A drafting financial projection guideline is a helpful tool for your business. Your marketing plan and strategy don’t mean a thing if you can’t justify your business with good figures on the bottom line. This is done in a distinct section of your business plan for financial statements and forecasts.
Management Accounts and Income Statements
A forecast income statement for the year under review is required. The losses and profits per month are to be listed under the following categories:
- Sales in Units
- Turnover (Rands)
- Cost of Sales
- Opening Stock
- Purchases
- Closing Stock
- Gross Profit
- Other Income (if applicable)
- Operating Expenses (pick those which are relevant to your business)
- Depreciation
- Accounting Fees
- Admin Costs
- Advertising, Promotions, and Marketing
- Bank Charges
- Computer and Web/POS/IT/internet Costs
- Directors Remuneration
- Employee Costs; Salaries and Wages; Staff Welfare; Staff Training; Employee Taxes; Commissions and Incentives; Payroll Taxes; Uniforms and Safety Wear
- General Maintenance
- Premises
- Royalties
- Security and Insurance
- Telephone
- Utilities; Gas
- Vehicle Costs; Fuel Costs
- Export Duties
- Public Relations
- Sundry and Petty; Wastage
- Trade Shows and Expos; Travel and Accommodation
- Parking
- Cleaning and Pest Control/Laundry/Refuse and Waste
- Meals and Entertainment
- Stationery, Books and Printing
- Donations
- Legal and Consulting Fees; Professional Fees
- Postage Delivery and Courier
- Subscriptions
- Licences and Levies
- Bad Debts
- Packaging and Consumables
- Equipment Rentals
- Transport and Freight; Logistics and Fleet Management
- Sub-contractors
- Clearing, Forwarding and Shipping; Warehousing and Distribution
- Rates and Taxes
- Franchise Fees
- Net Profit Before Tax and Interest
- Finance Costs
- Net Profit After Tax and Before Interest
- Tax
- Net Profit After Tax and Interest
- Gross Profit Percentage
- Net Profit Percentage
- Operating Expenses as a Percentage of Sales
- Interest Cover
Sales and Finance Costs can be represented on line graphs, while Operating Expenses can be shown on a bar graph. Net Profit should be depicted on two graphs, one Before Tax and Interest, and one After Tax and Interest.
Balance Sheet and Ratios
Balance sheet ratios are financial metrics that determine relationships between different aspects of a company’s financial position (liquidity versus solvency). They include only balance sheet items (components of assets, liabilities and shareholders equity) in their calculation.
A financial ratio determines a relationship between two components.
Assets:
- Fixed Assets
- Motor Vehicles
- Furniture and Fittings
- Computer Equipment
- Land and Buildings
- Current Assets
- Inventory
- Debtors
- Cash
- Total Assets
Equity and Liabilities:
- Capital and Reserves
- Share Capital
- Retained Income
- Drawings
- Non-Current Liabilities
- Loan
- Current Liabilities
- Creditors
- Total Equity and Liabilities
Ratios:
- Debtors Days
- Creditors Days
- Inventory Days
- Acid Test Ratio
- Current Ratio
- Asset Turnover
- Debt Equity
- Debt Ratio
- Return on Total Assets
- Return on Equity
Cash and Retained Income can be represented on bar charts.
Drafting a Breakeven Analysis Projection
The breakeven analysis lets you determine what you need to sell, monthly or annually, to cover costs of doing your business. A breakeven analysis depends on averaging your per-unit variable cost and per-unit revenue over the whole business.
The breakeven analysis depends on three key assumptions.
- Average Per-Unit Sales Price (Per-Unit Revenue): This is the price that you receive per unit of sales. Take into account sales discounts and special offers. Get this number from your sales forecast. For a non-unit based business, make the per-unit revenue one Rand and enter your costs as a percent of a Rand.
- Average Per-Unit Cost: This is the variable cost of each unit of sales. If you buy goods for resale, this is what you paid, on average, for the goods you sell. If you provide a service, this is what it costs you, per Rand of revenue or unit of service provided, to provide that service. If you are using a units-based sales forecast table, for manufacturing and mixed business types, you can project unit costs from the sales forecast table.
- Monthly fixed costs: Use your regular running fixed costs, including payroll and normal expenses (total monthly operating expenses). This will give you a better insight on financial realities. If averaging and estimating is difficult, use your profit and loss table to calculate a working fixed cost estimate- it will be a rough estimate, but it will provide a useful input for a conservative breakeven analysis.
The breakeven analysis should be rendered as a line graph. As sales increase, the profit line passes through the zero or breakeven line at the breakeven point. This is a classic business chart that helps you consider your bottom-line financial realities. Can you sell enough to make your breakeven volume?
