Module 11 Financial Plan

8/19/2019 Module 11 Financial Plan

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MODULE 11

FINANCIAL PLAN

ENT300: Fundamentals of Entrepreneurship


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LEARNING OUTCOMES

At the end of the session, students should beble to!

• Understand the importance of preparing anancial plan

• Understand the process of developing a nancial

plan• Identify the components of a nancial plan• Analye the nancial position of the proposed

!usiness•

"repare a nancial plan for a small !usiness


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INTRODUCTION

• A nancial plan incorporates all nancial data derivedfrom the operating !udgets i#e# the administration

!udget$ mar%eting !udget and production &or

operations' !udget#• Financial information from the operating !udgets is

then translated or transformed into a nancial !udget#

• (ased on the nancial data$ pro)ections are prepared

via the follo*ing pro forma statements:1" Csh #o$

%" In&o'e (o) *)o+t nd loss stte'ent

-" .ln&e sheet"


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T/E IMPORTANCE OF AFINANCIAL PLAN

A nancial plan is crucial to the overall !usinessplan that is developed for a particular !usinessor pro)ect# Its importance can !e summarised

as follo*s:

+# To determine the sie of investment

,# To identify and propose the relevant sources of nance

3# To ensure that the initial capital is su-cient.# To analyse the via!ility of the pro)ect !efore actual

investment is committed

/# To !e used as a guideline for pro)ect implementation


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T/E PROCESS OF DE0ELOPING AFINANCIAL PLAN

To develop a *or%a!le and meaningful nancialplan$ the entrepreneur has to follo* these steps:

tep +: 1ather all nancial inputs tep ,: 2etermine the pro)ect implementation cost

tep 3: 2etermine the sources of nance

tep .: "repare the pro forma cash o* statement

tep /: "repare the pro forma income statement tep 4: "repare the pro forma !alance sheets

tep 5: "erform !asic nancial analysis


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Ste* 1!

Gthe) the Finn&il In*ut• The process of developing a nancial plan

for a specic pro)ect !egins *ith theaccumulation of nancial information fromthe mar%eting$ operations andadministration plans#

• The nancial re6uirements for each plan arepresented in the form of !udgets %no*n asoperating budgets &i#e# mar%eting$operations and administration !udgets'


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Ste* 1!

Gthe) the Finn&il In*ut

• In addition$ the monthly or annual sales

forecast derived earlier in the mar%etingplan is a very important input for thenancial plan#

• After gathering all information the nancial

plan is prepared in terms of nancial !udget#


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Ste* %!Dete)'ine the P)oe&t I'*le'enttion

Cost

• A pro)ect implementation cost incorporates!oth long7term and short7term e8penditure

needed to start a pro)ect#

• Lon23te)' e4*enditu)e refers to suche8penditure as the procurement of plant$

machinery$ e6uipment$ vehicles and other8ed assets needed !y the ne* !usiness#


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Ste* %!Dete)'ine the P)oe&t I'*le'enttion

Cost

• Sho)t3te)' e4*enditu)e$ such as payments of utilities$salaries and *ages$ factory overheads$ purchase of ra*materials or inventories$ represent the amount of initial

*or%ing capital re6uired to nance the daily operationuntil the !usiness gets its rst sale#

• 9omponents of pro)ect implementation cost:

Capital expenditure

Working capital

Other expenditure

Contingency cost


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Ste* -!Dete)'ine the Sou)&es of Finn&e

• ources of nance refers to the sources*here funds to nance a particular pro)ectsimplementation costs can !e secured#

• These can !e categorised into internal ande8ternal sources#

• The inte)nl sou)&es mainly come in theform of e6uity contri!utions from theentrepreneurs# These contri!utions caneither !e in the form of cash or other assets#


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• E4te)nl sou)&es of nance are mainlyderived from commercial !an%s$ nancecompanies and government agencies# It maycome in the form of term loans$ hire purchaseor grants#

• The total amount of funds that has to be

sourced should equal the total projectimplementation cost calculated earlier# Thisis to ensure that the pro)ect is fully funded andto avoid the ris%s of under7nancing#


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• 9omponents of sources of nance:

Internal sources

E6uity contri!utions &cash and;or assets' E8ternal sources

Term loan


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Ste* 5!P)e*)e P)o Fo)' Csh Flo$

Stte'ent

• P)o fo)' &sh #o$ stte'ent refers to the pro)ectedstatement of cash ino* and outo* throughout theplanned period#

• Under normal circumstances$ the pro forma cash o*statement is prepared for three consecutive years$detailed !y month for the rst year and !y year for thesecond and third years#


