FINANCIAL ACTION PLANS

STEPS IN FINANCIAL PLANNING

• Produce short and long term financial targets
• Set short and long term financial rewards
• Set efficiency standards
• Document the plan
• Verify the plan and review where necessary
• Analyze the plan and compare to standards
• Communicate the plan to employees
 Profitability
• Net Margin e.g. 10%
• Return on Investment: say 30%
• Growth Expectations
• Rewards to the owners
• Investments to be made from profits
 Financial Rewards to Owner Manager

• Basic Managerial Salary

• Pay for hours worked
• Qualifications
• Experience
• Responsibility
• Return on Investment
 Analysis of Plan
• Wages and Salaries
• Occupancy expenses (rent, utilities, security,
insurance)
• Financial expenses (interest, discounts, bad
debt, bank charges)
• Selling and promotions expenses (advertising,
delivery, promotion)
• Communication Expenses
 Financial Efficiency
• Net Margin
• Gross Margin
• Expense Margin
• Break-even Point = Business Expenses/Gross
Margin
• Exp. = $102,000, Gross Margin = 27%, BEP =
102,000/0.27 = $377,000
 The Break-Even Point (BEP) Formula

P(X) = F + V(X)
Revenue Total Costs
Where:
– F = fixed costs
– V = variable costs per unit
– X = volume of output (in units)
– P = price per unit

08/20/2020 Presented by: SB Satorre 7

 The Break-Even Point Formula (cont.)

If we rearrange the formula where the breakeven

is X then the formula look like this

X = F /( P – V)
Break-Event
Point

This formula says that the breakeven point is

where the number of sales needed to make the
cost equal to the revenue.
08/20/2020 Presented by: SB Satorre 8
 Break-Even Point Chart

08/20/2020 Presented by: SB Satorre 9

• Margin of Safety = (Planned sales – BEP
Sales)/Planned Sales.
• If planned sales =$600,000, Margin of Safety =
(600,000 – 377,000)/600,000X100% = 37%
• Sales have to reduce by 37% to reach BEP or
zero profitability
 Financial Stability
• Liquidity Measure is current ratio = Current
assets/current liabilities= 60,000/50,000 = 1.2
this is acceptable
• Are Debtors at risk? Sales 375,000, average
debtors = 93,000.
• Credit Sales per day = 375,000/250 = $1,500
Debtor Days = 93,000/1,500 = 62 days, more
than two months, This is unacceptable
 Financial Stability
• Financial Leverage = (current + long-term
liabilities)/Total Assets= 80,000/(80,000
+122,000) x100% = 39% I.e. Part of business
financed by liabilities. This is fair
• Interest Cover = Income before interest/
interest charge = 48,000/8,000 = 6 times
• This is ok.
 Inventories
• Inventories hold up a lot of cash
• Stock turn = Inventory sold per year/ average
inventory = 438,000/60,000=7.3 times
• Should be related to margins. High margins
may mean low stock turn, low margins means
high stock turn
• Since entrepreneur may not be highly skilled
in finance, can seek assistance from
professionals
 Suppliers
• Good materials for your manufacturing
processes
• Suppliers Credit
• Information on inputs
• Need to keep good relations with them
 Profit Generators
May be
• people,
• machines,
• capital,
• products,
• location
• Any resource available to you
• So need to identify yourreal profit generators.
• Product Groups – which products are most
and leawst profitable
• Production Centres – their performance
• Selling Centres – retail outlets or selling
divisions
• Cost Control Centres – responsibility to hem in
costs
• People – individuals or groups in production.
Selling. Buying and administration, motivation
• Distribution Patterns, mail order
vs. direct selling, counter, self-
service
• National or international units
• High margin products/service
• High productivity groups
• Low Cost centres
 FINANCIAL RESOURCES

• Trade Credit
• Profit Plough-back
• Long Term credit
• Factoring (LPO credit)
• Leasing
• Hire-purchase
• Loan Guarantee
• Equity funds
• Venture capital Funds
 EMPLOYMENT RELATIONS
• Equal Pay
• Minimum Wage
• Pay Slip
• Sick Leave
Maternity Leave
• Paternity Leave
• Emergency Time Off-work
• Minimum Period of notice
• Contracts of employment
• Job Description
• Terms for termination (firing or redundancy)
• Breach of Contract
• Benefits
Statutory
Contractual
Discretionary; performance related, Retention
related
Pension
Incentives