Financing Your Dream: A Presentation at the Youth Business Linkage Forum (#EAWY2014) Akin Oyebode Head SME Banking, Stanbic IBTC Bank, Nigeria.

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1 Financing Your Dream: A Presentation at the Youth Business Linkage Forum (#EAWY2014) Akin Oyebode Head SME Banking, Stanbic IBTC Bank, Nigeria.

2 Content 1 Introduction 2 Profit and loss Account or Income Statement and its composition 3 Balance sheet and its composition 4 Cash Flow Statement and its composition 5 Financial statements based ratios/analyses 6 Financing Your Business funding options and valuation

3 Profit and loss account and its composition An income statement is a record of revenue generated and expenditure incurred over a given period usually one year. It shows whether the business has made a profit (more revenue than expenditure) or a loss (vice versa) The composition of an income statement are: Composition of income statement Income / revenue Expenses Gross Profit Net profit / loss These are the amounts earned during a period. It represents the income arising in the ordinary course of an entity s activity, e.g. sales, fees, interest etc These are the costs of goods and services consumed during the accounting period. It represents the costs of running a business that arise from the ordinary activity of the business e.g. salaries, depreciation, admin and distribution expenses, etc This is the profit earned on goods sold during a period. It is arrived at by deducting cost of goods sold (or cost of sales) from the sales value This is the excess of all income over all expenses (or vice versa for a loss). It is obtained after adding other incomes to the gross profit and deducting all expenses

4 Format for Profit and Loss Account Profit and Loss account for the year ended 31 Dec 20X4 Revenue Cost of Sale () Gross Profit Other Income Distribution Cost () Administrative Expense () Other Expenses () EBITDA Finance Cost (Interest on Debt) () Profit Before Tax Taxation () Profit After Tax

5 Balance Sheet and its composition The balance sheet (statement of financial position) is a list of all assets owned and all liabilities owed by a business as well as the capital of the business as at a particular date It is a snap shot of the financial position of the business at a particular moment 1. Assets are resources controlled by an entity from which future economic benefits are expected to flow e.g office buildings, plant and machinery, vehicles, office furniture, stock in trade, cash, etc Assets are classified as current or non-current depending on the duration over which the business expects to derive economic benefit from its use. An asset which will deliver economic benefits to the entity over the long term is classified as non-current whereas those assets that are expected to be realized within one year are classified as current assets 2. Liabilities are present obligations of a business entity the settlement of which is expected to result in an outflow from the entity e.g. amounts owed to suppliers, amounts owed to banks and tax authorities, etc Liabilities are classified as current or non-current depending on the duration over which the business intends to settle the liability. A liability which will be settled over the long term is classified as non-current whereas those liabilities that are expected to be settled within one year are classified as current liabilities 3. Capital or equity: the amounts invested in a business by the owner. Capital is usually in form of shares

6 Balance Sheet and its composition (cont d) Equity is usually presented in the statement of financial position under the following categories: Share Capital Retained Earnings Reserves Share capital represents the amount invested by the owners in the entity usually in form of shares Retained Earnings comprises the total net profit or loss retained in the business after distribution to the owners in the form of dividends Revaluation Reserve contains the net surplus of any upward revaluation of property, plant and equipment The Accounting Equation Assets Capital Liabilities The accounting equation simply reflects the fact that the assets of a business must be equal to the claims over the assets at any point in time

7 Balance Sheet Format Balance sheet as at 31 December 20X4 Fixed Assets Buildings Machinery Vehicles Current Assets Stock Debtors Prepaid Expenses Current Liabilities Creditors Accrued Expenses Bank Overdraft Net Current Assets Long Term Liabilities (debentures) Share Capital Ordinary Shares Retained Profit for the year

8 Cash Flow Statement and its composition The cash flow statement provides a summary of the cash inflows and outflows during a period and is divided into three areas based on the type of activity. 1. Cash flow from operating activities are cash effects of transactions involved in calculating net income. 2. Cash flow from investing activities is cash from non-operating activities outside the normal scope of business. This involves items classified as assets in the balance sheet including the purchase and sale of investments and equipment. 3. Cash flow from financing activities involves items classified as liability and equity in the balance sheet. It includes payment of dividend as well payment of debt or equity.

