Recurring vs. non-recurring We need to understand the cost structure/drivers of the company Fixed vs. variable costs Variable costs are those that vary with business activity (e.g. sales) Fixed costs are those that are not variable in the short term Variable costs e.g. material costs, selling and distribution costs Fixed costs e.g. personnel, rent, audit fees An analysis of fixed vs. variable costs is key for our analysis of projections.
  11. 11. FINANCIALPLANNING Cost Estimation 16.04.2015 11Entrepreneurship
  12. 12. FINANCIALPLANNING Contribution Margin 16.04.2015 12Entrepreneurship SALES VARIABLE COSTS = CONTRIBUTION Common metrics include contribution per unit or contribution margin % (contribution/sales) Contribution margin is a measure of profit margin that focuses on what proportion of sales revenue is left over after paying associated variable costs This is the amount that is left over to cover fixed costs, or to add to profits Businesses often calculate the contribution of an individual product line or department
  13. 13. FINANCIALPLANNING Margins 16.04.2015 13Entrepreneurship Typical margins we review are: Contribution margin (Contribution / sales) Gross margin (Gross profit / sales) EBITDA margin (EBITDA / sales) We use margins since absolute figures can be misleading We can compare margins to prior periods or peer group companies Margin analysis helps us gain an understanding of the performance of the business and identifies areas we want to investigate further The understanding we gain here will also be helpful in building a profit bridge.
  14. 14. FINANCIALPLANNING Margins (continued) 16.04.2015 14Entrepreneurship
  15. 15. FINANCIALPLANNING Margins (continued) 16.04.2015 15Entrepreneurship Falling gross margin, possible reasons: Pressure on prices / price war Discounts offered Rise in costs (e.g. raw materials) Change in product mix Inefficiency in production Rising gross margin, possible reasons: Economies of scale Price increase Cost cuttings / savings Increase in sales with certain element of costs fixed Change in product mix Efficiency improvements
  16. 16. FINANCIALPLANNING Completion of Pro-Forma Income Statements 16.04.2015 16Entrepreneurship Other Operating Expenses (indirect production cost, marketing + sales, gen.admin.cost) Personnel cost Other time-dependent operating expenses Set up costs Depreciation / amortization based on investment plan / depreciation plan Cost on monthly basis for years 1-3 Other Operating Income Other operating income positions Gross margin operating expenses + other operating income = EBIT EBITDA = EBIT + depreciation / amortization Calculation of financial result Consideration of interest expenses for long-term loans or other types of debt If applicable, calculation of other regular financial income / financial expenses EBIT +/- financial result = EBT (earnings before taxes) Calculation of taxes on income Normally in % of EBT, if applicable consideration of losses carried forward Net Profit / Loss = EBT ./. Taxes on income
  17. 17. INCOMESTATEMENTS 16.04.2015 17BIC Angels Investments Statutory Income Statements - Summary TL k Budget Actual PY Actual CY Dfference BU-CY Dfference PY-CY Budget Actual PY Actual CY Dfference BU-CY Dfference PY-CY Sales, net Direct COS Contribution Margin I Indirect COS Gross profit (CM II) Other operating income Other operating expenses EBIT (CM III) Finance income Finance expense Contribution Margin IV (CM IV) Extraordinary income Extraordinary expense Profit before tax (CM V) Provision for tax Net profit Depr. & Amor. EBITDA Contribution margin I (CM I) % Gross profit margin (CM II) % EBIT margin (CM III) % EBITDA margin % PBT margin % OPEX / net sales % YTDPrevous Month Current year
  18. 18. BALANCESHEET 16.04.2015 18BIC Angels Investments Summary Balance Sheet TL k 31-Dec-13 Month Cash and cash equivalents Trade receivables Inventories Other current assets Total current assets Tangible fixed assets Intangible fixed asset Non-current assets Total non-current assets Total assets Borrowings short terms Trade payables Other current liabilities Total current liabilities Borrowings Long terms Total non-current liabilities Capital Total liabilities and equity Assets: What you got Liabilities: What you owe Equity: Whats left over
  19. 19. FINANCIALPLANNING Completion of Pro-Forma Financial Statements 16.04.2015 19Entrepreneurship Balance sheet at beginning of venture Normally only initial equity + cash Balance sheet at end of each period Consideration of income statement for period Consideration of changes in working capital (accounts receivables, inventories, accounts payables) in balance sheet at end of period Consideration of investments and depreciation in balance sheet at end of period Consideration of loan repayments / additional loans in balance sheet at end of period Consideration of equity measures / dividend payouts in balance sheet at end of period
  20. 20. CASHFLOWSTATEMENT 16.04.2015 20BIC Angels Investments Cash flow analysis TL 31- Dec-13 31-Jan-2014 28-Feb-2014 EBITDA Non-cash items Cash EBITDA Change in Net Working Capital - Change in trade receivables - Change in inventories - Change in trade payables - Change in other current assets -Change in other current liabilities Operational Cash Flow Investing activities Capex Gain on sales fixed assets Other Investing activities Cash Flow after Investing activities Financing activities Change short term bank loans Change in long term bank loans Changes in equity Change in other financial activities Financing activities Free cash flow Cash and cash equivalents- Previous month Cash and cash equivalents - end of period Where cash comes from; Where cash goes to
  21. 21. FINANCIALPLANNING Determination of Operative Cash Flow 16.04.2015 21Entrepreneurship Indirect calculation of operative cash flow: Starting point net profit / loss of period + adding back: depreciation / amortization of that period +/- changes in working capital - increases in accounts receivables - increases in inventories + increases in accounts payables Alternative: direct calculation of operative cash flow Consideration of cash-effective revenues in month of cash effectiveness Example: 70% cash, 20% credit card = 1 month later, 10% per invoice with 5% payment within one month, 5% payment within two months after purchase Consideration of cash-effective expenses in month of cash effectiveness Example: standard payment term for suppliers of 30 days = consideration of cash outflow one month after purchase No consideration of non-cash-effective expenses, e.g. depreciation = Operative cash flow Working Capital
  22. 22. FINANCIALPLANNING Working capital 16.04.2015 22Entrepreneurship What is working capital ? Comprises items relating to normal trading activity that will crystallise into cash inflows and outflows in the short-term Working capital = current assets - current liabilities
  23. 23. FINANCIALPLANNING Determination of Complete Cash Flow Statements 16.04.2015 23Entrepreneurship Calculation of investment plan Calc