Writing An Effective Business Plan - Nipissing Parry Sound

parakeetconspiracyManagement

Nov 20, 2013 (3 years and 8 months ago)

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1

The Business Centre Nipissing Parry Sound Inc.

200 McIntyre Street E, North Bay ON

705.474.0626 ext. 2528

Financial Forecasting



2

Recap of Last Week


Target Market


Marketing Plan


Management & Operations


Financial Plan


Appendices


Appearance


Sample Plans


WSIB Information


Planning Tips & Tricks



3



What is financial forecasting?


It is the process of estimating future financial
performance.


It is an assessment of future financial needs.


Forecasting is important so that a business
can prepare and plan in order to remain a
sustainable business.

Why Having A Financial
Forecasting Is Important



4

Components of Financial
Forecasting


Capital Asset Requirements


Start
-
Up Budget


Determining Price


Cash Flow Statement


Income Statement


Balance Sheet



What is a Capital Asset?

Capital assets are:


Permanent in nature


Have a useful life of at least one year


Used to produce income

Why is this useful?


Some lenders will only fund capital assets as they are
often the most expensive but also the most important.

Example: NOHFC will fund a computer & printer but
not the ink or paper because these are considered to
be “consumables”.



6

Capital Asset Requirements

What equipment is necessary to operate your business?



Vehicle


Property and/or building


Shelving units or storage facilities


Furniture & fixtures


Computer


Cash register, POS devices




7

Start
-
Up Budget


This budget helps to identify how much money will
be needed to start the business.


Knowing these costs will allow you to secure
appropriate funding and plan purchases for the
future.


The budget will also help you to prioritize what is
absolutely needed before the business opens vs.
wants that will improve the experience.



8

Start
-
Up Budget

Five Main Categories of Costs:

1.
Cost of Sales
-

Product inventory, materials,
manufacturing equipment, shipping, packaging, storage.


2.
Professional Fees
-

Setting up legal structure
(incorporation or formal partnership agreements),
trademarks, patents, copyrights, etc.


3.
Technology Costs
-

Computer hardware and software,
printers, telephones, internet modem, servers, security,
consulting.



9

4.
Administrative Costs
-

Insurance, supplies, licenses,
postage, parking, rent, utilities, office furniture,
renovations, etc.


5.
Sales & Marketing Costs


Branding, stationery
printing, marketing materials, trade shows,
sponsorships, Chamber of Commerce fees, travel,
mail
-
outs, etc.


You can separate these on your budget if you like
but it is not required.

Start
-
Up Budget



Start
-
Up Budget Sample

See handout for a complete template.


One
-
Time Expense

Amount

Inventory

10,000

Equipment

8,000

Computer/Printer

1,500

Professional Fees

1,500

Office Supplies

800

Office Furniture

1,200

Land & Building

150,000

Renovations

20,000

Total Amount to Open

193,000



11


Must be both competitive and profitable.


Direct Costs


Materials & Labour


Indirect Costs


Overhead (rent, marketing, wages,
insurance, etc).



How much is your competition charging?


Use this as a guideline to gauge your profit margins.



Pricing Strategy: Will you charge per hour? Per item?

Determining Price



12

Determining Price


How much does it cost to operate every month?


Rent, utilities, storage, wages


How much did the product / materials cost you to
purchase?


Transfer this cost directly to customer.


Is there a delivery or mileage charge to cover your
costs of travel?



13

Determining Price


Breakeven Point


where your costs and income is
equal.


Once you sell enough to reach your breakeven point,
everything in addition is profit.


If you do not reach your breakeven point then you are
not making enough to cover basic costs.




14

Determining Price Example


Hairdresser


industry standards


Services:


based on industry standards


Products:

100% markup (also an industry






standard)



Market Garden


Cost of seeds, fertilizer, machinery maintenance, fuel,
wages, packaging must be covered in pricing to meet
break
-
even



15

What is a Cash Flow
Statement?


A cash flow statement shows all of the revenues and all of
the expenses of a business on a month
-
to
-
month basis.


This is especially useful when planning major purchases,
repaying debt, or preparing for seasonal decline.


Projections can be made years in advance.


It is important to update the cash flow with ACTUAL
numbers as time passes.


Adjust projections based on actual numbers so that they
are more accurate.




16

Cash Flow Statement
-

Revenue


How to determine revenues:


How many customers would you realistically have in
a month?


How much $ would an average sale bring in?


How often will this customer buy from you?



Service:


How many customers can you realistically serve in a
day / week / month? This will be your capacity.



17

Revenue Example

Hair stylist:


How many customers would you realistically have in
a month? 10 clients per day x 20 workdays a month =
200 clients


How much $ would an average sale bring in? $30 per
client for wash/cut.


How often will this customer buy from you? 1 time
every 3 months.


