financial analysis in buisness plan

BE analysis

helps buisness detemrine point thier reveue equal their total costs

• useful to acess fincial viability and make informed decion abt rpicking, produciton levels and sales targets

• helps for buisness to plan goals for units sold, minmums and production levles

good BE value

if BE sales/units are low in comparison to poteinial sales and the slaes are long lasting in nature

• BE=  30% - 50% capacity

• high margin and high capacity

ok BE values

value that meets buisness expectations, allows buisness to cover costs and operate without incuring loss but not leave much room for sig. profit or expansion

•  Break-even at 60% - 80% capacity

• leaves some but not much room for shocks

• requires consistent steady sales to stay profitable

scary BE values

if very large number of unit/sales of BE and buisness knwos it can’t in long tern obtain, operating below break even

sensitivity analysis and its use

used to evalue how changes in a variable or assuption can impact net income

• crucial for start ups because they operate in dynamic enviorments where uncertaintes in key variables can sig. impact their sucess

process of sensitivity analysi

1. create base case for net income comutation

   1. variables like price, quantiy, and varialbe and fixed epxpienses

2. idneitfy variables most likely to change

3. select 2 or 3 variables

4. define worse and beest case scenarion

5. comput net income at these values and see what impact thye have on it

cash flow gap assesemnt

cash flow gap - when having more money going out than coming in

• cash inflow less than cash outflow

short term cash flow gap

tempory short falls

• buisness not liquid for part of year but shortage is resolved within the accoutning period

• could be due to timing of sales, collections of account recivealbes, cusotmer payemetns

• common for seasonal buisness, start ups, contracters

how to manage ST cash flow gap

• increase cash INFLOW

  • manaage AR - get ppl to pay you quicker - monitor custioer creidt usage and adjust credit limt, negoiate discounts for pyaing earlier involces

  • obtain highe rmoney of cash inflows- more sales or places to sell

    • raise prices, incerase amount of cusotmers/frequeincies of purchases- deposits

• reduce cash outflow

  • reduce or elimnate costs

  • manage inventoyr - just in time

  • negoatte favorable payemnt terms with suppliers and AP

  • stagger payments, lease instad of buy

• use working capital finaicng

  • line of credit

  • operating line

long term gap

cash flow gap that isnt respovled iwhtin one accooutnign period

• coudl be due to bigger probelms with firm/products/managment

  • increased comp=less sales

  • ineffiecnt equipmant usage

  • decrease in maket demand

  • climate change

how to manage longterm cash flow gaps

• strageies

• changing market

• exit market

• STARTUPS

  • investors, bank loans, lines of credit

why cash flow gap for start up is usally large

• heavy start up costs, scale, marketing branding

profitiablity analysis

assessing a comapnys abilty to generate profit in reation to its costs, expenses nd investment

what does tools does a profitabilty analysis include

• net profit margin

• ROI

• Vertical analysis

• growth ratios

• EBITDA

net profit margin

net income/reveune

• refelcts comapnies abilty to generate earnings after all expenses and taxes

• each time a sale is made, the company earns the % of the profit margin

retnurn on investment what does it refelct

return as a percentage of the orginal owner investment

vertical analysis

techinique that standardizies ficnial statments by indrotroudicng a common demonomatier

• income statment wehre each line item is expressed as percentage of total revenue

  • base is revenue value

use of vertical anlaysis

• refelcts contributon of each expens and income categeory to total revune

• useful for comparison over time or to competition

growth ratios - reveune groth rate

( current reveune- last year reveue)/ last year revenue

• reflects rate revenue is increasing

growth ratio - profit growth rate

(current year net profit - last years) / last years

• measurres rate profits are increasing

EBITDA

• proxy for cash flow - easiest calculation to calculate cash flow - how much money does a compnay have

• used as a common metric to compare to other buisnesses

  • used for valuations

• can indicate prfoitabllity

EBITDA why add taxes back in

• becasue they can be deffered and are cumulative, and can change province to procinve and dpending on how good your accounting in

EBITDA why add intrest back in

want to know what the buisness earns regardless of how much debt they carry - allows you to use as a common metric for comaprison

EBITDA why add deprication/amoritization back in

because its non cash, not an expense you actaully pay

• and in real life

EBITDA margin =

(EBITDA / Total SALES) x100

Financial ratios - pay back period

time it takes to earn back the money you put into a statr up of the buisness

• length of time requried to reach a BE point for that investment

finacial ratios - interst coverage ratio

mesaures how easilty firm can meet its curent year intrest payemnt with its avialbe erarnings - imkprotant b/c intrest cant be delayed or changed easily

• green= much larger than 1, = the moer firm is able to pay its debts

• yellow = close to 1, low ratio, possibly troube to pay intrest

• red= less than 1, not able to pay annual itnrest

quick and current ratios

measures firms ability to meet shrot term obligations - LIQUIDITY

• green = larger than 1= can meet obligations

• yellow = close to 1, close to not being able to pay current obligations

• red = less than 1, wont be able to pay current obligations

debt to equity ratio

measures proiton of comapnys debt realtive to equity

• gives insight into how coapny is finacing assets by comapring tis total debt to shareholders’ equtiy

  • less than 1= comapny has mroe equty than debt= conservative fincail structure

  • greater than 1 = company has more debt whihc can increase fincial risks

why opening balace sheet is important for startups

want to know what your starting point is

• and for investors and ledners, they want to know what the levearge is ( how much are you putting in and how much do you want someone else to put in)

• want to see how money is in equity, and how much debt - need to knwo if its reasoanble amount of edebt to equity

• can’t start a buienss wht more debt than equity

  • 1:1 should be the max

KPIs

meetrics that are improtant to a buisness as they provide valuable insigts for decison maing and stragetic planning

• start ups need to tailor thie KPIs to align withtheir buinsess objectives, industry and growth stage

• most likley to be included in ficnalial part of buisness plan

differnce between kpi and fincacial ratios

similar, ratios can be KPIs but not all KPIs are fincail rations - can be non finacnial ( chrun rate, cusotmer statsfication etc.)

• FR

  • are more standard

  • what bankers and investrs look to assess a business

  • tend to be one point in time

• KPI

  • more specifc to firm

  • used more by managment for day to day

  • more dynamic

how is pay back period useful for buisenss pallnning

insight for

• project evaluation

  • reivew of itming ot get money ack and data for invesment allocation

• liquidty - tiing to review when ivnestment money return

• risk assemsnet

  • long tim frames= risker as it is far in the future