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Financial Basics

MODULE 5

Getting comfortable with finance

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Financial Basics

MODULE 5

In this lesson you will learn the basics on start-up finance and receive tools to set up your own financial administration.

At the end of this lesson, you should feel more comfortable to talk about finance and to record the financial basics of your business

  • Develop a basic understanding of financial concepts;
  • Know how & why to set up a financial administration;
  • Understand the 3 financial statements of a business.

OVERALL OUTCOME

LEARNING OBJECTIVES

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Session Overview

MODULE 5

PREPARE

Lingo Quiz

PRESENTATION

& exercises

Financial administration The who, what, when, where

GROUP DISCUSSION

Are you in control of your finance?

PRESENTATION

Financial Statements

WARM UP

Taking steps

GROUP EXERCISE

From reality to paper

HOMEWORK

Your own financial statements

5 Min�BREAK

10 Min

BREAK

5 Min

BREAK

45 min

80 min

60 min

40 min

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Start-up Finance

3 Modules on finance!

Get up to speed on:

  • Financial administration > Module 5
  • Financial models > Module 6
  • Financial planning > Module 11
  • Investments > Module 11

Gain the confidence and knowledge to talk about the finances of your startup!

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ENERGIZER�

Finance Lingo

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Quiz!

  1. What is the difference between turnover and revenues?
    1. Turnover is the total amount of sales a business generates, revenues are the profit a business makes after subtracting costs.
    2. There is no difference.

  1. Are both statements below about interest rates correct?
  2. An interest rate is how much interest is paid by borrowers for the money that they borrow. It is usually a percentage of the sum borrowed. So, a simple 10% interest means that if one borrows $200, one pays back $220.
  3. A loan that is considered low risk by the lender will have a higher interest rate. A loan that is considered high risk will have a lower interest rate.
  4. Both are correct
  5. Only 1 statement is correct.

3. In general, is Venture Capital an equity or a debt investment?

    • Equity
    • Debt

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Quiz!

4. A balance sheet is the financial statement of a business which includes assets, liabilities and equity at a point in time. True or false: for the balance sheet to be correct, liabilities & assets should be equal to each other.

    • True
    • False

5. Which of the following statements about the concept of profit is incorrect?

    • Profit is calculated as total revenue minus total expenses
    • Profits earned are reinvested back into the business, and are not funneled back to business owners.

6. Fixed costs are costs that do not change with varying output. Which of the following choices shows examples of fixed costs?

    • Commision, raw material inputs.
    • Rental payments, insurance, machinery.

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GROUP DISCUSSION

Are you in control of your finance?

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GROUP DISCUSSION

  • What is your average monthly turnover?
  • Do you know the margins on your products or services?
  • Can you name your fixed and variable costs?
  • Do you have an annual budget?
  • Do you keep a daily ledger?

ARE YOU IN CONTROL?

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PRESENTATION

Financial Administration

From daily ledgers to annual accounts

PEER FEEDBACK

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Financial administration is the sum of processes, people and structures to record and manage the financials of a business.

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GROUP DISCUSSION

What is a good financial administration?

What do you need to have?

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Connecting the dots

MOBILE MONEY

CUSTOMERS

INVOICES

RECEIPTS

SUPPLIERS

TAXES

CASH

SALARIES

RENT

BUDGET

INPUTS

INVESTMENTS

ACCOUNTANT

MARGIN

DAILY LEDGER

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BRAINSTORM

What are some financial activities and actions?

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Photo by UX Indonesia on Unsplash

  • Many persons have an interest in your business finance OR perform financial actions.
    • Can be employees, owners, accountant, government, suppliers, but also family.

  • Different people need different information.
    • Different people have different rights to perform financial actions, like receiving or making payments.

Decide:�

  • Who is a stakeholder in your finances?
  • Who needs what information?
  • Who has authority over financial flows (in and out)?

Who

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Group Exercise

Who is a stakeholder to JoJoJuice’s finances?

What information do they need?

What authority do they have over JoJoJuice’s finances?

Joanna has a cafe in downtown Abuja where she sells fruit drinks and cakes: JoJoJuice.

