Business Plan

Class 2
2022 S1
Jeffrey Brown
• Homework review
• Kahoot Business objectives
• Basic finance introduction
• Kahoot Depreciation
• Game kickoff

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Available on http://jeffsuperioreducation.blogspot.com/
You have a car cleaning business and want to expand. The average cost for a service is
€25, the price is € 50. You contacted a regional communication agency, and they offered
you 2 options to accelerate your growth:

• Option A : Distribution of flyers with 10% discount coupon

• Option B : Digital marketing campaign (AdWords + Facebook) to increase your notoriety.

The cost the agency would charge for each option is € 1000.
1. What are the risks of such each option?
• Option A risks

• Option B risks

2. How many additional car cleanings must be sold for each option?
• Option A - additional sales needed for a positive return on investment:

• Option B - additional sales needed for a positive return on investment:

3. Which option do you recommend, and why?

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You have a car cleaning business and want to expand. The average cost for a service is
€25, the price is € 50. You contacted a regional communication agency, and they offered
you 2 options to accelerate your growth:

• Option A : Distribution of flyers with 10% discount coupon

• Option B : Digital marketing campaign (AdWords + Facebook) to increase your notoriety.

The cost the agency would charge for each option is € 1000.
1. What are the risks of such each option?
• Option A risks

• Option B risks

2. How many additional car cleanings must be sold for each option?
• Option A - additional sales needed for a positive return on investment:

• Option B - additional sales needed for a positive return on investment:

3. Which option do you recommend, and why?

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• Not all companies have the same long term objectives
• Different objectives use different KPIs / metrics to measure
success
• Depending on the structure and long term
goals, management’s primary focus may be :

• Market valuation / Shareholder value

• Operating Income /EBITDA/Net income
• Free cash flow
• Revenue growth
• Market share
• Gross Profit margin

• There are many other possible metrics

that are used in different situations, but
we’ll focus on these for now.

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• Market valuation / Shareholder value

• Operating Income /EBITDA/Net income

• Free cash flow

• Revenue growth

• Market share

• Gross Profit margin

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Business Plan

7
Basic Finance
Part 1 of 2

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• The expected parts of a financial forecast
for a business plan are:
• Revenue forecast *
• Net Income statement forecast *
• The forecast balance sheet N
• Forecasted financing / investment plan *
• Forecasted cash flow *
• Other annexes - depending on the business plan*
• A written summary of the key points of the
financials of the business plan *

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• The forecast income statement (or P&L = profit and
loss) is a table that summarizes all potential benefits
(forecast revenue, other operating income, financial
income, etc.) and the projected costs of the project
(operating expenses, financial expenses, taxes and
duties, depreciation and amortization and exceptional
expenses).
• The forecast income statement shows the expected
result of the activity for a given period - in other words
if the company has created value (profit) or if it has
destroyed value (loss) in any given period.
• A profit exists if the forecasted revenues are higher
than the forecasted expenses: the company will, in this
case, have created value and it will have enriched
itself. In the opposite case (expenses > revenues), the
company has destroyed value and its assets will have
become impoverished. The forecast income statement
is one of the key elements of a business plan.

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• At the top of every P&L is the revenue / sales
figures

• At the bottom of every P&L is the “net

income”, which corresponds to the “profit” or
“loss” for the given period

• There is lots of information between the “top

line” and the “bottom line”, and each
“section” can provide information about how
the business is performing, or being run

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 Income Statement (P&L)
reported in K$
Y1 Y2 Y3 Y4
Sales Revenue $ 170 $ 170 $ 170 $ 170
Cost of Goods Sold $ 100 $ 100 $ 100 $ 100
Profit Margin $ 70 $ 70 $ 70 $ 70
Operating Expenses $ 40 $ 40 $ 40 $ 40
Gross Operating Income $ 30 $ 30 $ 30 $ 30
Depreciation $ 5 $ 5 $ 5 $ 5
Operating Income (before Interest and
$ 25 $ 25 $ 25 $ 25
Taxes)
Financial Profit or Loss $ (3) $ (3) $ (3) $ (3)
Operating Income (before taxes) $ 22 $ 22 $ 22 $ 22
Exceptional Profit or Loss $ 4 $ 4 $ 4 $ 4
Net Income (Before Taxes) $ 26 $ 26 $ 26 $ 26
Taxes $ 5 $ 5 $ 5 $ 5

