44_48_02 July 02 Introduction to Business Planning Content: – Business Plan Overview – Financial Plan

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July 02

Introduction to Business Planning

Content:– Business Plan Overview

– Financial Plan

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Business Plans and Financial Analysis

Business plan overview (1)

The Three « C » to the Business Plan:

– CONCEPT– CUSTOMERS– CAPITAL

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CONCEPT– What business are you in ?– Why is it the right business for you to be in?– What would you like your business to be famous for?– What do you sell?– Why will people buy from you?– Who are your competitors?– How can you stand out from the crowd?

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CUSTOMERS– Who are (and will be) your customers?– What benefits do you (can you) provide them?– How many of them are there?– How many customers do you need?– What are their buying patterns?– Where do they currently buy?– How will they know about you?

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CAPITAL (or CASH)– How much capital do you need?– How can you maintain cash flow and liquidity?– How much working capital do you need?– What kind of budgets should you follow?– How can you control your finance?– How much growth can you afford?

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OUTLINE OF A BUSINESS PLAN (sample)– 0) Cover sheet and confidentiality agreement– 1) Executive summary- critical issues– 2) Company summary– 3) Services– 4) Market analysis summary– 5) Strategy and Implementation summary– 6) Management Summary– 7) Financial Plan

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WORKING GROUP SESSION (1 hour max)

You are know preparing your own business plan.

Try to define what kind of information,or documents you need for each item as presented in the previous slide :OUTLINE OF A BUSINESS PLAN (sample)

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Financial plan (1)

It is now time to put all these hypotheses on a calculator to build a financial plan :

– Constructing a financial plan does not require only technical competence.

– Determining relevant hypotheses demands a sound professional judgment and a good knowledge of the business.

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Financial plan (2)

1) Financial assumptions 2) Projected P&L 3) Projected Balance Sheet 4) Projected Cash Flow 5) Key Valuation Measures 6) Sensitivity Analysis

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Financial plan (3)

1)The Financial and Overall Assumptions– a) on Revenues : (P&L)

• Tariff evolution

• volume,…

– b) on Costs : (P&L)• Price evolution

• salary, ...

– c) other (P&L, CF, BS)• interest rate

• tax rate

• ...

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Financial plan (4)

Building a financial plan requires the construction over the project ’s life (usually from three to ten years) of :– a P / L,– a balance sheet,– and a cash flow statement.

You must know the general structure of those documents. The figures you use to fill in those documents derive from your assumptions about your business.

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Financial plan (5)

A P / L (Profit and Loss statement or Income statement) lists all the revenues and the expenses generated by the project.

Revenues and expenses are classified according to their function (operating v.s non-operating; cost of revenue, SGA, depreciation, other).

Five key indicators: Gross Margin, EBITDA, Operating income, EBIT, NI.

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Year 200XNet revenue $9 500less : cost of revenue -$2 800

Gross margin $6 700 in % 71%

Selling, general and administrative expenses -$3 500 - Selling -$930

- General -$1 220

- Administrative -$1 350

Other expenses -$330

EBITDA - Earnings before interest, taxes, depreciation and amortization $2 870

in % 30%

Depreciation and amortization -$1 930

EBIT - Earnings before interest and taxes. $940

in % 10%

Interest expenses -$250

Gross Income $690Taxes (@ 40%) $276

Net income $414

Projected P / L - an exemple

Financial plan (6)

This general framework can be adapted to take into account the specificities of your business.

Extraordinary expenses and revenues are excluded from this forecasted P / L due to their non predictable nature.

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Projected Profit & LossYear 1 Year 2 Year 3 Year 4 Year 5

Revenue 10.000$ 60.000$ 150.000$ 220.000$ 365.000$

Gross Revenue 10.000$ 60.000$ 150.000$ 220.000$ 365.000$ Revenue Adjustments (500)$ (3.000)$ (7.500)$ (11.000)$ (18.250)$

Net Revenue 10.500$ 63.000$ 157.500$ 231.000$ 383.250$

Cost of Revenue 4.300$ 25.000$ 31.500$ 45.000$ 71.000$

Sub-Total COR 4.300$ 25.000$ 31.500$ 45.000$ 71.000$ Gross Margin $6.200 $38.000 $126.000 $186.000 $312.250Gross Margin % 59% 60% 80% 81% 81%