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Stte'ent

• The pro forma cash o* statement must !ea!le to sho* the follo*ing information:

CASHI!"OWS

the pro)ected amount of cash o*ing into the!usiness#

CASHO#$!"OWS

the pro)ected amount of cash o*ing out of the!usiness#

CASH %&!ICI$

O' S#'("#S

the di>erence !et*een cash ino*s and

outo*s#

CASH(OSI$IO

the !eginning and ending cash !alances for aparticular period#


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Stte'ent

Ele'ents of &sh in#o$s Ele'ents of &sh out#o$s

E6uity contri!ution&cash'

Term loan 9ash sales 9ollection of receiva!les =thers

?ar%eting e8penditure =perations e8penditure

Administrativee8penditure Term loan repayment


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"ro Forma 9ash Flo* tatement


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"ro Forma 9ash Flo* tatement


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Ste* 6!P)e*)e P)o Fo)' In&o'e Stte'ent

• The ne8t step in developing a nancial plan isto prepare the *)o fo)' in&o'estte'ent *hich sho*s the e8pected prot

or loss for the planned period$ usually forthree consecutive years#

• The pro forma income statement consists of

the follo*ing elements: Sles G)oss P)o+t7Loss

Net P)o+t7Loss .efo)e T4


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"ro Forma Income tatement

E8ample: "ro Forma Income tatement

@ear + @ear , @ear 3ales ,.0$000 ,54$000 3+5$.009ost of sales .$400 +03$00 +0B$.01ross prot +./$.00 +5,$+00 ,0B$.40

Less: =perating E8penses?ar%eting e8penses +B$000 +B$00 +$B./Administrative e8penses 4$000 +00$B00 +0/$B.02epreciation charges 5$,00 5$,00 5$,00?iscellaneous ,$500 400 400

+,3$00 +,5$/00 +33$.B/=perating income ,+$/00 ..$400 5.$5/

Less: Financing e8penses:Interest on term loan .$/00 3$400 ,$500Interest on hire7purchase +$400 +$400 +$400

4$+00 /$,00 .$300Net prot !efore ta8 +/$.00 3$.00 50$45/


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Ste* 8!P)e*)e P)o Fo)' .ln&e Sheet

• Chile the pro forma income statement sho*sthe nancial performance of the !usiness forthe planned period$ the pro forma !alance

sheet sho*s the nancial position of the!usiness at a specic point in time in termsof assets o*ned and ho* those assets arenanced#

• The pro forma !alance sheet is normallyprepared for a period of three years#


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• The pro forma !alance sheet consists of thefollo*ing elements:

Assets =*ners e6uity

Dia!ilities

• The !alance sheet sho*s the follo*inge6uation:

Assets 9 O$ne)s: e;uit< = Libilities


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• Assets are the economic resources of a !usiness thatare e8pected to !e of !enet in the future# Assetsreported in the !alance sheet are generally categoriedinto t*o categories: non3&u))ent nd &u))ent ssets#

• Non3&u))ent ssets include 8ed assets and otherassets that are o*ned and usually held to produceproducts or services# These assets are not intended forsale in the short term# E8amples: property$ plant$

machinery$ e6uipment$ vehicles$ ma)or renovations andlong7term investments# For 8ed assets$ the valuessho*n in the !alance sheet are the !oo% value i#e# theoriginal cost less the accumulated depreciation#


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• Cu))ent ssets are short7term assets thatcan !e converted into cash *ithin a year#E8amples: cash$ inventories &ra* materials$

*or%7in7process and;or nished goods'$receiva!les and other short7terminvestments#

• O$ne)s: e;uit< refers to capitalcontri!utions from the o*ners orshareholders in terms of cash or assets plusthe accumulated amount of net income#

ers a loss$ the


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• Libilities are the amounts o*ed !y the !usiness tooutsiders# They are categorised as non3&u))ent(lon23te)' nd &u))ent libilities"

• Non3&u))ent or long7term lia!ilities refer to the long7term o!ligations of the !usiness that mature in aperiod of more than one year# They usually includelong7term loans as *ell as hire purchase#

• Cu))ent libilities refer to the short7term o!ligationsof the !usiness that mature *ithin a period of lessthan a year# The most common forms of currentlia!ilities are accounts paya!le and accrued payments


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E8ample: "ro Forma (alance heet

