Financial Objectives

(1)

Financial Objectives

Financial Objectives SBW 2012/05/V1 Page 1

Business Plan – Financial Objectives

The business plan financial objectives involve measuring financial performance to reflect the total operational performance. The aim in managing this

performance should be to maximise net profit and net cash surpluses of the operation. The two main measures, therefore, are net profit and net cash flow.

Each indicator for any given period is calculated as follows:

Total income (revenue) less direct costs (or C.O.G.S.) equals gross profit

(contribution margin) and gross profit less operating costs (cost of running the business) is equal to net profit.

Total receipts (inflows) less total payments (outflows) are equal to net cash flow.

Net profit is calculated as the excess of income (revenue) over expenses of the operation for a given period. Income (revenue) is the earnings of the business and expenses are its running costs.

Net cash flow surplus is calculated as the excess of receipts (inflows) over payments for a given period. Receipts are the cash inflows of the business, payments are its cash outflows or outgoings.

Financial Plan Outline

1) Break even analysis

One of the main financial objectives is to perform a break even analysis. This should be done before preparing the final financial plans for your operation. You should know the sales break-even point, that is, the level of sales

necessary to meet the total business running costs. You can also use break-even analysis to determine the level of sales to achieve a desired profit target.

(2)

Financial Objectives

2) Categorise costs as fixed or variable

Fixed costs are constant. They do not change when sales levels change provided the business does not change its operating capacity.

Variable costs change proportionally to changes in business activity. When sale levels change, these costs also change (up or down). Examples of variable costs are stock purchases, raw material purchases, and direct costs (job material purchases).

3) Calculate the contribution margin

This is a key area of the financial objectives. The sales income of the business must be enough to cover its variable costs and it's fixed costs as well as the required profit. The contribution margin is the excess of sales income over the variable costs of the business for the period (sales less direct costs). The

contribution margin measures how much sales contribute towards meeting fixed costs and the desired net profit of the business.

This is the one of the key financial objectives, as without sufficient contribution margin you cannot meet your operating costs and you will be in negative net profit territory.

4) Calculate the break-even point

With a knowledge of the contribution margin (% to sales), you can find the business's break-even point, the level at which income equals expenses (direct costs and overheads or expenses), so that neither a profit or a loss is made (in the net profit line of your profit and loss report). See also sales break even point.

5) Financial Forecasts sales

Sales forecasts should be the first forecasts made when planning profit and overall financial objectives. The sales forecast is of prime importance because it influences many of the cost forecasts for your business.

(3)

Financial Objectives

6) Forecast profit statements

Prepare a forecast profit statement showing the annual net profit target for the business for each year.

7) Forecast capital expenditure requirements

Prepare an annual capital expenditure forecast for each year. This shows details of your proposed capital expenditure for the period in the business plan.

8) Forecast cash flow

After you have prepared the forecast profit and capital expenditure

statements, you can now prepare cash flow statements for each year of the business plan. Potential lenders will critically analyse your cash flow forecasts to determine your ability to meet loan repayments.

A cash flow statement shows the intended cash receipts and payments of the business over the period of the business plan, which then allows the cash flow to be calculated. A forecast cash flow statement shows the cash receipts

(inflows) and payments (outflows) of the operation, which enables future cash positions to be predicted.

This is one of the key financial objectives of your business, and dictates any required level of funding over the coming trading period (budget year).

9) Financial Ratios

The calculation of financial ratios provides a useful summary of the acceptability of forecasts. They can be used to identify strengths and weaknesses in planned operating activities.

Ratios are compared with standard benchmarks such as industry averages for acceptability. Ratios should also be improving over time. The identification of any unacceptable ratios should cause you to review and adjust relevant sections of the operational plan to produce satisfactory forecasts and results.

(4)

Financial Objectives

10) Financial records

You will need to design a comprehensive record system that records the financial transactions of the business. Financial records are necessary for the financial control of the operation. Records of financial transactions enable accurate reports to be prepared for monitoring the financial results of the operation. Financial results are compared with corresponding targets to

identify any unsatisfactory performance so that follow up action can be taken.

11) Business insurance

Plan what types of insurance will be required for the business now and for the period of the plan, the types of insurance might include public liability (usually the minimum) and professional indemnity. Comprehensive insurance cover should be arranged and maintained for your business operation to minimise exposure to daily risks which can cause financial losses.

12) Financial controls

The final area of financial objectives is to establish the financial controls for your business. After you have designed your financial record keeping system, you should then decide what financial controls to adopt for your business operation.

Financial controls are the methods or techniques you will use to monitor and evaluate the financial results of your operation. Key financial results are 'profit', 'cash flow' and 'financial position'.

Understanding the financial objectives for your business operation is essential if your business is to be successful.

Many business fail because they do not take time out to first establish these, and then to monitor them. These are your "stakes in the ground" which ultimately support the structure of your business!

(5)