Transmission costs 5.000$ 10.000$ 12.000$ 15.000$ 16.000$ Operations costs 3.000$ 8.000$ 7.000$ 7.500$ 8.000$ Network Depreciation 1.000$ 14.000$ 37.000$ 56.000$ 56.000$

other expenses -$ 3.800$ -$ 6.130$ 4.125$ Billing 3.000$ 7.000$ 4.500$ 7.000$ 8.000$

Sub-Total 12.000$ 42.800$ 60.500$ 91.630$ 92.125$ Operating Margin (5.800)$ (4.800)$ 65.500$ 94.370$ 220.125$ Operating Margin % -55% -8% 42% 41% 57%

Sales, General and AdminSales Commission 1.300$ 4.800$ 12.000$ 17.600$ 29.200$ SG & A 15.000$ 25.000$ 25.000$ 26.000$ 25.000$

Total SG&A 16.300$ 29.800$ 37.000$ 43.600$ 54.200$

Contribution Margin (EBIT) (22.100)$ (34.600)$ 28.500$ 50.770$ 165.925$ Contribution Margin % (% of Net Revenue) -210% -55% 18% 22% 43%interest expenses $900 $5.400 $13.500 $19.800 $32.850Taxable Income: Loss Carryforward (23.000)$ (63.000)$ (48.000)$ 2.770$ -$ Income Tax (35%) -$ -$ -$ 970$ 58.074$

-$23.000 -$40.000 $15.000 $30.001 $75.001Net Income (23.000)$ (40.000)$ 15.000$ 30.000$ 75.000$ Net Income % -219% -63% 10% 13% 20%

Financial plan (7)

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Financial plan (8)

The BS presents on the one hand the assets necessary to carry out the project, and on the other hand, the origin of the funding (liabilities or equity - capital stock or retained earnings; internal versus external).

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Current assets 2912cash 1000marketable securities 250accounts receivable less allowance for bad debt 450inventories 1200prepaid expenses 12

Long term assets 1515land and buildings 1000machniery and equipment 1200total Property, Plant and Equipment 2200less : accumulated dépreciation 830total PPE net 1370long term receivables 120deferred charges 25

Total assets 4427

AssetsCurrent liabilities 2095

accounts payable 1830accrued expenses 23federal taxes payable 12current maturities on long term debt 230

Other liabilities 39sinking funds 10deffered taxes on income due to depreciation 29

Long term debt 573Shareholders' equity 1720

preferred stock 200common stock 1200TOTAL capital stocks 1400retained earnings 320

Total liabilities and common equity 4427

Liabilities and shareholder's equity

Financial plan (9)

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Projected Balance Sheet

Year 1 Year 2 Year 3 Year 4 Year 5

Short term Assets 32.000$ 73.000$ 58.000$ 69.000$ 202.000$ Cash 25.000$ 56.000$ 36.000$ 32.000$ 135.000$ Accounts receivable -$ 10.000$ 15.000$ 30.000$ 60.000$ Other Short-Term Assers 7.000$ 7.000$ 7.000$ 7.000$ 7.000$

Long Term Assets 9.000$ 105.000$ 228.000$ 215.000$ 132.000$ Capital Assets 10.000$ 120.000$ 280.000$ 280.000$ 280.000$ Accumulated depreciation (1.000)$ (15.000)$ (52.000)$ (108.000)$ (164.000)$ Other Long-Term Assets -$ -$ -$ 43.000$ 16.000$

TOTAL ASSETS 41.000$ 178.000$ 286.000$ 284.000$ 334.000$

short term Liabilities 14.000$ 141.000$ 144.000$ 112.000$ 107.000$ Accounts payable 5.000$ 65.000$ 85.000$ 90.000$ 95.000$ Short-term notes 8.000$ 16.000$ 15.000$ 12.000$ 12.000$

Other short term liabilities 1.000$ 60.000$ 44.000$ 10.000$ -$

Long term liabilities -$ 50.000$ 100.000$ 100.000$ 80.000$

Total Capital 27.000$ (13.000)$ 42.000$ 72.000$ 147.000$ Paid in Capital 50.000$ 50.000$ 90.000$ 90.000$ 90.000$ Retained Earnings (23.000)$ (23.000)$ (63.000)$ (48.000)$ (18.000)$ Earnings -$ (40.000)$ 15.000$ 30.000$ 75.000$

TOTAL LIABILITIES AND CAPITAL $41.000 $178.000 $286.000 $284.000 $334.000

Financial plan (10)

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Financial plan (11)

The projected cash flows is document that list year per year the sources of cash inflows and cash outflows :– operating activities– financing activities– investing activities

The cumulative external funding must be null or positive each year.

