Financial plan for a small business

Financial plan for a small business

 

Name

 

 

Institution

 

 

Date

 

 

 

 

 

 

 

 

Introduction

At the heart of every successful enterprise there must be a comprehensive financial plan.  The financial plans of most small businesses are reflected in the overall business plan. Nonetheless, it should be noted that the financial plan of a business is a document that is self supporting which is intended to direct as well as support business actions. A financial plan explains future projections of a business in terms of what the business can be able to afford, ways in which the business can afford to do it, as well as explaining the amount of profits expected in the business. A standard financial plan should consist of a cash flow statement, the balance sheet, personal financial statement, and the income statement[1].

The financial statement of the business shall be completed once every year and shall be revised every mouth for purposes of incorporating results that are accurate and actual. This will enable a person to take better business decisions regarding the moves that are available for the company to make, the financial resources that the company actually needs to succeed. Accordinf to Berger and Udell, the financial plan will also help in the planning for and acquiring the finances that are necessary for purposes of establishing the business, continuing the operations of such a business, and helping the business to grow[2]. It is worth noting that a financial plan that is solid is a clear demonstration to business lenders as well as potential investors that the business is serious, planning to succeed, and very realistic.

Other than impressing lenders and potential investors, financial plan enables potential investors, potential lenders, and the business enterprise itself to easily evaluate the profit potentials of the business, both the short and long term prospects of the enterprise, the weaknesses and strengths of the business, the type as well as the amount of financing the business requires in order to be successful, and finally the future challenges and opportunities of the business.

The financial plan for the business will include: start up costs, cash flow projections, projected income statements and balance sheet, a ratio analysis, and a break even analysis.

Start- up costs

Binks., and Ennew , states that start up costs is a one- time expenditures that are incurred by a business before it commences its business operations. Such expenses includes: the cost of supplies and materials, furniture, licenses, equipments, incorporation fees, and permits[3]. The expenses that will be incurred after the business has stated its operations shall be recorded in the income statement of the business as the operating expenses.

The costs of incorporation of My Western wear are outlined below. A three month inventory will be used to start the business for accessories and apparel since they are the primary generators of revenue. Most of the assets belonging to the business will reside in the inventory. About $384 will be the cash on hand balance in the opening days. The main objective of this financial plan is to acquire an Accion loan of about $16,700. It is worth noting that this supplemental funding is needed for purposes of preparing the site in terms of operational, and inventory expenses.  This amount of loan according to Cavalluzzo, et al, should be indicated in the long-term liability row[4]. Other sources of financing will include a short term credit of about $2,000 for purpose of replenishing the inventory during high reception months, and $ 5, 100 owners investment. Creating a loyal customer base as well as having a successful operation will allow My Western wear to be profitable and self sufficient in two years.

Start-up Funding

Start-up Expenses to Fund $9,416
Start-up Assets to Fund $14,384
Total Funding Required $23,800
Assets  
Non-cash Assets from Start-up $14,000
Cash Requirements from Start-up $384
Additional Cash Raised $0
Cash Balance on Starting Date $384
Total Assets $14,384
Liabilities and Capital  
Liabilities  
Current Borrowing $0
Long-term Liabilities $16,700
Accounts Payable (Outstanding Bills) $0
Other Current Liabilities (interest-free) $2,000
Total Liabilities $18,700
Capital  
Planned Investment  
Owners Investment – Cash $5,100
Other $0
Additional Investment Requirement $0
Total Planned Investment $5,100
Loss at Start-up (Start-up Expenses) ($9,416)
Total Capital ($4,316)
Total Capital and Liabilities $14,384
Total Funding $23,800

Start-up Requirements

Start-up Expenses Rent $1,606
Grand Opening Event $400
Telephone & Utilities (3 months) $1,575
Travel – Dallas Market Buying Trip $350
Business Insurance $600
Advertising & Promotion $1,010
Store Fixtures/Decorations $1,500
Computer/Cash Register $950
Signage (Including Permits) $400
Organizational Dues & Subscriptions $125
Business/Office Supplies $400
Other

 

$500
Start-up Inventory $14,000
Total Start-up Expenses $9,416
Start-up Assets Cash Required $384
Other Current Assets $0
Long-term Assets $0
Total Assets $14,384
Total Requirements $23,800

 

 

There will be a moderate growth in My Western wear and there will always be a positive cash balance. The business will not be selling its products since it is retail based. The business will accept all major credit cards, checks, as well as cash[5]. In an effort to mitigate the bad checks loss, the business will use Tele-check services as a guaranty system. The rate of advertising as well as marketing will remain at about 5 percent. The residual profits will be reinvested in the business personnel as well as expansion.

