chap 7 financial plan

7/31/2019 Chap 7 Financial Plan

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Chapter 7:

Financial

Plan


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What is a Financial Plan?

A financial plan is a plan that shows the

short and long-term financial

requirements in order to start a new

business or project.

It also shows how the requirements are

going to be financed (using internal and

external resources).


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What is a Financial Plan?

A financial plan should also include the

projections of the financial statements

such as the cash flow, profit & loss and

balance sheet.

A financial plan should include some

financial analysis in order to determine

the viability of the proposedbusiness/project.


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The Importance of A Financial

Plan To determine the amount of money to be

investedthe project cost.

To identify and propose the relevant

sources of fund. To ensure that the initial capital is

sufficient.

To appraise the viability before actualinvestment is committed.

As a guideline for implementation.


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Sources of Financial Information

Financial information is gathered throughbudgets.

Operational budgetAdministrative budget

Marketing budgetProduction budget

Financial budgetProject implementation cost

Sources of fundProjected cash flow statements

Projected profit & loss statements

Projected balance sheet statements


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Steps in Preparing a Financial

Plan Step 1:

Prepare the project implementation costschedule.

Prepare table of depreciation for each fixedasset owned or purchased by the company.

Step 2:Prepare the sources of fund to finance the

project cost.

Prepare a loan amortization schedule for termloan.

Prepare a hire-purchase repayment scheduleif hire-purchase financing is used.


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Plan

Step 3:

Prepare the projected cash-flow statements (for 3

years).

For year 1monthly. For year 2 and 3annually.

Step 4:

Prepare projected trading, profit & loss statements(for 3 years).

For manufacturing companies, include

manufacturing accounts.


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Plan

Step 5:

Prepare projected balance sheet statements

(for 3 years).

Step 6:

Perform relevant financial analysis based on

the projected financial statements.


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Project Implementation Cost

Project implementation cost refers to the totalcosts (short & long-term costs) needed toimplement the proposed business/project.

Long-term costs refer to capital expenditure

required to buy fixed assets (ex. land,building, machinery, equipment, furnitureand vehicle).

Short-term costs refer to expenditure to

finance day-to-day operation of the business(ex. raw materials/inventory, wages &salaries, utilities and other overheads.


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Elements in Project Cost

Schedule Capital Expenditure

Land

Building

Renovation Machinery & Equipment

Furniture & Fixtures

Vehicle

Working Capital ( xx month) Administrative

Marketing

Operation


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Elements in Project Cost

Schedule Other Expenditure

Pre-operational costs

Business registration & licenses

Legal fees Road tax & insurance

Stamp duties etc.

Deposits

Rental Utilities

Contingency cost

(5 - 10 percent)


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Capital Expenditure

Include all purchases of fixed assets: Land

Building

Machinery

Equipment Transportation

Furniture

Fixtures & Fittings

Renovation costs

Can be done in three ways: Cash

Hire purchase

Personal contribution by the entrepreneur


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Working capital requirement

Determination of initial working capital is based

on the length of time (in months) needed by the

firm to generate their first sales multiplied the

amount of monthly operating expenditure(admin, marketing & operation)

Example: if monthly operating expenditure is

RM 25,000 per month and the firm need 2

month to generate first sales, initial working

capital for the firm is RM 50,000 (RM 25,000 x

2 months)


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Other expenditure

One off cost or to paid annually

Examples:

Business registration

Road tax & insurance

deposits


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Contingency Cost/Allowance

Amount allocated to take care of any

variance of the actual from the budgeted

expenditure.

Example:

Increase in material cost

Based on certain percentage (5-10%)


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Example: Project

Implementation Cost ScheduleRM RM

Capital ExpenditureBuilding 45,000Machinery & Equipment 23,000Furniture & Fixtures 7,000

Van 25,000Renovation 4,000

104,000Working Capital (1 month)

Administrative 8,000Marketing 1,500

Operation 8,00017,500

Pre-operational costs 2,700Deposits 800Grand Total 125,000Allowance for contingencies (10%) 12,500

Total cost 137,500


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Table of Depreciation

All fixed assets (except land) will bedepreciated.