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Projected Cash FlowsYear 0 Year 1 Year 2 Year 3 Year 4 Year 5

Net Income (23 000)$ (40 000)$ 15 000$ 30 000$ 75 000$ Add: Depreciation 1 000$ 14 000$ 37 000$ 56 000$ 56 000$ Cash Flow from Operations (EBITDA) (22 000)$ (26 000)$ 52 000$ 86 000$ 131 000$ Change in Working Capital 10 000$ 1 200$ 100$ 1 000$ (2 300)$ (10 000)$ Less Capital Expenditures 30 000$ 20 000$ 20 000$ 20 000$ -$ -$ Long term Debt Repayment -$ 30 000$ 20 000$ 30 000$ -$ Dividendes -$ -$ -$ -$ -$ -$ Free Cashflow (40 000)$ (43 200)$ (76 100)$ 11 000$ 58 300$ 131 000$ Cummulative Free Cashflow (40 000)$ (83 200)$ (159 300)$ (148 300)$ (90 000)$ 41 000$ Capital fundings 55 000$ -$ 30 000$ -$ -$ -$ Long term Borrowing -$ 35 000$ 50 000$ -$ -$ -$

Financing Balance 15 000$ (8 200)$ 3 900$ 11 000$ 58 300$ 131 000$ Cumulative Financing Balance 15 000$ 6 800$ 10 700$ 21 700$ 80 000$ 211 000$

Financial plan (12)

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Financial plan (13)

The P / L, the balance sheet and the projected cash flow statement are closely connected :

– The issuance of debt has an impact on the BS (liabilities), on the PL (interest) and on the projected cash flow (new resources).

– Think also about : dividend policy, sales cut, an increase in inventory prices,…

Constructing financial forecasts is a play - replay game.

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Financial plan (14)

Constructing forecasted financial statement is helpful to evaluate:– the external funding required, – to have a quick view of the future business.

However, we are not yet able to answer the question: Is it worthwhile, on an economic point of view, to invest in this project ?

This is the objective of the next section.

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Financial plan (15)

Key valuation measures– a first step requires to compute some relevant ratios on the projected

financial statements:• Profitability : Gross margin, net profit, return on assets, return on

equity... • Activity: Turnover growth, Collection Days,…• Debt ratios : Debt to Capital, Short term liabilities to Short term assets• Liquidity ratios: Current ratios, Cash flow to debt• other ratios

– a temporal comparison, a benchmark with leading competitors or comparable firms should help to evaluate the global relevance of the business model.

– A break even analysis must also be performed to test the sensitivity of the results to the macroeconomic conditions.

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Financial plan (16)

Valuation method– The evaluation of any investment opportunity involves three discrete

steps :• estimate the relevant cash flows

• calculate a figure of merit for the investment

• compare the figure of merit to an acceptance criterion.

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– A figure of merit is a number summarizing an investment’s economic worth.

Imagine that you know the cash flows generated by a project.

How to transform this sequence in a single figure?

Year 0 1 2 3 4 5 6 7 8 9 10

Cash flow ($40) 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 17

Financial plan (17)

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7.517

40

1 2 3 4 5 6 7 8 9 10

Financial plan (18)

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discount rate

NPV

10,00% 8,86 F12,00% 4,85 F14,00% 1,48 F14,50% 0,72 F14,99% 0,00 F15,00% -0,01 F20,00% -5,85 F30,00% -12,40 F

Financial plan (19)

The Net Present Value (NPV) principle:– How much would you like to earn in one year to lend me $ 100 today?– The equivalence principle.– Excel example.

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Financial plan (20)

Sensitivity Analysis and Risk Analysis– OBJECTIVE : to check the impact of variances in assumptions which

were used for the projected business plan.

– METHODOLOGY : to analyse the most sensible parameters in the business such as price erosion, volume growth, Market share, capital expenditure (Capex) needs, …

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Financial plan (21)

CONCLUSION

– IT’s MORE THAN IMPORTANT TO TAKE TIME TO THINK THROUGH YOUR ASSUMPTIONS AND OBJECTIVES.

– PLANNING IS THE KEY TO BUSINESS SUCCESS

Documents

44_48_02 July 02 Introduction to Business Planning Content: – Business Plan Overview – Financial Plan