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Entrepreneurship and Business Management

Financial plan Module 8

Think about it What is a financial plan? What is the difference between own capital and borrowed capital? What is an Income Statement, a Balance Sheet and a Cash Flow Statement?

Sources of financing Unit 8.1

Sources of financing All businesses need finance to be able to start. The type of ownership will determine where the funding will be obtained from. Figure 8.1: Sources of finance

Capital Table 8.1: The accounting equation

Equity financing ‘Equity financing’ refers to the permanent funds of the business contributed by the owner(s). This stays in the business and represents the owner’s equity. Important point Remember that profit refers to the difference between income and expenses.

Borrowed capital Figure 8.2: Layout of the borrowed capital of an enterprise

Financial management Unit 8.2

Financial management Financial management means the planning, organising, leading and control of all financial aspects of a business. It is about the obtaining of funds and the utilising and control of these funds. Figure 8.3: The aspects of financial management

Financial management includes: The acquisition of funds. The amount of funds that will be needed and the ratio between own funds and borrowed funds. How these funds will be used. How many fixed (non-current) and current assets will be needed. The credit policy of the business. The record-keeping system of the business. Management of the cash flow. The compiling of financial statements. Analysis and interpretation of financial statements. Security control over cash received.

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Creating projected financial statements Unit 8.3

Creating projected financial statements An entrepreneur has to do thorough financial planning and budgeting to ensure that his or her intended business will be financially viable. Financial institutions will require detailed forecasts before granting financial aid. Figure 8.4: The most important financial statements

The most important financial statements of a business Table 8.2: The most important financial statements of a business Financial statement Content Purpose Income Statement All income and expense accounts Calculation of the gross and net profit. This statement is used to calculate the financial results for a specific period. It determines the profitability of the enterprise. Cash Flow Statement All receipts and Payments Calculation of the cash position of the enterprise. It determines the liquidity of the enterprise.

The most important financial statements of a business Table 8.2: The most important financial statements of a business (continued) Financial statement Content Purpose Statement of changes in equity Capital and reserves and how they change during the Year Only applicable to companies and close corporations. It reflects any movements in capital and reserves. Balance Sheet All assets, owner’s equity and liabilities To indicate the financial position of an enterprise on a certain date. It determines the solvability of the enterprise.

Projected Cash Flow Statement A Cash Flow Statement indicates the movement of money into and out of the business. It is therefore concerned with receipts and payments. It cannot include credit transactions, but only the payment or receipt of money for these credit transactions. Figure 8.5: The elements of a Cash Flow Statement

What will be included in the Cash Flow Statement? Balance in the bank (opening balance). Receipts. Payments. The balance must be calculated at the end of each month. This balance becomes the opening balance of the next month.

Important point Some templates for a Cash Flow Statement indicate ‘other receipts’ as ‘other income’ and ‘monthly payments’ as ‘monthly expenses’. This is strictly speaking NOT correct as this is about receipts and payments.

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Activity 8.1 – 8.2 Test your knowledge of this section by completing Activity 8.1 – 8.2 (page 150 – 152 of your Student’s Book)

Projected Income Statement An Income Statement is drawn up in order to calculate the gross and the net profit. Income and expenses are recorded in this statement. The layout of an Income Statement will differ for a service undertaking, a retailer and a manufacturer. Figure 8.6: Elements of an Income Statement

Important point Please note that no assets or liabilities can be recorded in an Income Statement.

A sales forecast and estimated monthly expenses You need the following information to draw up a projected Income Statement: A sales forecast. Other projected income. Projected expenses and other expenses. Figure 8.7: A comparison between budgeted and real expenses

Stock inventory for companies The Income Statements of a business will differ depending on the type of company. Table 8.3: Stock inventory for various types of companies Service company Merchandising company Manufacturing company A service company usually does not carry inventory except for certain consumable items, e.g. supplies or spare parts. A merchandising company carries inventory for resale, known as purchases. Whatever is not sold is kept as stock to be sold in future. A manufacturing company carries three types of inventory: Direct materials inventory (raw materials). Work-in-process inventory. Finished goods inventory.

Important point No assets and liabilities appear in an Income Statement. Where the business is a company or a close corporation, tax will be deducted from the net profit, because legal entities are taxed. This will not be the case with the sole trader and partnership, because the owners pay tax in their personal capacity and the enterprise is not taxed.

Difference between an Income Statement and a Cash Flow Statement Table 8.4: The difference between an Income Statement and a Cash Flow Statement Income Statement Cash Flow Statement This statement reflects the profitability of an enterprise. It consists of income and expenses. Income, for example, sales, can be sales on credit plus cash sales. Expenses, whether paid or not, must be recorded for the specific financial period. No balance sheet accounts appear in this statement. This statement reflects the liquidity of an enterprise. It consists of receipts and payments. No credit transaction can be recorded – only payments received or payments made. It reflects ALL cash received and paid and therefore balance sheet items are also included, e.g. receiving money for an old vehicle sold or paying back a loan.

Determining the loan requirement Unit 8.4

Determining the loan requirement All new businesses have certain start-up (pre-operating) costs that must be paid before the business starts operating. Included in these pre-operating costs are the assets that must be paid for. A business can make use of own funds or borrowed funds (loans). An entrepreneur has to calculate how much money will be needed in order to start a business and then determine how much can be provided by the owners and how much money will have to be borrowed.

Activity 8.3 Test your knowledge of this section by completing Activity 8.3 (page 156 of your Student’s Book)

Prepare the financial plan for your proposed business plan Unit 8.5

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Activity 8.4 Test your knowledge of this section by completing Activity 8.4 (page 156 of your Student’s Book)

Summative assessment Test your knowledge of this section by completing the Summative assessment (page 157 of your Student’s Book)