BASIC FINANCIAL PLAN FOR BUSINESS START-UP

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Basic Financial Planning for Business Start-ups

Dr. Sharon Ong

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Learning Objectives (1 of 2)

1. Describe how to prepare the basic financial statements

and use them to manage a small business.

2. Create financial statements.

3. Understand the basic financial statements through ratio

analysis.

4. Explain how to interpret financial ratios.

5. Conduct a break-even analysis for a small company.

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The Importance of a Financial Plan

• Common mistake among business owners: Failing to

collect and analyze basic financial data.

• Many entrepreneurs run their companies without any kind

of financial plan.

• About 75% of business owners do not understand or fail to

focus on the financial details of their companies.

• Financial planning is essential to running a successful

business and is not that difficult!

Financial Plan

•A basic financial plan includes the
following:

Step 1: Project Implementation Cost and Sources of Fund

Step 1: Project Implementation Cost and Sources of Fund

Step 1: Project Implementation Cost and Sources of Fund

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Step 2: Loan Amortization Table

Step 3: Depreciation of Asset

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Step 3: Depreciation of Asset

Step 4: Cash Flow Statement

Step 4: Cash Flow Statement

• Cash flow is the estimated total cash inflow, cash outflow and balance of cash at the end of the day, week or month. It is done for an accounting period (e.g. one month or one year).

Step 2: Cash Flow Projection

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• Purpose? The purpose of the cash flow statement is to show where an entities cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time (usually quarterly and annually).

Step 4: Cash Flow Statement

Step 4: Cash Flow Statement

Step 5: Financial Statement

Based on the projected income
statement,
Profit margin on sale
= Net profit/Sale ×100%
= 2,600/6,000 × 100%
= 43.33%

The projected financial statement
shows the projected overall
results of each step that has been
discussed before. Table 8.6
shows the projected income
statement which gives the
expected financial performance
for the financial periods on total
sale, cost of goods sold, gross
profit, expenses and net profit.

Step 6: Balance Sheet

•The balance sheet shows the
balance for asset, liability, and
equity at the end of the financial
period.

Asset = Liability + Equity

• Assets

• Non-current assets

• Fixed assets are used and depreciated by a company

for more than a year, and thus, they are considered
non-current assets.

• Current assets

• Current assets are short-term assets that can be

converted into cash within a year. Examples of these
assets are cash, stock (raw materials), account
receivables and other short-term investments.

Step 6: Balance Sheet

• Owners’ Equity

• Owners’ equity refers to the original capital contributions from the

owners or shareholders in terms of cash or assets plus the
accumulated amount of net profit. However, if the company suffers
a loss, the amount of loss will be deducted from the original equity
contribution.

• Liabilities

• Liabilities are the amounts owed by the company to outsiders.

They are categorized as current liabilities and non-current liabilities
(long-term liabilities).For example, accounts payable.

• Non-current liabilities or Long-term liabilities refer to the long-term

obligations of the company that mature in a period of more than
one year. For example, bank loan.

Step 6: Balance Sheet

The balance sheet shows the balance
for cash, asset, liability and equity at the

end of the financial period.

Return on investment (ROI) per month:
= Net profit/Project implementation cost (total cost
of the investment)

×100%

= 2,600/2,700×100% = 96.3%

Return on asset per month:
= Net profit/Total asset ×100%
= 2,600/4,300 ×100% = 60.5%

Asset = Liability + Equity

Step 6: Balance Sheet

Ratio Analysis

• Ratio analysis:

– A method of expressing the relationships between any

– A method of expressing the relationships between any

two elements on financial statements.

– Important barometers of a company’s health.

• Studies indicate few small business owners compute

financial ratios and use them to manage their businesses.

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Basic Financial Statements (3 of 3)

• Statement of Cash Flows:

– Shows the change in the firm's working capital over a

period of time by listing the sources and uses of
funds.