 

 

 

General assumptions

  Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 30.00% 30.00% 30.00%
Other 0 0 0

 

Break-even Analysis

The importance of break-even analysis is to enable a person to compute the amount of sales that a business needs to make in an effort to avoiding lose of money. Consequently, the break-even point of a business is where the total cost of the business equals the total revenue of such business. In the words of Cooper, et al,  this calculation is vital for purposes of determining the profitability as well as the viability of the company[6]. There are three factors that form the basis of a break-even analysis which include: the selling price, fixed costs, and variable costs. Gaskill, state that selling price is the amount at which a particular good or service is sold; fixed costs are expenses that do not change whether or not there is a decrease or increase in sale[7]. Such costs/ expenses may include; mortgages, loan repayments, rent, core staff, insurance, and equipment leases to mention a few. Variable costs on the other hand, are those expenses that decrease or increase proportionate to sales, that is to say when the sales increases variable costs increases and when sales reduces variable costs decrease. Variable costs may include: materials and supplies, the costs of sold goods, and salaries of additional staff.

A table of a break-even analysis for My Western wear business has been prepared based on average prices/costs. The average sales have fixed costs of 5,800 dollars, (47 average per unit revenue) and average variable costs of 23 dollars. To break even therefore, we require sales of about 11,000 pounds per month.

Break-even Analysis

Break- even units per month 248
Monthly revenue Break- even $ 11,712
Assumptions:  
Average per unit revenue $ 47.21
Average per unit variable cost $ 23.60
Estimated monthly fixed cost $5,856

 

Cash flow projections

Cash flow forecast or projection is a rough estimate of the period within which a business expect to get cash from its sales, and certainly, the time within which such a business anticipate to pay its bills. In a study conducted by Pond, cash flow projection is very crucial to the business plan and certainly a core part of the financial plan of the business because it highlights the amount of cash that will get into and out of the business in every month. Often, cash flow forecasts are carried out monthly and at least in a year’s time[8]. The importance of cash flow projection include: enables the business to calculate the approximate amount of money that is needed to finance business operations every month; it also enables the business to make adequate preparation of how to cover expenses during the period when the revenue is insufficient; in addition cash flow projections gives a clear picture to potential lenders on how the business anticipate to get enough revenue for purposes of paying back the loans without defaulting. Finally, Leach and Ronald, observe that cash flow projections may be used for purposes of comparing actual and projected flow of cash in every month. Thus, it can be easy for a business to constantly adjust is cash flow projections as well as identify areas that are potentially problematic[9].

The following table elaborates the Cash flow projections of My Western wear business.

 

Cash flow projections

  Year1  Year2 Year3
Cash Received      
Cash from operations      
cash sales $284,200 $369,460 $480,290
Subtotal cash from operations $284,200 $369,460 $480,290
Additional cash received      
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $0 $0 $0
Subtotal Cash Received $284,200 $369,460 $480,290
Expenditures Year1 Year2 Year3
Expenditures from Operations $44,115 $48,527 $53,379
Bill Payments $174,454 $244,577 $315,576
Subtotal Spent on Operations $218,569 $293,103 $368,955
Additional Cash Spent      
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Long-term Liabilities Principal Repayment $3,300 $3,300 $3,300
Other Liabilities Principal Repayment $0 $0 $0
Principal Repayment of Current Borrowing $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $221,869 $296,403 $372,255
Net cash flow $62,331 $73,057 $108,035
Cash Balance $62,715 $135,771 $243,806

 

Income statements

The actual business expenses and revenues are presented by an income statement. The difference between revenues and expenses is the net profit or net loss accumulated over a particular period of time. Often times, the income statement is also referred to as an operating statement, an income and expenses statement or profit and loss statement. An operating statement according to Wucinich, makes a comparison of revenue estimates and estimate expenses then estimated net loss of profit is calculated[10]. The profits of the business are projected to rise every year from about $70,000 in the first year of operation to about $130,000 in the third year of operation. This is clearly indicated by the graph and explained by the table below:

 

Income statement for My Western wear

  Year1  Year2 Year3
Sales $284,200 $369,460 $480,290
Direct Cost of Sales $142,100 $184,730 $240,145
Other Production Expenses $0 $0 $0
Total Cost of Sales $142,100 $184,730 $240,145
Gross Margin $142,100 $184,730 $240,145
Gross Margin % 50.00% 50.00% 50.00%
Expenses      
Payroll $44,115 $48,527 $53,379
Sales and Marketing and Other Expenses $15,448 $15,523 $15,834
Depreciation $0 $0 $0
Telephone / Pagers/ Cell $1,800 $1,800 $1,836
Utilities $4,500 $4,800 $4,896
Payroll Taxes $4,412 $4,853 $5,338
Other $0 $0 $0
Total Operating Expenses $70,275 $75,502 $81,283
Profit Before Interest and Taxes $71,826 $109,228 $158,862
EBITDA $71,826 $109,228 $158,862
Interest Expense $1,491 $1,175 $845
Taxes Incurred $21,100 $32,416 $47,405
Net Profit $49,234 $75,637 $110,612
Net Profit/Sales 17.32% 20.47% 23.03%

