Financial Projection

How to do them in right

way.......

Key financial documents

Profit and loss statement
Cash flow
Break-even analysis
Balance sheet

Other financial forms

Sources and uses of funds
Break even analysis
Starts up cost
Assumption sheet

Guidelines for preparing financial

Documents....
Be conservative
Be honest
Dont be creative
Get accountant's advice
Follow industry practice
Choose appropriate accounting
method
Be consistent

Prepare financial worksheet

Staffing budget
Professional services
Sales projection
Marketing budget
Start- up cost

Sources of Finance
How to get your business
started...

Almost half of all new ventures fail

because of poor financial
management -Dun & Brandstreet

Choosing the Right Source of Finance

A business needs to assess the different types of finance based on the
following criteria:

Amount of money required

A large amount of money is not available through some sources and the
other sources of finance may not offer enough flexibility for a smaller
amount.

How quickly the money is needed

the longer a business can spend trying to raise the money, normally the
cheaper it is. However it may need the money very quickly The
business would then have to accept a higher cost.

The cheapest option available

the cost of finance is normally measured in terms of the extra money

that needs to be paid to secure the initial amount the typical cost is
the interest that has to be paid on the borrowed amount. The cheapest
form of money to a business comes from its trading profits.

The amount of risk involved in the reason for the cash

a project which has less chance of leading to a profit is deemed
more risky than one that does. Potential sources of finance
(especially external sources) take this into account and may not
lend money to higher risk business projects, unless there is
some sort of guarantee that their money will be returned.
The length of time of the requirement for finance - a good
entrepreneur will judge whether the finance needed is for a
long-term project or short term and therefore decide what type
of finance they wish to use.

Sources of Finance

Business Growth

Internal Sources of Finance and Growth

Organic growth growth

generated through the
development and expansion
of the business itself. Can
be achieved through:
Generating increasing sales
increasing revenue to impact
on overall profit levels
Use of retained profit used
to reinvest in the business
Sale of assets can be a
double edged sword

reduces capacity?

Business Growth
External
Long Term
Short Term
'Inorganic Growth

Business Growth
External
Long Term
Shares

Ordinary Shares
Preference Shares
New share issues
Rights Issue
Bonus or Scrip Issue

Loans

Debentures
Bank loans (mortgage)
Merchant or Investment Banks
Government/EU
Grants

Business Growth
External
Short Term

Bank loans
Overdraft facilities
Trade credit
Factoring
Invoice discounting
Leasing

Business Growth External Short Term

Factoring is a financial transaction
whereby a business sells its
accounts receivable (i.e., invoices) to a
third party (called a factor) at a discount in
exchange for immediate money
Factoring allows company to raise finance
based on the value of your outstanding
invoices.

 Factoring also gives company the

opportunity to outsource your sales ledger
operations and to use more sophisticated
credit rating systems.
Offers 80 85% of the total invoice value
Company pays factoring fees

Business Growth External Short Term

LEASING

is a contract between the leasing company, the lessor,

and the customer (the lessee). The leasing company
buys and owns the asset that the lessee requires. The
customer hires the asset from the leasing company and
pays rental over a pre-determined period for the use of
the asset. There are two types of leases:

 1: Finance Leases
An agreement where the lessor receives lease
payments to cover its ownership costs. The lessee
is responsible for maintenance, insurance, and
taxes. Some finance leases are conditional sales or
hire purchase agreements.
2: Operating Leases
The lease will not run for the full life of the asset
and the lessee will not be liable for its full value.
The lessor or the original manufacturer or supplier
will assume the residual risk. This type of lease is
normally only used when the asset has a probable
resale value, for instance, aircraft or vehicles.

Business Growth External

'Inorganic Growth'
Acquisitions
Merger
Takeover

External Sources of Finance

Long Term may be paid back after many
years or not at all!
Short Term used to cover fluctuations in
cash flow
Inorganic Growth growth generated by
acquisition

The existence of capital markets enable firms to raise

long term loans and share capital.
Title: Dow up on Wall Street. Copyright: Getty Images,
available from Education Image Gallery

Long term (Means?)

Loans (Represent creditors to the company not owners)

Bank loans and mortgages suitable for small to medium

sized firms where property or some other asset acts as
security for the loan

A mortgage loan is a loan secured by real property

Merchant or Investment Banks act on behalf of clients to

organise and underwrite raising finance
Government/EU may offer loans in certain circumstances

Grants

Shares (Shareholders are part owners of a

company only in PLCs)

New Share Issues arranged by investment

banks.

Short Term

Bank loans necessity of paying interest on the payment,

repayment periods from 1 year upwards but generally no longer
than 5 or 10 years at most
Overdraft facilities the right to be able to withdraw funds you do
not currently have
Provides flexibility for a firm
Interest only paid on the amount overdrawn
Overdraft limit the maximum amount allowed to be drawn the firm does not have to use all of this limit
Trade credit Careful management of trade credit can help ease
cash flow usually between 28 and 90 days to pay
Factoring the sale of debt to a specialist firm who secures
payment and charges a commission for the service.
Leasing provides the opportunity to secure the use of capital
without ownership effectively a hire agreement

'Inorganic Growth'
Acquisitions
The necessity of
financing external
inorganic growth

Merger:

firms agree to join

together both may
retain some form of
identity

Takeover:

One firm secures

control of the other, the
firm taken over may
lose its identity

Business Angels

Business Angels
Individuals looking for investment
opportunities
Generally small sums up to
100,000
Could be an individual or a small
group
Generally have some say in the
running of the company

Venture Capital

Venture Capital
Pooling of capital in the form of limited
companies Venture Capital Companies
Looking for investment opportunities in fast
growing businesses or businesses with
highly rated prospects
May also buy out firms in administration who
are going concerns
May also provide advice, contacts and
experience
In the UK, venture capitalists have invested
50 billion since 1983

Working Capital

Firms need short-term finance to start up a business or to

cover day-to-day running costs. This is repaid over a short
period and provides a firm with working capital.
Working capital The difference between current assets less
current liabilities - the difference between a firm's cash and
its short-term debts - the money it has to play with.

Liquidity
In business, the term refers to a company's ability to
meet its obligations. If the firm is unable to meet its
obligation in time, the company is in danger of
insolvency. Therefore, heavy weight is put in finance
planning by the controlling staff in order to register all
potential shortages in funds.

Short Term and Long Term Finance

Short-term finance

Long-term finance tends to be spent on large projects that

is needed to cover the day to day

running of the business. It will be paid back in a short period of
time, so less risky for lenders.

will pay back over a longer period of time. More risky so lenders
tend to ask for some form of insurance or security for if the
company is unable to repay the loan. A mortgage is an example
of secured long-term finance.

Types of short-term finance

Overdraft
Suppliers credit
Working capital

Types of long-term finance

Mortgages
Bank loans
Share issue
Debentures
Retained profits
Hire purchase

Internal and External Finance

Internal finance

comes from the trading of the business.

External finance

comes from individuals or organizations that

do not trade directly with the business e.g.
banks.

Examples of internal finance

Internal finance tends to be the cheapest form of

finance since a business does not need to pay interest
on the money. However it may not be able to generate
the sums of money the business is looking for, especially
for larger uses of finance.
Day to day cash from sales to customers.
Money loaned from trade suppliers through extended
credit.
Reductions in the amount of stock held by the business.
Disposal (sale) of any surplus assets no longer needed

Examples of external finance

An overdraft from the bank.

A loan from a bank or building society.
The sale of new shares through a share
issue