Guest Lecture

Presented by:
S. Moyo
04.04.2025
Financial Engineering Department
[email protected]
FINANCIAL PLAN
Chapter 5
 Learning Outcomes

1. Identify financial 4. Analyse the proforma

objectives & assumptions financial statements

2. Explain sources and 5. Compute financial ratios

uses of funds & evaluate company
performance
3. Calculate the Break-
6. Highlight the exit
Even Point (BEP)
strategy for investors
 INTRODUCTION
• Financial plan is last chapter of the business plan.
• It reflects and ties together all decisions made in previous
chapters.
• Financial plan is crucial for the success of the start-up /
business.
 FINANCIAL OBJECTIVES
• State 2 or 3 main financial objectives for your startup
Examples:
• To achieve Gross Margin of 60% annually
• To realise profits of $200 000 by year 2025
• To earn Return on Investment (ROI) of 25% per annum
NB: Do not use words like ‘to increase’ since this is a new
business venture that has no historical performance metrics.
 FINANCIAL PLAN ASSUMPTIONS
• Provide assumptions for each of the 3 projected financial
statements.
• Develop realistic sales projections underpinned by market
research.
• Financial projections must be build from clear marketing
assumptions and pricing plans.
• Income and expense assumptions must be factual and
verifiable. Do not use unrealistic profit margins.
• Assumptions for balance sheet presentations should be
conservative.
 CAPITAL REQUIREMENTS & MIX
(Use of funds & Sources of funds)
• List fixed assets and current assets required for the business
• Estimate all pre-opening expenses
• Calculate total start-up costs
• Indicate how the start-up costs will be financed. This is
known as the capital mix.
• Sources of funds can be a mixture of equity and debt
 START-UP COSTS
Start up Capital Assets Start up Expenses
• Equipment & Machinery • Rentals and deposits
• Vehicles required
• Fixtures & Fittings • Business licensing and
permits
• Computers
• Insurance
Start up Current Assets
• Salaries
• Raw material stock
NB: Use realistic figures
• Cash & Bank balances sourced from industry
 SOURCES OF CAPITAL
EQUITY:
• Internal Shareholders DEBT:
• External Investors • Banks
• Retained Earnings • Suppliers
• Shareholder Loans
DEBT/ EQUITY • Friends & Family
• Business angels
• Venture capitalists
BREAK–EVEN POINT ANALYSIS
 BREAK-EVEN ESTIMATES

First define what is a unit for your business.

It could be a product, number of clients, labour hours,
jobs or projects.
Three things to be estimated to find break-even point:
1) Selling price per unit, or sales
2) Variable costs per unit, or cost of sales
3) Overhead or fixed expenses
 FIXED & VARIABLE COSTS
• Fixed costs do not change over a given range of unit sales
volumes e.g. rent, salaries, utilities, insurance etc
• However, once a business scales beyond current capacity,
fixed costs may increase; larger offices, more staff etc
• Variable costs respond directly and proportionately to
changes in activity level or volume e.g. raw materials,
delivery costs, direct labour, packaging, commission,
• When there is no production, job, project, client there are
zero variable costs.
 CONTRIBUTION PER UNIT
• Contribution = Sales – Variable Costs (S-VC)

• Contribution per unit = Sales per unit – Variable Costs per

unit

• Contribution margin = Sales – Variable Costs

Sales
 BREAK-EVEN POINT
• Break even point (BEP) = Fixed Costs
(in units) Contribution