Used straight line method

To calculate the annual depreciation= Original cost of AssetScrap value

Assets Economic Life

Economic life: the period the assets can be usedwithout much maintenance or breakdown (in years)

Scrap value: estimated residual value of an asset atthe end of economic life.


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Example: Table of Depreciation

Type of asset : VanCost of asset : RM25,000Economic life : 5 yearsMethod : Straight line

Year Annual Accumulated BookDepreciation Depreciation Value

0 25,0001 5,000 5,000 20,0002 5,000 10,000 15,0003 5,000 15,000 10,0004 5,000 20,000 5,0005 5,000 25,000 0


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Sources of Fund

Sources of fund refer to the source where fund

to finance the project cost is secured. It can be

internally or externally generated.

Internal External

Equity contribution

from the business

owner/s

Commercial banks

finance companiesgovernment agencies


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Sources of Fund

Equity Contribution

Cash

Assets Term Loan

Hire-Purchase Scheme

Others


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Equity Contribution

Can be in the form of cash or assets

Personal assets : current market price


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Term loan

Offered by most commercial banks

Used to finance fixed assets and workingcapital

Interest rate and amount of loan dependson current rate.

Normally require collateral as security to

the loan. Used to supplement other source of

finance


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Hire Purchase

To finance vehicles, business premises

and some machinery and equipment.

In hire purchase the entrepreneur did not

receive cash, they get the item they

purchase

Have to pay down payment for every

asset purchased.

Interest rate: flat rate


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Others

Government grant

Personal borrowing from individuals and

companies


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Example: Sources of Finance

Source RM

Equity ContributionCash 27,500Asset 45,000

Term Loan 45,000

Hire-purchase Finance 20,000

Total 137,500


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Example:

Loan Amortization Schedule

Loan amount : RM45,000Loan period : 5 yearsInterest rate : 10%Method : Reducing balance (annually)

Year Interest Principal Payment Balance

0 0 0 0 45,0001 4,500 9,000 13,500 36,000

2 3,600 9,000 12,600 27,0003 2,700 9,000 11,700 18,0004 1,800 9,000 10,800 9,0005 900 9,000 9,900 0

To Cash Flow

E l Hi h


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Example: Hire-purchase

Repayment Schedule

Cost of asset : RM25,000Down payment : RM 5,000Loan amount : RM20,000Loan period : 5 yearsInterest rate : 8%

Method : Flat (annually)

Year Interest Principal Payment Balance0 0 0 0 20,0001 1,600 4,000 5,600 16,0002 1,600 4,000 5,600 12,000

3 1,600 4,000 5,600 8,0004 1,600 4,000 5,600 4,0005 1,600 4,000 5,600 0

To Cash Flow


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Cash-flow Projected Statements

It is projected statements of cash inflowsand outflows throughout the plannedperiod.

Prepared for 3 yearsMonthly for 1st year

Yearly for 2nd & 3rd year


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Cash-flow Projected Statements

It shows the following:

Cash inflows

Cash outflows

Deficit or surplus

Cash position (beginning & ending balances)


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Elements in Cash-flow

Statement

Cash Inflows

Equitycash only

Term-loanCash sales

Collection of receivables

Sales of asset


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Collection of receivables

The amount collected from the credit sales

realised by the company.

The patern depend on the term of credit

sales formulated by the company.

Included in cash inflow in the period

where the payment for the credit sales is

received from the customers.

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Statement

Cash Outflows

Operational expenditure

Marketing expenditure

Administrative expenditure

Loan repayment

Hire-purchase repayment

Purchase of fixed assets

Pre-operational expenses

Miscellaneous expenses


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Statement Cash Surplus or Deficit

Inflows > Outflows = Surplus

Inflows < Outflows = Deficit

Cash Position Beginning cash + Surplus/ (- Deficit) = Ending cash

Note: The ending cash balance for a particular

month becomes the beginning balance for the next

consecutive month


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Example:

Cash-flow Pro-forma Statement

Month Pre-Operation Jan Feb Mac Apr May June July AugA CASH INFLOWS


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A CASH INFLOWS

Beginning cash balance 0 30,000 30,909 31,818 32,727 33,636 34,545 35,454 36,363

Equity - Cash 27,500

Term-loan 45,000

Cash sales 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000

B Total Cash Inflows 72,500 50,000 50,909 51,818 52,727 53,636 54,545 55,454 56,363

