C6 Business Plan

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C6 Business Plan

• Finance for Start-Up Businesses

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C6 Finance for Business Start-Ups

• Aims
• To understand the main financial statements of
  any business.
• Objectives
• At the end of this session participants should be
  able to
• Understand the purpose and meaning of the Cash
  Flow forecast and statement, the Profit Loss
  account, the Balance Sheet, and the relationship
  between them.

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Financial Statements

• There are three basic financial statements
• The Cash Flow Forecast (or Statement) summarises
  expected (or actual) cash receipts into the
  business, and payments made from the business.
• Profit Loss account (PL) shows how a business
  performed over a specific period and shows the
  total revenue (money in) and total expenditure
  (money out) over that period.
• The Balance Sheet is a statement at a given point
  in time. It provides a snapshot summary of what a
  business owns or is owed (assets) and what it
  owes (liabilities).

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The Cash Flow Forecast

• The cash flow forecast shows all cash receipts
  and cash payments - expected by the
  business.
• Usually cover a period of one year (first year
  forecast).
• Probably the first financial statement produced
  by a start up business.
• It should highlight for the entrepreneur just how
  much cash will be needed to get the business off
  the ground.

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Typical student cash flow forecast
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Example DVD entrepreneur

• The DVD entrepreneur plays in a band who have
  recorded some songs and recently played at the
  Student Union, which a friend put onto digital
  video.
• The entrepreneur thought that there was a
  potential market for a DVD containing the
  recorded songs and the live performance.
• After buying a DVD recorder and software for
  135, and some blank DVDs, the entrepreneur set
  about tapping into the market.

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Example DVD entrepreneur

• The blank DVDs cost 1 each to buy, but could
  only be bought in batches of 50.
• The DVD entrepreneur sold them mainly to fellow
  students for 4 each.
• In month 2 sales were slow so the DVD
  entrepreneur had some posters and flyers printed
  for a total cost of 40.
• The results are shown on the example Cash Flow
  Statement.

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DVD Entrepreneur Cash flow Statement
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Example DVD entrepreneur

• Questions?
• In this example of the DVD entrepreneur, what was
  the maximum cash the entrepreneur needed in the
  bank to operate, and when?
• With hindsight, could the entrepreneur have
  operated with less cash?

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Profit Loss account (PL)

• The P L shows
• The revenue (i.e. the income of the business) for
  the given period (e.g. April 5th 2004 to April
  4th 2005 tax year).
• The expenditure for the same period.
• How much profit there was (after subtracting all
  allowable expenses from the revenue)
• How the profit has been divided (e.g. to business
  owners, to directors, to staff, to other
  shareholders)

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Profit Loss account (PL)

• A profit and loss account is
• A summary of business transactions for a given
  period - normally 12 months. By deducting total
  expenditure from total income, it shows on the
  "bottom line" whether your business made a profit
  or loss at the end of that period.
• Produced primarily for business purposes to
  show owners, shareholders or potential investors
  how the business is performing.
• Most of the information is also used by the
  Inland Revenue to work out your tax bill.

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Simple Profit Loss summary for DVD entrepreneur
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DVD Entrepreneur Profit Loss Statement
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Example DVD entrepreneur

• Questions?
• What are the key differences between the is the
  Profit Loss and the Cash Flow statements?
• How much money did the DVD entrepreneur make from
  the business over the year?

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The Balance Sheet

• The Balance Sheet is used in three ways
• For reporting purposes as part of a limited
  company's annual accounts.
• To help you and other interested parties such as
  investors, creditors or shareholders to assess
  the worth of your business at a given moment.
• As a tool to help you analyse and improve the
  management of your business.

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The Balance Sheet

• A balance sheet shows
• Fixed assets - e.g. what the business owns.
• Current assets - e.g. what the business is owed.
• Current liabilities - e.g. what the business owes
  - short term.
• Long-term liabilities debts, loans, including
  owner's capital.

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Typical student balance sheet
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DVD EntrepreneurBalance Sheetfor 1st year
trading
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Financial Performance

• It is important to measure a business
  performance, one useful measure is Return on
  Capital Employed or ROCE.
• In the example Capital Employed 304.
• Return on Capital Employed Net Profit 18.
• ROCE 380/304x100 125.
• Bank Interest _at_ 6 gives 304x6 322
• Net profit from bank 380.
• The DVD entrepreneur did much better than the
  bank!

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Useful Finance Resources

• Ready made blank Excel spreadsheets for
• Balance Sheet
• Profit Loss
• Cash flow forecast (and statement)
• Handout with explanations of statements, ratios,
  and a worked example.
• http//www.businesslink.gov.uk
• Home gt Finance and grants gt Cash flow gt Financial
  and management accounts the basics

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Activities - Prepare your own financial
statements

• Sources of income student loans, parents,
  part-time work, vacation work, your own business.
• Expenditure accommodation, meals, transport,
  books, entertainment etc.