Fiscal prognosiss are. rather merely. your prognosis of how your concern will execute financially over. state. the twelvemonth in front. Fixing prognosiss will assist you to measure your likely gross revenues income. costs. external funding demands and profitableness. Fiscal prognosiss are indispensable if you need to raise money from a 3rd party. such as a bank. But they besides provide you with the agencies to supervise public presentation on. state. a monthly footing and thereby exert effectual fiscal control – arguably the 2nd most of import direction map in running a concern. Aims

The purpose of this subdivision is to assist you to fix fiscal prognosiss. It will enable you to:
•Understand costing and pricing ;
•Use break-even analysis as a manner of puting gross revenues marks ;
•Understand fiscal prediction ;
•Assess working capital demands.

Assignment
The intent of these assignments is to guarantee that you are able to fix the necessary fiscal prognosiss for your concern. Satisfactory completion of the set of assignments will show that you know and understand how to: •Identify and cipher the fiscal lineations it will be necessary to fix. •Calculate your ain personal endurance budget.

•Determine the funding/materials demands of get downing in concern. •Consider how you will take and maintain effectual fiscal control of the concern. •Consider and program to cover with alternate scenarios.

1. Personal budget

How much money do you necessitate for yourself. Think about nutrient. apparels. vacations. personal travel. etc. Draw up a personal budget. Don’t skimp. You may be in concern to hold merriment – but you need to do money as good. Use this budget in ciphering your costs and monetary values. Of class you may non hold adequate gross revenues at the start to be able to take that sum of money. so you should besides cipher the minimal demand that you must take from the concern.

2. Costing and pricing

Calculate all your costs and find a suited monetary value for your merchandise or service. Think about your natural stuff demands as portion of your direct costs ; believe about your likely overhead costs.

3. Break-even

Now that you have calculated all your costs and put a monetary value. you should be in a place to fix a break-even chart. Is your prognosis of gross revenues above or below break-even? Do you hold a sensible border of safety? How much net income will you do if you achieve your gross revenues prognosis?

4. Prediction net income and loss

You should hold all the figures that you need to fix a prognosis of net income and loss. What is your awaited gross net income border? What is your operating net income? How much money will be retained in the concern?

5. Cash flow prediction

You should hold all the figures that you need to fix a hard currency flow prognosis. Remember to believe about everything shown on the net income and loss history. outgo points non shown on the net income and loss and. in peculiar. to believe about timing or grosss and payments. You will besides necessitate to believe carefully about your stock retention demands and your capital outgo. The first clip you prepare the hard currency flow. disregard any investing or borrowing other than that needed for capital equipment. The worst cumulative shortage will bespeak the minimal degree of working capital required.

6. Forecasting your balance sheet

Once you have completed the net income and loss and hard currency flow prognosiss. you should be able to fix a balance sheet prognosis. What degree of working capital demand is suggested by the balance sheet?

7. Sensitivity analysis

Have another expression at your net income and loss and hard currency flow prognosiss. What happens if gross revenues are 15 % less than you have forecast? Do you still do a net income? What happens if natural stuff monetary values travel up by 25 % ? What does this make to your profitableness? Can you go through on such additions to your clients or will they exchange providers?

8. Effective fiscal control

You should now be in a place to exert control over your concern. Will you use a simple manual book-keeping system or a computerised 1? As a brief reminder. compose down the cardinal grounds for maintaining effectual fiscal control. What are the critical Numberss at which to look to guarantee you retain effectual fiscal control?

Break Even Analysis
Break-even analysis identifies the point at which your concern starts to do a net income. You can work out the break-even point utilizing any timescale. e. g. hebdomadal. monthly. annually. etc. To cipher the break-even point you need to cognize the undermentioned: •The entire fixed costs of your concern – these include rent and rates. your drawings. loan refunds. etc ; •The entire variable costs for bring forthing your merchandise – these include labor. stuffs and packaging ; and •The selling monetary value of your merchandise.

Once you have these figures. you can work out your break-even point utilizing four simple computations and plotting the findings on a graph.