C CASH OUTFLOWS

Operational Expenditure:Raw materials 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Direct labor 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000

Operational overheads 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

Marketing Expenditure:

Sales commission 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Entertainment allowance 500 500 500 500 500 500 500 500

Adminstrative Expenditure:

Salaries & Wages 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000EPF & SOCSO 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

Adminstrative overheads 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

Loan Repayment:

Principal 750 750 750 750 750 750 750 750

Interest 375 375 375 375 375 375 375 375

Hire-purchase repayment:

Down payment 5,000

Principal 333 333 333 333 333 333 333 333Interest 133 133 133 133 133 133 133 133

Capital Expenditure:

Machinery & Equipment 23,000

Furniture & Fixtures 7,000

Renovation 4,000

Pre-operational Expenditure 2,700

Deposits 800

D Total Cash Outflows 42,500 19,091 19,091 19,091 19,091 19,091 19,091 19,091 19,091

E Cash Surplus/(Deficit) 30,000 30,909 31,818 32,727 33,636 34,545 35,454 36,363 37,272

F Ending cash balance 30,000 30,909 31,818 32,727 33,636 34,545 35,454 36,363 37,272

Year Year 1 Year 2 Year 3A CASH INFLOWS


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A CASH INFLOWS

Beginning cash balance 0 40,900 77,000

Equity - Cash 27,500 0 0

Term-loan 45,000 0 0

Cash sales 240,000 276,000 317,400

B Total Cash Inflows 312,500 316,900 394,400

C CASH OUTFLOWS

Operational Expenditure:Raw materials 36,000 37,800 39,690

Direct labor 36,000 37,800 39,690

Operational overheads 24,000 25,200 26,460

Marketing Expenditure:

Sales commission 12,000 12,600 13,230

Entertainment allowance 6,000 6,000 6,000

Adminstrative Expenditure:

Salaries & Wages 60,000 63,000 66,150EPF & SOCSO 12,000 12,600 13,230

Adminstrative overheads 24,000 25,200 26,460

Loan Repayment:

Principal 9,000 9,000 9,000

Interest 4,500 3,600 2,700

Hire-purchase repayment:

Down payment 5,000 0 0

Principal 4,000 4,000 4,000Interest 1,600 1,600 1,600

Capital Expenditure:

Machinery & Equipment 23,000 0 0

Furniture & Fixtures 7,000 0 0

Renovation 4,000 0 0

Pre-operational Expenditure 2,700 1,500 1,500

Deposits 800 0 0

D Total Cash Outflows 271,600 239,900 249,710

E Cash Surplus/(Deficit) 40,900 77,000 144,690

F Ending cash balance 40,900 77,000 144,690

Manufacturing Trading Profit


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Manufacturing, Trading, Profit

& Loss Pro-forma Statements

It is a projected statement which shows theexpected profit or loss throughout the plannedperiod (3 consecutive years).

For manufacturing companies, they should firstprepare the manufacturing account.

For trading companies, they should first preparethe trading account.

For service companies, they can just prepare theprofit and loss account.

Elements in the Manufacturing


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Elements in the Manufacturing

Account Raw Materials Used

Opening stock (beginning of year)

Add: Purchase of raw materials (for the year)

Minus: Closing stock (end of year)

Direct Labor

Prime Cost (Direct material +Direct labour) Manufacturing Overheads

Indirect materials

Indirect labor

Depreciation on plant, machinery & equipment

Maintenance Utilities

Work-in-process Add: Beginning work-in-process

Minus: Ending work-in-process

Cost of Goods Manufactured


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Cost of Goods Manufactured

a.k.a as production cost

The total production cost involved in

producing the finished goods.

f i


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Example: Manufacturing

AccountRM RM

Raw MaterialsOpening stock 1/1 0Add: Purchases of raw materials 36,000Raw materials available 36,000Minus: Closing stock 31/12 3,000

Raw Materials Used 33,000Direct Labor 36,000Prime Costs 69,000Manufacturing Overheads 24,000

