1、Financial Planning & Forecasting,Financial plan,Generally speaking, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent, and also reserves some income for short-term and long-term savings. A fina
2、ncial plan can also be an investment plan, which allocates savings to various assets or projects, expected to generate future income, such as a new business or a product line, shares in an existing business, or a real estate.,Financial plan,In business, a financial plan can refer to the three primar
3、y financial statements created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as t
4、hrough borrowing or issuing additional shares of a company. While a financial plan refers to estimating future income, expenses and assets, a financing plan or finance plan usually refer to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or
5、using saved cash.,Financial planning,Financial planning is a task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the a
6、ctivities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.,Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable
7、from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set. The role of financial planning includes three categories: Strategic role of financial management Objectives of financial management The
8、planning cycle,The planning cycle Addressing present financial position Determining financial elements of the business plan Developing budgets Cash flows Interpretation of financial reports Maintaining record systems Planning financial controls Minimising financial risks and losses,The role of finan
9、cial planning,The Financial Planning activity involves the following tasks,Assess the business environment Confirm the business vision and objectives Identify the types of resources needed to achieve these objectives Quantify the amount of resource (labor, equipment, materials) Calculate the total c
10、ost of each type of resource Summarize the costs to create a budget Identify any risks and issues with the budget set,Financial Markets Relevant to Business Financial Needs,Major participants Banks Financial and insurance companies Merchant banks Superannuation/mutual funds Companies Government,Over
11、seas and domestic market influences and trends in financial markets and their implications for business financial needs Domestic Economic growth business cycle Interest rates Inflation Employment International Politics Exchange rates World events,Financial Markets Relevant to Business Financial Need
12、s,Management of funds,Sources of funds Internal Owners equity Retained profits External Short term debt Bank overdraft Bank bills,Long-term debt Leasing: operating/financial Trade Credit Factoring Venture capital Grants,Management of funds,Financial Considerations Matching source of finance to busin
13、ess purpose and structure Factors to consider in financing business activities: Set-up costs Interest costs Availability of funds Flexibility of funds Level of external control,Management of funds,Comparison of debt and equity Costs and benefits Risks Gearing/leverage Leverage is the proportion of d
14、ebt (external finance) and the proportion of equity (internal finance) that is used to finance the activities of a business.,Financial Forecasting,Preparing forecasts will help a CEO/CFO to assess likely sales income, costs, external financing needs and profitability. Financial forecasts are essenti
15、al if the CEO/CFO needs to raise money from a stakeholder, such as a bank. But they also provide the CEO/CFO with the means to monitor performance on a periodical basis and thereby exercise effective financial control - arguably the second most important management function in running a business.,Br
16、eak-even analysis,Break-even analysis identifies the point at which a business starts to make a profit. The CEO/CFO can work out the break-even point using any timescale, eg. weekly, monthly, yearly, etc. To calculate the break-even point it is needed to know the following: the total fixed costs of
17、the business - these include rent and rates, drawings, loan repayments, etc; the total variable costs for producing aproduct - these include labour, materials and packaging; and the selling price of the product.,Costing and pricing,Although accountants define costs in several different ways, there a
18、re, effectively, just two types of cost. The first cost is that which is directly attributable to the product or service. Direct costs include raw materials and sub-contract work. If the company makes desks, for example, the cost of wood will be a direct cost. Within reason, the cost will be the sam
19、e for each desk, no matter how many desks are produced.,All other costs are overheads, eg. staff salaries, marketing, rent, rates and insurance. They also include depreciation; that is, an allowance for wear and tear on capital equipment. Overheads are often called fixed costs because, generally, th
20、ey are fixed for the business.,Price,The price at which a product or a service is sold clearly needs to exceed total costs of providing it. The price should also reflect what the market can stand. If the company is selling a differentiated product or has adopted a strategy of market focus then it ma
21、y also be able to charge a premium price. If the company is pursuing a cost leadership strategy it will need to be ruthless in keeping costs down and under control.,In calculating your price you will need to follow a number of steps:,estimate likely sales for a period, e.g. one year; calculate the t
22、otal direct costs and divide by the sales volume to give direct costs per unit (e.g. per product or per hour of service); calculate total overhead costs and divide by the sales volume to give overhead costs per unit; add direct costs per unit and overhead costs per unit to give total cost per unit;
