Financial Planning:
Making Sense of the Numbers
Dr Robert A. Phillips
Manchester Science
Enterprise Centre
Your Costs
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Raw materials and equipment
Wages
Taxes
Utility bills – gas, electric, telephone, postage
etc
Premises (Rental or Mortgage)
Delivery costs
Loan repayment
Marketing and advertising costs
Manchester Science Enterprise Centre
Your Cash Inflows
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Investments
Sales of goods
Subscriptions to services
Sale of Intellectual Property rights
Money from royalties
Sale of assets
Manchester Science Enterprise Centre
Break even analysis
• Need to sell enough product to cover
costs = Break even point
• Variable costs e.g. raw materials
• Fixed costs e.g. Rent, wages
• Fixed costs make less of a contribution
when you make more products !
Manchester Science Enterprise Centre
Working Capital Cycle
Cash
Collections
Purchases
Accounts
Receivable
Materials
Sales
Finished
Inventory
Accounts
Payable
Production
Manchester Science Enterprise Centre
Three main statements
• Balance Sheet – A ‘snap shot’ of the
companies financial situation at a point in
time (e.g. end of year)
– Assets, Liabilities, Owner’s Equity
• Profit and Loss Statement – From…..to….
– Income (Revenue) and Expenses
• Cash flow Statement – From ….to….
– Cash in and Cash out
Manchester Science Enterprise Centre
Flow of Cash Through a Business
Owner’s
Investment
Borrowed
Funds
Sale of Fixed
Assets
Cash Sales
Collection of
Accounts
Receivable
Cash
Purchase
of Fixed
Assets
Small Business Management, 11th edition
Longenecker, Moore, and Petty
© 2000
South-Western College Publishing
Payment of
Expenses
Payment of
Dividends
Payment
for Stock
Manchester Science Enterprise Centre
Cash Flow
• The flow of cash in to and out of a
business
• Can be net positive or negative
• Continuously moving picture
• Especially important for a new start-up
company- may update daily!
• NOT simply sales minus expenditure
Manchester Science Enterprise Centre
Cash Flow
Positive
Cash Flow
Profits
Essential
Essential
Desirable
Essential
Short Term
Long Term
Cash is King
Manchester Science Enterprise Centre
Analysing Cash Flow
1. Net Cash Flow +ve or –ve? What are
the problems?
2. Determine main causes of problem –
costs or income?
3. Profitable companies with full order
books can still fail !
Use the Pareto (80:20) Rule
Manchester Science Enterprise Centre
Profit and Loss Statement
• Reports on expenses and income over a
period of time.
• Displays Profit.
• How does that relate to cash?
• Some Terms:
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Sales/Turnover
Cost of Goods sold
Gross Profit
Net Profit
Manchester Science Enterprise Centre
Profit and Loss Details
Sales
- Cost of Goods sold
= Gross Profit
- Operating Expenses
= Operating Profit or Earning before
interest and Tax (EBIT)
-Interest
=Earnings before Tax (EBT)
-Tax
= Net Profit
Manchester Science Enterprise Centre
Balance Sheet
Assets: (everything the business
OWNS)
Liabilities/Debt: (Everything the
business OWES)
Current Assets
Cash
Debtors
Stock
Current Liabilities
Creditors
Short-term loans
Fixed Assets
Equipment
Premises
Long-term Liabilities
Loans
Overdraft
Equity: Value of owners’ share of
the business
Total Assests
Owners initial Investments
Retained profits/Loss
Manchester Science Enterprise Centre
Why do this ?
• To show investors you are profitable (or
to forecast profitability)
• To identify areas where the company
could improve and identify potential
problems
• To show investors you are efficient
• To show customers and suppliers you
will still be around next year !
• It may be required by law !
Manchester Science Enterprise Centre
What do we expect
• Three years of projected financial
statements – Cash Flow, Profit and
Loss, Balance sheet
• A break even analysis – how well do
you need to do before you make a profit
?
• Estimation of costs and how much
money you would ask from investors
Manchester Science Enterprise Centre
Happy Financial Planning
Manchester Science Enterprise Centre