Financial Plan Summary

Financial Plan

Learning Outcomes

  • Prepare relevant statements for the financial plan.
  • Develop skills in preparing a financial plan.
  • Evaluate the financial viability of a proposed business/project.

Introduction

  • A financial plan shows short and long-term financial requirements for a new business/project.
  • It indicates how these requirements will be financed (internal and external resources).
  • It includes projections of financial statements: cash flow, profit & loss, and balance sheet.
  • It includes financial analysis to determine the viability of the proposed business/project.

Importance of Financial Plan

  • Determine the amount of money to be invested (project’s cost).
  • Identify relevant sources of finance and their purpose.
  • Ensure sufficient initial capital.
  • Appraise viability before investment.
  • Serve as a guideline for implementation.

Financial Plan Steps

  • Step 1:
    • Prepare the project implementation cost’s schedule.
    • Prepare table of depreciation for each fixed asset.
  • Step 2:
    • Prepare the source of funds to finance the project’s cost.
    • Prepare a loan amortization schedule for the term loan.
    • Prepare a hire-purchase repayment schedule if hire-purchase financing is used.
  • Step 3:
    • Prepare the pro-forma cash-flow statements (for 3 years).
    • For year 1 – monthly.
    • For years 2 and 3 – annually.
  • Step 4:
    • Prepare proforma trading, profit and loss statements for (3 years).
    • For manufacturing companies, including manufacturing accounts.
  • Step 5:
    • Prepare a proforma balance sheet statements (for 3 years).

Project Implementation Cost

  • Total costs (short & long-term) to implement the project.
  • Long-term costs: capital expenditure to buy fixed assets (e.g., land, building, machinery).
  • Short-term costs: day-to-day operation expenses (e.g., raw materials, wages, utilities).

Elements in Project Cost

  • Capital Expenditure:
    • Land, building, renovation, machinery & equipment, furniture & fixtures.
  • Working Capital:
    • Administrative, marketing, operation.
  • Other Expenses:
    • Pre-operational costs (business registration, legal fees), deposits (rental, utilities), provision for contingencies (2-10% of total cost).

Sources of Finance

  • Sources where long-term funds to finance the project cost are secured (internal or external).
  • Elements:
    • Equity Contribution (Cash + Assets)
    • Term Loan
    • Hire-Purchase

Cash-flow Pro-forma Statements

  • Projected statements of cash inflows and outflows.
  • Shows cash inflows, cash outflows, deficit or surplus, and cash position (beginning & ending balances).
Elements in Cash-flow
  • Cash Inflows:
    • Equity (cash), term loan, cash sales, collection of receivables, sales of assets.
  • Cash Outflows:
    • Operational, marketing, administrative expenditure, loan repayment, hire-purchase repayment, purchase of fixed assets, pre-operational expenses, miscellaneous expenses.
  • Cash Surplus or Deficit:
    • Inflows > Outflows = Surplus
    • Inflows < Outflows = Deficit
  • Cash Position:
    • Beginning cash + Surplus/(-Deficit) = Ending cash
    • The ending cash balance becomes the beginning balance for the next month.

Profit & Loss Pro-forma Statements

  • A projected statement showing expected profit or loss over the planned period (3 years).
  • Manufacturing companies: prepare the manufacturing account first.
  • Trading companies: prepare the trading account first.
  • Service companies: directly prepare the profit and loss account.
Elements in A Profit & Loss
  • (Service Companies)
    • Sales less expenses (administrative, marketing, operational, financial, depreciation, other) = Net Profit
  • (Manufacturing & Trading Companies)
    • Sales less cost of goods sold = Gross Profit less expenses (administrative, marketing, financial, depreciation, other) = Net Profit

Balance Sheet Statements

  • A projected statement showing the financial position at a specific point in time.
  • Shows assets owned and how those assets are financed.
  • Prepared for three (3) years.
Elements in Balance Sheet
  • Fixed Assets:
    • List fixed assets at book value (Cost – Accumulated depreciation).
  • Current Assets:
    • List current assets (e.g., cash, stocks, account receivables, deposits).
  • Equity:
    • Equity contribution (cash + assets) plus net profit (accumulated).
  • Long-term Liabilities:
    • Term loan (year-end balance) and Hire-purchase (year-end balance).