FINANCIAL OBJECTIVES Plan small business Finances Manage small

FINANCIAL OBJECTIVES Plan small business Finances / Manage small business finances 24/05/2014 The financial function of the business operation involves measuring financial per formanceto reflect total operational performance. The aim in managing financial performance should be to maximise net profit and net cash flow surpluses of the oper ation. The two main financial performance measures, therefore, are net profit and net cash flow. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 1

Each indicator for any given period is calculated as follows: Plan small business Finances / Manage small business finances 24/05/2014 total income total expenses = net profit total receipts total payments = net cash flow surplus Net profit is calculated as the excess of income over expenses of the operation for a given period. Income is the earnings of the operation; expenses are its running costs. Net cash flow surplus is calculated as the excess of receipts over payments for a given period. Receipts are the cash inflows of the operation; payments are its cash outflows or outgoings. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 2

Plan small business Finances / Manage small business finances 24/05/2014 The key financial performance measure to be shown as a business objective is net profit for the period. Other measures of financial performance, including net cash flow surplus, depend upon the profit measurement. The annual profit target for each year in the plan period is arrived at by deducting forecast expenses from forecast income for the period. The bottom line profit target must be acceptable as well as achievable. An achievable profit depends on the accuracy of income and expense forecasts. An acceptable profit target, however, should at least equal the minimum amount required for the operation to remain viable. This minimum profit amount required is sometimes referred to as the normal profit of the operation. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 3

Plan small business Finances / Manage small business finances 24/05/2014 As a guide, an acceptable annual net profit should be sufficient to: • remunerate a business owner for the time and effort put into the business • provide an adequate return on the owner's funds invested in the business. An adequate remuneration should at least equal what you could earn as an employee for the same time and effort put into your business BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 4

BREAK EVEN ANALYSIS Plan small business Finances / Manage small business finances 24/05/2014 A break even analysis should be done before preparing financial plans for your opera tion. You should know the sales break even point that is, the level of sales necessary to meet total business running costs. You can also use break even analysis to determine the level of sales required to achieve a desired profit target. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 5

BREAK EVEN ANALYSIS Plan small business Finances / Manage small business finances 24/05/2014 BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 6

BREAK EVEN ANALYSIS Plan small business Finances / Manage small business finances 24/05/2014 BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 7

Step 1: Estimate likely business costs Plan small business Finances / Manage small business finances 24/05/2014 Business running costs (or expenses) can be identified for each operating function shown in your business plan. Some of the main running costs for each operating function are as follows. Marketing expenses: • advertising and promotions • rent • delivery costs (outwards) • motor vehicle running costs (petrol, repairs, maintenance, depreciation, registration, insurance) • packaging. Production expenses: • depreciation factory plant and equipment • repairs and maintenance factory plant and equipment. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 8

Purchasing expenses: Plan small business Finances / Manage small business finances 24/05/2014 • • • trading stock purchases raw materials purchases job materials purchases delivery costs (inwards duties and customs charges Personnel expenses: • • gross wages, including PAYG tax (excluding owner's drawings) wage on costs (e. g. workers' compensation insurance, employee superannuation, training costs, staff amenities) gross contractors' fees, including any PAYG tax advisers' fees (e. g. accountant's fees). BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 9

Financial and administrative expenses: Plan small business Finances / Manage small business finances 24/05/2014 • interest paid • bank charges • legal fees (e. g. licence/permit fees) • stationery • electricity • telephone • postage • depreciation office furniture and machines general business insurances • ISP Fees • other general expenses. Expense estimates should reflect realistic expectations and be consistent with your proposed business strategies. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 10

Step 2 Categorise costs as fixed or variable Plan small business Finances / Manage small business finances 24/05/2014 For break even analysis purposes, business running costs identified are categorised as being either fixed or variable costs. • Fixed costs (i. e. overheads) are constant. They do not change when sales volumes change provided the business does not change its operating capacity. Examples of fixed costs are rent, depreciation, wages and interest paid. • Variable costs change proportionally to changes in volumes of business activity. When sales volumes change, these costs generally do so too. Examples of variable costs are stock purchases, raw materials purchases and job materials purchases. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 11