Net Earnings $ 21 $ 21 $ 21 $ 21

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13
• Profit Margin
• Gross operating income
• Operating income before interest and
taxes
• Operating Income
• Net Income before taxes
• Net Income

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 Income Statement (P&L)
reported in K$
Y1 Y2 Y3 Y4
Sales Revenue $ 170 $ 170 $ 170 $ 170
Cost of Goods Sold $ 100 $ 100 $ 100 $ 100
Profit Margin $ 70 $ 70 $ 70 $ 70
Operating Expenses $ 40 $ 40 $ 40 $ 40
Gross Operating Income $ 30 $ 30 $ 30 $ 30
Depreciation $ 5 $ 5 $ 5 $ 5
Operating Income (before Interest and
$ 25 $ 25 $ 25 $ 25
Taxes)
Financial Profit or Loss $ (3) $ (3) $ (3) $ (3)
Operating Income (before taxes) $ 22 $ 22 $ 22 $ 22
Exceptional Profit or Loss $ 4 $ 4 $ 4 $ 4
Net Income (Before Taxes) $ 26 $ 26 $ 26 $ 26
Taxes $ 5 $ 5 $ 5 $ 5

Net Earnings $ 21 $ 21 $ 21 $ 21

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Profit Margin = competitive
advantage at the most basic
level

• Can I produce my goods /

services for less than the
competition? (operational
efficiency)
• Can I sell my product /
service for MORE than the
competition?
(differentiation)

Profit margin = revenue – cost

of goods sold

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A company’s ability to manage
its operating expenses shows
the management philosophy
and ability of the management
team to run an efficient
operation.

The ability to run an efficient

organization can also be a
competitive advantage!

EBITDA = Profit Margin –

Operating Expenses

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We need to do a little detour
to discuss depreciation

Keep in mind that

depreciation impacts the
reported results of the
company, but there is no
actual expense incurred…

This is an accounting practice

to allow a comprehensive
view of a business over time.
Let’s discuss..

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Capitalization :
Conversion of income or assets into
capital, or of capital into income or
assets

Depreciation :
A reduction in the value of an asset
over time, due for example to wear
and tear
Fruit and vegetable basket delivery business – to homes or offices

• What do you need to run this business?

Need Solution Classification

Fruit, veg and baskets Purchase from Variable cost

suppliers

A place to assemble the fruit and veg Rent Fixed cost

into parcels

Some “human resources” to make all this Hire an Variable Cost? Fixed Cost?
happen employee

A vehicle to deliver the baskets Buy a truck CAPITAL INVESTMENT

 Type of asset Expected lifetime % of value depreciated /
year

Permanent construction, 20 years 5%

buildings, etc….
Light construction 10 years 10%
(hangar, temporary
structure, etc..)
Furniture, etc… 10 years 10%

Equipment, tools, 5 to 10 years 10 to 20%

machines
Cars, trucks, light 4 to 5 years 20 to 25%
vehicles
Technology, PCs, phones 2 to 5 years 20 to 50%
How to calculate the amount to depreciate
Cost of the asset (value at time of purchase) x
depreciation rate (1/number of years to be depreciated)

The number of years to be depreciated is

determined by the accounting norms in place

• The actual amount to be depreciated depends on

when the asset was installed or deployed…
 • A delivery truck was purchased for €12000 HT and put into
service on January 1st
• Expected lifetime of this truck = 4 years

J F M A M J J A S O N D

12 months = 360 days

 AMOUNT VALUE OF ASSET AT
AMOUNT TO BE ANNUAL DEPRECIATED AT THE END OF
YEAR DEPRECIATED DEPRECIATION END OF PERIOD PERIOD
1 12000 3000 3000 9000

2 12000 3000 6000 6000

3 12000 3000 9000 3000

4 12000 3000 12000 0

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• Exemple 2 : Prorata Temporis
• A machine is purchased on March 15th 2021 for €8500. It is
installed on June 15th 2021 for €1500 and put into service
on June 15th 2021. Expected lifetime of 5 years
Purchase date Installation date
15/03/21 15/06/21