Examples:

Ron from Widgets ‘R’ Us want to work out how many doodads he needs to sell in order to break-even every month. He works his fixed costs out as follows:
•Rent – ?167 per month
•Salary – ?834 per month
•Rates – ?70 per month
•Loan refund – ?100 per month
•Total – ?1. 171
( ?1 = Rs. 84 )
( Note: It is better to round figures up instead than down. as this will increase your safety margin. )

This figure can be plotted as follows:

Ron so works out his variable costs for the production of each doodad: •Materials – ?9. 00
•Packaging – ?1. 00
•Labour – ?11. 00
•Total cost – ?21. 00 per doodad
( ?1 = Rs. 84 )

He selects a value on the ‘number of widgets’ axis ( in this instance. 250 ) and does the undermentioned computation: •250 doodads x ?21. 00 per doodad = ?5. 250
Ron secret plans this figure on the graph and draws a consecutive line from it to zero.

The following measure is for Ron to work out his entire costs. To make this. he adds his fixed costs to his variable costs: ?1. 171 + ?5. 250 = ?6. 421 ( ?1 = Rs. 84 )
He plots this figure on the graph and draws a consecutive line from it to ?1. 171 on the ‘Pounds’ axis.

Ron now needs to work out his gross line. To make this. he merely multiplies his products’ merchandising monetary value by the illustration figure of doodads he chose earlier ( 250 ) : ?32. 50 ten 250 = ?8. 125 ( ?1 = Rs. 84 )

He so plots this figure on the graph and draws a consecutive line from it to zero.

Ron can now happen his break-even point merely by turn uping the exact point where the gross line disects the entire costs line.

In this instance. Ron must sell 100 doodads each month if his concern is to break-even. If he sells more than 100. he makes a net income ; if he sells less he makes a loss.

Costing And Pricing
Costss
Although comptrollers define costs in several different ways. there are. efficaciously. merely two types of cost. The first cost is that which is straight attributable to the merchandise or service. Direct costs include. for illustration. natural stuffs and sub-contract work. If you make desks. for illustration. the cost of wood will be a direct cost. Within ground. the cost will be the same for each desk. no affair how many desks you make. When you make a sale the income foremost has to cover the direct costs associating to that sale. Whatever is left is called gross net income or part.

All other costs are operating expenses. These include. for illustration. staff wages. selling. rent. rates and insurance. They besides include depreciation ; that is. an allowance for wear and rupture on capital equipment. Operating expenses are frequently called fixed costs because. by and large. they are fixed for the concern. Interest is frequently regarded as a tax write-off from net net income instead than an overhead cost. You need to include it as an operating expense in your costing computations. even though it varies with the size of your overdraft or loan. If you are freelance. you will take drawings from the concern. Whilst. purely talking. drawings are an progress against net income. include them ( and an allowance for income revenue enhancement ) as an operating expense when ciphering entire costs.

The part is alleged because it contributes towards covering the operating expense costs. Each sale generates a part. When adequate parts have been made. and all the operating expense costs are covered. they start to lend to net net income. Monetary value

The monetary value at which you sell your merchandise or service clearly needs to transcend the entire costs of supplying it. But the monetary value should besides reflect what the market can stand. If you are selling a differentiated merchandise or have adopted a scheme of market focal point so you may besides be able to bear down a premium monetary value. If you are prosecuting a cost leading scheme you will necessitate to be ruthless in maintaining your costs down and under control.

In ciphering your monetary value you will necessitate to follow a figure of stairss: •Estimate your likely gross revenues for a period. state. one twelvemonth ; •Calculate the entire direct costs and split by the gross revenues volume to give direct costs per unit ( say per merchandise or per hr of service ) ; •Calculate your entire overhead costs and split by the gross revenues volume to give operating expense costs per unit ; •Add direct costs per unit and overhead costs per unit to give entire cost per unit ; and. •Add a farther net income border ( to let for reinvestment. etc ) . If necessary. add VAT every bit good. You now have a first stab monetary value. How does that compare with your rivals? Will clients purchase at that monetary value? Do you need to cut down costs? Can you accomplish a higher net income border?

What happens if you fail to accomplish gross revenues at the determined monetary value? Remember that the operating expense costs are fixed. so if gross revenues fall the operating expenses will be spread over fewer points and the unit cost efficaciously increases. The converse is besides true. Increasing the volume of gross revenues means that the operating expenses are spread over more units. so the unit cost falls. This means that you can. if you choose. cut down the monetary value. And cut downing the monetary value might increase your degree of gross revenues. It’s a all right reconciliation act.

