Dr Robert A. Phillips Manchester Science Enterprise Centre Financial Planning: Making Sense of the Numbers

Manchester Science Enterprise Centre Your Costs 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 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 Purchases Materials Accounts Payable Accounts Payable Production Finished Inventory Finished Inventory Sales Accounts Receivable Accounts Receivable Collections

Manchester Science Enterprise Centre Balance Sheet – A snap shot of the companies financial situation at a point in time (e.g. end of year) –Assets, Liabilities, Owners Equity Profit and Loss Statement – From…..to…. –Income (Revenue) and Expenses Cash flow Statement – From ….to…. –Cash in and Cash out Three main statements

Manchester Science Enterprise Centre Small Business Management, 11th edition Longenecker, Moore, and Petty © 2000 South-Western College Publishing Flow of Cash Through a Business Owners Investment Borrowed Funds Sale of Fixed Assets Cash Sales Purchase of Fixed Assets Payment of Expenses Collection of Accounts Receivable Payment of Dividends Payment for Stock Cash

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 Long TermShort Term Positive Cash Flow Profits Essential DesirableEssential 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: –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

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