J F M A M J J A S O N D

15 30 30 30 30 30 30
To calculate the correct amount to depreciate this year, we use the date that the
machine was put in to use – and we use the cost of purchase AND installation
Days of use this year = 15 days of June + 6x30 days for the rest of the year
Days of use this year = 195 jours, which is 54% of 360
The amount to depreciate the 1st year is 54% * 2000
 VALUE OF
ANNUAL AMOUNT ASSET AT THE
AMOUNT TO BE DEPRECIA DEPRECIATED AT END OF
YEAR DEPRECIATED TION END OF PERIOD PERIOD
2021 10000 1080 1080 8920

2022 10000 2000 3080 6920

2023 10000 2000 5080 4920

2024 10000 2000 7080 2920

2025 10000 2000 9080 920

2026 10000 920 920 0

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What is the amount to depreciate?

• the purchase price excluding tax

• VAT if it is not recoverable
• transport costs excluding VAT
• installation and assembly costs
excluding VAT

Taxes or duties paid on the purchase

of a fixed asset are not included in
the original value (registration or a
vehicle, for example)
 Machine purchased and put into use on January 1st, purchase price of

4000, expected lifetime of 4 years.

Produce a depreciation schedule

(Kahoot)
AMOUNT VALUE OF
AMOUNT TO DEPRECIATED ASSET AT THE
BE ANNUAL AT END OF END OF
YEAR DEPRECIATED DEPRECIATION PERIOD PERIOD

2016
2017
2018
2019
 AMOUNT VALUE OF
AMOUNT TO DEPRECIATED ASSET AT THE
BE ANNUAL AT END OF END OF
YEAR DEPRECIATED DEPRECIATION PERIOD PERIOD

2016 4000 1000 1000 3000

2017 4000 1000 2000 2000
2018 4000 1000 3000 1000
2019 4000 1000 4000 0
Now we’ve gone from EBITDA,
and we’ve included the
depreciation – so at this level,
we can get a feeling for how
well the business is run from
the OPERATIONAL point of
view, including the value of the
assets needed to run the
business

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At this level, we are also
integrating the financial profit
or loss of running this
business. Most business report
financial charges, and not
financial profits – the majority
of these charges will come
from interest or other bank
fees.

Managing the capital structure

and financial ratios of a
business can ALSO be a
competitive advantage.

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This is the end of the line – did
you create value for the owner
/ shareholder in the period of
reference?

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A balance sheet is important because:

• It reveals value of stockholder’s/owner’s equity which

is the residual of assets minus liabilities.
• Proper notes and commentaries are brought to
highlight inconsistent balances or to justify relevant
and suitable ones.

A balance sheet enables you to:

• Quickly see the financial strengths and capabilities of

your business
• Review the level of assets, debt and working capital of
your business
• Compare the increase or decrease in value of your
business over time
• See the relative liquidity of your business
• Analyze your ability to pay all short-term and long-
term debts as they come due
• Review the composition of assets and liabilities, the
relative proportions of debt and equity financing and
the amount of retained earnings

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35
Determining a company's liquidity
A critical need for small (and all) businesses is having
sufficient money on hand to meet their payroll and to pay
the other obligations when they come due. This is
associated with the term liquidity, which is often assessed
by comparing a company's current assets to its current
liabilities

Determining a company's ability to obtain long-term loans

The balance sheet also provides information on a
corporation's ability to obtain long-term loans. For instance,
if a corporation has a large amount of debt (the combination
of current and long-term liabilities) compared to the amount
of its stockholders' equity, the corporation is said to be
highly leveraged. A high level of financial leverage may be
viewed by lenders as a high level of risk.

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Some assets are not included
Due to the accounting principle known as the cost principle (or
historical cost principle), some valuable trademarks developed
internally by a company are not reported as assets on its balance
sheet. For example, the internationally recognized trademarks
developed by Coca-Cola and Nike might be among their most
valuable assets. However, these trademarks are not reported on
their balance sheets since they were not purchased in a
transaction with another party.