Depreciation
Depreciation is an allowance for wear and rupture on the equipment used in your concern. As clip base on ballss. your equipment will normally lose value. and this can be considered a cost to your concern. You need to believe about how long you expect your assets to last. For illustration. if you purchase a computing machine system. you may calculate that in 5 old ages it will be disused. That means the depreciation rate is 20 % per twelvemonth. If you determine it to be 2 old ages. so it will be 50 % per twelvemonth. This does non hold any consequence on hard currency flow. merely on how net incomes are calculated. Deprecation is an accounting cost that must be included to give a Profit & A ; Loss history more relevancy. Finance Action Planner ( FAP )

The Finance Action Planner ( FAP ) is a learning tool that will assist you to: •Develop your all-around fiscal accomplishments
•Learn more about a scope of fiscal issues
•Identify suited beginnings of finance
•Create a set of fiscal prognosiss
•Test out different fiscal scenarios

Fiscal prognosiss
Once you have an thought of your likely costs and an thought of how much you need to sell to do a net income you are in a place to fix fiscal prognosiss. There are three basic fiscal statements ( the net income and loss history ( P & A ; L ) ; the hard currency flow statement ; and the balance sheet ) that describe the activities and fiscal province of any concern. These can be prepared on a historical footing – to demo how a concern performed during a defined period – or as prognosiss – as estimations of how the concern will execute in the hereafter. 3 stairss to calculating

1. Businesss frequently start by calculating their hard currency flow and so take to deduce other prognosiss from it. It makes more sense. nevertheless. to get down by calculating the income and outgo of the concern. which will bespeak whether you will do a net income. so worry about when money will be received or paid out – to detect if you will hold adequate hard currency when it is needed. Income and outgo is summarised in a net income and loss history. 2. You will besides necessitate to look at your likely gross revenues for. state. the twelvemonth in front. This needs to associate back to your market research and. if you are already in concern. to old public presentation.

The direct costs can so be estimated ( normally as a per centum of gross revenues ) to give gross net income. 3. The following measure is to gauge the likely operating expenses. Subtracting these gives an operating net income prognosis. If the net net income is excessively low you will either demand to measure whether you can accomplish higher gross revenues or whether you can cut down the operating expenses. When fixing your prognosiss. retrieve to let for increased costs. for case. due to rising prices or future wage awards. If you do necessitate a loan. so you will besides necessitate to let an sum for loan involvement. If you use equipment. retrieve to let for depreciation. Whilst depreciation is non included in the P & A ; L. you may necessitate to let for the replacing or fixs of machinery. so you may wish to include a eventuality.

The P & A ; L prognosis will demo whether you are likely to accomplish your first cardinal fiscal demand: doing a net income.

Fixing hard currency flow prognosiss
In fixing your prognosiss. you will necessitate to believe carefully about all your costs. about your monetary value and likely gross revenues at that monetary value and about the timing of both grosss and payments.

As mentioned above. the first prognosis that you set out should ideally be a P & A ; L. sum uping income and outgo for. state. the twelvemonth in front. You might make this monthly or yearly. The P & A ; L is of import for showing profitableness ; over the really short term. nevertheless. the cardinal demand is to bring forth hard currency and cognize the business’s working capital demands. This can best be done by fixing hard currency flow prognosis which should put out all the information. month by month. sing hard currency influxs and escapes. The hard currency flow prognosis should include: •Receipts of hard currency from clients ;

•Payments for natural stuffs ;
•Payments for all other disbursals ;
•Drawings and rewards ;
•Capital outgo ;
•Capital. loans or grants introduced ;
•Loan refunds ;
•VAT grosss and payments ( if VAT registered ) ; and.
•Tax payments.
All of these points should usually be shown individually and in the month into which the money will be received. or paid by. your concern.

For concerns with a modest turnover and that demonstrate profitableness in the twelvemonth. it is normal merely to calculate one twelvemonth in front. with a monthly hard currency flow. Larger concerns. particularly those seeking equity investings and/or which do non demo profitableness in the twelvemonth. may necessitate to fix prognosiss for two or three old ages. The first twelvemonth hard currency flow is normally shown monthly. the 2nd twelvemonth quarterly and the 3rd twelvemonth merely a individual one-year figure.