 

Projected balance sheet

According to Leach  and Ronald[11] a  pro forma balance sheet or projected balance sheet is a prediction or an estimate of the net worth of a business at a particular time sometimes in the future.

The following table elucidates the pro forma balance sheet of My Western wear

 

  Year1 Year2 Year3
Assets      
Current Assets      
Cash $62,715 $135,771 $243,806
Inventory $13,365 $17,375 $22,586
Other Current Assets $0 $0 $0
Total Current Assets $76,080 $153,146 $266,393
Long-term Assets      
Long-term Assets $0 $0 $0
Accumulated Depreciation Total $0 $0 $0
Total Assets $76,080 $153,146 $266,393
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities      
Accounts Payable $15,762 $20,491 $26,426
Current Borrowing $0 $0 $0
Other Current Liabilities $2,000 $2,000 $2,000
Subtotal Current Liabilities $17,762 $22,491 $28,426
Long-term Liabilities $13,400 $10,100 $6,800
Total Liabilities $31,162 $32,591 $35,226
Paid-in Capital $5,100 $5,100 $5,100
Retained Earnings ($9,416) $39,818 $115,455
Earnings $49,234 $75,637 $110,612
Total Capital $44,918 $120,555 $231,167
Total Liabilities and Capital $76,080 $153,146 $266,393
Net Worth $44,918 $120,555 $231,167

 

Business ratio analysis

            Business ratio analysis is an important management tool that is used for purposes of identifying negative and positive trends in the performance of a business. Thus, a number of business ratios are used by potential investors as well as lenders for purposes of evaluating the comparative health of the business enterprise. Ratio analysis data is extracted from income statement as well as the balance sheet of the business. The useful ratios in the business include; current ratio, quick ratio (acid test ratio), debt to equity ratio, return on investment ratio, inventory turnover ratio (stock turns), working capital,

The following are the business ratio analysis of My Western wear:

Ratio Analysis

  Year1 Year1 Year3 Industry profile
Sales Growth 0.00% 30.00% 30.00% 0.20%
Percent of Total Assets        
Inventory 17.57% 11.35% 8.48% 49.00%
Other Current Assets 0.00% 0.00% 0.00% 23.00%
Total Current Assets 100.00% 100.00% 100.00% 100.00%
Long-term Assets 0.00% 0.00% 0.00% 18.60%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 23.35% 14.69% 10.67% 40.70%
Long-term Liabilities 17.61% 6.60% 2.55% 15.20%
Total Liabilities 40.96% 21.28% 13.22% 55.90%
Net Worth 59.04% 78.72% 86.78% 44.10%
Percent of Sales        
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 50.00% 50.00% 50.00% 38.30%
Selling, General & Administrative Expenses 32.72% 29.62% 27.09% 22.10%
Advertising Expenses 0.00% 0.02% 0.02% 2.10%
Profit Before Interest and Taxes 2.22 29.56% 33.08% 0.70%
Main Ratios        
Current 4.28 6.81 9.37 2.22
Quick 3.53 6.04 8.58 0.62
Total Debt to Total Assets 40.96% 21.28% 13.22% 55.90%
Pre-tax Return on Net Worth 156.58% 89.63% 68.36% 1.70%
Pre-tax Return on Assets 92.45% 70.56% 59.32% 3.80%
Additional Ratios Year 1 Year2 Year3  
Net Profit Margin 17.32% 20.47% 23.03% n.a
Return on Equity 109.61% 62.74% 47.85% n.a
Activity Ratios        
Inventory Turnover 10.91 12.02 12.02 n.a
Accounts Payable Turnover 12.07 12.17 12.17 n.a
Payment Days 27 27 27 n.a
Total Asset Turnover 3.74 2.41 2.41 n.a
Debt Ratios        
Debt to Net Worth 0.69 0.27 0.15 n.a
Current Liability 0.57 0.69 0.81 n.a
Liquidity Ratios       n.a
Net Working Capital $58,318 $130,655 $237,967 n.a
Interest Coverage 48.16 92.96 188.00 n.a
Additional Ratios        
Assets to Sales 0.27 0.41 0.55 n.a
Current Debt/Total Assets 23% 15% 11% n.a
Acid Test 3.53 6.04 8.58 n.a
Sales/Net Worth 6.33 3.06 2.08 n.a
Dividend Payout 0.00 0.00 0.00 n.a

