Financial Plan for a Startup Business - Literature review Example

?Financial plan for a startup business Content Methodology 4 Introduction 3 Methodology 4 Uses of data 5 Process of analysis 7 Sources of data 11 Conclusion 11 Appendices 13 References 15 Financial plan for a startup business Introduction A business plan is a written down description showing the future of a business. It is a detailed work schedule that analyses al future aspects of a business. The plan is not just a document to be prepared and stored it is a vital blue print of any business that should be referred to from tm to time to see if the plan is being followed and for compliance reasons. With god business plan, the future of the business is certain and all future occurrences will be met with certainty. For a stat-up business, plan is used by business to determine its future survival and viability. Businesses cannot run effectively without a plan. Most plan make assumptions about the future. Any assumption made should be made with great caution as failure for the assumption to hold, the whole plan might be jeopardized. A successful business plan should be prepared based on past experiences fact and empirical data. It requires lo of expertise to prepare a concrete plan for a start-up business that has no past records experience. This paper will focus on the financial side of a business plan by reviewing overall financial records for all industries that are components of a plan. The financial plan of a start-up business will be based on the size of the proposed business. This means that it will rely mainly on assumptions. Analysis will be done o the future cash flows, incomes and expenses, balance sheet, capital, profitability and financial ratio analysis. The major assumption that will be used in the plan will be: The prevailing market and economic conditions prevail. Methodology The plan will be prepared based on projection of financial statements. This requires a detailed survey of the market to ascertain he various issues that may hinder productivity. Clear projections on the profit will be used to estimate the cash flow statement and the income statement. The tables provided in the appendix will be used for this financial plan. The revenue earnings, net profits, the cash flows have been forecasted for a period of the next three years after starting the business. According to Lemieux (2013), The various parameters that have taken into consideration for evaluation of the net income of the firms are the general, selling and administrative expenses, depreciation, regulatory expense, insurance costs of the company, rental charges to be paid for the establishment of the business, cost of advertising, utility bills, etc (Lemieux, 2013, p.39). These expenses are adjusted to the gross earnings to form the net earnings of the company. The net earnings of the company are important for the calculation of the net operating cash flows. The net operating cash flow has been forecasted to be 35500 pounds which is expected to increase gradually in the next two years. There are investment cash flows for firms which would involve cash outflows for purchase of fixed assets of the company and other capital expenditures. The cash out flows on account of investment activity of the business is valued at 16250 pounds. The investment activities are expected to increase in the first three years as the business would focus on increasing their market share. The cash outflows due to financing activities would be due to the interest payment for the debt incurred from the bank and the interest paid to the creditors. The cash outflow for financing activities of the business would be 15650 pounds that is anticipated to increase in the next two years. The net cash flows for the business have been forecasted to be 3600 pounds which is expected to increase by 10% in the next two years as shown in Table 4 in the Appendix. Uses of the data The profit and loss statement and the balance sheet have been forecasted as a part of the business plan and have been presented in Table 2 and Table 3 respectively in the Appendix. The risk associated with this business could be determined by considering the impacts of the unsystematic and systematic risk factor affecting the business performance. The unsystematic risks in the start-up business are due to the uncertainty in business performance that is specific to the company. The unsystematic risks in the project could be diversified by taking appropriate measures to hedge the risks. The systematic risks are unavoidable and are also termed as market risk that arises due to the uncertainty of the performance of the industry. The total assets of the company have been projected to increase year after year with the increase in business operations of the company in the industry. It has been assumed that the company would not face difficulties in acquiring long term loans due to strong financial performance as indicated in the balance sheet. This will be crucial for a start-up business as it will determine its long term debt financing. Also the business is like to be able to pay the interest amount in the schedule time. Based on the estimated fixed cost, variable costs and the long term asset growth, the breakeven calculations for the business have been done as shown in the tabular forms given below. In case of fluctuation of industry wide financial parameters like the interest rates, occurrence of recession, etc. the business of tour and travel would be exposed to the systematic risks in the industry