BASIC FINANCIAL PLANNING

PART 4
Presented by:
• The Business Financial Plan commonly
appears in the overall business plan for a small
business. However, the financial plan is a self-
supporting document intended to support and
direct the actions of the business. It explains
what your business can afford, how it can afford
to do it and what the expected profits will be. For
a small business, a well-written business plan
can be the difference between you carrying the
business or the business carrying you.
Statements

• Your small business financial plan should

include standard forms that attached documents
support:
• 1. Balance Sheet
• 2. Income Statement
• 3. Cash Flow Statement
Balance Sheet
• A balance sheet is a financial statement that
reports a company's assets, liabilities and
shareholders' equity at a specific point in time,
and provides a basis for computing rates of
return and evaluating its capital structure. It is a
financial statement that provides a snapshot of
what a company owns and owes, as well as the
amount invested by shareholders.
Income Statement
• Also known as the profit and loss statement or
the statement of revenue and expense, the
income statement primarily focuses on
company’s revenues and expenses during a
particular period.
Statement of Cash Flow
• A cash flow statement is
a financial statement that provides aggregate
data regarding all cash inflows a company
receives from its ongoing operations and
external investment sources, as well as all cash
outflows that pay for business activities and
investments during a given period.
Supporting Documents

• The supporting documents of the financial plan are those

that place merit into your financial figures. Depending
on the information provided in your statements, these
documents can include:
• Stock documents,
• Life insurance policies,
• Real estate deeds,
• Tax statements,
• Bank statements and
• Register receipts and accounting ledgers.
Ratios

• The financial plan is an analysis of your business

that lenders and investors use to determine your
business’ viability. The information within this
plan helps determine your business’ financial
ratios, or scorecards. Institutions and
financial specialists use an array of ratios to
identify the information they seek about your
business.
Common Financial Ratios
• Liquidity Ratios- used to determine a debtor's ability to
pay off current debt obligations without raising external
capital.
Example : working capital ratio , also called the current
ratio, is a liquidity ratio that measures a firm’s ability to
pay off its current liabilities with current assets. The
working capital ratio is important to creditors because it
shows the liquidity of the company.
Formula:
working capital ratio= current assets / current liabilities.
Acid test ratio:

Uses a firm's balance sheet data as an indicator of whether

it has sufficient short-term assets to cover its short-term
liabilities. since it ignores assets such as inventory, which
may be difficult to quickly liquidate. The acid-test ratio is
also commonly known as the quick ratio.
Formula:
Acid-Test Ratio = (Current assets – Inventory) / Current
Liabilities
• Asset Management Ratios
The asset turnover ratio measures the value of a company's
sales or revenues relative to the value of its assets. The
asset turnover ratio can be used as an indicator of the
efficiency with which a company is using its assets to
generate revenue.

Example : debt management ratios like the accounts

payable turnover and leverage tests.
• The accounts payable turnover ratio is a short-term
liquidity measure used to quantify the rate at which a
company pays off its suppliers. Accounts payable
turnover shows how many times a company pays off its
accounts payable during a period.

Formula:
Accounts payable turnover ratio=
Net credit purchases/Average Accounts payable
• A leverage ratio is any one of several financial
measurements that look at how much capital
comes in the form of debt (loans) or assesses the
ability of a company to meet its financial
obligations. The leverage ratio category is
important because companies rely on a mixture
of equity and debt to finance their operations,
and knowing the amount of debt held by a
company is useful in evaluating whether it can
pay its debts off as they come due.
Example Formulas

Debt to Equity Ratio=

Total Shareholders’ Equity/ Total Liabilities

Equity Multiplier=Total Equity/ Total Assets

The Break-Even formula
• is one of the most important aspects of the small
business financial plan. This formula uses the
information within the income statement to determine
the point at which your company begins to generate a
profit. The break-even formula is the company’s fixed
expenses divided by its margin percentage. The margin
percentage is determined by subtracting your business’
total variable expense from its total net sales and then
determining what percentage that margin represents
Periodic Evaluation

• Periodic reviews of your financial plan will not only

assist you in keeping your small business on track, but it
also will help you to identify the areas where you need
restrictions and expansions. MasterCard International
explains that the quarterly review of the financial plan is
an effective schedule that will help to keep you ahead of
unexpected financial developments.
• Thank you!!!