CREATING A SUCCESSFUL FINANCIAL PLAN

Submitted To:Mr. Zillur RahmanAssistant ProfessorDepartment of Business AdministrationShahjalal University of Science & Technology

Group Members

Name Registration

Prodayat Das 2009731014

Sumon Debnath 2009731019

Tipu lal Datta 2009731044

Md. Sohel Rana 2009731057

Financial Management

A process that provides entrepreneurs with relevant financial information in an easy-to-read format on a timely basis; it allows entrepreneurs to know not only how their businesses are doingfinancially, but also why they are performing that way

Basic Financial Statements

The Balance Sheet

a financial statement thatprovides a snapshot of a business’s financial position, estimate its worth on a given date; it is built on the fundamental accounting equation:Assets =

Liabilities + Owner’s Equity

Basic Financial Statements (cont’d)current assets- assets such as cash and other

items to be converted into cash within one year or within the company’s normal operating cycle.

fixed assets- assets acquired for long-term use in a business.

liabilities- creditors’ claims against a company’s assets. current liabilities- those debts that must be paid within one year or within the normal operating cycle of a company.

long-term liabilities- liabilities that come due after one year.

owners equity- the value of the owner’s investment in the business.

Basic Financial Statements (cont’d)

The Income Statement a financial statement that represents a “moving picture” of a business, comparing its expenses against its revenue over a period of time to show its net profit (or loss). Cost of goods sold-the total cost, including shipping of the merchandise sold during the accounting period. gross profit margin-gross profit divided bye net sales revenue. operating expenses- those costs that contribute directly to the manufacture and distribution of goods.

Basic Financial Statements (cont’d)

The Statement of Cash Flows a financial statement showing the changes in a company’s working capital from the beginning of the year by listing both the sources and the uses of those funds.

Creating Projected Financial Statements

Pro Forma Statements for the Small Business

Pro Forma Income StatementPro Forma Balance SheetPro Forma Statement of Cash Flows

Creating Projected Financial Statements (cont’d)Pro Forma Income Statement

1. Net Sales 2 options:

a) Net Profit (Industry)= Net Profit Wanted/Net Sales or b) Net Sales=Sales Forecast

Which one is Most Likely? Optimistic? Pessimistic? Tip: Compute for Average Daily Sales

2. Estimated Monthly ExpensesPro Forma Balance Sheet-Assets

Cash:Cash Requirement=Cash Expenses/AITR* *Average Inventory Turnover Ratio

Inventory:AITR=Cost of Goods Sold/Inventory Level

Creating Projected Financial Statements (cont’d)

Pro Forma Balance Sheet-Liabilities

Accounts Payable (supplier financing) Short-term Notes PayableLong-term Notes Payable

Ratio Analysis

A method of expressing the relationship between a y two accounting elements that allows business owners to analyze their companies’ financial performance

Ratio Analysis

Liquidity Ratios: tell whether a small business will be able to meet its short-term obligations as they come due

Current Ratio: measures a small firm’s solvency by indicating its ability to pay current liabilities out of current assets=Current Assets/Current Liabilities =$686,985/$367,850=1.87:1 Good: 2:1 Industry: 1.5:1

Ratio Analysis

Liquidity Ratios (cont’d)

Quick Ratio: a conservative measure of a firm’s liquidity, measuring the extent to which its most liquid assets (minus inventory) cover its current liabilities=(Current Assets-Inventory)/Current Liabilities =($686,750-$455,555)/$367,850 =0.61:1 Good: 1:1 Industry: 0.50:1

Operating Ratios (cont’d)

Net Sales to Total Assets Ratio: measures a company’s ability to generate sales in relation to its asset base=Net Sales/Net Total Assets=$1,870,841/$847,655=2.21:1 Industry: 2.7:1

Ratio Analysis

Profitability Ratios: indicate how efficiently a small company is being managed

Net Profit on Sales Ratio: measures a company’s

profit per dollar of sales=Net Profit/Net Sales=$60,629/$1,870,841=3.24%Industry: 7.6%

Ratio Analysis

Profitability Ratios (cont’d)

Net Profit to Assets Ratio: measures how much profit a company generates for each dollar of assets that it owns=Net Profit/Total Assets=$60,629/$847,655=7.15%Industry: 5.5%

Ratio Analysis

Profitability Ratios (cont’d)

Net Profit to Equity Ratio: measures the owner’s rate of return on investment=Net Profit/Owner’s Equity=$60,629/$267,655=22.65%Industry:12.6%

Ratio Analysis

Interpreting Business Ratios

Critical numbers: indicators that measure key financial and operational aspects of a company’s performance; when these numbers are moving in the right direction, a business is on track to reach its objectives

Break-even Analysis

Break-even point: the level of operation (sales dollars or production quantity) at which a company neither earns a profit or incurs a loss

Fixed expenses: expenses that do not vary with changes in the volume of sales or production

Variable expenses: expenses that vary directly with changes in the volume of sales or production

Calculating the Break-Even PointStep 1: Determine Expenses expected to be incurred (646,000+$236,500)Step 2: Categorize the expenses into fixed and variable ($177,375+$705,125)Step 3: Calculate ratio of variable expenses to net sales ($705,125/$950,000)=74%, Contribution margin is 26%= Step 4: Compute Break-even Sales:=Total Fixed Cost/Contribution Margin as % of sales=$177,375/0.26=$686,212

Break-even Analysis

Better than Break-even Sales=(Total Fixed Expenses + Desired Profit)/Contribution Margin as % of sales=($177,375+$80,000)/0.26=$989,904

Break-even point in units=Total Fixed Costs/(Sale Price/unit-Variable cost/unit)=$390,000/($17.50-$12.10)=$390,000/$5.40=72,222

Break-even Analysis