Operating FinanceOperating Finance

Need to know:

• Opening the bank account

• Taxation

• Insurance

Opening a Bank Account

• Complete a bank mandate form• Authorised signatures• Copy of Memorandum and Articles of Association• Certificate of Incorporation• Name of the account

Taxation

• Income Tax – Sole Traders and partnerships• Corporation Tax – Limited Companies on profits• Value Added Tax – All Businesses in excess of

certain threshold• PAYE/PRSI – Employees etc.

Calculating Taxable Profits

• Taxable profits are calculated by deducting allowable business expenses from turnover. These include:– Purchase of goods for resale– Wages, rent, rates, repairs, lighting, heating– Running costs of vehicles or machinery used in the

business– Accountancy and audit fees– Interest paid on any monies borrowed to finance

business expenses– Lease payments on vehicles or machinery for business

PAYE/PRSI

• Operates on the basis that an employer deducts tax at a specified rate from an employee’s pay.

• Must register for PRSI/PAYE• Need to make payments and returns to Collector-

General

VALUE ADDED TAX

• Taxable Persons• Rates of VAT• Register for VAT• Returns to the Collector General

NEED TO KEEP…

• Records• Returns• Information for Revenue Audits • Record of transactions• Quality Credit Control• Correct financial books

– Trading Account, P&L Account, Capital Account, Balance Sheet

• Financial Software

Insurance

• Business Insurance– Fire– Burglary/theft– All risks– Public liability– Product liability– Employer’s liability– Motor Insurance

Financial StatementsFinancial Statements

Types of Statements

• Cash Flow• Profit & Loss• Balance Sheet• Break Even Analysis• Initial Investment• Sources of Funding Proposal

Cash Flow Cash Flow StatementsStatements

Managing Small Business Accounts

• Cash Method

– Only records income when cash is received

– Only records expenses when payment is made

– But what about credit?

• Accrual Method

– Sales recorded as sale made or items ordered

– Expenses recorded when order made

Cashflow Forecast

• Gives a monthly snap shot of the amount of money coming in and going out of the company’s bank account

• Note the positive or negative cash flow

Opening Balance Jan Feb March April

Income

Cost of SalesRentHeating, Lighting, WaterTel., InternetProfessional FeesBank ChargesWagesMaterialEquipmentTransportTotal Cost

Closing Balance

Notes to Cash Forecast

• Opening Balance for each month to be brought forward amount from the previous month’s closing balance

• Sales may be up front, payment with purchase or 1, 2 or 3 months after sale – depends on type of business

• Office rent usually one month in advance• Heating, Lighting and water usually give one month credit• Telephone, Internet usually one month credit• Professional Fees usually two months credit• Bank charges and credit cards usually one month credit

Notes to Cash Forecast

• Wages and salaries usually same month• Material costs – varies but usually one month• Equipment – varies – 1, 2 or 3 months• Transport costs – varies – up front etc.

Stocking / Destocking

• Stocking – Gearing up of materials and stock to supply increasing sales (may take a few months before positive effect realised)

• Destocking – Winding down of stock as sales reduce (effect seen immediately)

Information required for cash flow forecasting

• Easy to get for some expenses e.g. insurance, selling, administrative etc.

• Owner/manager source of information• Trade Journals• Note seasonality • Avoid Estimating - aim for factual information as

much as possible

Profit & Loss Account

• Sales (volumes or values)

• Cost of Sales

• Fixed Overheads

• Variable overheads

Business NameProfit & Loss Account

Year 1 Year 2 Year 3 Year 4SalesCost of salesGross ProfitGross Profit %OverheadsStaffProductionPremisesTransportSelling and promotionGeneral ExpensesFinanceDepreciationTotal Overheads

Net Profit/ (Loss)Tax on profit / (Loss)Profit retained for Business

Break-even Analysis

• Sales Price: Can this be increased?

• Sales Volume: Can this be increased?

• Cost of sales: Can this be reduced?

• Overheads: Can this be reduced?

Break-even Analysis

• Fixed Costs– Machinery, salaries, rent, marketing

• Variable Costs– Labour, materials and variable overheads

• Income– Turnover

Break-even Analysis

• Contribution per unit sale– Equals:

• Income per unit sales-variable costs• Breakeven Point

– Equals:• Fixed Costs

Contribution per unit sales

Balance Sheet

• A snap shot of the balance between the company’s assets and the company’s liabilities on any particular day

• Fixed Assets

– Capital items not yet paid for

• Current Assets

– Actual cash in hand, actual amounts owed (debtors), Stock-in-hand (Unpaid stock as liability under creditors)

Balance Sheet

• Capital– Shareholders capital –amount invested in

business– Retained earnings – profit or loss as recorded

• Term Liabilities – Loans not due for repayment in this current year

Balance Sheet

• Current Liabilities– Bank overdrafts, – Tax payable– Creditors

2007 2006 2005BALANCE SHEETFixed AssetsPropertyPlant, Machinery, VehiclesTOTAL FIXED ASSETSCurrent AssetsBank AccountsStockDebtorsTOTAL CURRENT ASSETSCapitalShareholders CapitalRetained EarningsTOTAL CAPITALTerm LiabilitiesLoansCurrent Liabilities Bank OverdraftTax PayableCreditorsTOTAL LIABILITIES

• Initial Investment Summary€ €

1. Fixed AssetsPropertyRenovationsFixture & FittingsTransportMachines and equipmentGoodwill, security depositsOtherTotal Fixed Assets2. Current AssetsStock of raw materialStock of finished goodsWork in progressDebtorsOtherTotal Current Assets3. Liquid AssetsCashBankOtherTotal Liquid Assets4. Start-up costsPrepaid expensesPromotion, openingOtherTotal Start-up costsMargin for unforeseen costs

• Investment : Sources of Funding€

InternalPersonal Assets

Fixed assetsCarAdditional private mortgageDeferred loans (family)Other

Total person assetsIntroduced as:

EquityLoans

ExternalExternal equity Agreed

Source Y/NExternal Debt (Long term) Agreed

Mortgage Y/NLoan Y/NLeasing Y/NOther Y/N

External Debt (Short term) AgreedOverdraft Y/NSuppliers' credit Y/NPayments received in advance Y/NOther Y/N

Subsidies/Grants AgreedAgency Y/NEnterprise Board Y/NOther Y/N

Project Accounts

• WBS

– Breaks down the work into different packages.

– Each package can be assigned to a department or person

• Business Plan

– Short term estimates

– Long term estimates

– Feasibility of Project

Project Accounts

• Estimate

– Direct Costs

– Indirect Costs

– Labour Costs

– Procurement Costs

– Time related costs

– Unit Rates

– Factoring

– Estimating factoring

Project Accounts

• Sources of Finance– Personal– Investors– State Agencies– Partners– Angels– Venture Capital

Business Plan should help answer following questions:

• Who are you?• What is your product or service?• Who are your customers?• Why will your customers buy my product or service?• What price will your customers pay for your product or

service?

Business Plan should help answer following questions:

• At this price, how many products/services will your customers buy?

• How many products/services can you make?

• How much does it cost to make/deliver each unit of product/service?

• How much start-up investment does the business need?

• Is this a viable business?