Financial Analysis Business Planning Tool

Important Privacy Information
User Tips and Recommendations
Navigation
What-if Analysis
Goal-Seek Analysis
Important Assumptions
Background Information - Concepts

Welcome to our interactive financial analysis for business planning tool. By linking business decisions to financial results this tool will help you analyse your business performance under different business scenarios. It will help you conduct "what-if" and "goal-seek" analysis as you develop your sales plan or operations budgets.

None of the data that you enter is stored/saved. Information entered by you is used by your browser to do calculations and it is not passed back to the server to be stored/saved. Because of this design feature, your actual data is made available from one screen to the next as you navigate between screens. Changes made at any stage overwrite previous values.

Click here to use Financial Analysis for Business Planning Tool.  By using Financial Analysis for Business Planning Tool, you accept that this Tool is provided on an as-is basis.  You should seek independent professional advice for interpretation of results.

Printing: All screens are best printed in landscape mode (page/setup). Printing results as you work through various business management scenarios is recommended.

You may open a number of browser windows as you work through the tool to store results from multiple business scenarios. This will allow you to review business scenarios by clicking between the browser windows.

The interactive tool has been designed to work in version 4 or higher of Netscape Navigator and Microsoft Internet Explorer.

Top of Page

Financial Analysis for Business Planning consists of a series of screens. They are linked to one another through the actual values for your business that are entered by you.

There are four basic screens: "start-up", "calculated results", "what-if analysis" and "goal-seek". Navigation between these screens is as follows:

Start-Up < -------- > Calculated Results < -------- >  What-If Analysis

                             Calculated Results < -------- > Goal Seek Analysis

Start your analysis by entering the figures for your business in the opening "Start-Up" screen. Clicking on any of the terms used will provide you with definitions in a new browser window.

Top of Page

In this screen, based on your information and knowledge of your business, you can choose to alter any of the values to see their impact on the business. What-If analysis can be done by either:

• evaluating the direct effect on any of the variables of a business strategy or
• considering price-volume trade-off in a marketing scenario.

You may consider the direct effect of adopting a particular business strategy. For example the financial effect of maintaining sales volume but incurring smaller fixed costs (eg by better cost control). Or, lowering variable expenses (efficient purchasing or manufacturing), or improving accounts receivable management, and achieving lower level of debtors. Based on the chosen business scenario and/or strategy target figures are entered into the appropriate fields. Clicking on "Calc Results" button will provide a snapshot of the resulting financial performance contrasted with the current situation.

Alternatively, you may evaluate the impact of a price-volume trade-off strategy eg a decrease of 5% in price may lead to an increase of 7% in sales. These figures may be input into the price/volume change fields. Clicking on the "price/volume" icon will yield the financial results that can be expected from adopting such a strategy.

Top of Page

Goal seek allows you to evaluate what changes you may need to institute to be able to achieve a certain level of performance. In this screen, you may choose to goal-seek either one of the three variables ie profitability, asset turnover or return on capital employed. By entering the target figure and clicking on calc results button, the financial analysis tool will return the target value of variable that will singly achieve the desired result.

These results need to be evaluated by management and a strategy developed which seeks to achieve the desired outcome by changing a number of variables concurrently. The degree of change (as a % of original value) indicated for each variable may be viewed as its sensitivity to deliver the required outcome. By varying a number of the variables, desired results can be achieved for the business. The chosen strategy should be evaluated by running a "What-if" analysis (see previous section).

At any stage, "Start New" button will return you to the opening "Start-Up" screen with all values as zeroes, while clicking on "Your Actuals" button in the "What-If" or "Goal-Seek" screens will take you to the "Start-Up" screen with your actual results.

Clicking on "Calc. Result" button in the "Start-Up" screen will calculate the ratios for your business. You may print this screen as a record of your current performance. In case any corrections are made in the actual or base-line figures at this stage, clicking on "Calc. Results" button will re-calculate the figures.

From your Calculated Results screen, you can either do a "What-if" analysis or a "Goal-Seek" analysis.

Top of Page

The results that the tool provides are subject to certain underlying assumptions:

• variable expenses increase or decrease in direct and exact proportion to the change in sales volume
• fixed and other expenses do not change with change in sales volume.