How many customers can you realistically serve in a
day / week / month? 12 cuts or 8 hours per day


200 clients x $30 = $6000 in revenues per month



18

Cash Flow Statement
-

Revenue

CASHFLOW PROJECTIONS
-

YEAR 1

(COMPANY)





Start Up

FEB

MAR

APR

TOTAL

Projected Revenue














1

Product Sales











2


Service Contracts











3


Other Revenue (Loan)











4


Other Revenue (Grant)











5


Other Revenue (specify)













Total Income

0

0

0

0

0



19


The estimates for the one
-
time start up expenses
come from the budgeting worksheet previously
discussed.


Include capital assets, deposits, equipment,
furniture, renovations, etc.

Start
-
Up Expenses



Cash Flow Statement


Start
-
Up Expenses





Start
Up

FEB

MAR

APR

TOTAL

Projected Expenses















Start Up Items











6

Beginning Inventory











7

Manufacturing Equipment











8

Shelving & Storage











9

Professional Fees











10

Trademark/Patent











11

Computer Hardware / Software











12

Printer











13

Cash Register / POS System











14

Telephone / Answering Machine











15

Security Hardware











16

Office Supplies











17

Licenses & Permits











18

First & Last Rent













21


Costs are determined by:


Quotes


Experience


Research


Some costs will remain constant every month / year.
Other costs will be variable, meaning they are
dependant on the level of business activity.


Example of constant expense = Rent $1200


Example of variable expense = Vehicle Mileage






45¢ per km

Determining Ongoing
-
Expenses



Cash Flow Statement


Ongoing Expenses



Ongoing Expenses

Start Up

FEB

MAR

APR

TOTAL

27

Owner's Draw


x









28

Purchase of materials (raw goods or relevant to product sales only)


x









29

Advertising


x









30

Bad Debts


x









31

Insurance


x









32

Interest (loans and credit cards)


x









33

Business licenses, dues, membership & subscriptions

x










34

Office expenses (postage, courier, etc.)


x









35

Supplies (paper, toner, stationery)


x









36

Legal, accounting, other professional fees


x









37

Management and administration fees


x









38

Rent


x









39

Maintenance and repairs (to office/shop)


x









40

Salaries, hourly wages and benefits


x











Cash Flow


Profit (Loss)

Total Income


Total Expenses = Cash Position

Accumulated Cash = last month’s accumulated cash +
current month’s cash position (profit or loss)





Start Up

FEB

MAR

APR

TOTAL



Total Income

0

0

0

0

0



Total Expenses

0

0

0

0

0

















Cash Position

$0

$0

$0

$0

$0

















Accumulated Cash Position

























24

Notes to Financials

It is important to always include explanations of how
you calculated each revenue or expense.



Number each revenue row. Continue numbering
each expense row.


For each row, explain to the reader why that
projected number is realistic (experience, set
payments, estimates, etc.)


Make sure your explanations are labeled with the
same number as the corresponding row.



25

Notes to Financials


Example 1:

Office Supplies


I will need to replenish the ink cartridge,
paper, and postage stamps every 3 months. These items
cost 57$ to restock.



Example 2:

Revenue


I can realistically cut hair for 5 people every
day, at an average income of $20. Therefore I will be
making $500 per week or $2000 per month until I build
my client base.



26

Income Statement


Year 1

PRO FORMA STATEMENT OF INCOME

(COMPANY)

Year 1

INCOME







Product Sales

0



Service Contracts

0



Other Revenue (specify)

0



Other Revenue (specify)

0



Total Income

0



27

Income Statement


Year 1

EXPENSES




Year 1



Owner's Draw

0



Purchase of materials (raw goods or relevant to product sales only)

0



Advertising

0



Bad Debts

0



Insurance

0



Interest (loans and credit cards)

0



Business licenses, dues, membership & subscriptions

0



Office expenses (postage, courrier, etc.)

0



Supplies (paper, toner, stationery)

0



Legal, accounting, other professional fees

0



Management and administration fees

0



Rent

0



Maintenance and repairs (to office/shop)

0



28

Income Statement


Year 1



Salaries, hourly wages and benefits

0



Property taxes

0



Travel (including transportation, accommodation and meals)

0



Telephone

0



Cell phone

0



Utilities (hydro, natural gas, etc.)

0



Fuel costs (for equipment other than motor vehicles)

0



Delivery, freight and express re: product movement

0



Motor vehicle expenses (license plates, fuel, insurance, maintenance)

0



Other expenses (specify)

0



Other expenses (specify)

0



Other expenses (specify)

0



Total Expenses

0







NET PROFIT (LOSS)



0



29

Upcoming Sessions



Wednesday, October 3
rd



Financial Forecasting






Part 2


Location: Trout Creek Senior Friendship Centre



Wednesday, October 10
th



Market Research /






Grants & Loans


Location: Powassan & District Union Public Library


30

The Business Centre Nipissing Parry Sound
Inc.

