Financial Planning & Sustainability

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

Course Outline

1. Financial Planning and Forecasting

2. Break-even and Ratios

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.

Key Financial Statements

Financial Planning

Income Statement

Balance Sheet

Cash flow Projection

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.

Key Financial Statements contd…

Liabilities Owners Equity Asset

Income Expenses Profit

ii. 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.

Key Financial Statements contd…

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

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.

Key Financial Statements contd…

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).

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.

Steps in Financial Planning contd…

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).

Break-even and Ratios

A. Break-even analysis

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

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.

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

Ratio Analysis contd...

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

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.

Liquidity 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.

Leverage Ratio

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.

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.

How to conduct Breakeven contd…

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

labour, and N0.80 overhead, for a total of N7.00.

iii. If you selling price of N12.00 for each plantain chips, then:

iv. N30,000 divided by (N12.00 - 7.00) 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.

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.