@ear + @ear , @ear3Non3Cu))ent Assets (boo> ?lueDand !uilding ./$000 ./$000 ./$000?achinery e6uipment +B$.00 +3$B00 $,00Furniture 8tures /$400 .$,00 ,$B00enovation 3$,00 ,$.00 +$400Gehicles ,0$000 +/$000 +0$0002eposit B00 7 7

3$000 B+$,00 4$.00Cu))ent AssetsInventory of ra* materials 3$000 3$/00 .$000Inventory of nished goods 3$000 .$000 /$0009ash .0$00 55$400 +./$/5/

.4$00 B/$+00 +/.$/5/Totl Assets 1-@,@ 188,- %%-,@B6

O$ne)s: E;uit<9apital 5,$/00 5,$/00 5,$/00Accumulated prot +/$.00 /.$B00 +,/$.5/

B5$00 +,5$300 +5$5/Lon23te)' Libilities

Term loan 34$000 ,5$000 +B$000


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Ste* B!Pe)fo)' .si& Finn&il Anl


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"iquidity 'atios

The term li6uidity refers to the availa!ility ofli6uid assets to meet short7term o!ligations#

Thus$ li6uidity ratios 'esu)e the bilit<

of the business to *< its 'onthl< bills#

The most *idely used li6uidity ratios are&u))ent )tio nd ;ui&> )tio"


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"iquidity 'atios )Current 'atio*

Year 1 Year 2 Year 3

Current assets RM53,500 RM114,350 RM256,645

Curent liabilities RM 9,000 RM15,000 RM 21,600

Current Ratio 5.94 7.62 11.88

Current ratio can !e determined !y dividingtotal current assets !y total currentlia!ilities#

1enerally$ this ratio sho*s the !usinessa!ility to generate cash to meet its short7term o!ligations#

Cu))ent )tio 9 Totl &u))ent ssetsTotl &u))ent libilities


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"iquidity 'atios )+uick 'atio*

If the !usiness current ratio falls !elo* +$it means that the !usiness is in a seriousli6uidity situation# In most cases$ thecomforta!le current ratio for most!usinesses is J,#

Quick ratio$ also %no*n as the acid testratio$ 'esu)es the e4tent to $hi&h&u))ent libilities )e &o?e)ed b<li;uid ssets"

To determine 6uic% ratio$ the calculation ofli6uid assets does not ta%e into accountinventrories since it is sometimes di-cult

to convert them into cash 6uic%ly#


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"iquidity 'atios )+uick 'atio*


Current assets RM53,500 RM114,350 RM256,645Inventories RM 7,000 RM 9,000 RM 12,000

Current liabilities RM 9,000 RM15,000 RM 21,600

Qui! Ratio 5.17 7.02 11.33

ui&> )tio 9 Totl &u))ent ssets 3in?ento)ies Totl &u))ent libilities

In most cases, the comfortable quick ratio is ‘1’.


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&,ciency 'atios

The e-ciency ratios measure ho* e-cient the!usiness uses its assets to generate sales#

The most *idely used e-ciency ratio for planningpurposes is inventory turnover ratio#

Inentor! turnoer "or stock turnoer# measuresthe num!er of times inventories have !eenconverted into sales and indicates ho* li6uid the

inventory is# All other things !eing e6ual$ thehigher the turnover gure$ the more li6uid the!usiness is#


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&,ciency 'atios )In-entory $urno-er*


Cost o" sales RM227,000 RM254,600 RM278,460

#vera$e inventor% RM 7,000 RM8,000 RM 10,500

Inventor% turnover 32.42 ti&es 31.83 ti&es 26.5 ti&es

This ratio divides the cost of sales &or cost ofgoods sold' !y the average value of inventory#

The average value of inventory is derived !yadding the opening and closing !alance of and

dividing the total !y t*o#

In?ento)< tu)no?e) 9 Cost of sles A?e)2e in?ento)


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(ro.tability 'atios

"rota!ility ratios are important indicators ofthe !usiness nancial performance# Investors*ill particularly !e interested in these ratios

since they measure the performance andgro*th potential of the !usiness#

ome of the commonly used prota!ility ratios

are gross prot margin$ net prot margin$ returnon assets and return on e6uity#


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$ross pro%t margin give a good indication ofnancial health of the !usiness# Cithout anade6uate gross margin$ the !usiness *ill !euna!le to pay its operating and other

e8penses# 1ross prot margin is calculated !y dividing

the !usiness gross income !y sales#

G)oss *)o+t ')2in 9 G)oss *)o+t Sles

(ro.tability 'atios )/ross (ro.t0argin*


'ross (ro"it RM349,000 RM407,800 RM516,420

)ales RM576,000 RM662,400 RM794,880

'ross (ro"it &ar$in 60.59* 61.56* 64.97*


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&et pro%t margin is an indication of ho*e>ective the !usiness is at cost control# Thehigher the net prot margin$ the more e>ectivethe !usiness is at converting sales into actual

