Need to know finance
You can’t hide from it…
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
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
Balance Sheet
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 Point
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
Break-even output = Fixed costs
selling price – variable cost
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?
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?
Pricing a product
£4,000 + £10,000 + £10,000 5,000
=
£4.80
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
Pricing a service
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
Communicating assumptions
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
Common pitfalls to avoid
Successful pitching
12-2pm Ridley 2 Buiiding room 1.58
Wednesday 30th September, 2015
