Financial Basics

MODULE 5

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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.

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

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• 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

Session Overview

MODULE 5

PREPARE

Lingo Quiz

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PRESENTATION

& exercises

Financial administration The who, what, when, where

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GROUP DISCUSSION

Are you in control of your finance?

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PRESENTATION

Financial Statements

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WARM UP

Taking steps

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GROUP EXERCISE

From reality to paper

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HOMEWORK

Your own financial statements

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5 Min�BREAK

10 Min

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5 Min

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Start-up Finance

3 Modules on finance!

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Get up to speed on:

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

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

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ENERGIZER�

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Finance Lingo

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.

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2. Are both statements below about interest rates correct?
1. 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.
2. 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.
1. Both are correct
2. Only 1 statement is correct.

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

• Equity
• Debt

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

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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.

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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.

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?

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ARE YOU IN CONTROL?

PRESENTATION

Financial Administration

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From daily ledgers to annual accounts

PEER FEEDBACK

Photo by heylagostechie

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?

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What do you need to have?

Connecting the dots

MOBILE MONEY

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CUSTOMERS

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INVOICES

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RECEIPTS

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SUPPLIERS

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TAXES

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CASH

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SALARIES

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RENT

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BUDGET

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INPUTS

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INVESTMENTS

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ACCOUNTANT

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MARGIN

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DAILY LEDGER

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BRAINSTORM

What are some financial activities and actions?

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Photo by UX Indonesia on Unsplash

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

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

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Decide:�

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

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Who

Group Exercise

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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.

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

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Individual Exercise

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Photo by UX Indonesia on Unsplash

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

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Decide:�

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

When

Group Exercise

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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.

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

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Individual Exercise

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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

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

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FEWER places = BETTER

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

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HAVING A BACK-UP = ESSENTIAL

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

Where

Group Exercise

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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.

Individual exercise

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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
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• 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

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Let’s dive into the financial statements

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Photo by

Profit & Loss

Cash Flow

Balance Sheet

What are the differences between these statements?

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What is recorded in each?

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What do you use them for?

Photo by heylagostechie

GROUP DISCUSSION

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Exercise: Connect the Dots

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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Photo by heylagostechie

INCOME (aka Revenue aka Turnover)

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

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

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

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• 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

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

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

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• 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

Cash Flow Statement

Looks like the P&L, but….

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

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

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

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Photo by heylagostechie

Cash Flows in & out

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• 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.

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• 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

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Balance Sheet

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

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

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

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

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Photo by heylagostechie

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

Balance Sheet

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• 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.

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• 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.

Group Exercise: Connect the Dots

Photo by

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

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We will use these in the next lesson!

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