that could not be avoided. The increase of interest rate would increase the interest payments of the payments of the business and as a result of the increase in cash outflows, the business would require more time to reach the breakeven point. The occurrence of industry wide recession would also decrease the activities of tour and travel for which the company is likely to face the risk of slowdown of the business performance against the projected values. The analysis on the financial ratios will be important for business decision making. The financial ratios provide summarized information about the business operation. For instance, the leverage ratios will be used to provide insight to the business owners about the effectiveness of the capital employed. The profitability ratios based on the projections will enable the owners of the business to determine viability of the business and effectiveness in operations. Such information is important in capital budgeting. Process of analysis The financial requirement of the business in the start up stage could be explained with the help of startup capital expenditures and the funding requirements as presented in the Table 1 given in the Appendix. A new business is required to incur the cost of acquiring long terms assets for starting the initial stages of the business as well as meet the costs of working capital requirements and the expenses to be incurred for the purpose of sustenance of the business. The expense to be incurred for acquiring the long term assets of the company is 25000 pound sterling. The current asset to be acquired by the company for running the business operations is 58000 pounds which includes the cash and the cash equivalents. Thus the total requirement of finances for a new business for acquiring the assets amount to 83000 pounds. There are miscellaneous expenses that are to be incurred by the business in the startup stage. This includes the regulatory expenses, expenses for office items; start up booklets to be printed and distributed, consultancy fees for staring the business, rental cost, insurance cost, electricity and telephone bills, professional fees, etc. These expenditures add up to total amount of 28500 pounds. Thus the total expenditures in the startup stage required by the tour and travel company are 111500 pounds. Thus the business has a financial requirement of 111500 pounds. The most reliable source of the fund available to the business is in the form of contribution from the owners of the company. The owners are the businessmen who would strive to attain a high return on investment and at the same time would share the risk of the company (Flynn, Uliana and Wormald, 2012, p.84). The available funds from the owners amount to 19500 pounds that is required to meet the financing requirement of the business in the startup stage. The other sources of fund in order to meet the financing requirements are the bank loans that could be availed by the business. In order to meet the asset funding requirements, the new business could acquire a bank loan amounting to 92500 pounds. By accumulating the contribution from the owners and the borrowings from the bank, the company would able to meet the total financing requirement which has been depicted in Table 1 in the Appendix. Ratio analysis: this is the calculation and interpretation of the various financial ratios. As mentioned above, the ratios provide summarized financial information whose interpretation can be used as a basis of decision making for the company. Leverage ratios These are used to determine the ability of the business to meet its obligations. They also determine the capital mix or structure for the business as this directly affects the operating income. If the business will have high variable costs, the income after the breakeven point will lower because as output increases, the variable costs increase too. The most important leverage ratio is the debt-equity ratio. It is calculated as follows: Debt-equity ratio = From the financial data projection in the appendix tables, short term debt = 8000, long term debt = 9250 and equity= 20000 + 28500 (owner’s contribution add retained earnings) Debt equity ratio = 100500/48500 = 2.0 this represent data from the first year. This is a high ratio showing that the business is highly risky as most of the financing is on debts. This will be crucial to the business owners as it will make them change the capital structure. Interest coverage ratio: it shows the ability of the business to make interest payments for the debts it owes. It is calculated as: Interest coverage ratio = operating income /interest expense. From the appendix table 2, operating income for year one = 31076 and interest expense = 8000 Interest coverage ratio = 31076/8000= 3.885. This is a high ratio which means that the business will gave difficulties in meeting interest obligations it owes debtors. Liquidity ratios Current ratio: It measures the ability of the business to meet its short term debt obligations based on the non-fixed assets it owns. It makes use of the forecasted cash flows in paying short term debts. It is calculated as: Current ration = current assets/current liabilities. From the data given in the projected balance sheet from appendix table 3 , current assets in year one =68000 and current liabilities for that year amount to 8000. The current ration therefore becomes 8.5. This is a high ratio which denotes that there is a lot of cash that is un-utilized hence should be invested. The optimal current ration should lie