Step 3 Calculate the contribution margin Plan small business Finances / Manage small business finances The sales income of the business must be enough to cover its variable costs and fixed costs as well as the required profit. TI 1 e contribution margin is the excess of sales income over the variable costs of the business for the period. The contribution margin measures how much sales contribute towards meeting fixed costs and desired profit. The contribution margin can also be expressed as a percentage. The contribution margin percentage measures how much in each sales dollar contributes towards meeting fixed costs and profit. The contribution margin (%) is calculated as follows (for the period): Contribution margin on sales (%) = Sales income ($) Variable costs ($) x 100 Sales income ($) 24/05/2014 BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 12

Plan small business Finances / Manage small business finances 24/05/2014 For example, your business's estimated sales income is $316 000 for the year and its variable costs are expected to be $194 000. The contribution margin is: $316 000 $194 000 = $122 000 The contribution margin (%) on sales is: $316 000 $194 000 x 100 = 38. 6% $316 000 This means that each $1 of sales contributes 38. 6 cents towards fixed costs and profit. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 13

Step 4: Calculate the break even point Plan small business Finances / Manage small business finances 24/05/2014 With a knowledge of the contribution margin (%), you can find the business's break even point the level of sales at which income equals expenses (costs) so that neither a profit nor a loss is made. The break even level of sales is calculated as follows (for the period): Break even point of sales ($) = Fixed costs ($) Contribution margin on sales (%) BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 14

The following estimations are made for your business for the year: Plan small business Finances / Manage small business finances 24/05/2014 Sales Fixed costs Variable costs Net profit (before tax) $380 000 $150 600 $182 400 $47 000 Variable costs ($182 400) as a percentage of sales ($380 000) are 48%. This means that 48 cents of every sales dollar is used to cover variable costs, while 52 cents must cover fixed costs and profit. The contribution margin (%) is: $380 000 $182 400 X 100=52% $380 000 The break even point of sales is therefore calculated as follows: $150 600 = $289 615 0. 52 At this sales level, all costs are covered and there is no profit. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 15

Plan small business Finances / Manage small business finances 24/05/2014 Annual break even sales can be shown separately underneath forecast profit statements in your business plan. You can also use break even analysis to find the level of sales required to cover costs (both fixed and variable) to achieve any desired profit target. The desired sales level is calculated as follows (for the period): Required sales ($) = Fixed costs ($) + Desired profit ($) Contribution margin on sales (%) BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 16

FINANCIAL PLAN GUIDELINES Plan small business Finances / Manage small business finances 24/05/2014 The financial plan is always the last component plan attempted in the plan building process for a business plan. It is prepared after completing the marketing and any production, purchasing and personnel plans for the operation. A financial plan is the financial expression of the objectives and strategies for all operational functions, such as marketing, production, purchasing and personnel. These objectives and strategies are shown in the other component plans. The financial forecasts in the financial plan must be consistent with all the other aspects of the operational plan. Realistic and achievable financial forecasts will enable you to evaluate the viability of a proposed operation, as well as to set measurable targets to achieve. If you are seeking a loan, lenders will always examine the financial forecasts and look at how you intend to control the financial aspects of the business. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 17

. Plan small business Finances / Manage small business finances 24/05/2014 BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 18

Plan small business Finances / Manage small business finances 24/05/2014 F. 1 PERSONAL FINANCIAL POSITION To begin financial planning, assess the personal financial position of each business owner. This requires the preparation of two personal financial statements (see Figure 7. 1). To determine how much personal capital you have available to start the business, prepare a current statement of personal net worth. This will list all your assets (what you own) and liabilities (what you owe). The difference between your total personal assets and total personal liabilities is your personal net worth (which may be a surplus or a deficit). Lenders will require a statement of personal net worth to assess your history of financial success and whether your security is adequate. The format of a statement of personal net worth is shown in Figure 7. 1. If you jointly own an asset or owe a liability, show only your share. The second personal financial statement to prepare is a current statement of monthly personal expenses. Your statement of monthly personal expenditure could include the items shown in Figure 7. 1. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 19

. Plan small business Finances / Manage small business finances 24/05/2014 BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 20

Plan small business Finances / Manage small business finances 24/05/2014 Convert all annual or quarterly outgoings to monthly equivalents. For example, annual car insurance for $600 would be $50 per month. Knowing your personal commitments will help you calculate the amount of cash drawings you will need to take from the business. Your business must be able to support and maintain your lifestyle. BSBSMB 402 APlan small business finances / BSBSMB 406 A Manage small business finances 21