prot# Net prot margin is calculated !y dividing the

!usiness net income !y sales#

Net *)o+t ')2in 9 Net *)o+tSles

(ro.tability 'atios )et (ro.t0argin*


+et (ro"it RM 24,000 RM 58,850 RM139,695

)ales RM576,000 RM662,400 RM794,880

+et (ro"it &ar$in 4.16* 8.88* 17.57*


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'eturn on assets measures the overall returnthat the !usiness is a!le to ma%e on its assets#

This ratio is derived !y dividing the !usiness

net prot !y total assets#

Retu)n on ssets 9 Net *)o+tTotl ssets

(ro.tability 'atios )'eturn onassets*


+et (ro"it RM 24,000 RM 58,850 RM139,695

otal assets RM270,000 RM302,350 RM415,645

Return on assets 8.89* 19.46* 33.61*


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'eturn on equit! sho*s *hat the !usiness hasearned on its o*ners investment in the!usiness#

This ratio is derived !y dividing the !usinessnet prot !y total e6uity#

Retu)n on e;uit< 9 Net *)o+tTotl e;uit<

(ro.tability 'atios )'eturn onequity*


+et (ro"it RM 24,000 RM 58,850 RM139,695

otal e-uit% RM129,500 RM188,350 RM328,045

Return on e-uit% 18.53* 31.25* 42.58*


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This nal category of ratios is designed to helpthe entrepreneur measure the degree ofnancial ris% that his !usiness faces# (yreferring to this ratio$ the entrepreneur can

assess his level of de!t and decide *hether it isappropriate for the !usiness#

The most commonly used solvency ratios are

total de!t &lia!ilities' to e6uity &also %no*n asleverage or gearing'$ total de!t to total assets$and times interest earned &also %no*n asinterest coverage'#

Sol-ency 'atios


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(he total debt to equit! ratio indicates *hatproportion of e6uity and de!t that thecompany is using to nance its assets#

This ratio is calculated !y dividing the the totalde!t !y total e6uity#

Debt to e;uit< )tio 9 Totl debt Totl e;uit<

Sol-ency 'atios )$he total debt to equity ratio *


otal ebt RM141,000 RM114,000 RM 87,600

otal e-uit% RM129,500 RM188,350 RM328,045

/ebt to e-uit% ratio 1.09 1 0.61 1 0.27 1


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(he debt to asset ratio measures thepercentage of the !usiness assets nanced !ycreditors relative to the percentage nanced!y the entrepreneur#

This ratio is calculated !y dividing the totalde!ts !y total assets#

Debt to e;uit< )tio 9 Totl debts Totl ssets

Sol-ency 'atios )$he debt toasset ratio *


otal ebts RM141,000 RM114,000 RM87,600

otal assets RM270,500 RM302,350 RM415,645

/ebt to total assets ratio 52.13* 37.70* 21.08*


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(imes interest earned ratio measures thenum!er of times interest e8pense can !ecovered !y prot !efore interest and ta8#

This ratio is calculated !y dividing totalinterest e8pense !y prot !efore interest andta8#

Ti'e inte)est e)ned 9 P)o+t befo)einte)est t4 Inte)este4*ense

Sol-ency 'atios )$imes interestearned ratio*


ro"it be"ore interest RM40,500 RM72,050 RM149,595

Interest e(ense RM16,500 RM13,200 RM9,900

i&e interest earne 2.45 ti&es 5.46 ti&es 15.11 ti&es


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SUMMAR

The nancial plan is an important part of the!usiness plan# It incorporates all nancial dataderived from the operating !udgets$ i#e# mar%eting$

operations and administrative !udgets#

(ased on this nancial data$ several nancialpro)ection tools are prepared to provide theentrepreneur *ith a clear picture of the amount of

money needed to start a !usiness$ sources ofnance$ the amount of cash availa!le and thenancial performance and position of the !usiness#


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The output of a nancial plan covers pro)ectimplementation cost schedule$ sources ofnancing schedule$ pro forma cash o*statement$ pro forma income statement $ and

pro forma !alance sheet#

The !usiness nancial data gathered in thenancial statements are analysed in order to

o!tain an overall nancial picture of the!usiness# The nancial ratios are used toanalyse the nancial performance of the!usiness#

Module 11 Financial Plan

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