FINANCIALS

FUNDSFLOW AND
PROJECTIONS
 GNS 304
FINANCIAL ANALYSIS GUIDE
 FINANCIAL ANALYSIS GUIDE
• Introduction
• Explanation of some terms
• Understanding financial statement
– Cash flow statement
– Income statement
– Balance sheet
• Budgeting and cash flow forecast
 Introduction
 The aim of this tutorial is to provide a succinct overview of
financial statements analysis. It is also designed to provide
the financial management skills necessary for business
success and to assist you to complete the business plan
template for this course.

 If you are new to financial statements, don’t

worry, we will try to be as simplistic as
possible.
 Introduction
“Show me the money!”

What do financial statements do?

They show you the money. They show you:

where a company’s money came from
where it went
where it is now.
 Explanation of some terms

Some basic terms you will continue to come across

when dealing with financial statements are explained
below.

Asset – Anything that has a commercial value that is

owned by the business
Break-even – Amount (in either units or value) the
business needs to achieve before generating profit
firms in your industry?
 Explanation of some terms
• Capital expenditure – amount of money allocated or
spent on assets. The grant is for capital expenditure
• Cash flow – flow of cash in and out of the business
• Cost of goods sold – total cost of all goods sold
during a period
• Creditors/payables – amount of money a business
owes its suppliers
 Explanation of some terms

Current assets – assets that can be turned into cash

within 12 months
Liability – amount of money the business owes other
business/people
Current liabilities – liabilities that are due within 12
months
Drawings – cash or anything of monetary value taken
out of the business by the owner
 Explanation of some terms

• Equity – amount the owner(s) has in the business

• Expenses – costs associated with earning the
business income eg. Salaries, rent
• Fixed assets – assets used to run the business
• Stock – raw materials and finished products that are
available for sale
 Explanation of some terms

Gross profit – profit from sales before deducting

expenses
Mark-up – how much profit you put on your cost
Overheads – costs not directly related to production
Profit – income less expenses
 Explanation of some terms
Receivables/debtors – amount owed to a business
Retained profit – profit reinvested in the business
Working capital – daily cash you need to run the
business
Budget – financial plan for a business for a defined
period
Accounting period – a period for which financial
statements are prepared
 Explanation of some terms

• Gross Revenue/Sales – this is the total

amount of money brought in by sale of
products or services
• Gross margin – gross profit divided by sales
• Net margin – net profit divided by sales
 Business Cycle

Reinvest
cash

The owners
Raise cash Invest cash Generate cash
The business

Return cash to owners

 Financial process explained

• Shareholders and lenders supply capital (cash)

to the business.
• The capital is used to purchase assets.
• The assets are used to create cash flow.
• Cash flow pays expenses and generates a
surplus/deficit
• Surplus is given to owners and/or reinvested
 Understanding financial statements

Statement of cash flows

Profit and loss (Income) Statement
Balance sheet (statement of financial position)
 Statement of cash flows
This is a summary of money coming into and
going out of the business. This is important
because a company needs to have cash on
hand to meet obligations. It is a useful tool to
measure the health of a business.

Operating Other Cash

Cash inflow
Cash flow Expenses Balance
 Warning signals

• cash receipt is less than cash payment

(running out of cash)
 Statement of cash flows important issues

• Revenue is not always equal to cash collected

because some sales may be on credit
• Expenses reported in the income statement
may not be equal to cash paid because
expenses may be incurred in one period and
paid for in another period.
 Income Statement
• An income statement is a report that shows how
much revenue a company earned over a specific time
period (usually for a year or some portion of a year),
and the costs and expenses associated with earning
that revenue.

Income Expenses Profit

 Income statement
For the year ended December 31,
2012
(N000)

Revenues N Notes
Sales revenue 37,436 Cash and credit sales

Expenses
Cost of goods sold 26,980 Cost to produce
Selling, general and admin expenses 3,624 Expenses not directly related to
production

Research and development 1,982 Expenses incurred to develop new

products

Interest expense 450 Cost of using borrowed funds

Total expenses 33,036

Profit before tax 4,400

Income tax expense 1,100 Income taxes on pretax income

Profit after tax 3,300

 Balance sheet (statement of
financial position)
A balance sheet provides detailed information
about a company’s assets, liabilities and
shareholders’ equity.

