Financial Planning and Control Summary

Financial Planning and Control

• Risks are inherent in business; knowledge improves success.
• Investors need a business plan to assess the venture.

Business Plan

• A sales document showcasing the business idea to stakeholders.
• Stakeholders include banks, investors, and employees.
• Financial managers compare actual results to budget for sustainability.
• Capital budgeting appraises asset purchases and project viability.
• Regular compilation of financial reports is essential for small business owners.

Importance of a Business Plan

• New businesses require an up-to-date business plan.
• Entrepreneurs often skip business plans due to perceived low capital needs or sufficient personal funds.

Financiers' Perspective

• Businesses often need external finance through equity or debt.
• Good ideas and capable people are scarce.
• Banks/SBDC invest in very few of the business plans they review.

What Financiers Look For

• Risk assessment is key.
• Entrepreneurs should invest their own equity.
• Substantial owner contribution or collateral is usually required for a loan.
• Quality of financial arguments and revenue model are critical.
• Financiers need assurance of repayment, often requiring asset security.
• Interest rates are charged based on market conditions and risk.
• Steady earnings are preferred over rapid, short-term gains.
• Realistic forecasts supported by facts are essential.
• Clearly define the business, target market, and value proposition.

Key Considerations for Financiers

• Market size matters; aim for a significant market share in a large market.
• Showcase a winning team with a strong track record.
• Provide projected cash flows, profit and loss, and financial position for at least three years.
• Summary of key financial data, ratios, and controls is necessary.
• Illustrate funding needs and how internal funding can sustain the business.

Business Plan Layout

• No fixed rules exist; entrepreneur involvement is desirable.
• External consultants can assist, but enthusiasm should be reflected.
• The provided structure is a guideline, not a strict format.

Front Page Details

• Business name and logo.
• Lead entrepreneur name.
• Confidentiality statement.
• Date.

Business Details

• Postal and physical address.
• Lead entrepreneur contact details.
• Banker details (account number, branch code, branch name, telephone & fax).
• Attorneys' details (address, telephone and fax).
• Auditors' details (address, telephone and fax).

Contents Page

• Table of contents with references and page numbers.

Executive Summary

• Brief description of the business.
• Highlights of key plan aspects.

Industry and Growth Projections

• Description of opportunity.
• Competitive advantage.
• Business concept and strategy.
• Market potential and strategy.

Profitability and Management

• The management team.

Introduction

• Business description and reasons for starting the business.
• Vision, mission, and business goals.
• Business viability assessment.

Business Description

• Comprehensive details of the proposed business.
• Product/service description.
• Market type.
• Competition analysis (SWOT).
• Owner involvement.
• Premises and location details.
• Type of ownership.
• Legal/ regulatory aspects.

Marketing Plan

• Specific target markets.
• Projected turnover/market potential.
• Sales/promotion strategy.
• Competitors' strategy.

Financial Plan

• Start-up capital requirements.
• Fixed assets and costs.
• Operating cost projections.
• Purchasing, costing, pricing strategies.
• Formulas (mark-up, gross profit, break-even point).
• Monthly profit and loss, cash flow projections.
• Statement of financial position projections.
• Contracts, records details.
• Scenarios.
• Finance required and own contribution.
• Security offered.

Management and Operations

• Organizational structure, personnel, and remuneration.
• Black Economic Empowerment (BEE) scorecard.
• Lead entrepreneur and management team details.
• Ownership, compensation, and profit-sharing.
• Tasks and responsibilities.
• Professional advisors.
• Bookkeeping.
• Legal requirements.
• Ground plan and equipment needs.
• Suppliers.

Risk and Assumptions

• Problems, assumptions, and risks.
• Contingency plan and strategy.
• Expected problems.
• New technology considerations.
• Underlying assumptions.
• Risks.

Conclusion

• Reasons for business success.
• Contribution to the economy.
• Motivation for loan.

Annexures

• Letters, research data and contracts.
• Consultant's report.
• Illustrations and photos.
• Testimonials & CVs.
• Legal documents & suppliers' lists.
• Quotations.

Business Strategy

• The business strategy describes how the enterprise will operate.
• Marketing, pricing, production, purchasing, staffing, capital-acquisition and funding strategies are key.
• Each strategy needs a budget.

