Episode 35 Entrepreneurs often overlook key parts of their financial plan. What’s missing from your plan?

Some elements of a financial plan should be obvious to every entrepreneur. Sales, Costs of production, Gross Margin, Overheads etc. But some cash intensive demands are often overlooked, especially by first time entrepreneurs who do not have a finance background. The objectives of your financial plan are many but one that is important to you is you are seeking funding is get an estimate of what your business will be worth. What is its valuation? ​ Working Capital – the money you need to run your business. A necessary evil. For this discussion I will define working capital as Inventory and Accounts Receivable which can thought of a the negative aspect of Working Capital. Accounts Payable – the positive side of working capital, as this is in effect money being lent to you by your suppliers. And finally, the cash balances your must maintain to ensure you can pay your bills as they come due. One of the most important of which is your employee’s salaries. Investors will look at your ability to manage working capital as a measure of how efficiently your business is being run. Good control of working capital shows that you are focused on what is important – that is cash. Common measures of working capital: For Accounts Receivable – Days Sales Outstanding DSO. If your customers are slow to pay your DSO will increase. For Accounts Payable – Days Payable Outstanding DPO. This reflects how quickly you pay your suppliers. The longer you delay payment the higher your DPO. Just paying late is not the most effective way to manage DPO. Inventory – Days on Hand (DOH) – the more money have tied up in inventory the higher your DOH. AR and Inventory are negative to cash, so you want DSO and DOH to be as low as possible. AP is positive to cash. so you want DPO to be as high as possible. Startup expenses – even before you open your doors you will be incurring expenses: Incorporation costs, business licenses, logo design, website creation, company secretarial fees Essential equipment – computers, phones, printers, desks, chairs, staff amenities Taxes Taxes on profits are obvious – but check out new business incentives. In early years tax losses may be incurred, this can usually be offset against future income. Sales taxes, VAT and GST. These become payable based on invoice date, not when your customer pays you. Understand the regulations in your country and estimate how much of this tax burden your may have to finance out of your funds. Depreciation Although it is a non-cash item it is on your P&L as a deduction from profits The rate of depreciation varies on the type of asset. Computers are often depreciated over 3 years, buildings over 40 years. Land is typically not depreciated. Valuation Many entrepreneurs would like to dispense with a financial forecast if it wasn’t that banks and other investors require a plan. The good news is that having prepared a financial plan you have a basis for valuing your business It’s not uncommon for businesses to be seeking funding before they launch. Your financial forecast is all you have as a basis of negotiation with your investors. How much of your company do you need to give up for X dollars of funding? Document and be able to justify your assumptions. The more reliable third party facts, figures, reports the better. Discounted Cash Flow (DCF) is a common method of determining a businesses value. After all the value of a company is its future cash flow. At this early stage you have no track record of your ability to forecast your business’s results so expect investors to challenge or discount your assumptions. Discounted cash flow requires a discount rate. This is often tied to the cost of borrowing.