between 1.2 and 2. Working capital: this is described as a measure of the cash flows for a business. It is recommended that for any productive business, this figure should be a positive number. It denotes investments in capital investments that result in a quick turn over. It is an important figure to lender as they will determine the ability of a new business to weather during hard times. A minimum working capital is sometimes set by some lender so the business must keep that figure for it to access credit (Tarantino, 2010). Breakeven analysis This is a feasibility study to show how the new business must operate so that it can remain in the industry, that is, it does not make losses. It shows what the revenue must amount to so that all the expenses are covered. This is important for a startup business at it will determine its minimum working capacity. From the information on projected sales, revenues and expenses, the table below summarizes the break-even analysis: Long term assets 25000 Total cost 2818644.00 No. of units 8064 Total cost per unit 349.53 Total variable cost 2792644 Variable cost per unit 346.31 Breakeven sales (?) 7753.85 This means that the business’ sales revenue must be at least ?7753.85 so that it does not incur losses. Sources of data Analyzing an existing business in the same industry will help in coming up with the projected data. The new business’ projected capacity can be based on the available data about the industry. Other financial information about the new business can be estimated by analyzing all the stages of the startup, the initial operations and the projections after the business is well established. The professional fees are important expenditures that are to be incurred by the new business in the startup stage in order to take appropriate suggestions from the professionals for establishing the business. The various professional that are required to be consulted by the owners in the startup stage includes the lawyer, chartered account, registrar of companies where applicable, etc. The owners will need to pay professional fees for the services received from them. The professional fees are included as other expenditures in the projected profit and loss statement. By paying the consultation fees, the business of tour and travel would be able to legal advises and useful advice for managing the business from the chartered accountant. Conclusion The projected profit and loss statement shows that the sales volume is expected to increase year after year after the start of business operations. It has been assumed that the pricing of the new business have been appropriate in the initial stages of the business. The volume of the customers has also been assumed to increase year after year due to the satisfactory services. Due to this, the net profits of the new business have also been projected to increase on an annual basis. The funding requirement is required to be met by the business with the help of various sources of funds available to the company. This is important insight into a new business as all the important aspects can be determined before the business even picks up. With the help of this plan, any new business will flourish and stay in the industry for long as business failure is associated with poor planning. Appendix Table 1 Expenses (Start-up) (in ?)   Assets (in ?) Regulatory Expenses 500   Total current assets 58000 Office Items 500   Total non-current assets 25000 Start-up Booklets 1000   Total assets 83000 Consultancy fees 2500   Liabilities (in ?) Cost for insurance 500   Short term debt/ borrowings 0 Rental expenses 2500   Non-current liabilities 92500 Computers 20000   Total liabilities 92500 Utilities, others 1000   Capital (in ?) Total expenses 28500   Owner's contribution 19000 Assets (Start-up) (in ?)   Shareholders' funds 0 Cash 40000   Total Investments 19000 Current assets 18000   Expenses at start-up 28500 Fixed assets 25000   Total Capital -9500 Total assets 83000   Total Liabilities and Capital 83000 Total start-up cost 111500   Total Funding 111500 Table 2 Budgeted Income Statement (in ?) Year 1 Year 2 Year 3 Sales 2862720.00 2977228.80 3096317.95 Cost of Sales 2790144.00 2901749.76 2988802.25 Gross profit 72576.00 75479.04 107515.70 Gross profit margin % 2.54% 2.54% 3.47% General, selling and administrative expense 23000 23000 23000 Depreciation 0 0 0 Regulatory expense 500 500 500 Rental 2500 2500 2500 Insurance 500 550 605 Advertisement 1000 1100 1210 Utility Bills, Others 1000 1100 1210 Earnings before interest and tax 44076.00 46729.04 78490.70 Interest Expense 8000 8800 9680 Taxes 5000 5500 6050 Net Profit 31076.00 32429.04 62760.70 Net Profit Margin 1.09% 1.09% 2.03% Table 3 Table 4 Cash Flow Statement (in ?) Year 1 Year 2 Year 3 Net Income 31076 32429 62761 Net cash flow from operating activities 35500 39050 42955 Net cash flow from investment -16250 -17875 -19662.5 Net cash-flow from financing -15650 -17215 -18936.5 Net Cash Flow 3600 3960 4356 References Jolly, A. 2003. Managing Business Risk. New York: Kogan Page Publishers. Lemieux, V. 2013. Financial Analysis and Risk Management: Data Governance, Analytics and Life Cycle Management. Toronto: Springer. Dickie, R. B. 2006. Financial Statement Analysis And Business Valuation for the Practical Lawyer. New York: American Bar Association. Tarantino, A. 2010. Essentials of Risk Management in Finance. New Jersey: John Wiley & Sons. Flynn, D. K., Uliana, E. and Wormald, M. 2012. Financial Management: 6th Edition. Johannesburg: Juta and Company Ltd. Read More