Financial PlanFinancial PlanGroup 4Group 4

Financial PlanFinancial Plan

In general usage, a In general usage, a financial financial planplan is a comprehensive is a comprehensive evaluation of someone's current evaluation of someone's current and future financial state by and future financial state by using currently known variables using currently known variables to predict future cash flows, to predict future cash flows, asset values and withdrawal asset values and withdrawal plans.plans.

Financial PlanningFinancial PlanningFinancial Planning is the Financial Planning is the process of estimating the process of estimating the capital required and capital required and determining it’s competition.determining it’s competition.

It is the process of framing It is the process of framing financial policies in relation financial policies in relation to procurement, investment to procurement, investment and administration of funds and administration of funds of an enterprise.of an enterprise.

Objectives of Objectives of Financial PlanningFinancial Planning

Determining capital Determining capital requirementsrequirements

Determining capital structureDetermining capital structure

Framing financial policies Framing financial policies with regards to cash control, with regards to cash control, lending, borrowings, etc.lending, borrowings, etc.

A finance manager ensures A finance manager ensures that the scarce financial that the scarce financial resources are maximally resources are maximally utilized in the best possible utilized in the best possible manner at least cost in order manner at least cost in order to get maximum returns on to get maximum returns on investment.investment.

Importance of Importance of Financial PlanningFinancial Planning

Adequate funds have to be ensured.Adequate funds have to be ensured.

Financial Planning helps in ensuring Financial Planning helps in ensuring a reasonable balance between a reasonable balance between outflow and inflow of funds so that outflow and inflow of funds so that stability is maintained.stability is maintained.

Financial Planning ensures that the Financial Planning ensures that the suppliers of funds are easily suppliers of funds are easily investing in companies which investing in companies which exercise financial planning.exercise financial planning.

Financial Planning helps in making Financial Planning helps in making growth and expansion programmes growth and expansion programmes which helps in long-run survival of the which helps in long-run survival of the company.company.

Financial Planning reduces Financial Planning reduces uncertainties with regards to changing uncertainties with regards to changing market trends which can be faced easily market trends which can be faced easily through enough funds.through enough funds.

Financial Planning helps in reducing the Financial Planning helps in reducing the uncertainties which can be a hindrance uncertainties which can be a hindrance to growth of the company. This helps in to growth of the company. This helps in ensuring stability an d profitability in ensuring stability an d profitability in concern.concern.

Financial Financial ForecastingForecasting

Financial forecastFinancial forecast can can refer to an annual refer to an annual projection of income and projection of income and expenses for aexpenses for a company, company, division or department.division or department.

2 Methods of 2 Methods of Financial Financial

ForecastingForecasting–– Using Pro Forma, or Using Pro Forma, or

ProjectedProjected, Financial , Financial Statements (more exact, Statements (more exact, time consuming)time consuming)

–– Percent-of-Sales Method Percent-of-Sales Method (less precise, easier to (less precise, easier to calculate)calculate)

3 Primary Components of 3 Primary Components of Financial PlanFinancial Plan

Cash Flow StatementCash Flow Statement

Balance SheetBalance Sheet

Income StatementIncome Statement

Cash Flow Cash Flow StatementStatement

In financial In financial accounting, a accounting, a cash cash flow statementflow statement, also , also

known as known as statementstatement of of cash flowscash flows, is a , is a

financial financial statementstatement that shows how changes that shows how changes

in balance sheet in balance sheet accounts and income accounts and income affect affect cashcash and and cashcash

equivalents, and breaks equivalents, and breaks the analysis down to the analysis down to

operating, investing and operating, investing and financing activities.financing activities.

Balance SheetBalance Sheet

The balance The balance sheet outlines a sheet outlines a business' business' assets, assets, liabilities and liabilities and equity. equity. •Assets= Liabilities + Assets= Liabilities + EquityEquity

Income Income StatemenStatemen

tt

is one of the is one of the financial financial statements of a statements of a company and company and shows the shows the company’s company’s revenues and revenues and expenses expenses during a during a particular particular period.period.