Both these assumptions need to be evaluated for impact of variations in relation to volume measured in quantity terms (rather than $ terms), change in product mix, changes in methods of manufacture/process, impact of inflation etc.

The tool calculates changes required in direct proportion to volume changes, although this may not always be the case. For example, efficient inventory management theory asserts that inventory costs increase in proportion to the square root of change rather than in direct proportion of change in volume ie when sales volume doubles, an efficient business would need to carry approximately 40% more stock rather than 100%.

Top of Page

The essential nature of all businesses is capital invested in assets, which are in turn employed to produce products that are sold in the market place. Business owners supply capital, which can take the form of either equity (net worth, a term which also incudes retained earnings and distributable reserves) or debt (liabilities). Debt may be short-term debt (current liabilities eg overdraft or monies typically due for repayment within one year), medium term (due to be re-paid in 2-5 years time) or long term debt which together are generally referred to as non-current liabilities.

Capital is used to purchase plant and machinery (non-current assets). Plant and machinery is used to convert raw materials and consumables (current assets) into finished product (finished good stock). When goods are sold on credit, capital is also consumed to finance debtors or receivables ie products sold on credit to customers. In addition part of the capital invested in a venture is held as cash (current asset) to meet expenses of running the business: paying for labour, utilities, office stationery, transport costs etc.

In short, capital employed in a business consists of owners' equity (including retained earnings) and net non-current liabilities. This is used to finance net non-current assets (eg plant and machinery) and working capital to run a business. Working capital is the difference between current assets and current liabilities (eg purchases not yet paid for).

A business' income is derived from selling products to its customers. A part of this income goes to meeting costs of acquiring and/or production (cost of goods of sold). The difference between sales income and cost of goods sold is the gross profit. Cost of goods sold typically consists of costs that are directly attributable to the acquisition/production of the goods. These costs may be variable ie vary directly to the volume of production or fixed ie are relatively fixed and do not vary with the level of production. There are no true fixed or variable costs - this distinction is generally made within typical range of business activity variation.

From gross profit, a business meets its indirect business expenses eg insurance costs, accounting expenses, general over head etc. Again, these expenses may be fixed ie relatively unchanging within the range of typical business activity or variable ie varying in relation to the level of business activity.

Most business trading accounts deduct interest expense from gross profit to arrive at net profit before tax. For the purposes of the model used in this tool, interest expense is not deducted - the resulting amount ie gross profit less expenses (excluding interest) is called Earnings Before Interest and Tax (EBIT).

Working with EBIT allows focus to remain purely on the operational side of the business and ignores how a business has been financed. As mentioned in the earlier part of the text, a business may be financed by any combination of equity and debt. With interest payable on debt a tax deductable expense, two businesses with identical operational performance can have vastly different profit outcomes depending upon the financing ratio employed - a business financed mainly by debt will have a much lower net profit before tax compared to a business financed mainly by equity. This is a direct result of a high interest expense in the former case. By using EBIT, we eliminate any impact a financing decision has on the final profit, instead focusing on the operational efficiency and effectiveness.

Profitability = EBIT / Sales

Profitability measures the price a product or service is able to command over its cost of manufacture. It measures a business' ability to achieve highest possible price while producing with the least cost.  Profitability focuses on marketing and sales effectiveness.

Asset Turnover = Sales / Capital Employed

Asset Turnover measures the ability of a business to run its assets efficiently, focusing on operational efficiency. By maximising sales for a given asset base or alternatively minimising capital employed to achieve a given sales level is a measure of efficiency in the deployment of assets.

A measure of operational efficiency in any business is the Return on Capital Employed or ROCE. It is simply a ratio of what a business Earned Before Interest and Tax and the Capital Employed (or Net Assets) to earn it.

Return on Capital Employed (ROCE) = EBIT / Capital Employed

Note:
Return on Capital Employed (ROCE) = Profitability x Asset Turnover

Thus:

A business is able to achieve superior Return on Capital Employed by increasing Profitability and/or increasing Asset Turnover ie running its assets "harder ".

Top of Page