Understanding Finance James Shand BSc FCA CF vfdnet
Understanding Finance James Shand BSc FCA CF vfdnet – Virtual Finance Directors
Who are our Clients? § Owner Managers of businesses with a turnover £ 0. 5 m - £ 20 m who manage their own business § Business Owners who want to: § § § § Fund Raise Buy another company (Acquisitions) Prepare for their own exit Turnaround their business Enter new markets eg China Re-engineer their systems Lock in their key people § Sectors: Manufacturing / IT / Software / Technology / Marketing / Services / Retail /
Agenda § § § § Welcome & Introductions Quiz Key Accounts Statements How to work out Assumptions? What is ‘What if’ analysis? How much money? Where can I get Money? Quiz (again)
Understanding Finance Quiz Time for a Quiz Review of answers
Agenda § Which Financial Statements? § How to work out Assumptions? § What is ‘What if’ analysis? § How much money? § Where can I get Money?
Which Financial Statements? What is Profit? Why important? What is a Balance Sheet? Why is Cash Flow important?
Profit & Loss Account Performance over time: 1 Mile took just 4 Minutes “On 6 May 1954 Roger Bannister became the first man to run a mile in under four minutes, establishing himself as one of the most famous sportsmen in history”
Profit & Loss Account Performance over time
Profit & Loss Account • • Revenue Costs Direct costs Indirect costs Is VAT included?
Profit & Loss Account What is meant by Gross Profit? Examples of High / Low Gross Profit?
Where does your Profit come from? Analysis of Gross Profit by: • Customer • Product / Service • Salesman Watch out for the 80: 20 principle How does your profitability compare with the Competition?
Profit & Loss Account What are Indirect Costs? What is the other name for them?
Profit & Loss Account Putting it together – Operating Profit OPERATING PROFIT = REVENUE LESS DIRECT COSTS LESS INDIRECT COSTS OPERATING PROFIT = GROSS PROFIT LESS INDIRECT COSTS
Profit & Loss Account Profit lines: • Pre Tax Profit • Post Tax Profit • Retained Earnings Post Tax Profit = Pre Tax Profit less Tax Retained Earnings = Post Tax Profit less Dividends
Profit & Loss Account Excel Proforma P & L
Break Even Analysis
Profit & Loss Account Key points: • Do you have monthly / quarterly Accounts? If so: • Timing: When do you review your monthly Accounts? • Accuracy: Do you ever find any errors in them? • Meaningful: Do the Accounts help you make Strategic decisions about your business?
Balance Sheet “Condition at a moment in Time”
Balance Sheet Definition of an Fixed Asset? So what is Depreciation? Which Statement has Depreciation in?
Balance Sheet Other Assets: • Debtors • Prepayments • Stock • Work in Progress • Cash Other Liabilities: • Creditors • Accruals • Bank Overdraft • Customer Deposits
Balance Sheet Shareholders Equity: • Share Capital • Reserves (Retained Profit)
Balance Sheet Excel Proforma Balance Sheet
Cash Flow Cash performance over Time: 1. Revenue is Vanity 2. Profit is Sanity 3. Cash is king (keeps you in business)
Cash Flow Cash performance over Time:
Cash Flow Cash performance over Time – Receipts & Payments method • • Receipts Payments Net Cashflow ‘Bank’ Balance
Cash Flow Excel Proforma Cash Flow
Cash Flow Cash performance over Time – Funds Flow Method Operating Profit adjusted for non-cash Working capital impact Other cash movements eg Financing, interest
Cash Flow Key Cash Flow points: • • Frequency: How often do you review your Cash Position? Time Period: If you Forecast your Cash Flow - What time period do you look at?
Adequate Funding? Do you have adequate Funding for your business? Signs of cash stress: • Timing of supplier payments • Overdraft restrictive Alternative Funding Sources
Agenda § Financial Statements: Profit & Loss Account § How to work out Assumptions? § What is ‘What if’ analysis? § How much money? § Where can I get Money?
Assumptions – They Matter!
Assumptions… To Cover: • Market • Pricing • Volumes • Marketing channels & spend • Competitor impacts • Projected margins • People resource + recruitment cost • Cash required
Assumptions… Example business: • Market • Pricing • Volumes • Marketing channels & spend • Competitor impacts • Projected margins • People resource + recruitment cost • Cash required
Who should prepare it? Ø Narrative – in house Ø Numbers – get help
How do you Check the Business Plan ? ü Narrative – independent eyes ü Statements all agree ü Narrative & Financial line up ü Ability to dummy run plan ü Prepare for likely questions
Who should present? Ø Existing Team Ø Look for gaps Ø Who leads?
What is the likely Business Plan success rate ? ü Venture Capital funds receive 40 Business Plans per week (2, 080 pa) ü Only invest in 3 – 6 companies pa ü Odds of success are therefore often 1 in 700!
Agenda § Financial Statements: Profit & Loss Account § How to work out Assumptions? § What is ‘What if’ analysis? / How much money? § Where can I get Money?
How much money to raise? Ø Early indication Ø Rule of Thumb Ø Financial Modelling + ‘What if Analysis’
What if the money runs out?
Agenda § Financial Statements: Profit & Loss Account § How to work out Assumptions? § What is ‘What if’ analysis? § How much money? § Where can I get Money?
Where to get Money? Ø Bank vs Equity Ø Private Investors (Angels)
Bank Funding £ Property – Term Loans £ Equipment – Hire Purchase £ Debtors – Factoring or Confidential Invoice Discounting £ Stock – manage stock ‘turn’ £ Overdraft – committed or uncommitted? £ Directors Loan vs Company loan and Personal Guarantee
Private Investor (Angels) or PE ♫ Private Investors ♫ growth expectations ♫ Door opening ♫ Risk profile ♫ Private Equity ♫ Growth expectations ♫ Due Diligence ♫ Management ♫ Friends & Family ♫ Still commercial!
How much will it Cost? Ø Bank fundraising Ø VC or Angel fundraising
How to approach Bank / Investor? Ø Bank approach Ø VC or Angel approach Ø Grants - considerations
How to use the plan afterwards? Ø External expectations Ø Business control & actions
Why bother with a Plan B? Ø Reaction to Market conditions changing Ø Have alternatives to Plan A funding choices
Summary § Which Financial Statements? § How to work out Assumptions? § What is ‘What if’ analysis? § How much money? § Where can I get Money?
There always 2 ways to do it…
Understanding Finance Quiz re-visited! Review of answers & comparison to the start of the day.
“ Make a careful exploration of who you are and the work you have been given, and then sink yourself into that. Don't be impressed with yourself. Don't compare yourself with others. Each of you must take responsibility for doing the creative best you can with your own life “ Galatians 6 v 4
Like More Information? Ø Free Newsletter “Game Plans for Growth” written for Owners / Managers of ambitious SME businesses Ø Free Proforma P & L Ø Business Plans – Top 10 tips Ø Or Contact James Shand 01865 78 40 60 email: james@vfdnet. com Thank You
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