200 McIntyre Street E, North Bay ON

705.474.0626 ext. 2528

Financial Forecasting



31

Recap Financial Forecasting
Part 1


Importance of Financial Forecasting


Capital Assets


Start
-
Up Budget


Determining Price


Cash Flow Statement


Estimating Revenues & Expenses


Notes to Financials


Income Statement



32

Cash Flow


Years 2 and 3


Once projections from Year 1 have been entered,
Years 2 & 3 can be more easily projected.


Some costs will remain the same on a monthly basis
(example: rent).




33

Cash Flow


Years 2 and 3


Ideally, revenues and some expenses will either
increase incrementally or proportionately.


Example of incremental increases:


Drawings increase $100 per month


$2000, $2100, $2200, $2300



Example of proportion (percentage) increases:


Revenues increase 2% per month


$5000, $5100, $5202, $5306, $5412



34

Cash Flow


Years 2 and 3


Spreadsheet


There are formulas in Excel that will automatically
add a percentage to the cell previous.



35

Introduction to Income
Statement


An income statement is important because it shows
if the revenues were high enough to cover expenses
over a specific time period.


Many new businesses show a loss for the first few
months but investors will be looking for a profit,
usually within the first year. (Specifically NOHFC)


If the company is showing a loss then revenues
must be increased and/or expenses decreased in
order to stay profitable.



36

Income Statement


Last week we looked at Year 1 of the income
statement.


We took our information from the “Totals” column
of the cash flow.


Now that we have completed cash flow for Years 2
and 3, we can use that information in the Income
Statement.



37

Income Statement

PRO FORMA STATEMENT OF INCOME

(COMPANY)

Year 1

Year 2

Year 3

INCOME















Product Sales

0



0



0



Service Contracts

0



0



0



Other Revenue (specify)

0



0



0



Other Revenue (specify)

0



0



0



Total Income

0



0



0



38

Income Statement

EXPE
-
NSES



Year 1





Year 2




Year 3



Owner's Draw

0



0



0



Purchase of materials (raw goods or relevant to product sales only)

0



0



0



Advertising

0



0



0



Bad Debts

0



0



0



Insurance

0



0



0



Interest (loans and credit cards)

0



0



0



Business licenses, dues, membership & subscriptions

0



0



0



Office expenses (postage, courier, etc.)

0



0



0



Supplies (paper, toner, stationery)

0



0



0



Legal, accounting, other professional fees

0



0



0



Management and administration fees

0



0



0



Rent

0



0



0



Maintenance and repairs (to office/shop)

0



0



0



39

Income Statement



Salaries, hourly wages and benefits

0



0



0



Property taxes

0



0



0



Travel (including transportation, accommodation and meals)

0



0



0



Telephone

0



0



0



Cell phone

0



0



0



Utilities (hydro, natural gas, etc.)

0



0



0



Fuel costs (for equipment other than motor vehicles)

0



0



0



Delivery, freight and express re: product movement

0



0



0



Motor vehicle expenses (license plates, fuel, insurance, maintenance)

0



0



0



Other expenses (specify)

0



0



0



Other expenses (specify)

0



0



0



Other expenses (specify)

0



0



0



Total Expenses

0



0



0















NET PROFIT
(LOSS)



0



0



0



40


What is this income statement telling us about the
business?


Are revenues increasing, decreasing, or remaining
steady?


Are expenses increasing, decreasing, or remaining
steady?


The relationship between revenues and expenses will
help us determine if our decisions as business
owners are having a positive impact on our profit.

Income Statement



41

Financial Planning Traps


Avoid using financial forecasting as a substitute for
business planning. They are interconnected.


Be aware of historic trends or performances.


Being overly optimistic in your forecasting
(overstating market shares and growth, sales
forecasts, or profit levels) can actually set you back.


If you give insufficient consideration to working
capital requirements you may find yourself without
enough cash to refill inventory, pay creditors, etc.




42

Financial Planning Traps


Expect time delays and be prepared to cover
associated costs (i.e. higher wage costs, higher
shipping costs). A contingency fund is important to
cover unexpected or underestimated expenses.



Making unduly optimistic assumptions about the
availability of grants or loans, or their interest rate,
can cause you to spend more cash than you have
available.



43

1. Its About Profit, Not Revenue


It doesn't matter how many thousands of
dollars you are bringing in each month if
your expenses are almost as high, or higher.
Many high
-
revenue businesses have gone
under for this very reason.



44

2. Think Before You Spend


When considering any new business expense,
including marketing and sales activities, evaluate the
increased earnings you expect to bring in against its
cost before you proceed to make a purchase. You can
often increase your profitability simply by delaying
expenses to a later month, quarter, or year.