It is frequently helpful when fixing hard currency flow prognosiss ab initio to disregard any finance that is available from the bank or other loaners. The hard currency flow prognosis so shows the true place of the concern. It can so be used to make up one’s mind if the budget is feasible and can be adjusted to reflect the true place and to measure the entire support demand.

If you do non hold sufficient money of your ain. so you will necessitate to seek loan finance or an equity investor. Most little concerns merely look for loan finance. Aim to fit the term of the loan to the life of the plus for which it is required. It would be normal to look for a short-run loan. for illustration. to buy equipment. or a long-run loan to buy premises. You will besides necessitate to purchase stock and pay operating expenses whilst expecting payment from your clients. The money required is called working capital and is typically funded by an overdraft. When fixing your hard currency flow prognosis. you may wish ab initio merely to include personal investing or loan finance for fixed assets and to disregard financess for working capital. The worst cumulative shortage will so give an indicant of your entire on the job capital demand. Of class. the sum that you need to borrow can be reduced if you have more available to put yourself.

If you have a term loan. the capital refunds will non calculate in your net income and loss history – they are non a concern disbursal – although the involvement part of the refunds will be charged as an disbursal. However. the refunds do necessitate to be included in your hard currency flow prognosis.

Balance sheet
The money in a concern can merely come from three beginnings: capital introduced by the proprietor ( s ) ; loans ( whether from the bank or. efficaciously. from creditors ) ; and. retained net incomes ; that is. net income which has been generated by. and retained within. the concern. That money is used to finance the fixed and current assets of the concern. Current liabilities include:

•Creditors
•Overdrafts
•Loans due within one twelvemonth
•Money owed under hire purchase understandings
•Any sums owed in VAT or revenue enhancement. etc.
In larger concerns. loans falling due in more than one twelvemonth are normally shown individually. You will. nevertheless. have a better thought of your business’s public presentation if you show all loans as current liabilities.

Current assets less current liabilities show your on the job capital demand. Since the balance sheet is simply a snapshot. nevertheless. it may be better to infer your working capital demand from the hard currency flow prognosis.

The net assets are ever equal to the capital introduced plus militias ; that is. the net finance. sometimes known as net worth or the equity of the concern.

The net finance. together with any long-run loans. is called the capital employed. All adoption should be included when ciphering capital employed.

Pricing schemes
The greatest danger when puting a monetary value for the first clip is to flip it excessively low. Raising a monetary value is ever more hard than take downing one. yet there are great enticements to undersell the competition. It is clearly of import to compare your monetary values to your competitors’ . but it is indispensable that your monetary value covers all your costs. There are a figure of possible pricing schemes from which you might take. These include: 1. Cost based pricing – sum costs are calculated and a grade up is added to give the needed net income. 2. Planing – you charge a comparatively high monetary value to retrieve put up costs rapidly if the merchandise is good or new. As more rivals enter the market. you lower the monetary value. 3. Individual – you negotiate monetary values separately with clients based on how much they are prepared to purchase. 4. Loss leaders – if you wish to sell to a peculiar market so you might sell one merchandise or service cheaper to derive market
entry.

You balance this by selling other merchandises or services at a higher monetary value. This can be hazardous as the danger is that everything becomes a loss leader. 5. Expected monetary value – what does the client expect to pay? If you are selling a quality merchandise. make non under monetary value. Often the client expects to pay a batch as the merchandise or service has a certain ‘snob’ value and this may be diminished if you under monetary value. 6. Differential pricing – you charge different sections of your market different monetary values for the same service. For illustration. offering price reductions to certain people like pensionaries or the unemployed. or bear downing lower rates for quiet periods. If. after working out your costs. the monetary value you charge is much greater than your competitors’ so you will hold to look at ways of cut downing costs.

Sensitivity analysis
It is of import to cognize how sensitive your prognosis is to alterations. Sensitivity analysis looks at ‘what if? ’ scenarios. What happens to your hard currency place. for illustration. if gross revenues fall by 10 % ? What happens if your chief provider additions natural stuff monetary values by 12 % ? Financial establishments when sing propositions for a loan peculiarly use sensitiveness analysis. If your concern is peculiarly susceptible to little alterations. so you likely do non hold a sufficiently big net income border. You will therefore be less likely to have the loan required. You may happen it hard to cut costs. You may non be able merely to increase monetary values to better your borders – that might discourage clients. Are at that place other ways in which you can force up the borders. e. g. by increasing end product?