 

Current ratio involves comparing business current assets to the business current liabilities and this ratio can enable a person to evaluate the ability of the business to pay up its bills. Investors and lenders are more attracted to businesses that have high current ratios. Acid test ratio sometimes referred to as quick ratio is similar to the current ratio only that in acid test ratio does not include inventory. Because selling some inventory is not easy measuring relative liquidity is better measure through quick ratio. Debt to equity ratio is the ratio that compares what the business owns, that is equity and what the business owes, that is debt. The overall debt divided by equity (liabilities are subtracted from assets). Often, investors and lenders make a comparison of debt and equity of the business with other business enterprises. In return on investment ratio the net profits are compared to equity (investment). The result of this comparison is shown as a percentage. Where there is low investment return the investors might decide to invest somewhere else.

Indeeda financial plan explains future projections of a business in terms of what the business can be able to afford, ways in which the business can afford to do it, as well as explaining the amount of profits expected in the business. A standard financial plan should consist of a cash flow statement, the balance sheet, the income statement, the break even analysis, as well as the business ratio analysis. In My Western wear clothing business the cash flow projection statement indicate a rough estimate of the period within which a business expect to get cash from its sales, and certainly, the time within which such a business anticipate to pay its bills. This projection is very crucial to the business plan and certainly a core part of the financial plan of the business because it highlights the amount of cash that will get into and out of the business in every month. The projected balance sheet of My Western wear gives an estimate of the net worth of a business at a particular time sometimes in the future, in this case for a period of three years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

Ang, James S, On the theory of finance for privately held firms, Journal of Small Business            Finance 1/3 (1992), 185-203.

Berger, Allen N., and Gregory F. Udell, Relationship lending and lines of credit in small firm       finance, Journal of Business 68/3,(2005), 351-381.

Binks, Martin R., and Christine T. Ennew, Growing firms and credit constraint, Small       Business Economics 8/1 (2006), 17-25.

Cavalluzzo, Ken et al, Competition, small business financing, and discrimination: Evidence from a new survey, Journal of Business 75/4, (2002), 641-679.

Chittenden, Francis, et al,  Small firm growth, access to capital markets and financial structure:     Review of issues and an empirical investigation, Small Business Economics 8/1 (2006),         59-67.

Cooper, Arnold et al,  Initial human and financial capital as predictors of new venture       performance, Journal of Business Venturing      9/5, (2004), 371-395.

Gaskill, Rickets, A factor analytic study of the perceived causes of small business failure,             Journal of Small Business Management 31/4 (2003), 18-31.

Pond, Jonathan., financial planning guide for self-employed professionals and small business         owners (Indiana: Dell Pub, 2010).

Leach, Chris., and Ronald Melicher., Entrepreneurial Finance, (Washington: South Western          College Publisher, 2005).

Wucinich, William., How to finance a small business, Management Accounting 61/5 (2000), 16-    18.

 

 

[1] James,  Ang, On the theory of finance for privately held firms, Journal of Small Business Finance 1/3 (1992), 185-203.

[2] Allen Berger., and Udell, Gregory, Relationship lending and lines of credit in small firm finance, Journal of Business 68/3,(2005), 351-381

[3] Martin, Binks., and Ennew, Christine, Growing firms and credit constraint, Small Business Economics 8/1 (2006), 17-25.

 

[4] Ken, Cavalluzzo, et al, Competition, small business financing, and discrimination: Evidence from a new survey, Journal of Business 75/4, (2002), 641-679.

 

[5] Francis, Chittenden, et al,  Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation, Small Business Economics 8/1 (2006),   59-67.

 

[6] Arnold, Cooper, et al,  Initial human and financial capital as predictors of new venture       performance, Journal of Business Venturing  9/5, (2004), 371-395.

[7] Rickets, Gaskill, , A factor analytic study of the perceived causes of small business failure, Journal of Small Business Management 31/4 (2003), 18-31.

 

[8] Jonathan, Pond. financial planning guide for self-employed professionals and small business owners         (Indiana: Dell Pub, 2010).

[9] Chris, Leach., and Melicher Ronald, Entrepreneurial Finance, (Washington: South Western College Publisher, 2005).

 

[10] William, Wucinich., How to finance a small business, Management Accounting 61/5 (2000), 16-18.

[11] Chris, Leach., and Melicher, Ronald., Entrepreneurial Finance, (Washington: South Western College Publisher, 2005).

 

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