�During the week, she is able to manage the cafe by herself, and in the weekend she has 2 employees who help out when it gets busy. Joanna has registered her business, because she wants to get a bank loan in the future and thinks a registration will help.

At home, Joanna lives with her parents, as they are old and rely on her care and support.

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Individual Exercise

Who are stakeholders to your business’ finances?

What information do they need?

What authority do they have over your finances?

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Photo by UX Indonesia on Unsplash

  • Know when money is coming in & out - is this aligned?

Decide:�

  • When which finances are entered into your administration, from daily cash register counts to monthly payments to suppliers.

When

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Group Exercise

When

What are the financial actions on a [...] basis?

Who is performing these actions?

Daily

Weekly

Monthly

Quarterly

Annual

Joanna has a cafe in downtown Abuja where she sells fruit drinks and cakes: JoJoJuice.

�During the week, she is able to manage the cafe by herself, and in the weekend she has 2 employees who help out when it gets busy. Joanna has registered her business, because she wants to get a bank loan in the future and thinks a registration will help.

At home, Joanna lives with her parents, as they are old and rely on her care and support.

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Individual Exercise

When

What are the financial actions on a [...] basis?

Who is performing these actions?

Daily

Weekly

Monthly

Quarterly

Annual

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Raise your hand if….

  • You have a business bank account
  • You have both cash and digital finance flows
  • You use paper invoices
  • You use digital invoices
  • You keep your finances on your laptop

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Photo by UX Indonesia on Unsplash

  • Where concerns both physical and digital administration.
  • Where concerns money (cash or digital) AND administration (invoices, excels, etc.)

FEWER places = BETTER

A.L.W.A.Y.S.

HAVING A BACK-UP = ESSENTIAL

A.L.W.A.Y.S.

Where

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Group Exercise

Joanna has a cafe in downtown Abuja where she sells fruit drinks and cakes - JoJoJuice. During the week, she is able to manage the cafe by herself, and in the weekend she has 2 employees who help out when it gets busy. Joanna has registered her business, because she wants to get a bank loan in the future and thinks a registration will help. At home, Joanna lives with her parents, as they are old and rely on her care and support.

What

Where

Cash

Cash from sales: in the cash register, counted & emptied daily

Cash for suppliers and other big expenses: in the safe at the cafe

Digital payments

Daily sales records

Supplier invoices

Annual budget

Cash flow statement

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Individual exercise

What

Where

Cash

Digital payments

Daily sales records

Supplier invoices

Annual budget

Cash flow statement

...

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WHAT

  • What you collect and record depends on what you need it for:
    • Compliance, e.g. (government) reporting
    • Forecasting, e.g. future investments
    • Analytics, e.g. cost analysis and cyclicality
  • At a minimum, you will need to set up:
    • A budget (future) and actuals (past)
    • The 3 financial statements:
  • Cash Flow
  • Profit & Loss (a.k.a. Income statement)
  • Balance Sheet

Let’s dive into the financial statements

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Profit & Loss

Cash Flow

Balance Sheet

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What are the differences between these statements?

What is recorded in each?

What do you use them for?

GROUP DISCUSSION

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Exercise: Connect the Dots

Joanna from JoJoJuice….

Buys a new kitchen appliance

Sells 3 cakes on Tuesday

Receives an order for a juice party next month

Pays her employees

Gets a loan to invest in new furniture

Hires a marketing company for new posters

Profit & Loss

Cash Flow

Balance Sheet

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Profit & Loss

  • Also known as Income statement
  • Most common financial statement
  • Shows the income, expenses and resulting profitability of your operations over a selected time period
  • Can be used to record actuals AND as a forecasting tool (a budget)
  • Can be used to analyse trends in revenues, expenses, margins and more.

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INCOME (aka Revenue aka Turnover)

  • Can be by type (juice, cakes), by sales channel (B2B, B2C) or another categorization that is useful for you

  • If you have refunds (e.g. clothing returns) subtract this from your sales.

  • You will NOT see the income from loans in revenue. Revenue in a P&L has to be generated through business, not through investors.

