Operating Finance

1. Operating Finance

2. Need to know: • Opening the bank account • Taxation • Insurance

3. Opening a Bank Account • Complete a bank mandate form • Authorised signatures • Copy of Memorandum and Articles of Association • Certificate of Incorporation • Name of the account

4. Taxation • Income Tax – Sole Traders and partnerships • Corporation Tax – Limited Companies on profits • Value Added Tax – All Businesses in excess of certain threshold • PAYE/PRSI – Employees etc.

5. Calculating Taxable Profits • Taxable profits are calculated by deducting allowable business expenses from turnover. These include: • Purchase of goods for resale • Wages, rent, rates, repairs, lighting, heating • Running costs of vehicles or machinery used in the business • Accountancy and audit fees • Interest paid on any monies borrowed to finance business expenses • Lease payments on vehicles or machinery for business

6. PAYE/PRSI • Operates on the basis that an employer deducts tax at a specified rate from an employee’s pay. • Must register for PRSI/PAYE • Need to make payments and returns to Collector-General

7. VALUE ADDED TAX • Taxable Persons • Rates of VAT • Register for VAT • Returns to the Collector General

8. NEED TO KEEP… • Records • Returns • Information for Revenue Audits • Record of transactions • Quality Credit Control • Correct financial books • Trading Account, P&L Account, Capital Account, Balance Sheet • Financial Software

9. Insurance • Business Insurance • Fire • Burglary/theft • All risks • Public liability • Product liability • Employer’s liability • Motor Insurance

10. Financial Statements

11. Types of Statements • Cash Flow • Profit & Loss • Balance Sheet • Break Even Analysis • Initial Investment • Sources of Funding Proposal

12. Cash Flow Statements

13. Managing Small Business Accounts • Cash Method • Only records income when cash is received • Only records expenses when payment is made • But what about credit? • Accrual Method • Sales recorded as sale made or items ordered • Expenses recorded when order made

14. Cashflow Forecast Gives a monthly snap shot of the amount of money coming in and going out of the company’s bank account Note the positive or negative cash flow

15. Opening Balance Jan Feb March April Income Cost of Sales Rent Heating, Lighting, Water Tel., Internet Professional Fees Bank Charges Wages Material Equipment Transport Total Cost Closing Balance

16. Notes to Cash Forecast • Opening Balance for each month to be brought forward amount from the previous month’s closing balance • Sales may be up front, payment with purchase or 1, 2 or 3 months after sale – depends on type of business • Office rent usually one month in advance • Heating, Lighting and water usually give one month credit • Telephone, Internet usually one month credit • Professional Fees usually two months credit • Bank charges and credit cards usually one month credit

17. Notes to Cash Forecast • Wages and salaries usually same month • Material costs – varies but usually one month • Equipment – varies – 1, 2 or 3 months • Transport costs – varies – up front etc.

18. Stocking / Destocking • Stocking – Gearing up of materials and stock to supply increasing sales (may take a few months before positive effect realised) • Destocking – Winding down of stock as sales reduce (effect seen immediately)

19. Information required for cash flow forecasting • Easy to get for some expenses e.g. insurance, selling, administrative etc. • Owner/manager source of information • Trade Journals • Note seasonality • Avoid Estimating - aim for factual information as much as possible

20. Profit & Loss Account • Sales (volumes or values) • Cost of Sales • Fixed Overheads • Variable overheads

21. Business Name Profit & Loss Account Year 1 Year 2 Year 3 Year 4 Sales Cost of sales Gross Profit Gross Profit % Overheads Staff Production Premises Transport Selling and promotion General Expenses Finance Depreciation Total Overheads Net Profit/ (Loss) Tax on profit / (Loss) Profit retained for Business

22. Break-even Analysis • Sales Price: Can this be increased? • Sales Volume: Can this be increased? • Cost of sales: Can this be reduced? • Overheads: Can this be reduced?

23. Break-even Analysis • Fixed Costs • Machinery, salaries, rent, marketing • Variable Costs • Labour, materials and variable overheads • Income • Turnover

24. Break-even Analysis • Contribution per unit sale • Equals: • Income per unit sales-variable costs • Breakeven Point • Equals: • Fixed Costs Contribution per unit sales

25. Balance Sheet • A snap shot of the balance between the company’s assets and the company’s liabilities on any particular day • Fixed Assets • Capital items not yet paid for • Current Assets • Actual cash in hand, actual amounts owed (debtors), Stock-in-hand (Unpaid stock as liability under creditors)

26. Balance Sheet • Capital • Shareholders capital –amount invested in business • Retained earnings – profit or loss as recorded • Term Liabilities • Loans not due for repayment in this current year

27. Balance Sheet • Current Liabilities • Bank overdrafts, • Tax payable • Creditors

28. 2007 2006 2005 BALANCE SHEET Fixed Assets Property Plant, Machinery, Vehicles TOTAL FIXED ASSETS Current Assets Bank Accounts Stock Debtors TOTAL CURRENT ASSETS Capital Shareholders Capital Retained Earnings TOTAL CAPITAL Term Liabilities Loans Current Liabilities Bank Overdraft Tax Payable Creditors TOTAL LIABILITIES

29. Initial Investment Summary € € • Fixed Assets Property Renovations Fixture & Fittings Transport Machines and equipment Goodwill, security deposits Other Total Fixed Assets 2. Current Assets Stock of raw material Stock of finished goods Work in progress Debtors Other Total Current Assets 3. Liquid Assets Cash Bank Other Total Liquid Assets 4. Start-up costs Prepaid expenses Promotion, opening Other Total Start-up costs Margin for unforeseen costs

30. Investment : Sources of Funding € Internal Personal Assets Fixed assets Car Additional private mortgage Deferred loans (family) Other Total person assets Introduced as: Equity Loans External External equity Agreed Source Y/N External Debt (Long term) Agreed Mortgage Y/N Loan Y/N Leasing Y/N Other Y/N External Debt (Short term) Agreed Overdraft Y/N Suppliers' credit Y/N Payments received in advance Y/N Other Y/N Subsidies/Grants Agreed Agency Y/N Enterprise Board Y/N Other Y/N

31. Project Accounts • WBS • Breaks down the work into different packages. • Each package can be assigned to a department or person • Business Plan • Short term estimates • Long term estimates • Feasibility of Project

32. Project Accounts • Estimate • Direct Costs • Indirect Costs • Labour Costs • Procurement Costs • Time related costs • Unit Rates • Factoring • Estimating factoring

33. Project Accounts • Sources of Finance • Personal • Investors • State Agencies • Partners • Angels • Venture Capital

34. Business Plan should help answer following questions: • Who are you? • What is your product or service? • Who are your customers? • Why will your customers buy my product or service? • What price will your customers pay for your product or service?

35. Business Plan should help answer following questions: • At this price, how many products/services will your customers buy? • How many products/services can you make? • How much does it cost to make/deliver each unit of product/service? • How much start-up investment does the business need? • Is this a viable business?