Having undertaken your sensitiveness analysis. you may necessitate to reexamine elements of your prognosis. Sensitivity analysis can assist in doing determinations. You may desire to see. for illustration. the consequence of increased natural stuff. labor or overhead costs ; of cut downing monetary values. with changeless volumes. to counteract rivals ; or cut downing volumes. with changeless monetary values. due to over optimistic prognosiss. Furthermore. if you are about to pass a big amount of money on equipment. you may desire to look in front several old ages. if at all possible.

Including a sensitiveness analysis in your concern program will show that you have thought about some of the possible hazards – and that is half manner to avoiding them.

VAT ( Value Added Tax )
VAT is revenue enhancement paid on the value added at each phase of bringing of a merchandise or service. It is a method whereby concerns act as revenue enhancement aggregators for the Government. If you are registered for VAT. by subjecting a VAT return you can claim back what you have paid in VAT. and manus over what you have collected. Not all goods are nonexempt – for illustration. insurance. some instruction and preparation. and postal services are exempt. If points are VAT-able. so. disregarding VAT on fuel. there are two rates – standard ( presently 17. 5 % ) . and zero-rated. Zero rated points are different from exempt points. It is merely necessary to register if your end product is nonexempt. If you do register. you will be able to retrieve VAT on your purchases including stuffs. capital equipment and operating expenses. You will. nevertheless. have to bear down VAT on your gross revenues.

The difference between what you collect and what you pay out in VAT is passed on in due class to Customs & A ; Excise. There is more paperwork involved if you are VAT registered – you need revenue enhancement bills demoing your VAT figure. an analyzed VAT history. and VAT return signifiers. It may. nevertheless. be advantageous to register voluntarily if your gross revenues are below the turnover bound. because VAT paid on purchases can be reclaimed. You may besides repossess VAT on capital equipment. natural stuffs and stocks bought before enrollment. provided the concern still owns them. If you are selling to VAT registered concerns. it is likely to be more attractive for you to register. If you are selling to the general populace. it likely will non be. This is. nevertheless. an country where you should seek professional advice.

CASE STUDY
Brian’s Book-keeping Business
Brian runs a book-keeping service for several little concerns. His operating expenses are as follows: Costs? Per twelvemonth ( ?1 = Rs. 84 )
Office costs5. 000
Ad 1. 100
Insurance550
Telephone650
Vehicle running costs900
Other3. 000
Brian works 40 hours per hebdomad. He spends 8 hours per hebdomad on disposal. selling. etc. He works 45 hebdomads each twelvemonth leting for vacations and unwellness. Brian draws ?200 out of the concern each hebdomad.

Brian has been asked to set about a specific undertaking and estimates he will necessitate to pass 12 hours on it. What is the cost of supplying the service?
How much should he bear down?

Solution:
What is the cost of supplying the service?
1. Entire hours worked per annum = 32 hours per hebdomad x 45 = 1. 440 hours 2. Entire drawings = 200 ten 52 = ?10. 400
3. Entire fixed costs = ?11. 200
4. Entire costs = ?21. 600
5. Costss per hr = 21. 600/1. 440 = ?15
6. For a occupation enduring 12 hours. the cost is ? 180
( ?1 = Rs. 84 )
How much should he bear down?
Brian has decided that he should besides add a farther 20 % net income border in instance his costs go up and to do a small excess for reinvestment. 180 + 20 % = 216
He is besides registered for VAT and demands. hence. to add VAT at the standard rate ( 17. 5 % )
216 + 17. 5 % = ?253. 80
So the monetary value he charges to his client is ? 253. 80

Useful tips:
1. Some readers of your concern program will see the fiscal prognosiss as the most of import constituent. It is where you summarise the expected income. dependant on your market research. and where you set out your expected costs. 2. The prognosiss need to show that the concern is feasible and that there is a sufficient border of comfort to let for autumn in demand or increase in costs. 3. Take attention to fix your fiscal prognosiss as
accurately as you can. Then compare your existent consequences with your prognosiss and. if necessary. take disciplinary action at an early phase to maintain yourself on class.