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WEEK 8 & 9 BUSINESS FINANCIAL MANAGEMENT
1. OBJECTIVES FOR FINANCIAL PLANNING • To identify the capital needed in order to execute the busines. • To identify possible sources of finance where applicable. • To ensure sufficient starting capital. • To evaluate business viability before any investment implementation. • As a guideline for business implementation.
FINANCIAL PLANNING – AN INTERLINKING BETWEEN BUSINESS FUNCTIONS (cont.) MARKETING BUDGET PLANNING BUSINESS FINANCE MANAGING CONTROLLING OPERATIONAL BUDGET ADMINISTRATIVE BUDGET
2. STEPS IN FINANCIAL PLANNING • Gather financial information (marketing, operation, administrative), • Prepare table of business implementation cost, • Prepare sources of financing, • Prepare cash flow pro forma (financial statement), • Prepare income statement pro forma.
Elements in Business Implementation Cost (cont.) • Purchasing or fixed assets: • Also known as Investment Capital. • Any cost to acquire fixed assets for business. • Fixed assets is any assets to harness business revenues and their benefit/usage is usually more than a year. For examples; vehicle, building, land, machine, furniture, etc. • Generally involves large cost because their long usage period. • Basically need to consider their depreciation. • Depreciation will reduce the fixed assets’ value for every year.
Elements in Business Implementation Cost (cont.) • Working Capital: • Capital needed for every daily/monthly business expenditure. • Three general categories: • Production expenditure; cost to produce a business product. Examples; direct labour cost, factory rental, utility bills, maintenance, etc. • Administration expenditure; cost to manage the company’s activities for smoothness of overall operation, Examples; wages for manager, executive, clerk, office rental, office supply and utilities, etc. • Marketing expenditure; cost for selling and marketing activities. Examples; wages for sellers, allowances, commisions, promotions, transportation, distribution, etc.
Elements in Business Implementation Cost (cont.) • Other cash requirements: • Other than fixed assets and working capital. • Usually non-recurring. • Usually being imposed once only during business start-up. • Examples: • Deposit for utilities, space rentals, etc. May get back those deposits once left from business. • Start-up expenditures. Cost for business registration, lawyer fee, professional service, training, stamp duty, etc.
Elements in Business Implementation Cost (cont.) • Contingency Expenditure: • Cost for any unforeseen matters during business start-up. • Generally, the allocation is between 5% to 10% from the previous elements in business implementation costs. • Usually, businessman will use their own judgments in determining the allocated expenditure.
3. HOW TO EVALUATE THE BUSINESS FINANCIAL PERFORMANCE • Usually by using: • Income (Profit/Loss) Statement • Cash Flow Statement • Balance Sheet Statement
I. Income (Profit/Loss) Statement • Reports the profitability of the business for a given period. • It compares revenue and expenses/resources used up to generate revenue. • Basic elements: • Sales – revenues/business income • Expenditures – cost of production and operational • Profit and Loss – difference between sales and expenditures; if positive, the business gain profit, and vice-versa.
II. Cash Flow Statement • Also known as ‘source and application’ of fund statement. • Reports the sources and usages of funds for a given period. • It compares the inflow and outflow of cash. • It also can assists knowledge on: • either the business have excess/surplus or shortages of cash, • total cash needed to cover the shortages, • when the business have surplus to pay back any short term loan.
III. Balance Sheet Statement • It is a statement of financial position. • Reports the company’s assets, liabilities, and owner’s equity for a specific date. • It shows the position or ending balances of company’s assets, liabilities, and equities. • Formula: • Asset = Liability + Equity
Balance Sheet Statement (cont.) • What is assets: • Either fixed assets or current assets. • Current assets = any assets that can easily turns into cash, such as account receivable (credit sales), inventories, supplies, and pre-payment expenditures (upfront). • Fixed assets = any assets to harness business income, such as land, building, factory, renovation, vehicle, machine, equipment, furniture, etc.
Balance Sheet Statement (cont.) • What is liabilities: • Any claims toward business assets, such as debt, obligation, etc. • Types of liabilities: • Short term; such as account receivable (credit sales) • Long term; such as bank loan which usually need more than one (1) year of monthly installments. • What is equity: • The ownership claims on total assets (total assets – total liabilities).