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Humphry Hung , PhD 洪興立博士 Faculty of Business Hong Kong Polytechnic University. Financial Planning 27 January 2010. Financial Planning. How wealth is created?. BUSINESS PLAN (Common Version). The Business Plan is the result of a PLANNING PROCESS . ELEMENTS OF A BUSINESS PLAN

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financial planning 27 january 2010

Humphry Hung, PhD

洪興立博士

Faculty of Business

Hong Kong Polytechnic University

Financial Planning

27 January 2010

financial planning

Financial Planning

How wealth is created?

business plan common version
BUSINESS PLAN (Common Version)

The Business Plan is the result of a PLANNING PROCESS.

ELEMENTS OF A BUSINESS PLAN

  • Executive Summary
  • The Opportunity and the Company’s Services/Products
  • Market Research/Analysis
  • Economics of the Business
  • Marketing Plan
  • Design and Development Plan
  • Manufacturing and Operations Plan
  • Management Team
  • Overall Schedule
  • Critical Risks, Problems and Assumptions
  • The Financial Plan
  • Appendices
business plan competition
BUSINESS PLAN (Competition)

ELEMENTS OF A BUSINESS PLAN FOR COMPEITITON

  • Executive Summary
  • Mission statement
  • The team
  • Market summary
  • Opportunities
  • Business concept
  • Competition
  • Goals and objectives
  • Financial plan
  • Resource requirements
  • Risks and rewards
  • Key Issues
financial planning purposes
Financial Planning: Purposes

Three important uses:

  • Forecast the financial viability of the new business
  • Forecast the amount of external financing that will be required
  • Set appropriate targets for future plans
the purpose of planning
THE PURPOSE OF PLANNING

2 major audiences: management and outside investors (and the judges)

THE MANAGERIAL VALUE OF PLANNING

The Planning Process

  • Creates a cohesive unit with common goals
  • Promotes an understanding of objectives and policies
  • Forces a thinking through of everything that has to be done
  • Makes people understand what they individually have to do

A Road Map for Running the Business

  • Comparing operating performance to plan
  • Investigate deviations
  • Propose Solutions
to communicate and convince
TO COMMUNICATE AND CONVINCE

Communicates management's ideas about what the

company will be in the future

Shows: the economic viability of the project

Tells: Potential investors their expected return

Debt investors the source of repayment

why need financial plans
WHY NEED FINANCIAL PLANS?
  • Profitability
  • Years of payback
  • Initial investment
  • We need…..
  • Income statement
  • Balance Sheet
  • Cash flow statement
slide9

INCOME STATEMENT ITEMS

Sales - RevenueProceeds from sale of product or service (only)

COGSSpending on things closely related to production

Material, labor, production overheadGross MarginProfitability of production operations Often expressed as a percent of sales

ExpensesOther spending - Marketing, finance, personnel

income statement
INCOME STATEMENT

Total Sales

Less Cost of Goods Sold

= Gross Margin

Operating expenses:

salaries

space costs (rent, utilities)

advertising/PR

Other expenses

=Total Expenses

Net Profit (Loss) pre-tax

slide11

INCOME STATEMENT : An Example

Sales $1,000Cost of Goods Sold 600 Gross Margin $400 Expenses 230 Earnings Before Interest & Taxes $170 Interest Expense 20 Earnings Before Tax $150Tax 24 Net Income $126

slide13

BALANCE SHEET ITEMS : ASSETS

ASSETS

Cash

Checking accounts +Currency

Accounts Receivable

Due from sales on credit

Offset-Allowance for doubtful accounts(bad debt reserve)

Writing off of uncollectibles

Overstatement of receivables

Inventory

Raw Material, WIP, Finished Goods

Offset - Inventory reserve

Writing off bad inventory

Overstatement of inventory

slide14

BALANCE SHEET ITEMS : LIABILITIES

Current Liabilities

Due within a year

Accounts Payable

Due from purchases on credit

Terms of sale

Working Capital

Current Assets - Current Liabilities

Supports routine operations

slide15
BALANCE SHEET ITEMS : CAPITAL

LONG TERM DEBT

Bonds and Loans

Debt generates interest expense - Increases

risk of failure

EQUITY

Investment by Sheareholders

slide16

BALANCE SHEET

ASSETSLIABILITIES

Cash $1,000 Accounts

Accounts Payable $1,500

Receivable 3,000 Others 500

Inventory 2,000

CURRENTCURRENT

ASSETS $6,000 LIABILITIES $2,000

Fixed Assets Long Term Debt $5,000

Gross $4,000 Equity 2,000

Accum Depr (1,000)

Net $3,000 TOTAL CAPITAL $7,000

TOTAL LIABILITIES

TOTAL ASSETS $9,000 AND EQUITY $9,000

ASSETS = LIABILITIES + EQUITY

Arrangement in order of decreasing liquidity

managing cash flows
Cash comes in:

net from operations

new debt

sale of fixed asset

new investment

Cash goes out:

debt retired

new fixed assets

dividends

stock redemption

MANAGING CASH FLOWS
the financial plan
THE FINANCIAL PLAN

A firm's projected financial statements, generally a part of a broader business plan

MAKING FINANCIAL PROJECTIONS

  • Translating physical and economic activity into dollars
  • Forecast sales first, then forecast the support required by the implied activity

PLANNING FOR NEW AND EXISTING BUSINESSES

  • Harder to plan for a new or proposed business
  • No history - must make assumptions about everything

THE TYPICAL PLANNING TASK

  • Most financial planning is for existing businesses
  • Forecast changes to past history
  • The changes are planning assumptions

Anything about which an assumption isn't made is implicitly assumed to remain unchanged. For a new business, everything has to be explicitly assumed.

planning assumptions
PLANNING ASSUMPTIONS

THE PROCEDURAL APPROACH

Make a revenue projection

Then forecast the income statement and balance sheet line by line

until come to interest and debt

THE INTEREST/DEBT PLANNING PROBLEM

We need debt to forecast interest and interest to forecast debt.