Work in processAdd: Work-in-process 1/1 0Minus: Work-in-process 31/12 0

0Cost of Goods Manufactured 93,000


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Elements in Trading Account

Manufacturing Company

Sales (as forecasted)

Cost of Goods Sold

Opening stock for

finished goods

Add: Cost of goods

manufactured

Stocks available for sale

Minus: Closing stockfor finished goods

Gross Profit

Trading Company

Sales (as forecasted)

Cost of Goods Sold

Opening stock for

finished goods

Add: Purchases for the

year

Available stocks for

sale Minus: Closing stock

for finished goods

Gross Profit


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Example: Trading Account for a

Manufacturing Company

Sales 240,000Less: Cost of Goods Sold

Opening stock for finished goods 0Add: Cost of goods manufactured 93,000Goods available for sale 93,000Minus: Closing stock for finished goods 3,000

90,000

Gross Profit 150,000


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Example: Trading Account for

Trading Companies

Sales 240,000Less: Cost of Goods Sold

Opening stock for finished goods 0Add: Purchase for the year 93,000Goods available for sale 93,000Minus: Closing stock for finished goods 3,000

90,000Gross Profit 150,000

El t i A P fit & L


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Elements in A Profit & Loss

AccountManufacturing & Trading

Companies

Sales

Less: Cost of Goods Sold

Gross Profit

Less: Expenses

Administrative

Marketing

Financial

Depreciation charges

Other expenses

Net Profit Before Tax

Service Companies

Sales

Less: Expenses

Administrative

Marketing Operational

Financial

Depreciation charges

Other expenses

Net Profit Before Tax

E l P fit & L A t


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Example: Profit & Loss Account

For Manufacturing & Trading

CompaniesSales 240,000Less: Cost of Goods Sold 90,000

Gross Profit 150,000Less: ExpensesAdministrative 96,000Marketing 18,000Financial:

Interest on term loan 4,500

Interest on hire-purchase 1,600Depreciation charges 11,800Pre-operational expenditure 2,700Total Expenditure 134,600

Net Profit Before Tax 15,400

E l P fit & L A t


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Example: Profit & Loss Account

For Service Companies

Sales 240,000

Less: Expenses

Administrative 96,000Marketing 18,000Operational 96,000Financial:

Interest on term loan 4,500

Interest on hire-purchase 1,600Depreciation charges 11,800Pre-operational expenditure 2,700Total Expenditure 230,600

Net Profit 9,400

Balance Sheet Pro-forma


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Balance Sheet Pro forma

Statements

It is a projected statement which showsthe financial position of the company at a

specific point in time in terms of assets

owned and how those assets are financed. Projected statements are prepared for the

period of three (3) years.

El t i A B l Sh t


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Elements in A Balance Sheet

Fixed Assets

List all fixed assets at its book value (Cost

Accumulated depreciation)

Current Assets

List all current assets (e.g. cash, stocks, accountreceivables, deposits etc.)

Equity

Equity contribution (cash + assets) plus net profit

(accumulated)

Long-term Liabilities

Term-loan (year end balance)

Hire-purchase (year end balance)

E l B l Sh t f


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Example: Balance Sheet for

Manufacturing & Trading Companies

Fixed AssetsMachinery & Equipment 18,400Furniture and Fixtures 5,600Renovation 3,200Van 20,000 47,200

Current Assets

Cash 40,900Closing stock for raw materials 3,000Closing stock for finished goods 3,000Deposits 800 47,700

Total Assets 94,900Equity

Capital 27,500Net profit 15,400 42,900

Long-term LiabilitiesTerm-loan 36,000Hire-purchase 16,000 52,000

Total Equity & Liabilities 94,900

E l B l Sh t f


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Example: Balance Sheet for

Service Companies

Fixed AssetsMachinery & Equipment 18,400Furniture and Fixtures 5,600Renovation 3,200Van 20,000 47,200

Current AssetsCash 40,900Deposits 800 41,700

Total Assets 88,900

Equity

Capital 27,500Net profit 9,400 36,900

Long-term LiabilitiesTerm-loan 36,000Hire-purchase 16,000 52,000

Total Equity & Liabilities 88,900

chap 7 financial plan

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