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Financial Planning & Sustainability
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Course Objectives
i. Introduce Participants to the concept of financial
planning and analysis
ii.Introduce Participants to terminologies as it relates to
the course
iii.Budget planning and forecasting
iv.Participants are introduced to ratio analysis as a tool for
performance evaluation
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Course Outline
1. Financial Planning and Forecasting
2. Break-even and Ratios
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What is Financial Planning?
A financial plan is a series of steps that are performed, or
goals that are accomplished, which relate to a business's
financial affairs. This plan allocates future income to
various types of expenses, such as rent or utilities, and also
reserves some income for short-term and long-term.
Financial Planning is the process of producing your
business financial plan.
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Key Financial Statements
Financial Planning
Income Statement
Balance Sheet
Cash flow Projection
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i. Balance Sheet: this is also known as the statement of the
financial position of a company and consists of assets,
liabilities and owner equity.
Key Financial Statements contd…
Liabilities Owners Equity Asset
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Income Expenses Profit
ii. Income Statement (Profit & Loss): It reports on a company's
income, expenses, and profits over a period of time. A Profit &
Loss statement provides information on the operation of the
enterprise. These include sale and the various expenses
incurred during the processing state.
Key Financial Statements contd…
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Key Financial Statements contd… iii. Cash Flow Statement: these reports on a company's
cash inflow (cash & receipts) or revenue activities,
operating (expenses e.g. Salaries, fuel/diesel etc),
investing and financing activities. It is important that
explanatory notes accompany financials.
Cash inflow
Operating Cash flow
Other Expenses
Cash Balance
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Forecasting
Financial planning is enabled by creating pro forma
income statements and balance sheets. Since different
income statement and balance sheet items grow at
different rates, in order for a balance sheet to really
balance, we may have to play with a plug variable, such
as future debt financing, equity issues, dividend payout
rates.
Key Financial Statements contd…
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Steps in Financial Planning Step 1: Gather the needed financial data you'll use to prepare these
financial statements for your business plan by examining your
expenses.
Step 2: think of your business expenses as broken into two
categories;
(a) your start up expenses (the cost of all the items you’ll use to start
business) and,
(b) your operating expenses( costs of keeping your business
running).
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Step 3: list all your start up cost and add them together.
Step 4: list all your monthly operating cost e.g. salaries,
raw materials, PHCN/Fuel etc., once you have your
operating expenses list complete, the total will show you
what it will cost you to keep your business running each
month.
Steps in Financial Planning contd…
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Steps in Financial Planning contd… Step 5: Multiply this number by 6, and you have a six
month estimate of your operating expenses.
Step 6: Then add this to the total of your start up expenses
list, and you'll have a ballpark figure for your complete
start up costs (the amount you’ll need to start and run the
business).
Step 7: Prepare your first year income statement on a
monthly basis( see attached template).
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Break-even and Ratios
A. Break-even analysis
A technique to identifying the point where the total revenue is just sufficient to cover the total cost. The breakeven point (BEP) is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has "broken even".
Revenue Expenses Zero
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Ratio Analysis
Ratio analysis establishes the relationships between
quantities in the financial statements.
The goal is to determine the strengths and weaknesses of
a business through evaluation of its financial statements
and also to understand the relationship between
management strategy and financial results.
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i. Profitability: return on firm’s investment
ii.Liquidity: ability to satisfy short-term obligations
when due.
iii.Efficiency: productivity of firm’s assets
iv.Leverage: how deeply the company is in debt
Ratio Analysis contd...
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Profitability Ratios
i. Gross Profit Margin: Gross Profit / Sales – that is what
% of sales is gross profit
ii. Operating Profit Margin: EBIT or Operating Profit /
Sales – this is what % of sales is operating profit
iii. Net Profit Margin: Net Profit / Sales – that is What %
of sales is net profit
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i. Current Ratio i. Current Assets / Current Liabilities
ii.Quick Ratio or Acid Test i. Current Assets minus Inventory / Current
Liabilities ii. A more precise measure of liquidity, especially if
inventory is not easily converted into cash.
Liquidity Ratio
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i. Debt Ratio: Total Debt / Total Assets
i. The higher the ratio, the more of other people’s
money that is being used to generate profits.
ii. Times Interest Earned: EBIT or Operating Profit /
Interest Expense
i. This coverage ratio shows the firm’s ability to service
its debt.
Leverage Ratio
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How to conduct Breakeven Analysis
i. Fixed Costs divided by (Revenue per unit - Variable
costs per unit)
ii. Fixed costs are costs that must be paid whether or not
any units are produced. These costs are "fixed" over a
specified period of time or range of production.
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iii.Variable costs are costs that vary directly with the
number of products produced. For instance, the cost of
the materials needed and the labour used to produce
units isn't always the same.
How to conduct Breakeven contd…
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Breakeven Analysis - Class example i. Suppose that your fixed costs for producing 100,000 plantain
chips were N30,000 a year.
ii. Your variable (operating) costs are N2.20 materials, N4.00
labour, and N0.80 overhead, for a total of N7.00.
iii. If you selling price of N12.00 for each plantain chips, then:
iv. N30,000 divided by (N12.00 - 7.00) equals 6000 units.
v. This is the number of plantain chips that have to be sold at a
selling price of N12.00 before your business will start to make
a profit.
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Benefits of Financial Planning
i. It helps determines whether or not your business idea is
viable.
ii. It helps in the process of managing your business
finance.
iii.It helps you to manage your cash flow.
iv.It gives financial direction in your business.