Summary Business plan

FINANCIAL FORECASTING

Steps:

 Forecast sales

 Project the assets needed to support sales

 Project internally generated funds

Pre money strategic plan (huge debt in the bank account as a consequence of the action plan)

Project outside funds needed

Decide how to raise funds

See effects of plan on ratios and stock price

Post money proposal (reduce short term bank debt by replacing it with other sources)

Developing a Long-Term Financial Plan

Forecasting a firm's future financing needs using a long-term financial plan can be thought of in terms of three basic

steps:

1. Construct a sales forecast

2. Prepare pro-forma financial statements

3. Estimate the firm's financing needs

Judgmental Models

Judgmental models are qualitative and essentially use estimates based on expert opinion.

 Survey of Sales Forces: most appropriate for manufacturing and wholesale firms.

 Surveys of Customers: applicable to all firms. Customers express preference for new or modified products.

 Historical Analogy is most appropriate for firms that have several outlets. Introduction of new product which has

characteristics similar to previous products.

 Market Research can include surveys, tests, and observations. Results are statistically extrapolated to develop

forecasts of demand for products.

 Delphi Method uses a panel of experts to obtain a consensus of opinion. Used primarily for unique new products

or processes for which no previous data exists.

Step 1: Construct a Sale Forecast generally based on:

 past trend in sales;

 the influence of any anticipated events that might materially affect that trend.

Step 2: Prepare Pro Forma Financial Statements

 Pro forma financial statements help forecast a firm's asset requirements needed to support the forecast of

revenues (step 1).

 The most common technique is percent of sales method that expresses expenses, assets, and liabilities for a

future period as a percentage of sales.

Step 3: Estimate the Firm's Financing Needs Using the pro forma statements we can extract the cash flow

requirements of the firm.

 Indirectly: using only p&l, fs and formulas (cash flows statement)

 Our mixed method: looking at changes in the bank account of a dinamic model that account for: p&l, fs, cf

(your excel in project 1)

 Directly: braking down the changes in the bank account month by month (possible improvement for our

project, cash budget)

INDIRECT METHOD

Percentage of sales method is based on the fact that assets and liabilities historically vary with sales.

Thus any increase in sales will cause a subsequent buildup in both assets and liabilities.

Both profit margins and dividend (owner) payout ratios determine the amount of internal financing that can be applied

to support increased asset buildup.

Example

Preparation of Ziegen's financial forecast for 2011 begins with a forecast of fim sales for the year. This forecast is

followed by a projection of assets required to support the projected level of sales. Offsetting the firm's need for

discretionary financing is the financing that the firm receives from accounts payable and accrued expenses, which

arise automnatically (or spontaneously) as a result of the firm's having made a sale. Ziegen's financial analysts

forecast $12 million in sales for 2011, which will require that the firm invest a total of $7.2 million in assets. The $1.2

million increase in assets will be financed partially by the $400,000 increase in the levels of accounts payable and

accrued expenses (equal to $2.4 million – $2.0 million), In addition, the analysts expect the firm to generate another

$300.000 from the firm's retention of one-half the firm's 2011 net income. The fim's discretionary financing need of

$500,000 is calculated by subtracting the $400,000 in accounts payable and accrued expenses and the $300,000

increase in retained earnings from the total increase in financing needs of $1.2 million.

Sources of Spontaneous Financing

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are typically the only liabilities that vary directly with sales. They are referred

to as sources of spontaneous financing. The percent of sales method can be used to forecast the levels of both these

sources of financing.

Sources of Discretionary Financing

Raising financing with notes payable, long-term debt and common stock requires managerial discretion and hence



these sources of financing are called discretionary sources of financing. injection of a business angel.

The retention of earnings is also a discretionary source as it is the result of firm's discretionary dividend policy. Th

e firm's discretionary financing needs (DFN) are equal to the financing the firm requires for the year that is not

provided by spontaneous sources such as accounts payable and accrued expenses plus retained earnings for the

period. In essence we estimate DFN as the "plug figure" that balances the financing side of the firm's pro forma

balance sheet.

DIRECT METHOD

Sales forecast:

 Listing what you know:

 Expertise, experience, knowledge of charges and fees

 Previous revenue and cost information based experience.

 Research similar companies via annual reports database, or industry-specific publications.

 List three types of expenses:

 Start-up

 Fixed

 Variable

 Develop a revenue forecast

Forecast revenue for a start up

Pro forma Financial Statements

A pro forma financial statement is a projected statement based on the forecast.

