Need to know finance

Need to know finance

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Every decision has financial implications

Estimating sales and cost of sales (aka direct costs)

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

Working out your overheads

Start Up Costs

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

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 2838 2838 1419 2838 3784 3784 3784 3784 3784 3784 2838 3784 39259 Capital introduced 0 0 0 0 0 0 0 0 0 0 0 0 0 Total income 2838 2838 1419 2838 3784 3784 3784 3784 3784 3784 2838 3784 39259 Expenditure Stock purchased 142 142 71 142 189 189 189 189 189 189 142 189 1963 Drawings including NIC 2000 2000 1400 2000 2000 2000 2000 2000 2000 2000 2000 2000 23400 Advertising 50 50 50 50 50 50 50 50 50 50 50 50 600 Motor 120 120 60 120 160 160 160 160 160 160 120 160 1660 Telephone / Internet 30 30 30 30 30 30 30 30 30 30 30 30 360 Stationery 150 0 0 50 0 0 0 50 0 0 50 0 300 Repairs 0 0 100 0 0 0 100 0 0 0 100 0 300 Insurances 55 55 55 55 55 55 55 55 55 55 55 55 660 Utilities 0 0 0 0 0 0 0 0 0 0 0 0 0 Professional Fees 0 0 0 0 0 0 0 0 0 0 0 300 300 Bank charges 10 10 10 10 10 10 10 10 10 10 10 10 120 Capital expenditure 0 200 0 0 0 0 0 0 200 0 0 0 400 Loan Repayments 32 32 32 32 32 32 32 32 32 32 32 32 387 Total expenditure 2589 2639 1808 2489 2526 2526 2626 2576 2726 2526 2589 2826 30450 Surplus (Deficit) for month 249 199-389 349 1258 1258 1158 1208 1058 1258 249 958 8809 Opening balance 0 249 448 58 407 1665 2922 4080 5287 6345 7602 7851 0 Overdraft interest paid 0 0 0 0 0 0 0 0 0 0 0 0 0 Closing balance 249 448 58 407 1665 2922 4080 5287 6345 7602 7851 8809 8809

Tom s Toy Shop

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

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 500 500 500 500 500 500 500 500 500 500 500 500 Loan 0 0 0 0 50,000 0 0 0 0 0 0 0 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 5,000 0 0 5,000 0 0 5,000 0 0 5,000 0 0 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 0 0 0 0 50,000 0 0 0 0 0 0 0 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 2,600-300 -7,300 2,700 5,500 Opening Balance 100-2,300 300 2,900 500 3,100 5,700 3,300 5,900 5,600-1,700 1,000 Closing Balance -2,300 300 2,900 500 3,100 5,700 3,300 5,900 5,600-1,700 1,000 6,500

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

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

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

Balance Sheet Fixed Assets (equipment) 20,000 20,000 Current Assets Stock 4000 Owed by Customers 12000 Cash at Bank 1000 17,000 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

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

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

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?

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?

4,000 + 10,000 + 10,000 5,000 = 4.80

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.

Pricing a service 12,000 + 7,000 + 2,000 (30 X 47) = 12,000 + 7,000 + 2,000 1410 = 14.89

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

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

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