45

3. Review the Plan Monthly


Even if time is taken to prepare a financial
plan with profit and loss projections, it often
sits in a desk drawer. It's not enough to have
a plan
--

you have to review it regularly.



46

Balance Sheet


A balance sheet is a snapshot of the business. It
shows the assets, liabilities, and owner’s equity in
the company.


Assets


List of everything that is owned by the business. Assets
must have a quantifiable value in order to be listed on the balance
sheet.


Liabilities


List of how much the company owes; all debts &
monetary obligations.


Owners’ Equity
-

What the business is worth. Equity includes the
original amount of money that the owners put into the business, plus
the earnings after withdrawals.




47

Balance Sheet


Assets and Liabilities are categorized as
either short
-
term or long
-
term.


An item is considered to be short
-
term if it
will last for one year or less. (Ex. Inventory)


An item is considered to be long
-
term if it
will last for more than a year (Ex. Loan or
Equipment)



Assets = liabilities + owners’ equity



What is a Capital Asset?

Capital assets are:


Permanent in nature


Have a useful life of at least one year


Used to produce income


The cost of the asset can be amortized over many years
to spread out the cost of purchase.



49

Amortize: “to charge a regular portion of an
expenditure over a fixed period of time”
www.beatley.net



Also known as depreciation.


Why are capital assets amortized? To show the cost
of the asset over its useful life.


“Reduces the value of an asset as a result of wear
and tear, age, or obsolescence. Most assets lose their
value over time (in other words, they depreciate),
and must be replaced once the end of their useful life
is reached.”
http://www.investorwords.com/1416/depreciation.html


Amortization



50


Items that are often amortized include vehicles,
buildings, and equipment.

After driving a car for 3 years, the value of the car has
decreased significantly and must be shown as such
on the balance sheet.



Amortization Example



Capital Asset Classification

These are some of the most common assets and how
much should be amortized per year:

Class 1

4%

Most buildings

Class 8

20%

Furniture, equipment,
tools ($500+)

Class 30

30%

Manufacturing
equipment

Class 52

100%

Computers & software

Class 10 or 10.1

30%

Vehicles



52

Balance Sheet Example

Current Assets
Current Liabilities
Cash
50000
Short-term Debt
30000
Accounts Receivable
40000
Accounts Payable
50000
Merchandise
100000
Salaries
110000
Total Current Assets
190000
Total Current Liabilities
190000
Other Liabilities
Capital Assets
Long-term Debt
20000
Equipment
30000
Less: Depreciation
-2000
Total Liabilities
210000
28000
Owner's Equity
8000
Total Assets
218000
Total Liabilities + Owner's
218000
Equity
Company ABC
Balance Sheet
October 1st 2012


53

Odds & Ends






54

Payroll Deductions


“Employee or Self
-
Employed?”


Determine whose benefits you are responsible for.



Covers topics:


Canada Pension Plan


Employment Insurance


Deducting Income Tax


Remitting Payroll Deductions



Even if a bookkeeper does this for you it is important
to understand the background of each.



55


Business owners are not required to charge HST to
their customers until they have reached $30000
worth of sales total from 4 consecutive quarters.


Sign up through Canada Revenue Agency


1.800.959.2221


Attached to your SIN number


More information in the booklet entitled “Guide for
Canadian Small Businesses”.



HST



56


Average Rates in Canada:


Junior Bookkeepers (1
-
2 years experience): $20
-

$40/hour

Intermediate Bookkeepers (3


10 years experience): $40
-








$60/hour

Senior Bookkeepers (over 10 years experience): $60
-

$80 hour



“If you are wondering how much to budget for bookkeeping services,
I'd say $3,000 including taxes annually for a set of audit proof books.
That would include a one time setup fee, monthly bookkeeping for 40
transactions or less per month, monthly conversations and
management reports , year
-
end, internal financial statements, and T1
tax preparation for sole proprietors.”



Bookkeeping Methods



57

Quickbooks vs. Simply
Accounting v. Excel


Quickbooks ranges from $80
-

$400 plus hst.


Claims to be designed for those who are unfamiliar
with accounting / bookkeeper.


Simply also ranges from $80
-
$400 plus hst.


More in
-
depth functions with a focus on business
management.


Excel comes standard on many new computers.


Setting up templates can take some time but easy to
update. If you update as you go year (month) end will
be much easier.



58


Tax remittances are done on a T2125 form.


This form is located in the booklet entitled “Business
and Professional Income”.


Some of your expenses (from your cash flow
statement) will be deductible for income tax
purposes.



Tax Remittance



59

Upcoming Sessions


Wenesday, October 10
th



Market Research / Grants




& Loans


Location: Powassan and District Union Library



Wednesday, October 24
th



Marketing On A





Shoestring Budget


Location: Powassan and District Union Library



November 7
th



Sales Strategies & Networking


Location: Powassan and District Union Library