Applying financial skills to real situations
1. Position fix2. Exploding the strategic model3. Examples of detailed projections4. Organising information5. The two big issues (Sales and Cost of Sales)6. Using the data collection “Template”7. Projections application demo8. Practice
Overview
Position Fix
Business PlanThis is the move from big picture strategy to detailed tactics. We need to explode our summary model to the multiple sales, expenses, assets and liabilities expected in business plans. (See next slide)
We will need to use a suitable financial modelling application to deal with the added detail – a spread sheet or one of the many financial modelling applications available. We use one called ProfitScout for the exercises in this element.
ButWe have already covered all the financial concepts, terms and skills we will need.
Expanding the Strategic ModelThe strategic financial model expands in depth and width for detailed projections. Month by month to capture extremes such as the maximum cash needed and into multiple sales drivers, costs, loans etc. to provide the precision needed for accurate operation planning.
Product/service 1; Product/service 2…Product/service n
Salaries, Rent, Telephones, Light Heat & Power etc.
Multiple bank loans, Directors loans, Financial Leases
Land & Buildings, Plant & Equipment, Patents, Vehicles,
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
Examples of the expanded plan – sales f’cast
Examples of the expanded plan – P & L (O/Hs)
Examples of the expanded plan – monthly cash flow
Examples of the expanded plan – Annual B. Sheet
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The sales forecast is the foundation of the financial model.
If you have only one or a few products/services it is easy to include them all in the forecast.
But what about businesses with very large product/service ranges.Using all products may be too cumbersome: too few will limit its usefulness.
The area of identifying the right product range, pricing, forecasting and reviewing sales performance can be immensely complex.
In business colour can differentiate products: in terms of financial projections products with the same price/cost structure are identical
The Sales Forecast Issue
Time to collaborate with your
accountant
Adapting product ranges for forecasting
Plan using … Advantages Disadvantages
One ”typical” product or a simple € based forecast
Simplicity Simplistic – ignores sales mix and winners and losers in the range
All items in the company’s product range
Reflect s the business reality
Is unmanageable for large product ranges
GuidanceMatch the range in the model to the range you use for practical sales forecasting in the day-to-day running of the business .
Common work-rounds are: breaking the range into categories or using the 80/20 rule consigning the less important to a catch-all “others” category.
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The Sales Forecast – Evidence
You will need evidence to support the assumptions underlying all aspects of your plan and particularly to back up the sales forecast.
See p162 for a checklist of the sources of
evidence required
The second defining issue for your financial model will be the detail required for the cost structure of the model.
Time to collaborate with your
accountant
The “Cost of Sales” Issue
Obviously the issue does not arise in Service plans and Retail plans have a simple purchase price/selling price for each product in the forecast.
But, manufacturing firms can have extensive product cost structures that take great time and effort to build into a model and can quickly swamp it in detail.
Such detail may be justified In large corporations with specialist staff and integrated MRP systems but is not justified in 99% of business plans.
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Adapting cost structures for forecasting
We will use the “Retail” format for the Template and Exercise
If you need a data collection template for a detailed manufacturing plan contact:
Unless you can be sure that the extra effort to include detailed cost structures in the model is justified use the “Retail” format.
Keep the detailed workings/cost sheets on which the summary cost is based as part of the EVIDENCE supporting the model assumptions.
Template
Exercise
Organising the information
Be systematic - use the data collection template to organise the information needed for the plan.
Template
1. Product information2. Credit phasing3. Opening balances (Interest, Vat, bank)4. Overhead expenses projections5. Fixed Asset details6. Financial Leases and Loans7. Share Capital, Revenue Grants and other income
Be able to produce evidence to support the data in each of the seven areas!
1. Product informationTemplate
Get reliable information/evidenceThink through the issues
2. Credit phasingTemplate
Get reliable information/evidenceThink through the issues
3. Opening balancesTemplate
Get reliable information/evidenceThink through the issues
4. Overheads expenses projectionsTemplate
Get reliable information/evidenceThink through the issues
5. Fixed assets detailsTemplate
Get reliable information/evidenceThink through the issues
6. Financial leases and LoansTemplate
Get reliable information/evidenceThink through the issues
7. Share Capital, Revenue Grants, and Other Income
Template
Get reliable information/evidenceThink through the issues
Demo
Walk through the detailed financial forecasting application to be made available for the exercise e.g.A programmed spread sheet ProfitScout ® (download from www.profitscoutsoftware.com )Another planning application
Exercise 6
Contact usIf you need exercises for other settings including detailed manufacturing plans contact:
• A programmed spread sheet • ProfitScout • Another planning application
Explodes our summary model to the multiple sales, expenses, assets and liabilities expected in business plans. Projects the business model over twelve months to produce detailed financial projections and examines new issues raised by this three dimensional financial model
Exercise 6 – WB Bikes Limited
Use the Templates to capture the data needed for your business or study project.
Practice 11
Build the financial model on a spread sheet, ProfitScout or other application if that is appropriate or collaborate with your accountant/course leader on theirs.
Use your knowledge of the Business/Financial model relationship to test What-ifs? and explore, explore and explore until you have the best possible plan.
Time to collaborate with your
accountant
Practice 11 – Preparing your own Financial Model & Projections
Good luck
If you have followed FaBeducation’s course to here you are well prepared to hold fluent conversations in the language of business and make financially smart decisions
Please contact us at:[email protected] you have any suggestions for changes or additions to the programme or If you need further information and assistance.
Best of luck with you business career.
