Home / Business ideas / Business plan financials: from revenue to earnings to free cash flow

Business plan financials: from revenue to earnings to free cash flow

[youtube https://www.youtube.com/watch?v=FC0ZODWFzpo&w=560&h=315]

Startup company business plans Once the strategic, technical and organizational elements of your business plan are in place, it’s a superb idea to incorporate estimated financials in your business plan

Which key numbers do you have to forecast? How do the important thing metrics in a business plan relate to one another? Get began with this short video on business plan financials, going from revenue to earnings to free cash flow Let’s check out Nick’s business plan He has a startup company idea that may take just a few years to completely mature once he puts his idea into action Year 1 would be the year of heavy investment and the launch of operations Year 2 scaling up

Year 3 rapid growth and expansion Year Four stabilization and fine-tuning Year 5 fully maturing with operational excellence Nick has done some pro-forma financial projections, based on market data, technical data and financial data that he has gathered so far In year 3 following commencing his business, Nick is aiming for half one million dollars in revenue

Revenue is the sum of the worth of the goods and services delivered and invoiced to customers in the course of the year From this revenue number, he deducts variable costs of $300,000 Variable costs are the kind of costs that increase whenever you sell more units Examples of variable costs are raw fabric, production labor, and the electricity that’s needed to run the production equipment Whether Nick takes revenue and deducts variable costs, he gets to Contribution Margin of $200,000

It is a profitability “subtotal”: what he sells his products and services for minus the quantity he makes them for Next, he deducts fixed costs of $150,000 Fixed costs are the prices that don’t increase whenever you sell more units Examples are depreciation on the production equipment, marketing expenses, and the salary of the managing director (Nick himself) Nick takes Contribution Margin and deducts fixed costs, to get to Operating Margin of $50,000

That is another profitability “subtotal” that represents the margin generated from operations Next, he deducts interest, the rate of debt financing, and corporate income taxes These whole $20,000 That gets him to the “bottom line” of the projected income statement for his startup company: net income, moreover referred to as net earnings or net earnings What’s left whether you remove all expenses from revenue

In his case $30,000 in year 3 Time to catch our breath Projecting your startup company income statement will be a number of work, as there’s a number of data to be gathered, and there are a number of assumptions to be made What else do you have to do to get an even bigger picture of the financial attractiveness of your startup business idea? The reply to that’s: gather cash flow related information! Initial of all, some superb news Not the entire costs that Nick incurs are paid in cash in-the alike year

An example of that is depreciation, which is the accounting strategy of allocating the upfront investment in production equipment over time that he uses the equipment The cash outflow occurred when Nick bought the equipment, depreciation is just spreading that investment amount over time, accounting for the usage of the production equipment as an expense In Nick’s example, the fixed costs that we deducted with the intention to calculate the estimated earnings included $70,000 of depreciation For Nick to get to the cash flow picture, he must increase back the deprecation that was deducted earlier Next step to get from earnings to cash flow is to take a look at the working capital needs in year 3

As the corporate is predicted to grow rapidly, Nick projects a rise in working capital, which implies from the cash flow perspective that there’s a cash outflow Here’s how that works Working Capital is the sum of Accounts Receivable (invoices that you simply sent to customers that haven’t been paid yet), plus Stock (goods that you simply grasp to sell), minus Accounts Payable (invoices received out of your supplier that you haven’t paid yet) Whether Working Capital goes up, then cash goes down The other would moreover be true: whether Working Capital goes down, then cash goes up, but that is unlikely to occur in a fast-growing startup company

Once Nick adds up the end three lines, Net Income plus Depreciation minus the cash outflow from the rise in working capital, he gets a cash flow subtotal called Cash From Operating Activities That is the amount of money generated from the business operations As you see, that is projected to be zero for year 3 This brings us to an meaningful learning point for any startup company Earnings doesn’t equal Cash Flow

Let’s take a look at the last element on this example Nick expects to expand the production capacity of his startup company in year 3 to seize an even bigger piece of the worth chain, in other words make a more valuable product To do this, he needs an extra investment in equipment, moreover called capital expenditures, of $200,000 This brings his Free Cash Flow to minus $200,000, in other words he must bring more capital into the business (through an fairness injection from shareholders or a loan from the bank) to take his year 3 plans forward Free Cash Flow is that a part of the whole cash flow that’s not required for operations or reinvestment

Whether Free Cash Flow is positive, then you possibly can take cash out of the business Whether Free Cash Flow is negative, then more money must be invested into the business Hopefully, Nick can accomplish a positive Free Cash Flow in years 4, 5 and onward, to ensure that his startup idea to generate value How? More revenue, lower costs, managing working capital, and planning the capital expenditures carefully! Need to memorize more about business and finance? Then sign up to the Finance Storyteller YouTube channel! Thanks

Source: Youtube

Check Also

Watch This Before Starting Keto Diet | How To Start The Keto Diet | Starting Keto

Friends, there are some things you need to keep in mind before starting a keto …

Leave a Reply