OR = . Fixed Costs .
Sales – Variable Costs

• High or low BEP depends on the type of industry

 FINANCIAL STATEMENTS
Check out these websites for financial statement templates:
Score.org
Vertex42.com
Liveplan
 PROJECTED FINANCIAL STATEMENTS
• Financial section of the business plan is very important
• It helps to understand and steer a business
• It helps to get funding from lenders or investors
• Financial statements show both short term and long term
vision of a business
• Investors or lenders may have a preferred way of presenting
financial statements
• Banks interested in monthly projections for first year,
quarterly projections for second year and annual projections
for third year
PROJECTED FINANCIAL STATEMENTS (Cont.)
• Proforma Financial Statements are projected statements.
• These statements are forecasted and are forward looking.
• Chapters 1 to 4 of your business plan feed into the financial
statement forecasts
• Use realistic projections and know your business
- e.g. Ratios need to be in line with industry averages
• Indicate collateral available e.g. stocks, equipment, vehicles
• Include proposed repayment schedule for lenders or exit
strategy for investors.
 FINANCIAL PROJECTIONS TEMPLATE
Create own financial statement templates or use online templates
or any other Apps.
At a minimum, show these worksheets:
• Sources & uses of funds worksheets. Figures from Chapter 1
• Assumptions sheet. State realistic estimates
• Sales / revenue forecast
• Expenses summary. Figures from Chapters 1 to 4.
• Break-even point. Determines minimum sales volume or value
 PROJECTIONS TEMPLATE (Cont.)
• Projected 12-month Cash Flows. Figures from expenses
summary
• Projected 3-year Cash Flows. Figures from 12month CFs &
assumptions sheet
• 3-year P&L projections. Figures from 12-month projected CFs.
Add non-cash items like depreciation
• 3-year Balance sheet projections. Figures from sources and
uses of funds; Profit and Loss statement
NB: For each projected financial statements, indicate the
assumptions /notes. Write a short commentary on company
performance
Lastly analyse KEY ratios and write a short commentary
PROJECTED CASHFLOW
STATEMENT
 PROJECTED CASHFLOW STATEMENT
• It shows cash that comes in a business and cash that goes
out of the business in a given time frame
• It shows if a business is financially viable
• It shows when business is low on cash. Arrange a bank
overdraft
• It shows when business is high on cash. Buy assets
• It is normal to have a negative cash flow projection in the
first months of starting operations.
 SALES FORECASTING
• The break-even point can provide a starting point for
creating the sales forecast.
• Forecasting using the Unit Method
List all the products to be sold.
Develop a sales forecast using the following equation:
Price per unit × Number of units sold = Sales
NB: The marketing plan must agree with sales volume and
price. The production plan must support this level of
production.
 OVERHEAD EXPENSES FORECAST
Use realistic figures obtained from the market.
• Rent
• Insurance
• Marketing & Distribution
• Salaries and Wages
• Security
• Office supplies
• Telecommunications
• Electricity
• Fuel
• Motor vehicle expenses
• Repairs and maintenance
PROJECTED PROFIT & LOSS
STATEMENT
 PROJECTED PROFIT & LOSS STATEMENT

• Also known as Statement of Comprehensive Income

• The purpose of the Income Statement forecast is to
project the revenues and expenses of your business
over a given period of time – usually one year.
 PROJECTED PROFIT & LOSS STATEMENT
• Sales = Price (of product) x Quantity sold
• Cost of Goods Sold (GOGS) = Cost (of product) x Quantity sold
• Gross Profit = Sales – Cost of Sales - Direct Expenses
• Operating Profit = Gross Profit – Overhead expenses
• Net Profit = Operating profit – Interest – Extraordinary items
• Profit after Tax = Net profit – Tax
NB: It is normal for a start-up business to record a loss in the first
year of operation.
PROJECTED BALANCE SHEET
 ASSETS FORECAST
FIXED ASSETS Intangible Assets
(tangible assets that are for • Patents / Trademarks
long term use) • Goodwill
• Land & Buildings • Franchise fees
• Equipment
• Machinery Other Assets
• Computers • Investment property
• Motor vehicles • Life insurance
 ASSETS (Cont.)
• CURRENT ASSETS
(assets that can convert to cash in less than 1 year)
• Cash
• Bank balance
• Trade Debtors
• Stocks
• Short term investments
• Prepaid expenses e.g. insurance
 LIABILITIES & EQUITY FORECASTS
Current Liabilities Long-term Liabilities
(less than 1 year to (more than 1 year to
maturity) maturity)
• Trade Creditors • Long term loans
• Short term loans
• Bank overdraft Shareholders’ Equity
• Accrued expenses • Ordinary shares
• Provision for taxes • Retained earnings
 EQUITY FINANCING