Owners
Asset Liabilities Equity
 KwasuLimited
Balance sheet
As at 31st December 2012

assets (N000) Notes

Cash 4,895 Cash at bank and at hand

Debtors 5,714 Amounts owed from prior
sales
Stock 8,517 Unsold stock
Plant & Equipment 7,154 Production machinery
Land 981 Factory land, if owned
Total Assets 27,261

Liabilities
Creditors 7,156 Owed on prior purchases
Loans 9,000 Owed on borrowings
Total liability 16,156

Shareholder’s equity
Capital 2,000 Shareholder’s investment
Retained earnings 9,105 Prior earnings not
distributed
Total shareholder equity 11,105
Total liability and equity 27,261
 Budgeting and cash forecasts

• A budget is the future financial plan of business.

• Cash forecasts or projected cash flow statements
details the cash a business expects to receive and
pay out monthly, quarterly, or annually as required.
• GO TO SPREADSHEET
 Explanation of template

• Cash sales – Record cash sales in the months you expect to

receive the money
• Collections from credit sales – using the credit terms offered
to your customers, record sales in the months you expect to
receive the money
• Loan and other cash injections – what other sources of cash
do you have; friends, family, personal, credit, other sources
except youwin? Record in the month you expect to receive
the money
 Explanation of template

• Grant /Loan– determine from your cash needs in which

month the grant will be needed in the business and include in
projection
• Raw materials (including delivery) – this is the total cost of
acquiring raw materials including transporting the raw
materials to the point of usage
• Delivery to customer – this is the cost of delivering finished
goods to the sale point
 Explanation of template

• Gross staff wages – this is the total payments made

to both permanent and temporary staff, including the
cost of providing other benefits to staff
• Payroll expenses – this relates to statutory and other
payments made on behalf of staff. Include taxes,
pension deductions, NHF, union dues etc
 Explanation of template

• Repairs and maintenance – this is the cost of

keeping the fixed assets working efficiently
• Advertising – cost of sales promotion and any
other awareness campaigns
• Transport – includes cost of fuel, local
business related movements
• Accounting and legal – projected payments
for accounting and legal services.
 Explanation of template

• Rental – rent and rates and other payments

relate to the use of a third party asset
• Telephone – telephone and
telecommunication costs
• Utilities – water, electricity, gas, etc.
• Insurance – payments of insurance on assets,
goods in transit
 Explanation of template

• Other costs (specify) – any other cost not included in

previous sub-heads like purchase of machinery, office
equipments and other capital expenditure
• Loan principal payment – this is the repayment of any loans
taken for the business
• Capital purchases - any asset acquisitions within the period
• Interest – refers to interest paid on borrowings
• Other start-up costs – any other costs related to the
commencement of the business. Eg. Payments for licences,
permits etc
 Explanation of template

• Owner’s withdrawal – any cash taken by the

owners or expenses incurred specifically for
the owners private affairs
• Cash on hand – this is the cash available at the
beginning of the business or the beginning of
the forecasting period
 How to conduct Breakeven Analysis

i. Fixed Costs divided by Contribution which is

Revenue per unit - Variable costs per unit
ii. Fixed costs are costs that must be paid whether
or not any units are produced. These costs are
"fixed" over a specified period of time or range of
production.
 How to conduct Breakeven contd…

• Variable costs are costs that vary directly

with the number of products produced. For
instance, the cost of the materials needed
and the labour used to produce units isn't
always the same.
 Breakeven Analysis - Class example

i. Suppose that your fixed costs for producing bags of plantain

chips were N30,000 a year.
ii. Your variable (operating) costs are N2.20 materials, N4.00
labour, and N0.80 direct overhead, for a total of N7.00.
iii. If selling price is N12.00 for each bag, then:
iv. N30,000 divided by (N12.00 - 7.00) equals 6000 units.
v. This is the number of bags that have to be sold at a selling
price of N12.00 before you will start to make a profit.