Financial planning

 Like any preparation for the future, a business has to make assumptions and estimates about the months ahead.  Income and spending estimates are made for both departments and for the whole business, usually for 12 months at a time.  Cash-flow forecasts can help to provide a more detailed picture of what is happening or might happen from month to month.

We will look at how such financial plans are of use to: • business departments; • the business as a whole; • investors in the business; • creditors who might lend money to the business. We will also look at how financial documents can be used to plan for: • an expansion of a business; • the costs of unexpected events; • reductions in the costs of the business.

Unexpected events  Foot and mouth, 9/11, Credit crunch  All of the above were unexpected and led to businesses having to revise their financial documents  For an airline 9/11 meant additional costs in the form of added security  Likewise foot and mouth meant added costs for framers  The credit crunch has meant access to banking finance is more limited

Expansion of a business  Expanding a business usually means that costs/expenses will increase  More finance will be need to cover increased wages, rent, electricity etc  Break even point will rise  In the long run it is to be hoped that increased revenue will cover such increases  In the short term, increased funds will be required – re-invest a greater % of profits, sell more share, increased borrowing etc (see sources of finance)

A reduction in costs of a business  If costs fall then a revision will have to take place of all financial docs  Less borrowing will have to take place  Withdrawals from the business can rise including drawings  The business can potentially make more profit and hence re-invest more in the business (break even point will fall)  Dividends can increase or be paid to shareholders

Financial plans: use to departments  Marketing: changes in price levels allows department to see affect on revenue  HR: pay rises allows dept to see affect on overall expenses and profit compared to more staff on lower pay  Finance: impact on costs in general can be examined  Production: impact of quality control can be assessed

Financial plans: use to whole business  Cash flow: allows business to monitor inflow and outflow of cash and to plan for cash flow problems by for example arranging loans/overdrafts  Budget: monitor spending of depts. and business as a whole – actual vs. planned  Profit and loss: monitor sales, cost and expenses and their effects on profitability  Balance sheets: allows the business to monitor how money is being used and in particular that not too much borrowing is taking place

Financial plans: investors in the business  Similar to the above slide  Particularly interested in:  profit and loss account – is the business making profit, what is the overall trend, how does it compare to other businesses in the industry  Balance sheet – how is money being used, are loans at a manageable level

Financial plans: creditors who might lend to the business  Examining the balance sheet would allow potential creditors to see how the business is dealing with its loans  A high current liability figure may indicate the business is taking too long to pay up. Also the level of cash would be of interest in relation to creditors – this would allow the business to settle its debts  Would also look at the figure for other types of loans to see if the business might have borrowed too much money or might struggle if say interest rates rose

exercise  It makes you think questions – pages 399, 400, 401, 402, 403