Financial Planning:

Making Sense of the Numbers

Dr Robert A. Phillips
Manchester Science
Enterprise Centre
 Your Costs
Raw materials and equipment
Wages
Taxes
Utility bills gas, electric, telephone, postage
etc
Premises (Rental or Mortgage)
Delivery costs
Loan repayment
Marketing and advertising costs
Manchester Science Enterprise Centre
 Your Cash Inflows
Investments
Sales of goods
Subscriptions to services
Sale of Intellectual Property rights
Money from royalties
Sale of assets

Manchester Science Enterprise Centre

 Break even analysis
Need to sell enough product to cover
costs = Break even point
Variable costs e.g. raw materials
Fixed costs e.g. Rent, wages
Fixed costs make less of a contribution
when you make more products !

Manchester Science Enterprise Centre

 Working Capital Cycle
Cash
Collections Purchases

Accounts
Receivable Materials

Sales Accounts
Payable
Finished
Inventory
Production

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 Three main statements
Balance Sheet A snap shot of the
companies financial situation at a point in
time (e.g. end of year)
Assets, Liabilities, Owners Equity
Profit and Loss Statement From..to.
Income (Revenue) and Expenses
Cash flow Statement From .to.
Cash in and Cash out

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Flow of Cash Through a Business
Owners Borrowed Sale of Fixed
Investment Funds Assets

Cash Sales
Collection of
Accounts
Receivable
Cash
Purchase
of Fixed Payment of
Assets Expenses

Payment
Payment of
for Stock
Small Business Management, 11th edition
Dividends
Longenecker, Moore, and Petty
2000
South-Western College Publishing
Manchester Science Enterprise Centre
 Cash Flow
The flow of cash in to and out of a
business
Can be net positive or negative
Continuously moving picture
Especially important for a new start-up
company- may update daily!
NOT simply sales minus expenditure
Manchester Science Enterprise Centre
 Cash Flow

Positive
Essential Essential
Cash Flow

Profits Desirable Essential

Short Term Long Term

Cash is King
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 Analysing Cash Flow
1. Net Cash Flow +ve or ve? What are
the problems?
2. Determine main causes of problem
costs or income?
3. Profitable companies with full order
books can still fail !

Use the Pareto (80:20) Rule

Manchester Science Enterprise Centre
 Profit and Loss Statement
Reports on expenses and income over a
period of time.
Displays Profit.
How does that relate to cash?
Some Terms:
Sales/Turnover
Cost of Goods sold
Gross Profit
Net Profit

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 Profit and Loss Details
Sales
- Cost of Goods sold
= Gross Profit
- Operating Expenses
= Operating Profit or Earning before
interest and Tax (EBIT)
-Interest
=Earnings before Tax (EBT)
-Tax
= Net Profit
Manchester Science Enterprise Centre
 Balance Sheet
Assets: (everything the business Liabilities/Debt: (Everything the
OWNS) business OWES)

Current Assets Current Liabilities

Cash Creditors
Debtors Short-term loans
Stock
Long-term Liabilities
Fixed Assets Loans
Equipment Overdraft
Premises
Equity: Value of owners share of
the business

Total Assests Owners initial Investments

Retained profits/Loss

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 Why do this ?
To show investors you are profitable (or
to forecast profitability)
To identify areas where the company
could improve and identify potential
problems
To show investors you are efficient
To show customers and suppliers you
will still be around next year !
It may be required by law !
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 What do we expect
Three years of projected financial
statements Cash Flow, Profit and
Loss, Balance sheet
A break even analysis how well do
you need to do before you make a profit
?
Estimation of costs and how much
money you would ask from investors
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Happy Financial Planning

Manchester Science Enterprise Centre