Budgets

• Common budgets include: Sales, marketing, production, purchasing, personnel, and fixed capital budgets.
• Sales budget determines income and expenses.
• Other budgets are expense budgets.
• Consolidate budgets into a projected income statement.
• Break-even analysis and contingency plans are crucial.

Monitoring Performance Against Budget

• Business plans convey budgets.
• Monitor actual results against budgets.
• Implement contingency plans for significant deviations.

Budget Variances

• Variance is the difference between actual and budgeted figures.
• Analyze significant variances.
• Variances can be favorable or unfavorable.
• Investigate reasons for variances.

Variance Example

• Unfavorable insurance variance due to unforeseen tariff increase.
• Favorable interest on mortgage variance due to rate decrease.
• Key variances (gross and net profit) are most important.
• Report on financial position based on actual vs. budgeted income and expenditure.

Calculating The Cost of Debt

• Determine repayments, including interest, and match to budget.

Loan Amortization Example

• Calculate monthly premium using PMT in Excel.
• Compounded annually.
• Formula is PMT(rate, nper, pv, [fv], [type]).

Loan Amortization Schedule

• Shows principal and interest portions of each payment.
• Interest payable in month one = $\text{R} 400,000 \times 15\% \times \frac{1}{12} = \text{R} 5,000$.
• Principal portion increases and interest portion decreases over time.

Changes In Interest Calculation

-Recalculate monthly premium using PMT when rates change.
-New rate is 16% (13% prime + 3%).

Capital Budgeting

• Choose between expensive, faster machines and cheaper, slower machines.
• Weigh financing options like hire purchase vs. leasing.
• Capital budgeting helps identify projects that add value.

Project types

• Mutually exclusive projects: Acceptance of one excludes others.
• Independent projects: Acceptance of one doesn't eliminate others

Capital rationing

• Availability of funds affect decisions.
• Consider both viability and cash budget, otherwise, dire consequences for immediate cash flow of the enterprise.

Required rate of return.

-Value-added activity enriches a person.
-Required rate of return often equals personal inflation rate.

Decision making

-Capital budgeting decision are based on cash flows
-After-tax cash inflows, adjusted for depreciation, should be used.

Net resent value Tecnnique

-Net present value is calculated for each different project to facilitate a valid comparison.
-NPV is sum of the present values of all future cash flows (inflows and outflows).
-If a proposed project shows a positive new present value then it considered value.

Jordina CC Example

$NPV = \sum \frac{CashFlow}{(1 + r)^t} - InitialInvestment$
-If a proposed project shows a positive net present value then it is viable
-if the NPV is negative, it not acceptable to continue the project

Machine A and B Example

• Machine A can be bought for $R 2$ million cash.
• This machine can produce $10 000$ dummies per month at a cost of $R 3.40$ per dummy.
• Value After-tax Cash flows using the following formula:
  $After-tax Cash flow = (Revenue - Expenses) \times (1 - TaxRate) + Depreciation \times TaxRate$

The payback period technique

-Payback periods are used to evaluate proposed investment.
-Payback period is the number of years to recover the initial investment, longer payback period, the lower the firm's exposure to risks!
-The longer the firm must wait to recover its invested funds, the greater the possibility of a calamity.

Disadvantages

-Subjectively determined.
-Payback approach fails to take the time value of money into account.
-Failuse to recognise cash flows that occur after the payback period

The Internal rate of return

-IRR is the discount rate used to make the NPV exactly zero
-Machine had a negative NPV, which means that the IRR for this machine must have been lower than 20%.

How to calculate IRR

-Type the various cash flows sequentially into the cells as indicated below.
-Type in the function ‘=IRR(A1:A5)’ and press ENTER. The answer will be shown as 17.18%.

The Importance of Financial Reporting

-Required to report the state of business to the relevant authorities on an annual basis.
-This means that a set of financial statements need to be prepared for your business.

Set of financial statements

-An income statement
-Statement of cash flows
-Notes to these financial statements

Types of Financial Statements

-Statutory Financial Statements (AFS)
-Management Accounts (MA's)

Monthly Management Reports

-Cash budget and statement of cashflow.
-A VAT return.
-An EMP201 return.

Financial Statements

-Annual Financial Statements
-Wages and salaries reports
-Other monthly reports