23、add a further profit margin (to allow for re-investment, etc).,Financial forecasts,Once you have an idea of your likely costs and an idea of how much you need to sell to make a profit you are in a position to prepare financial forecasts. There are three basic financial statements (the profit and los
24、s account (P and the balance sheet) that describe the activities and financial state of any business. These can be prepared on a historical basis - to show how a business performed during a defined period - or as forecasts - as estimates of how the business will perform in the future.,Three steps to
25、 forecasting,Businesses often start by forecasting their cashflow and then aim to derive other forecasts from it. It makes more sense, however, to start by forecasting the income and expenditure of the business, which will indicate whether you will make a profit, then worry about when money will be
26、received or paid out - to discover if you will have enough cash when it is needed. Income and expenditure is summarised in a profit and loss account. You will also need to look at your likely sales for, say, the year ahead. This needs to relate back to your market research and, if you are already in
27、 business, to previous performance. The direct costs can then be estimated (usually as a percentage of sales) to give gross profit. The next step is to estimate the likely overheads. Deducting these gives an operating profit forecast. If the net profit is too low you will either need to assess wheth
28、er you can achieve higher sales or whether you can reduce the overheads.,When preparing your forecasts, remember to allow for increased costs, for instance, due to inflation or future pay awards. If you do need a loan, then you will also need to allow an amount for loan interest. If you use equipmen
29、t, remember to allow for depreciation. Whilst depreciation is not included in the P&L, you may need to allow for the replacement or repairs of machinery, so you may wish to include a contingency. The P&L forecast will show whether you are likely to achieve your first key financial requirement: makin
30、g a profit.,Preparing cashflow forecasts,In preparing your forecasts, you will need to think carefully about all your costs, about your price and likely sales at that price, and about the timing of both receipts and payments. As mentioned above, the first forecast that you set out should ideally be
31、a P over the very short-term, however, the key requirement is to generate cash and know the business working capital requirements. This can best be done by preparing a cashflow forecast which should set out all the information, month by month, regarding cash inflows and outflows.,The cashflow foreca
32、st should include:,receipts of cash from customers; payments for raw materials; payments for all other expenses; drawings and wages; capital expenditure; capital, loans or grants introduced; loan repayments; VAT receipts and payments (if VAT registered); and, tax payments.,Pricing strategies,The gre
33、atest danger when setting a price for the first time is to pitch it too low. Raising a price is always more difficult than lowering one, yet there are great temptations to undercut the competition. It is clearly important to compare your prices to your competitors, but it is essential that your pric
34、e covers all your costs. There are a number of possible pricing strategies from which you might choose.,Pricing strategies,Cost based pricing Skimming Individual Loss leaders Expected price Differential pricing,Sensitivity analysis,It is important to know how sensitive your forecast is to changes. S
35、ensitivity analysis looks at what if? scenarios. What happens to your cash position, for example, if sales fall by 10%? What happens if your main supplier increases raw material prices by 12%? Sensitivity analysis is particularly used by financial institutions when considering propositions for a loa
36、n. Including a sensitivity analysis in your business plan will demonstrate that you have thought about some of the potential risks - and that is half way to avoiding them.,The Ingredients of a Financial Plan,A financial plan consists of several ingredients Expectations about the economic environment
37、 A sales forecast Pro forma (forecasted) financial statements Asset requirements Required new financing Cash Budget We will focus on developing the pro formas and the cash budget,Forecasting: The % of Sales Method,The most basic method of forecasting financial statements (income statements and balan
38、ce sheets) is the percent of sales method This method assumes that certain expenses, assets, and liabilities maintain a constant relationship to the level of sales There are two inputs to this method: A sales forecast (exogenous) The percentages which are assumed to be constant,Discretionary Financi
39、ng Needed,Ordinarily, the pro-forma balance sheet will not balance! This is intentional, and the amount needed to make it balance is referred to as the Discretionary Financing Needed, DFN (or External Financing Needed, EFN) This is a “plug figure” that represents the amount of discretionary financin
40、g that the firm will need to obtain in order to support its forecasted level of sales,The Cash Budget,A cash budget is a document which shows the expected cash inflows and outflows for a chosen time period (say, 6 or 9 months). The benefits of the cash budget are: It provides an estimate of the endi
41、ng cash balance in each month It provides estimates and sources of the cash inflows and outflows It provides a basis of comparison against which managers can be evaluated,Parts of the Cash Budget,In a simple cash budget, there are three parts: The Worksheet Area The Inflows and Outflows The calculation of the ending cash balance Essentially, a cash budget starts with the beginning cash balance, adds expected cash inflows, and subtracts any expected cash outflows. The result is the expected ending cash balance.,Thank you for your attention!,