Similarly, the cost principle prevents a company's balance sheet

from including the value of its highly effective management, its
research team, customer allegiance, unique marketing strategies,
etc.

The balance sheet often ignores some potentially important

pieces of a company’s competitive position!

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Working capital is defined as current assets minus current liabilities.
In the below example, the balance sheet shows 170000 in current
assets, with 100000 in current liabilities – which results in 70000 in
working capital

Note that working capital is an amount. Some of the factors that

determine the amount of working capital needed include:
• Whether or not a company needs to have an inventory of goods
• How fast customers pay for goods or services
• How fast the company must pay its suppliers
• The company's growth rate
• The company's profitability
• The company's ability to get financing
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Working capital can be increased by:
• Profitable business operations
• Sale of long-term assets
• Long-term borrowings
• Investment by owners

Working capital can decrease from:

• Unprofitable business operations
• Purchasing long-term assets (without long-term financing)
• Repaying long-term debt
• Distributing cash to owners

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Liquidity definition
Liquidity is having the money to pay the company's obligations
when they are due. In other words, it is the company's ability to
convert its current assets to cash so that the current liabilities
can be paid when they come due. Liquidity is necessary for a
company to continue its business operations.

The first section of most balance sheets will report a company's

current assets in their order of liquidity. This means that cash will
appear first, followed by the remaining current assets in the
order in which they are expected to be converted into cash.

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Liquidity could increase by:
Operating activities
Net income from the business operations
Accounts receivable decreased
Inventory decreased
Prepaid expenses decreased
Accounts payable increased

Investing activities
Proceeds from the sale of assets used in the business
Proceeds from the sale of long-term investments

Financing activities
Short-term and long-term borrowings
Proceeds from issuing shares of common and preferred stock
Proceeds from sale of treasury stock

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Liquidity could decrease from:
Operating activities
Net loss from the business operations
Accounts receivable increased
Inventory increased
Prepaid expenses increased
Accounts payable decreased

Investing activities
Capital expenditures (purchase of equipment, etc.)
Purchase of long-term investments

Financing activities
Repayment of short-term and long-term debt
Declaring dividends for stockholders
Purchase of treasury stock
Sole proprietor's or partners' draws

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A retailer, distributor or manufacturer may have a large amount
of working capital. However, if most of its current assets are in
slow-moving inventory, the company may not have the liquidity
to pay its obligations on the agreed upon due dates. Similarly, if a
company is unable to collect its accounts receivable, it may not
have the liquidity to pay its obligations.

In contrast, consider a company that sells popular products

online and customers pay with bank credit cards or debit cards
when they order. Further, the company's suppliers allow the
company to pay 60 days after it purchases the products. This
company may have very little in working capital, but it may have
the liquidity it needs.

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• A company uses its cash to purchase inventory

• It takes on average 120 days to get the items sold

• The standard payment term for their customers is 30 days

• On average, the company receives the money from these

customers 45 days after the sales occurred (even though
the credit terms were 30 days)

With these conditions, the distributor's operating cycle is on

average 165 days, as illustrated here:

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"Cash is king" is a popular phrase for several reasons. One reason
involves liquidity: cash is necessary to meet Friday's payroll, to
make a loan payment, to pay suppliers, to remit payroll taxes,
etc.

Another reason for "cash is king" pertains to the accrual method

of accounting. Under this generally required method of
accounting, a company's financial statements will report
revenues and the related receivables when they are earned (not
when the customers' cash is received).

Further, expenses and liabilities are reported when they are

incurred (not when the cash is paid out). Because of the
judgements used in determining when the revenues and
expenses are reported on the income statement, there is a
concern with this perceived "flexibility". With cash there are no
judgments or estimates involved. The company either has the
cash or it doesn't.

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• BFR positif
• Lorsque le BFR est supérieur à 0, les emplois d’exploitation
sont supérieurs aux ressources de la même nature.
l’entreprise doit alors financer ses besoins à court terme soit
par son fonds de roulement soit par des dettes financières à
court terme (concours bancaires courants c’est-à-dire des
découverts bancaires),

• BFR nul
• Lorsque le BFR est égal à 0, les ressources d’exploitation
permettent de couvrir les emplois en intégralité. L’entreprise
n’a aucun besoin à financier mais elle ne dispose d’aucun
excédent financier.