  • You count income when the service/product legally changes hands, NOT just when cash changes hands.
    • E.g. a business customer pays an advance of $500 for a big party next month. When the party is successful, he pays another $500. The total revenue here ($1000) may only be counted when the party has happened! That is when the service/product is officially delivered.

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Expenses

  • Includes fixed expenses (e.g. rent) and variable expenses (e.g. materials)

  • You DON’T record principal repayments on loans, you DO have to record interest expenses from your loan.

  • BIG expenses are normally expensed over their lifetime use, not just at once.

E.g. a professional oven that costs $5,000 can be ‘expensed’ over 5 years time, $1,000 per year.

This ‘evens out’ your P&L and avoids big differences year-on-year.

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Group Exercise: Connect the Dots

Joanna from JoJoJuice….

Buys a new kitchen appliance of $300

Sells 3 cakes in the cafe on Tuesday for $5 each

Receives an order for a juice party next month for $250, including an advance payment of $150

Pays her employees their salary of $750 in total

Gets a loan to invest in new furniture of $1200

Hires a marketing company for new posters costing $300

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Cash Flow Statement

Looks like the P&L, but….

  • The P&L looks at when a transaction is LEGALLY made, but a cash flow statement looks at when the cash changes hands

  • P&L looks at ‘regular’ operations and doesn’t show external investment, a cash flow shows the cash from investments.

  • A cash flow statement shows if you have enough cash coming in to meet your expenses

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Cash Flows in & out

  • Look at all sources of cash, this can be from sales of your product, but also if JoJoJuice sells an old oven or takes out a loan.

  • It’s best practise to make a cash flow forecast per month. That way you can see if you have a cash flow problem coming up.
    • E.g. in January, juice sales are historically low, because everyone spent their money in December. However, JoJoJuice’s loan (both interest and principal) are due in January. This might be a cash flow problem.

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Group Exercise: Connect the Dots

Joanna from JoJoJuice….

Buys a new kitchen appliance of $300

Sells 3 cakes in the cafe on Tuesday for $5 each

Receives an order for a juice party next month for $250, including an advance payment of $150

Pays her employees their salary of $750 in total

Gets a loan to invest in new furniture of $1200

Hires a marketing company for new posters costing $300

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Balance Sheet

  • Shows the assets and liabilities of a business at a point in time.

  • Assets refer to the things owned by the business that present value, like cash, property, equipment.

  • Liabilities refer to the things the companies owes, like salaries, loans, taxes.

  • What’s left when you deduct your liabilities from assets is the equity

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An industrial oven

A year of rent paid in advance

The chairs & tables in your cafe

Finished products in your warehouse

Credit card debt to pay inventory

A payment you still have to pay to your supplier

A bank loan that you need to repay in 2 years time

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Balance Sheet

  • Current refers to assets and liabilities that are expected to change in the coming 12 months.
    • E.g. the cash that is counted on 30/6/2020 will probably be used in the coming weeks. The amount will be different when we count again in 30/7/2020
    • E.g. Salaries are paid monthly on the 30th for the same month. This means that from the 1st until the 29th, the business has a liability on salaries (accounts payable) - they will have to pay these very soon.

  • Long-term or Non-current assets and liabilities are expected to remain the same for 12+ months.
  • A balance sheet is the only financial statement that is a snapshot in time.

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Group Exercise: Connect the Dots

Joanna from JoJoJuice….

Buys a new kitchen appliance of $300

Sells 3 cakes in the cafe on Tuesday for $5 each

Receives an order for a juice party next month for $250, including an advance payment of $150

Pays her employees their salary of $750 in total

Gets a loan to invest in new furniture of $1200

Hires a marketing company for new posters costing $300

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Summary

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Summary

  • Financial administration encompasses A LOT.
  • It is not just about recording sales and expenses, but also about the big network of people that have different information needs and authorities.
  • If done properly from the start, it will save a lot of time when you do your taxes or want to talk to external investors
  • The 3 financial statements are all intertwined, but used to collect different types of information and insights.
  • You use your financial administration to look at the past (how did I do last year?) and the future (what can I do next year?)

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HOMEWORK

Use the templates to make your financial statements

We will use these in the next lesson!