The three basic pro forma statements are:

 Pro Forma Income Statement

 Pro Forma Balance Sheet

 Pro Forma Cash Budget

Developing a Short-term Financial plan

Unlike a long-term financial plan that is prepared using pro forma income statements and balance sheets, short-term

financial plan is typically presented in the form of a cash budget that contains details concerning the firm's cash

receipts and disbursements.

Cash budget includes the following main elements:

 Cash receipts,

 Cash disbursements,

 Net change in cash, and

 New financing needed.

Example

The cash budget for Melco Furniture, Inc. consists of four components or sections: (1) cash receipts, including cash

received from sales made during the month of the budget as well as from sales made in previous months; (2) cash

disbursements made during the month for various categories of expenses such as labor (wages and salaries), rent,

and interest and principal on the firm's debt; (3) the calculated change in cash for the month, which is simply cash

receipts less cash disbursements; and finally (4) the computation of new financing needed to maintain the firm's

desired cash balance.

Uses of the cash budget

1. It is a useful tool for predicting the amount and timing of the firm's future financing requirements.

2. Cash budget is monthly, but its annual result matches with the annual Cash Flow Statement

3. The annual cash flow statement might HIDE some financial sufferance if the pick in your short term debt is

reached in a month BEFORE December and next re-absorbed by positive cash from operations

BORSA ITALIANA GUIDE

Preface

For your project we will follow this guide, which stresses out:

 

Strategic Aims (intentions) Goals, supported by analysis and research

 Actions to be carried out

 Evolution of Key Value Driver (growth for financial partners) Most important KPIs to improve efficacy and

internal efficiency

 Expected results Financial statement

 The document is intended for listed company and its sponsor for IPOs (initial public offer)

Network of financial players of IPO

 Sponsor: propose the company for a future listing, coordination and management of the IPO, ensure

comliance with rules, develop investment case, valuation and offer structure, advisor of company’s board.

 Bookrunner: prepare company for roadshow, facilitate research, marketing and distribution, pricing,

allocation

 Lawyers: legal due diligence, draft of the prospectus, corporate restructuring, provide leal opinions

 Reporting accountant: attract the interest, review financials, tax restructuring, financial due diligence

 Financial PR: attract the interest, develop communication strategy to support the process, enchance market

perceptions to support share price, pre and post IPO press releases

 Other advisers: registrars, finanical printers, remuneration consultants.

Phases

SBU vs SBA

 Strategic business area

 Sub-system of the external sector / market / industry

 Useful for competitive comparative analysis

 Combination of

- Product / service / brand

- Technology used

- Distributional channel

- Type of customer

- Geographic area

 Strategis business unit

Internal organization decision

- Basic element for the planning activities

Plan minimum requisites

 Financial sustainability: get control over your Net Financial Position (financial need covered by financial

debt and equity.

In pre-money financial need is covered 100% through debt.

Post money shows equity injection by new shareholders.

 Consistency: between level of investment and expected results. No incongruences among goals, actions,

available resources and results.

 Reliability: apprpriate and verifiable assumptions, sensitivity analysis when variability and risks arise.

Components of the SP

 Strategy pursued

Description of:

- Operative strategic layout

- Performance realized in each SBA

- Need/opportunity for strategic renewal

 Strategic aims

Management choices relating to:

- Role in competitive arena

- Value proposition

- Creation of competitive advantage

 Action plan

Actions which reduce the gap between strategy pursued and strategic aims in particular:

- Economic/financial impact and timetable

- Investments to be made

- Organizational impact of the individual action

- Intervention on products / services / brand porfolio

- Actions which change the customer target

- Restrictions regarding realizable nature

 Assumptions

Relative to key value drivers and forecast data, with reference to:

- Macro economic magnitudes

- Development of revenues

- Direct and indirect costs

- Evaluation of capital employed

- Evaluation of financial structure

 Forecast financial data

Consistent with the strategic aims and the Action Plan and referring to:

SBUs

Distribution channels

Geographic areas

Customer type products / services / brands

KSF, KPI, KVD, Financials



- Key Success Factor Qualitative, in the mission

Factors that will allow you to defeat competitors (better quality, higher speed, larger convenience, direct control of

the channel, clearer image, etc.)



- Key Performance indicators Quantitative

Measures of your success generally expressed in units