• BFR négatif
• Lorsque le BFR est inférieur à 0, les emplois sont inférieurs
aux ressources. Aucun besoin financier n’est généré par
l’activité et l’excédent de ressources dégagé va permettre
d’alimenter la trésorerie nette de l’entreprise.

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• The forecasted financing plan shall identify all
the needs generated by the project and all the
resources provided to meet them.
• Key concepts are included in the provisional
financing plan, such as working capital
requirements and cash flow.
• It is important that there is adequate financing
for the expected expenses of starting the
business, as well as some margin for error.
Otherwise, the project is not viable, and the
company will very quickly be faced with cash
flow difficulties.
•

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What is a cash flow budget?
The cash flow budget makes it possible to
analyze the company's activity month by
month, from a purely “cash on hand” point
of view (cash received vs cash paid) in order
to highlight the net cash flow of the
company.
These forecasts will then make it possible to
steer cash management and anticipate any
decline in activity.
The use of a cash flow budget is necessary
in the business creation phase and in the
business development phase.

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The cash flow budget is composed of two parts (forecast
receipts and forecast disbursements) which are broken down
over a number of periods. Each entry or outflow of funds is
charged to it on its actual date of payment.
Receipts
The first part of the cash budget has all the sums that the
company is supposed to collect over the forecast period
Disbursements
This part of the cash budget includes all the amounts that the
company will disburse over the forecast period.

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Receipts:
trade receivables (including VAT)
grants to be received
the release of the planned loan(s)
contributions of cash in capital or partner's current account
any tax credit relief and refunds
proceeds from disposal of capital assets
Disbursements
supplier debts (including VAT)
the salaries and social security contributions provided for
budgeted investments (tangible, intangible and financial assets)
taxes
loan repayments (global maturities)
repayments of contributions in partners' current accounts
dividends

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Building a cash flow budget requires
knowledge of the following essential items
• The payment terms of the suppliers (15
days from the date of invoice, 30 days end
of month, etc.)
• the payment terms of the customers
• the dates of collection of the various taxes
and duties which the company owes
• the dates of payment of salaries (end of
month, 5th of the following month, etc.)
• deadlines for payment of social security
contributions (end of month, end of
quarter, end of year)...

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52
• The expected parts of a financial forecast
for a business plan are:
• Revenue forecast
• Net Income statement forecast
• The forecast balance sheet
• Forecasted financing / investment plan
• Forecasted cash flow
• Other annexes – depending on the business plan
• A written summary of the key points of the
financials of the business plan

53
The business plan may contain other
financial tables that are usually included in
the appendix of the business plan. These
may include:
• summary of investments and financing
• details of the estimated overhead
• details of the estimated staff costs
• details of the taxes and estimated taxes
• a detailed cash statement
• Various financial ratios and their expected
evolution
• Etc…

54
• The expected parts of a financial forecast
for a business plan are:
• Revenue forecast
• Net Income statement forecast
• The forecast balance sheet
• Forecasted financing / investment plan
• Forecasted cash flow
• Other annexes – depending on the business plan
• A written summary of the key points of the
financials of the business plan

55
• Homework = complete rows 10 to 25 of the "worksheet"

• You have just signed a contract that allows you to import robot lawn
mowers
• The contract states that it is necessary to order
• Minimum 500 units to start
• Minimum 100 units every month
• Minimum 5000 units a year
• Calculate (for each month and the whole year)
• Per unit sales price
• Per Unit purchase price
• Per unit margin
• Gross Margin
• Profitability
• Cash on Hand
• Inventory
• Operating Expenses 56
You have purchased a machine on July 12 2016 and you installed and
started using it on October 10th 2016. Purchase price of 2 500€, and
500€ in installation costs. Expected lifetime of 5 years.

Provide the depreciation schedule

AMOUNT VALUE OF
AMOUNT TO DEPRECIATED ASSET AT THE
BE ANNUAL AT END OF END OF
YEAR DEPRECIATED DEPRECIATION PERIOD PERIOD
2016
2017
2018
2019
2020
2021