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Introduction to Business Planning. Content : Business Plan Overview Financial Plan. Business plan overview (1). The Three « C » to the Business Plan: CONCEPT CUSTOMERS CAPITAL. Business plan overview (2). CONCEPT What business are you in ? Why is it the right business for you to be in?

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slide1

Introduction to Business Planning

  • Content:
    • Business Plan Overview
    • Financial Plan
business plan overview 1
Business plan overview (1)
  • The Three « C » to the Business Plan:
    • CONCEPT
    • CUSTOMERS
    • CAPITAL
business plan overview 2
Business plan overview (2)
  • CONCEPT
    • What business are you in ?
    • Why is it the right business for you to be in?
    • What would you like your business to be famous for?
    • What do you sell?
    • Why will people buy from you?
    • Who are your competitors?
    • How can you stand out from the crowd?
business plan overview 3
Business plan overview (3)
  • CUSTOMERS
    • Who are (and will be) your customers?
    • What benefits do you (can you) provide them?
    • How many of them are there?
    • How many customers do you need?
    • What are their buying patterns?
    • Where do they currently buy?
    • How will they know about you?
business plan overview 4
Business plan overview (4)
  • CAPITAL (or CASH)
    • How much capital do you need?
    • How can you maintain cash flow and liquidity?
    • How much working capital do you need?
    • What kind of budgets should you follow?
    • How can you control your finance?
    • How much growth can you afford?
business plan overview 5
Business plan overview (5)
  • OUTLINE OF A BUSINESS PLAN (sample)
    • 0) Cover sheet and confidentiality agreement
    • 1) Executive summary- critical issues
    • 2) Company summary
    • 3) Services
    • 4) Market analysis summary
    • 5) Strategy and Implementation summary
    • 6) Management Summary
    • 7) Financial Plan
business plan overview 6
Business plan overview (6)
  • WORKING GROUP SESSION (1 hour max)
  • You are know preparing your own business plan.
  • Try to define what kind of information,or documents you need for each item as presented in the previous slide :OUTLINE OF A BUSINESS PLAN (sample)
financial plan 1
Financial plan (1)
  • It is now time to put all these hypotheses on a calculator to build a financial plan :
    • Constructing a financial plan does not require only technical competence.
    • Determining relevant hypotheses demands a sound professional judgment and a good knowledge of the business.
financial plan 2
Financial plan (2)
  • 1) Financial assumptions
  • 2) Projected P&L
  • 3) Projected Balance Sheet
  • 4) Projected Cash Flow
  • 5) Key Valuation Measures
  • 6) Sensitivity Analysis
financial plan 3
Financial plan (3)
  • 1)The Financial and Overall Assumptions
    • a) on Revenues : (P&L)
      • Tariff evolution
      • volume,…
    • b) on Costs : (P&L)
      • Price evolution
      • salary, ...
    • c) other (P&L, CF, BS)
      • interest rate
      • tax rate
      • ...
financial plan 4
Financial plan (4)
  • Building a financial plan requires the construction over the project ’s life (usually from three to ten years) of :
    • a P / L,
    • a balance sheet,
    • and a cash flow statement.
  • You must know the general structure of those documents. The figures you use to fill in those documents derive from your assumptions about your business.
financial plan 5
Financial plan (5)
  • A P / L (Profit and Loss statement or Income statement) lists all the revenues and the expenses generated by the project.
  • Revenues and expenses are classified according to their function (operating v.s non-operating; cost of revenue, SGA, depreciation, other).
  • Five key indicators: Gross Margin, EBITDA, Operating income, EBIT, NI.
financial plan 6
This general framework can be adapted to take into account the specificities of your business.

Extraordinary expenses and revenues are excluded from this forecasted P / L due to their non predictable nature.

Financial plan (6)
financial plan 7
Financial plan (7)
  • Projected Profit & Loss
financial plan 8
Financial plan (8)
  • The BS presents on the one hand the assets necessary to carry out the project, and on the other hand, the origin of the funding (liabilities or equity - capital stock or retained earnings; internal versus external).
financial plan 10
Financial plan (10)

Projected Balance Sheet

financial plan 11
Financial plan (11)
  • The projected cash flows is document that list year per year the sources of cash inflows and cash outflows :
    • operating activities
    • financing activities
    • investing activities
  • The cumulative external funding must be null or positive each year.
financial plan 12
Financial plan (12)

Projected Cash Flows

financial plan 13
Financial plan (13)
  • The P / L, the balance sheet and the projected cash flow statement are closely connected :
    • The issuance of debt has an impact on the BS (liabilities), on the PL (interest) and on the projected cash flow (new resources).
    • Think also about : dividend policy, sales cut, an increase in inventory prices,…
  • Constructing financial forecasts is a play - replay game.
financial plan 14
Financial plan (14)
  • Constructing forecasted financial statement is helpful to evaluate:
    • the external funding required,
    • to have a quick view of the future business.
  • However, we are not yet able to answer the question: Is it worthwhile, on an economic point of view, to invest in this project ?
  • This is the objective of the next section.
financial plan 15
Financial plan (15)
  • Key valuation measures
    • a first step requires to compute some relevant ratios on the projected financial statements:
      • Profitability : Gross margin, net profit, return on assets, return on equity...
      • Activity: Turnover growth, Collection Days,…
      • Debt ratios : Debt to Capital, Short term liabilities to Short term assets
      • Liquidity ratios: Current ratios, Cash flow to debt
      • other ratios
    • a temporal comparison, a benchmark with leading competitors or comparable firms should help to evaluate the global relevance of the business model.
    • A break even analysis must also be performed to test the sensitivity of the results to the macroeconomic conditions.
financial plan 16
Financial plan (16)
  • Valuation method
    • The evaluation of any investment opportunity involves three discrete steps :
      • estimate the relevant cash flows
      • calculate a figure of merit for the investment
      • compare the figure of merit to an acceptance criterion.
financial plan 17

Year 0 1 2 3 4 5 6 7 8 9 10

Cash flow ($40)7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 17

Financial plan (17)
    • A figure of merit is a number summarizing an investment’s economic worth.
  • Imagine that you know the cash flows generated by a project.
  • How to transform this sequence in a single figure?
financial plan 18

7.5

17

1 2 3 4 5 6 7 8 9 10

40

Financial plan (18)
financial plan 19
Financial plan (19)
  • The Net Present Value (NPV) principle:
    • How much would you like to earn in one year to lend me $ 100 today?
    • The equivalence principle.
    • Excel example.
financial plan 20
Financial plan (20)
  • Sensitivity Analysis and Risk Analysis
    • OBJECTIVE : to check the impact of variances in assumptions which were used for the projected business plan.
    • METHODOLOGY : to analyse the most sensible parameters in the business such as price erosion, volume growth, Market share, capital expenditure (Capex) needs, …
financial plan 21
Financial plan (21)
  • CONCLUSION
    • IT’s MORE THAN IMPORTANT TO TAKE TIME TO THINK THROUGH YOUR ASSUMPTIONS AND OBJECTIVES.
    • PLANNING IS THE KEY TO BUSINESS SUCCESS
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