What Are The Tools of Financial Planning?

The tools required to prepare a financial plan for your business's development, include the following:

Basic Financial Statements - the Balance Sheet and Statement of Income
Ratio Analysis - a means by which individual business performance is compared to similar businesses in the same category
The Pro Forma Statement of Income - a method used to forecast future profitability
Break-Even Analysis - a method allowing the small business person to calculate the sales level at which a business recovers all its costs or expenses
The Cash Flow Statement - also known as the Budget identifies the flow of cash into and out of the business
Pricing formulas and policies - used to calculate profitable selling prices for products and services
Types and sources of capital available to finance business operations
Short- and long-term planning considerations necessary to maximize profits

The entrepreneur who understands these concepts and uses them effectively to control the growth of the business is practicing sound financial management thereby increasing the likelihood of success.

As a new entrepreneur, you must get into the culture of being continuously alert to changes in working capital accounts, the cause of these changes and the implications of these changes on the financial health of the company.

One convenient and effective method to highlight the key managerial requirements in this area is to view working capital in terms of its major components:

Components of working capital
Item	Description
1. Cash and Equivalents	Usually marketable securities or short-term certificate of deposit.
2. Accounts Receivable	Monies owed by clients.
3. Inventories	Stock at hand often makes up about 50% or more of a firm's current assets.
4. Accounts Payable and Trade Notes Payable	Trade credit is often a major source of financing for the firm. The amount of money owed to suppliers should be reasonable in relation to purchases.
5. Notes Payable	Notes payable to banks or other lenders are a second major source of financing for the business. Keep a check on the amount of bank borrowing employed and make sure that the debt amount is reasonable in relation to the equity financing of the firm.
6. Accrued Expenses and Taxes Payable	These are obligations of the firm as of the date of balance sheet preparation. Accrued expenses are items such as salaries, interest payments on bank notes, insurance premiums and similar items.

1. Cash and Equivalents

This form of assets, cash and cash equivalents (usually marketable securities or short-term certificate of deposit) requires constant supervision. A well-planned and maintained cash budgeting system is essential to answer key questions such as:

1. Is the cash level adequate to meet current expenses as they come due?
2. What are the timing relationships between cash inflows and outflows?
3. When will peak cash needs occur?
4. What will be the magnitude of bank borrowing required to meet any cash
shortfalls?
5. When will this borrowing be necessary and when can repayment be
expected?

2. Accounts Receivable

Almost all businesses are required to extend credit to their customers. Key issues in this area include:

Is the amount of accounts receivable reasonable in relation to sales?
How rapidly are accounts receivable being collected?
Which customers are "slow payers"?
What action should be taken to speed-up collections?

3. Inventories

Inventories often make up 50% or more of a firm's current assets and therefore, deserve close scrutiny. Key questions, which must be considered, include:

• Is the level of inventory reasonable in relation to sales and the operating characteristics of the business?


• How rapidly is inventory turned over in relation to other companies in the same industry?


• Is any capital invested in dead or slow moving stock?


• Are sales being lost due to inadequate inventory levels?


• If appropriate, what action should be taken to increase or decrease inventory?

4. Accounts Payable and Trade Notes Payable

In a business, trade credit often provides a major source of financing for the firm. Key issues to investigate in this category include:

• Is the amount of money owed to suppliers reasonable in relation to purchases?


• Is the firm's payment policy such that it will enhance or detract from the firm's credit rating?


• If available, are discounts being taken?


• What are the timing relationships between payments on accounts payable and collection on accounts receivable?

5. Notes Payable

Notes payable to banks or other lenders are a second major source of financing for the business. Important questions in this class include:

• What is the amount of bank borrowing employed?


• Is this debt amount reasonable in relation to the equity financing of the firm?


• When will principal and interest payments fall due?


• Will funds be available to meet these payments on time?

6. Accrued Expenses and Taxes Payable

Accrued expenses and taxes payable represent obligations of the firm as of the date of balance sheet preparation. Accrued expenses are items such as salaries, interest payments on bank notes, insurance premiums and similar items.

Of primary concern in this area, particularly with regard to taxes payable, is the magnitude, timing, and availability of funds for payment. Careful planning is required to ensure that these obligations are met on time.