The breakeven analysis depends on assumptions made for average per-unit revenue, average per-unit cost, and fixed costs. Do the breakeven analysis twice: first, with educated guesses for assumptions, as part of the initial assessment, and later on, using your detailed sales forecast and profit and loss numbers.
- Fixed Costs
- Contribution Margin
- Breakeven
Drafting a Cash Forecast Projection
A projected cash forecast is a plan that shows how much a business expects to receive in, and pay out, over a period of time.
Accounts receivable refer to the money the business is expecting to collect, such as customer payments and deposits, but it also includes government grants, rebates, and even bank loans and lines of credit.
Accounts payable refer to anything that the business will spend money on. That includes payroll, taxes, payments to suppliers and vendors, rent, overhead, inventory, as well as the owner’s compensation.
A projected cash forecast is a breakdown of expected receivables versus payables.
On the payables side of the equation, try to anticipate annual and quarterly bills and plan for an increased tax rate if the business is likely to reach a new tax level. Also pay attention to payroll cycles.
Those who want to be extra cautious with their projections can include an “other expenses” category that designates a certain percentage of revenues for unanticipated costs. Putting aside some extra cash as a buffer is especially useful for those building their first projections, just in case they accidentally leave something out.
List the opening balance for the first 12 months.
Receipts:
- Sales
- Loan
- Capital Injection
- Development Fees
- Receipts from Debtors
- Sale of Fixed Assets
Payments:
- Purchases
- Operating Expenses
- Tax Paid
- Interest Paid
- Loan Repayments
- Creditors Payments
- Purchase of Fixed Assets (specify what kind of asset it is (computers, vehicles, etc.))
- Purchase of Land and Building
Net Receipt = Receipts less Payments
Drafting a Forecast Cashflow Statement for Your Financial Projection
A cashflow forecast can be derived from the balance sheet and income statement. Forecast cashflows from operating activities before moving onto forecasting cashflows from investing and financing. Operating activities include revenues and operating expenses while investing activities include sale or purchase of assets and financing activities with the issuance of shares and raising debt. From forecasting all three activities, you will arrive at the forecast net cash movement.
The first step is to forecast cashflows from operating activities, which can be derived from the balance sheet and the income statement.
From the income statement, use forecast net income and add back the forecast depreciation. Use the forecast balance sheet to calculate changes in operating assets and liabilities. For each operating asset and liability, compare the forecast year in question with the previous year.
Changes in trade and other payables decrease total cashflows from operating activities.
All investing activity items come from specific fixed assets, or plant, property and equipment forecasts.
Most financing activity items are calculated by comparing the forecast year with the prior year.
- Cashflows From Operations
- Net Profit Before Tax
- Depreciation
- Interest Expense
- Interest Income
- Cashflow Before Working Capital Changes
- Increase/Decrease in Debtors
- Increase/Decrease in Inventory
- Increase/Decrease in Creditors
- Cash Generated From Operations
- Interest Paid
- Tax Paid
- Drawings
- Net Cashflow From Operating Activities
Cashflow From Investing Activities:
- Capital Expenditure
- Interest Received
- Net Cashflow From Investing Activities
Cashflows From Financing Activities:
- Proceeds From the Sale of Assets
- Loan
- Capital Injection
- Net Cashflow From Financing Activities
Net Change in Cash = Cash at the End of the Year less Cash at the Beginning of the Year
Drafting a Fixed Asset Schedule for Your Financial Projection
Fixed assets are tangible properties owned by a company used in the operating activities of that company. These are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings and equipment.
A fixed asset schedule contains the name of the asset, the opening balance of the asset, additions during the year, disposal during the year, depreciation rate of such asset, accumulated depreciation charge, and the current depreciation charge. The fixed asset shows a net book value for the year end and beginning of the year. The fixed asset schedule shows the true financial implication of the fixed assets to the company, evident in the net book value.
Assets include Furniture and Fittings, Computers, Motor Vehicles, and Land and Buildings.
- Net Book Value
- Accumulated Depreciation
- Cost
- Addition
- Disposal at Carrying Amount
- Cost
- Accumulated Depreciation
- Cost
- Depreciation for the Year
- Cost
- Accumulated Depreciation
- Net Book Value
Drafting a Loan Amortisation Schedule for Your Financial Projection
A loan amortisation schedule is a complete table of periodic loan payments, showing the principal amount and the interest that comprise each payment until the loan is paid off at the end of its term. While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan’s principal. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term.
The percentage of each payment that goes toward the principal amount increases. If you choose a shorter amortisation period, you will save considerably on interest over the life of the loan. Interest rates on shorter-term loans are often at a discount compared to longer-term loans. Short amortisations are a good option if you can handle higher monthly payments without hardship.
- Date
- Initial Outlay
- Opening Balance
- Capital
- Interest
- Total Repayments
- Outstanding Balance
- Days
- Rate of Interest
Contact us for more information on drafting a financial projection for your company.