1. Investment
– This is the equity investment raised by the business owners.
2. Retained Earnings
– These are the profits, after income tax, ploughed back into the
business to ensure its growth.
 DEBT FINANCING (LIABILITIES)
1. Supplier Credit
• Sometimes a supplier will provide credit to their customers.
Usually this is for stock.
2. Bank Term Loan
• A bank loan (asset financing / lease hire) is usually used for
financing the capital assets of the business
• The loan is repaid over a period of time, and the interest rate
may be fixed or floating.
3. Bank Overdraft : used to finance current assets
RATIO ANALYSIS
 RATIO ANALYSIS
Research on prevailing ratios used in your industry and carry
out the analysis:
• Profitability analysis
• Liquidity analysis
• Activity analysis
• Leverage analysis
Use trend analysis for ratios
Compare the ratios with industry averages
 RATIO ANALYSIS (Cont.)
PROFITABILITY RATIOS
• Contribution Margin = Contribution / Sales
• Gross Profit Margin = Gross profit / Sales
• Operating Profit Margin = Operating Profit / Sales
• Net Profit Margin = Net Profit / Sales
• Return on Equity (ROE) = Net Profit / Owners Equity
• Return on Asset (ROA) = Net Profit / Total Asset
 RATIO ANALYSIS (Cont.)
LIQUIDITY RATIOS
• Current Ratio = Current Assets/ Current Liabilities
• Quick / Acid test Ratio = (Current Assets – Stock)/ Current
Liabilities
• Working Capital Ratio = Working Capital/ Sales
 RATIO ANALYSIS (Cont.)
ACTIVITY RATIOS
• Debtors Collection Period = (Debtors x 365) / Sales
• Stock Turnover ratio = (Stock x 365)/ Cost of Goods Sold
• Creditors Payment Period = (Creditors x 365) / Purchases
• Sales to Assets = Total Sales / Total Assets
 RATIO ANALYSIS (Cont.)
LEVERAGE RATIOS
• Debt to Equity Ratio = Total liabilities/Owners Equity
• Debt Ratio = Total Liabilities/Total Assets
• Debt Coverage Ratio = (Net Income + Depreciation)/Current
Maturities of Long-Term Debt
• Interest Coverage Ratio = EBIT / Interest Expense
NB: EBIT is Earnings Before Interest and Tax
 RATIO ANALYSIS (Cont.)
COMMENTARY
• Ratios are useful when compared over a period of time
(trend analysis)
• And when compared with companies in the same industry
or with industry averages.
 EXIT STRATEGY
• An exit strategy should be spelt out from the onset.
• It is a plan on how the founders, investors and other
stakeholders will leave when they no longer want to be
involved or associated with the business.
• The reasons vary from realizing the gains from company
growth, minimizing losses or changing ownership.
• The main exit strategies include: Initial Public Offering (IPO),
Merger, Acquisition, Management Buy Out (MBO),
Liquidation.
 CHAPTER 5 OUTLINE
• Financial objectives
• Financial plan assumptions
• Capital requirements (uses of funds)
• Capital mix (sources of funds)
• Start-up assets and expenses (start-up costs)
Break-even analysis and decision making
• Variable cost per unit
• Contribution per unit
• Breakeven point
 CHAPTER 5 OUTLINE
Projected Financial Statements
• 12 Months projected Cashflow Statement
• 3-year projected Cashflow Statement
• 3-year projected Profit & Loss Statement
• 3-year projected Balance Sheet Statement
• Ratio Analysis and Commentary
• Exit Strategy
 ASK

ME

ANYTHING