9 Cash Flow Statement Format Balance sheet as at 31 December 20X4 Net Income Depreciation Expense Increase in account receivable Increase in account payable Net cash from Operating Activities (A) () Purchase of Building Sale of long term investments Net cash from Investing Activities (B) () Payment of Dividends Creditors Net cash from Financing Activities (C) () Net Increase/Decrease in cash (A+B+C) Cash at the beginning of the year Cash at the end of the year

10 Financial Statement Based Ratios Profitability Ratio Return on Capital Employed This indicates the percentage return generated by the total funds employed to finance the business. Operating profit/capital employed*100 Return on Equity This measures the return on shareholders funds (less preference shares) Profit after tax divided by equity Gross profit margin Indicates the percentage of sales earned as gross profit. Gross profit /sales*100 Liquidity Ratio Current ratio Quick / acid test ratio Indicates the ability of a company to meet its short term liabilities from its current assets without having to sell its fixed assets. Current assets/current liabilities:1 A generally accepted ratio is 2:1 Indicates the ability of a company to meet its short term liabilities from its current assets without having to sell stocks. Current assets less stock/current liabilities:1

11 Financial Statement Based Ratios (cont d) Gear Ratio Debt ratio/gearing ratio Debt to equity ratio It indicates the percentage of total funds generated from external borrowings. Debt capital/capital employed*100 This indicates the ratio of debt to equity in the finance structure of a company. Debt/Equity Interest cover Indicates the number of times operating profit will be able to cover interest payments. (Operating Profit/Interest Expense)*100 Shareholders Ratio Earnings per share This indicates the net return attributable to each ordinary share. Profit after tax/no of shares Dividend per share Price earnings ratio Indicates the amount paid as dividend per ordinary share. Total dividend/no of shares This indicates how many times earnings must be generated to cover the amount invested Dividend yield This indicates the net returns in percentage earned by each holder of an ordinary share. (Dividend per share/market price per share)*100 Dividend cover This indicates how many times EPS is able to cover the amount paid out as dividend. EPS/DPS

12 Financial Opportunities for Small Businesses in Africa Equity - Private Equity: Leveraged Buyouts / Growth Capital / Venture Capital / Stock Market - Venture Capital / Angel Investors: Early Stage Capital (Startups) / Growth Capital Debt - Term Loans: Expansion / Growth - Overdraft: Working Capital - Leases: Asset Acquisition Government Funding / Grants 12

13 Valuation Methods Market Valuation - Used to value publicly traded firms - Stock Price x No of Shares Outstanding = Market Capitalization - Easy to determine if a company is being sold for a discount or premium Comparable Entities - Price/EBITDA - Price/Earnings - Price/Sales - Price/Book Net Asset Value - Sum of Assets less Liabilities - Valuation Floor - Mainly used in valuing distressed entities 13

14 Valuation Methods Discounted Cash Flow Uses the concept of time value of money - Future cash flows are discounted to give present values (PV) - The sum of all cash flows is known as Net Present Value (NPV) - A discount rate is applied to the NPV to calculate value Discount Rate - Introduces Weighted Average Cost of Capital (WACC) to reflect the risk of cash flows Driven by the company s capital structure - Assumes investors must be paid for investing cash for future returns - The risk premium reflects the extra returns demanded by the investor for taking the risk. 14

15 How to optimize the business opportunity Build Structures Company Registration Separate your business from your person Accounting Prepare periodic management and audited accounts Corporate Governance Constitute a Board of Directors and adhere to acceptable governance structures Understand your business and its funding needs Ensure your business records and accounts are up to date Keep supply and sales records - receipts and buyer receipts Maintain a good borrowing history Ensure the business is well capitalized Finance SME Business Management Business Training Use Boot camp/toolkits to improve your management skills Advisory Have periodic strategy and business review meetings to ensure goals are achievable Business Planning Be disciplined about the planning process Insurance mitigates operational risks: Fire/Theft/Accident/ Workmen injury etc. Tax Advisory Ensures compliance with regulations HR Recruitment/Payroll /Pension Operate with the necessary licenses/approvals:. Technical Assistance/ Compliance Mentoring/ Monitoring Find a mentor that brings relevant skills/experience Review goals/milestones to align strategy and performance Ensures accountability 9

16 Questions 10

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