Need to know finance

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1 Need to know finance

2 You can t hide from it

3 Every decision has financial implications

4 Estimating sales and cost of sales (aka direct costs)

5 Gross Profit and Gross Profit Margin (GPM) Sales cost of sales = gross profit 90k - 40k = 50,000 gross profit Gross profit total sales x 100 = gross profit margin 50k 90k x 100 = 55% is the gross profit margin For every 100 of sales you make 55 gross profit Eg: 120k sales x 55% = 66,000 in gross profit

6 Working out your overheads

7 Start Up Costs

8 Net profit Gross profit overheads = net profit 50k - 45k = 5,000 net profit

9 Cash Flow Forecast From: Oct-14 To: Sep-15 Business Name: L&D Property Maintenance Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Total Yr1 Income Cash from sales Capital introduced Total income Expenditure Stock purchased Drawings including NIC Advertising Motor Telephone / Internet Stationery Repairs Insurances Utilities Professional Fees Bank charges Capital expenditure Loan Repayments Total expenditure Surplus (Deficit) for month Opening balance Overdraft interest paid Closing balance

10 Tom s Toy Shop

11 Cash Flow Forecast Case Study Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Receipts Sales Interest on Investments Loan Total Receipts Payments Rent Bills Salaries Equipment Stock Total Payments Net Cash Flow Opening Balance Closing Balance

12 Cash Flow Forecast Case Study Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Receipts Sales 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 25,000 30,000 30,000 Interest on Investments Loan , Total Receipts 23,500 23,500 23,500 23,500 73,500 23,500 23,500 23,500 23,500 25,500 30,500 30,500 Payments Rent 5,800 5,800 5,800 5,800 5,800 5,800 5,800 5,800 5,800 5,800 5,800 6,000 Bills 5, , , , Salaries 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 12,000 12,000 12,000 Equipment , Stock 5,100 5,100 5,100 5,100 5,100 5,100 5,100 5,100 8,000 10,000 10,000 7,000 Total Payments 25,900 20,900 20,900 25,900 70,900 20,900 25,900 20,900 23,800 32,800 27,800 25,000 Net Cash Flow -2,400 2,600 2,600-2,400 2,600 2,600-2,400 2, ,300 2,700 5,500 Opening Balance 100-2, , ,100 5,700 3,300 5,900 5,600-1,700 1,000 Closing Balance -2, , ,100 5,700 3,300 5,900 5,600-1,700 1,000 6,500

13 Profit and Loss Gross Profit Sales revenues less direct costs materials, production wages/costs Operating Profit Gross profit less indirect costs/overheads Management costs, energy, marketing, premises Net profit Operating profit less finance costs

14

15 Balance Sheet A snapshot of the assets and liabilities at a given moment Assets: machinery, stock, money owed by customers, cash in hand Liabilities: money owed to suppliers, loans, bank overdraft Shows the sources of funding Owners equity, profits earned and retained, borrowings, investments

16 Balance Sheet The way money is used in the business: Assets, liabilities, working capital BALANCED by The capital invested by owners and shareholders Retained earnings and profits

17 Balance Sheet Fixed Assets (equipment) 20,000 20,000 Current Assets Stock 4000 Owed by Customers Cash at Bank ,000 Less Current Liabilities Owed to Suppliers 4000 (4,000) Net Current Assets 13,000 Total Assets less total current liabilities 33,000 Less Creditors falling due after 1 yr Bank Loan 10,000 (10,000) Net Total Assets 23,000 Capital Owners capital introduced 13,000 Retained Profits 10,000 Total Capital and Reserves 23,000

18 Break Even Point The break-even point is output level where sales equal costs 2 types of costs Fixed costs - don t change with sales Variable costs - do change with sales Break-even output = Fixed costs selling price variable cost

19 Break-even output = Fixed costs selling price variable cost Fixed costs 10,000 Selling price per unit 5 Raw materials (variable costs) per unit 3 10,000/ ( 5-3) = 5000 units Need to sell 5000 units to break even

20 Another way Overheads GPM = Break even point Café example: 50,000 60% - 83,333 In other words GPM of 60% = necessary to generate 83k + in order to generate a gross profit of 50k How does this compare with your sales projections?

21 Pricing a product Total cost of materials + total overheads + desired profit Total number of units produced E.g. a company selling ceramic jugs Raw materials = 4,000 Total overheads = 10,000 Desired profit = 10,000 Number of units = 5,000 What will the selling price of a jug need to be?

22 4, , ,000 5,000 = 4.80

23 Pricing a service Total cost of people + total overheads + desired profit Annual production hours E.g. Alex is a graphic designer. He wants to pay himself 12,000 per year, has overheads of 7,000 per year and wants to invest 2,000 back into the business next year. He can work 30 productive hours for a 40 hour working week for 47 weeks per year.

24 Pricing a service 12, , ,000 (30 X 47) = 12, , , = 14.89

25 Communicating assumptions Numbers will not make sense without explanation In business plan you need to justify your figures and show working out Sales figures based on logic/history Costs based on research

26 Common pitfalls to avoid Not grounding the figures based on the plans for your business Approaching the figures as guesswork Not understanding your figures or being unprepared for them to be challenged Not factoring in initial growth period, seasonality etc. Not showing how growth affects figures throughout your business (consider all of your costs) Being too positive/negative (sensitivity analysis?) Not understanding what your investor is seeking Not factoring in when you will be paid

27 Successful pitching 12-2pm Ridley 2 Buiiding room 1.58 Wednesday 30 th September, 2015

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