Financial Planning for Business Start-ups PDF

 1 Financial Planning for Business Start-ups 8  Synopsis This chapter introduces students to financial management for business start-ups and small business enterprises. It focuses on the steps of preparing a financial plan. A simple example is provided...

 1 Financial Planning for Business Start-ups 8  Synopsis This chapter introduces students to financial management for business start-ups and small business enterprises. It focuses on the steps of preparing a financial plan. A simple example is provided as a guide for students to prepare a financial plan for their project. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 3  Objectives The objectives of this chapter are: To introduce the basics of a financial plan and prepare students for their practicum entrepreneurial projects. To introduce students to the financial plan for small business start-ups. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 4  Learning Outcomes At the end of this chapter, students should be able to: Discuss the basics of a financial plan for small business start-ups. Prepare a financial plan for small business start-ups. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 5  List of Topics 1. Overview of Financial Management for Small Business Start-ups 2. Financial Plan Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 6  Introduction  This chapter introduces students to the basics of financial management.  It gives an example on how to prepare a simple financial plan and how it can be used as a guide for preparing a financial plan for the entrepreneurial practicum project. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 7  1. Overview of Financial Management for Small Business Start-ups  Money or finance to a business entity is like blood to our body.  Money circulates and flows to every part of the business organization, i.e. administration, production, marketing, and finance.  It begins as money paid into the company by entrepreneur or shareholders to form start-up capital for project implementation. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 8  1. Overview of Financial Management for Small Business Start-ups  This money goes to finance: – for the purchase of assets, – to pay working capital (purchase of raw material, paying of salary, rental, etc.) and – buy other miscellaneous items. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 9  1. Overview of Financial Management for Small Business Start-ups (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 10  1. Overview of Financial Management for Small Business Start-ups (cont.)  From Figure 8.1, you should understand the following: (a) Project implementation cost is the total capital required to finance the project cost, including cost of purchasing assets, expenses for working capital (monthly expenses) and other miscellaneous items. (b) Fund sources include owner’s equity, external borrowings and contribution of owner’s existing assets. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 11  1. Overview of Financial Management for Small Business Start-ups (cont.) (c) The cash flow projection statement represents data on all monthly cash inflows (i.e. cash capital injection, sales, collection of account receivable, etc.) minus all monthly cash outflows (i.e. purchases, salary, paying of account payables, dividend, etc.) to yield the monthly cash balance. – Generally, a positive monthly cash balance is a good indication that the project is viable. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 12  1. Overview of Financial Management for Small Business Start-ups (cont.) (d) The profit and loss statement – represents the total sales in a financial period minus the cost of goods sold used to yield the gross profit. – The gross profit minus the total expenses for the period (i.e. salary, rental, utility, etc.) will yield the profit for the financial period. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 13  Overview of Financial Management for Small Business Start-ups (cont.) (e) The balance sheet represents the amount of money or value at the end of a financial period for every item listed as: i. Asset: fixed asset and current asset, ii. Liability : borrowings and account payable, and iii. Equity: capital injected and accumulated profit). – The balance sheet must be as follows: Asset = Liability + Equity Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 14  2. Financial Plan  A basic financial plan includes the following: Step 1: Project implementation cost and sources of fund Step 2: Loan amortization Step 3: Depreciation of asset Step 4: Cash flow projection Step 5: Projected financial statement Step 6: Projected balance sheet Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 15  Project Implementation Cost and Sources of Fund a) Project implementation cost  includes all the costs needed to start the business, e.g. – cost of assets: cost of equipment, renovation, furniture, etc. – working capital: cost of salary, rental, raw material, etc. – other miscellaneous items: business registration, rental deposit, contingencies, etc. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 16  Project Implementation Cost and Sources of Fund (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 17  Project Implementation Cost and Sources of Fund (cont.) b) Source of Fund  Is the sources of money to be capitalised for the business, normally from the owner’s money and borrowings Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 18  Project Implementation Cost and Sources of Fund (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 19  Project Implementation Cost and Sources of Fund (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 20  Project Implementation Cost and Sources of Fund (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 21  Loan Amortization Loan Amortization A table that schedules the principal, interest and loan balance over the borrowing period. – E.g. The loan amount is RM1,000, the duration is 4 weeks and interest is at RM10/week. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 22  Depreciation of Asset  The value of an asset depreciates over time. – The depreciation amount per year or per month is calculated based on the life expectancy of the asset. – It is deducted as an expense in the profit and loss statement. – E.g. Cost of asset (equipment)** = RM1,500 Depreciation per week = RM1,500 /100 weeks = RM15 /1 week **Note: Life expectancy of the asset is 100 weeks (approximately 2 years) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 23  Depreciation of Asset (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 24  Cash Flow Projection  Cash flow projection is the estimated total cash inflow, cash outflow and balance of cash at the end of the day, week or month. It is done for an accounting period (e.g. one month or one year).  The cash flow projection shows if there is going to be cash shortage within the accounting period, in which case, additional cash resources should be allocated through further capital injection or borrowings. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 25  Cash Flow Projection (cont.) Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 26  Example of Profit & Loss (P&L) Statement  The projected financial Income Statements For statement shows the projected Company XYZ Inc., For the year ended 31st Dec 20xx overall results of each step that has been discussed before. Total Sales / Revenue  Income statement provides the (Cost of Good Sold) expected financial performance Gross Profit for the financial periods on : (Operating Expenses) – total sale, Total Operating Expenses – cost of goods sold, – (Interest Expenses) gross profit, – (Taxes) expenses and – net profit. Net Profit Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 27  Projected Financial Statement Based on the projected income statement, Profit margin on sale = Net profit/Sale ×100% = 2,600/6,000 × 100% = 43.33% Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 28  Projected Balance Sheet  The balance sheet shows the balance for cash, asset, liability and equity at the end of the financial period.  A company that is financially healthy will have: – a high amount of cash and asset, – low liability and – positive accumulated profit instead of accumulated losses. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 29  Projected Balance Sheet (cont.) 1. Return on investment per month Project implementation cost = 2,600/2,700×100% = 96.3% 2. Return on asset per month ROA = Net profit/Total asset ×100% = 2,600/4,300 ×100% = 60.5% Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 30  Financial Statements for a Business Three (3) important statements that even a start up business should prepare: 1.Cash Flow Statements 2.Profit & Loss Statement 3.Balance Sheet Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 31  Summary This chapter introduces students to the basics of financial management. The six steps for preparing financial statements will help students in their entrepreneurial practicum project. The experience will also enhance students’ understanding on finance. Introduction to Entrepreneurship All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2017 8– 32