Session 3Sajjad Hamid

SME Consultantwww.entrepreneurtnt.com

entrepreneurtnt@gmail.com

Session OutlineWhat is financial management?Benefits of an accounting systemSupplier IssuesKnowing the Profit & Loss statementKnowing Cash Flow StatementSean Brown Business plan

Session OutcomesUnderstanding what is financial management

is aboutThe importance of an accounting systemUnderstanding suppliers and their

importanceHow to complete a simple Profit & LossHow to complete a simple Cash Flow

What is Financial Management?Is a process that provides entrepreneurs with

relevant financial information in an easy-to-read format on a timely basis; it allows entrepreneurs to know not only how their businesses are doing financially but also why they are performing that way-

Zimmerer & Scarborough

What is an accounting system?Is a system that helps the owner(s) keep track

of all accounting transactions and other financial information.

Inputs must be fed into the system and outputs registered.

Benefits of an accounting systemInterpret past performanceMeasure present progressAnticipate & plan for the futureControl operationsUncover significant trendsMake decisionsComply with gov’t regulations

Suppliers IssuesSuppliers play a key role:

You should choose a vendor that meets your requirements (timely delivery, quality products, price competitive, good reputation, etc)

Can give your credit and other benefits down the road

Can growth with you and help you growNever be afraid to negotiate for better terms

(not only on price)Hold them accountable!

Basic Financial StatementsThe Profit & LossThe Cash FlowThe Balance Sheet (we will not cover this)

The Profit & Loss StatementThe P & L (income statement) compares a

company’s expenses against its revenue over a period of time to show its profit or (loss).

It includes three key items:Sales, Gross Profit, Expenses

The Profit & Loss StatementSales $100,000Cost of Goods Sold $80,000 Gross Margin $20,000

Expenses (less) $42,000

Profit (loss) ($22,000)

The Profit & Loss StatementKey TermsRevenueThese include all sales from the businesswhether cash or credit

Cost of Goods The cost (direct), including shipping of all the

merchandise sold during the period

The Profit & Loss StatementCost of GoodsThis applies to manufacturers or wholesalers or

retailers but there is a difference when it comes to service operations.

The Profit & Loss StatementCost of Goods

Manufacturer (Coconut Bake)Direct Materials:

Flour $10.00Coconut $20.00Baking Powder $1.00

Direct Labour $1.00Cost of Goods $32.00

The Profit & Loss StatementCost of Goods

Retailer (Coconut Bake)Purchase price $40.00Pick up cost $2.00

Cost of goods $42.00

The Profit & Loss StatementCost of Goods-calculation1. To calculate Cost of goods, an easy way is

to estimate it as a percentage of sales by costing a batch of goods.Cost of goods for Coconut bake is 80% of sales.

2. The accurate way is to add your= opening stock + purchases – closing stock.

The Profit & Loss StatementCost of Goods

Landscaping (services)

You do not have cost of goods (COGS) like a selling or manufacturing operation.

However, your Cost of Sales (COS) would include all expenses that are directly attached to the service:

Direct labour, materials & other expenses but not indirect expenses; administrative & general expenses

The Profit & Loss StatementGross ProfitGross Profit margin is sales minus the cost of

goods sold.

Sales-Cost of Goods=Gross Margin$100,000-$80,000=$20,000

The Profit & Loss StatementExpensesList all expenses and create a category for

them:WagesSalariesPhoneElectricityMaterialsLoan InterestVehicle Expenses

The Profit & Loss StatementRetailer- 2005Sales $200,000Cost of Goods (sold) $120,000Gross Margin $80,000Expenses

Wages $15,000Electricity $5,000Rent $25,000Salary $5,000Loan Interest $10,000

Total $60,000Profit $20,000

The Profit & Loss StatementLandscaperSales $200,000COS $131,000Gross Margin $69,000Expenses

Salaries $60,000Phone $5,000Electricity $5,000Loan Interest (not principal) $2,000

Total $72,000Profit (loss) -$3,000

Profit & LossProjectedIf you are starting a business you will not have

any history & therefore will need to project (forecast) a P & L

This is a key document that the bank will look at.

Profit & LossProjected-steps1. Use a Monthly time period2. Estimate the sales for each month 3. Estimate the cost of sales & gross margin

for each month4. Estimate the expenses for each month5. Tally the profit & loss for each month6. Total for a year

Profit & LossProjected (6 months)

Months 1 2 3 4 5 6 Total

Sales 10,000 15,000 20,000 23,000 25,000 28,000

COGS (80%)

8,000 12,000 16,000 18,400 20,000 22,400

Gross Profit (20%)

2,000 3,000 4,000 4,600 5,000 5,600

Expenses 3,000 4,000 6,000 7,000 8,000 9,000

Profit/loss -1,000 -1,000 -2,000 -2,400 -3,000 -3,400

Profit & LossProjected (6-12 months)

Months 7 8 9 10 11 12 Total

Sales 30,000 35,000 40,000 50,000 60,000 70,000 406,000

COGS (80%)

24,000 28,000 32,000 40,000 48,000 56,000 324,800

Gross Profit (20%)

6,000 7,000 8,000 10,000 12,000 14,000 81,200

Expenses 10,000 11,000 12,000 13,000 14,000 15,000 112,000

Profit/loss -4,000 -4,000 -4,000 -3,000 -1,000 -1,000 -30,800

Cash Flow StatementThis shows the changes in the firm’s cash

movement both in (sources of funds) and out (uses of funds).

Banks are especially interested in this statement

Cash Flow StatementIn Flow (Sources) of Funds Sales (cash sales) Accounts receivable (credit sales) Loan proceeds Owner’s Contribution Asset sales

Cash Flow StatementOut Flow (Uses of Funds) of Funds Wages, Salaries Electricity Loan interest & principal Materials/stock purchases Phone Other expenses

SOURCES OF FUNDS 1 2 3

Sales (cash) 0 2,000 4,000

Sales (credit) same month 0 3,000 7,000

Loan proceeds 20,000 0 0

Total funds In (A) 20,000 5,000 11,000

USES OF FUNDS

Wages 1,000 1,500 2,500

Phone 2,000 1,500 1,500

Loan payment 5,000 5,000 5,000

Total funds Out (B) 8,000 8,000 9,000

Cash Surplus/deficit (A-B) 12,000 (3,000) 2,000

Opening balance 0 12,000 9,000

Closing balance 12,000 9,000 11,000

AssignmentComplete a projection of some of your

business expenses, sales per monthComplete a projection of cash in-flow and out

flow in the cash flow templateStart writing your business planning

QuestionsAny questions-this sessionAny questions last sessionsAny questions-Sean Brown Business Plan

Next session: Human Resources