Percentage of sales Method

Percentage of sales method relies on relationships between sales and other items.

The Purpose of financial forecastTo predict the financial consequences of our business plan

To allow us to change our plans in advance to optimize the real financial results after analyzing the forecast financial statement.

To demonstrate to prospective financial partners that we understand our business, the business model and how to manage it effectively to produce positive financial results.

To demonstrate the potential of the business to produce an adequate return on investment.

Characteristic of Good Forecasts

Reasonable

Based upon good Primary and secondary research

Congruent with operating and marketing plan

Can withstand stress testing

Conservative/achievable

Financial Planning process

Forecast financial statement under alternative operating plans.

Determine amount of capital needed to support the plan.

Forecast the funds that will be generated internally and identify sources from which required external capital can be raised.

Establish a performance-based management compensation system that rewards employees for creating shareholder wealth.

Management must monitor operations after implementing the plan to spot any deviations and then take corrective actions.

Steps in financial forecasting

Forecast sales

Project the assets needed to support sales

Project internally generated funds

Project outside funds needed

Decide how to raise funds

See effects of plan on ratios and stock price

How to Create a How to Create a Financial Business Financial Business

PlanPlanStep 1Step 1

Estimate your start-up costs if you are Estimate your start-up costs if you are starting a new business. If you are starting a new business. If you are investing in equipment to run the investing in equipment to run the business, the current market value will business, the current market value will become a part of your assets listed on become a part of your assets listed on your balance sheet. If you own an your balance sheet. If you own an existing business, start-up costs will existing business, start-up costs will not apply; go to the next step.not apply; go to the next step.

Step 2Step 2

Figure your balance sheet. If you are Figure your balance sheet. If you are starting a new business, project starting a new business, project your balances per month, forward to your balances per month, forward to one year. If you own an existing one year. If you own an existing business, gather up your balance business, gather up your balance sheets for the last three years. sheets for the last three years. Website links to automated Website links to automated templates for the balance sheet, templates for the balance sheet, income statement, and cash flow income statement, and cash flow statement are available online.statement are available online.

Step 3Step 3

Figure your income statement, also Figure your income statement, also known as your P & L statement or known as your P & L statement or profit and loss statement. If you are profit and loss statement. If you are starting a new business, project your starting a new business, project your income statement forward to one year. income statement forward to one year. If you own an existing business, gather If you own an existing business, gather up your business income statements up your business income statements for the last three years.for the last three years.

Step 4Step 4

Figure your cash flow. If you are Figure your cash flow. If you are starting a new business, project starting a new business, project your cash flow per month, forward your cash flow per month, forward one year. If you own an existing one year. If you own an existing business, gather up your cash business, gather up your cash flow statements for the last three flow statements for the last three years.years.

Step 5Step 5

Include your current personal financial Include your current personal financial statement if you are applying for a statement if you are applying for a loan. A lender needs to know your loan. A lender needs to know your personal net worth based on personal net worth based on obligations and other personal debt. obligations and other personal debt. This is in addition to identifying This is in addition to identifying business obligations for loan business obligations for loan considerations.considerations.

Step 6Step 6

Include your federal tax return for the Include your federal tax return for the previous year if you are applying for previous year if you are applying for a loan. The lender wants to see a a loan. The lender wants to see a true, non-projected income true, non-projected income reflecting your personal capability to reflecting your personal capability to repay a new loan or actual business repay a new loan or actual business sales and profit and loss indicated sales and profit and loss indicated on your Schedule C form.on your Schedule C form.

Step 7Step 7

Set forth new projections if you own an Set forth new projections if you own an existing business. Take the monthly existing business. Take the monthly average of the last three years of average of the last three years of expenses when projecting for your expenses when projecting for your balance sheet, cash flow and income balance sheet, cash flow and income statements. Also take into account the statements. Also take into account the previous year's expenses more than previous year's expenses more than the others, since this year may reflect the others, since this year may reflect new expenses based on modifications new expenses based on modifications due to business growth.due to business growth.