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| Date post: | 06-May-2015 |
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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