EAT (less dividends) is added to Beginning Equity

to arrive at Ending Equity.

Ending Debt is averaged with Beginning Debt and multiplied

by the interest rate to calculate Interest Expense.

plans with simple assumptions
PLANS WITH SIMPLE ASSUMPTIONS

Quick Estimates Based on Sales Growth

Percentage of Sales Method

All line items grow by the same percentage as sales

(A very unrealistic assumption)

Modified Percentage of Sales Method

Most line items grow by the same percentage as sales

7 steps in financial planning
7 STEPS IN FINANCIAL PLANNING
  • Determine Purpose/Use of Forecast
  • Set Forecast Time Frame (matches Use)
  • Project Revenue (history & expectations)
  • Project Expenses (ratios & one time events)
  • Project Balance Sheet:
    • Investment Needs (Uses of funds)
    • Spontaneous Sources of funds
  • Calculate External Financing Need
  • SENSITIVITY TEST ASSUMPTIONS
step 1 determine purpose of forecast
Step 1:Determine Purpose of Forecast
  • Sample Purposes:
    • When to convert Investments to Cash
    • When Debt can be paid down
    • Estimating Sales Commissions
    • Setting Marketing Expense Budget
  • Typical Audiences
    • Your Bank
    • Your Management
    • All Employees
    • Investors
step 2 set forecast timeframe
Step 2:Set Forecast Timeframe

Examples:

  • 12 week Cash Budget
  • One Year Operating Plan
  • 3 Year Rolling Long Range Plan
  • 5-10 Year Strategic Plan
step 3 project revenue
Step 3:Project Revenue
  • How
    • Trends
    • Expected Change Factors
  • Components of Revenue
    • Units x Price
    • Ratio of Products to Services
  • Importance of getting it Right
  • Validation & Updating
step 4 project expenses
Step 4:Project Expenses
  • % of Sales (Top Down) Method
  • Bottom-Up (Zero Based) Method
  • FTE (Full Time Employee) or Headcount- Based Method
  • Must develop Assumption for each Expense Line… Walk Through P&L
sample expense assumptions
Sample Expense Assumptions
  • Cost of goods sold
  • % of Sales
  • Headcount, Inflation
  • R & D.
  • Inflation, Competition
  • Sales & Marketing
  • Inflation
  • General & Adm.
  • % of Fixed Assets
  • Depreciation
  • % of Intangible Assets
  • Amortization
  • % of Debt
  • Interest Expense
step 5 project balance sheet
Step 5:Project Balance Sheet
  • Normally 5 years
  • Develop Assumption for each line on Balance Sheet
sample balance sheet assumptions
Sample Balance Sheet Assumptions
  • Inventory
  • % of Sales
  • % of Sales
  • Accountable receivables
  • Replacement, Events
  • Fixed Assets
  • % of Expenses
  • Accounts Payable
  • Use to Balance
  • Notes Payable
  • Usually No Change
  • Long term Debt
  • Add Net Income less Dividends
  • Equity
step 6 calculate external financing need
Step 6:Calculate External Financing Need
  • Investment for the new business
  • Investment for further expansion
  • Credit control effectiveness
step 7 sensitivity test for each assumption
Step 7:Sensitivity Test for each Assumption

Optional Assumptions:

  • Best Case Scenario
  • Worst Case Scenario
  • Competitive Ratios
  • Calculate & consider the impact
slide32
Sales Channel

3D body scanning

Virtual fitting

Information kiosk

Cross-selling

Collect market data

Online assistance

La Tailleur

Example

La TailleurKiosk

Finalist of Asia Moot Business Plan Competition

business startup kiosk components

Example

Business Startup Kiosk Components

Processing

Unit

Telecom

Device

Body

Scanning

La Tailleur kiosk

Information

Window

Virtual

Fitting

Room

marketing plan

Example

Marketing Plan

Year 1 – 2 3 – 4 5

Phase 1

Phase 2

Phase 3

Sportswear

Overseas

Market

Business Wear

More than 40 retailers

promotion plan

Example

Promotion Plan
  • Loyalty discount
  • Intensive personal selling
  • TV and radio
  • Sports event sponsorship
  • Web banner ads
  • Personal selling
  • Trade show
  • Road show
  • Publication
  • Official web site
  • Intensive personal selling
  • International trade show
  • Overseas publication

Introductory

Growth

Maturity

Total Market Sales

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

financial plan

Example

Financial Plan

Assumptions:

  • No bad debt provision
  • No prepayment or accrual
  • Corporate profit tax is 16%
  • Our contribution 30%
  • Sales volume figures are calculated based on information projected by the Hong Kong Retailer Management Association
the deal

Example

The Deal
  • HK$10 million
  • 60% Equity Position
  • Class ‘A’ shares
return on investment

Example

Return On Investment
  • ROI = 103.63%
  • Payback = 3 Year
exit options

Example

Exit Options
  • Public Listing
  • Buy Out
    • 50 million at 5th year
  • Sales below 113 million in 5th year
    • Merger and acquisition
summary
SUMMARY

We have covered….

  • What is financial planning
  • Importance of forecasting
  • Financial statements
  • An Example of Financial Plan