Chapter 7: Financial Plan

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 proposed business/project.

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The Importance of A Financial Plan

To determine the amount of money to be invested the project cost. To identify and propose the relevant sources of fund. To ensure that the initial capital is sufficient. To appraise the viability before actual investment is committed. As a guideline for implementation.
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Sources of Financial Information

Financial information is gathered through budgets. Operational budget
Administrative budget Marketing budget Production budget

Financial budget

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Project implementation cost Sources of fund Projected 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 cost schedule. Prepare table of depreciation for each fixed asset owned or purchased by the company.

Step 2:
Prepare the sources of fund to finance the project cost. Prepare a loan amortization schedule for term loan. Prepare a hire-purchase repayment schedule if hire-purchase financing is used.
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Steps in Preparing a Financial Plan

Step 3:
Prepare the projected cash-flow statements (for 3 years). For year 1 monthly. For year 2 and 3 annually.

Step 4:
Prepare projected trading, profit & loss statements (for 3 years). For manufacturing companies, include manufacturing accounts.
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Steps in Preparing a Financial 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 total costs (short & long-term costs) needed to implement the proposed business/project. Long-term costs refer to capital expenditure required to buy fixed assets (ex. land, building, machinery, equipment, furniture and 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 Schedule

RM RM

Capital Expenditure Building Machinery & Equipment Furniture & Fixtures Van Renovation
Working Capital (1 month) Administrative Marketing Operation Pre-operational costs Deposits Grand Total Allowance for contingencies (10%) Total cost
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45,000 23,000 7,000 25,000 4,000 8,000 1,500 8,000

104,000

17,500 2,700 800 125,000 12,500 137,500

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Table of Depreciation
All fixed assets (except land) will be depreciated. Used straight line method To calculate the annual depreciation
= Original cost of Asset Scrap value Assets Economic Life
Economic life: the period the assets can be used without much maintenance or breakdown (in years) Scrap value: estimated residual value of an asset at the end of economic life.
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Example: Table of Depreciation

Type of asset Cost of asset Economic life Method
Year 0 1 2 3 4 5
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: Van : RM25,000 : 5 years : Straight line

Accumulated Depreciation 5,000 10,000 15,000 20,000 25,000 Book Value 25,000 20,000 15,000 10,000 5,000 0

Annual Depreciation 5,000 5,000 5,000 5,000 5,000

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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 Equity contribution from the business owner/s

External Commercial banks finance companies government 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 working capital Interest rate and amount of loan depends on 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 Equity Contribution Cash Asset RM 27,500 45,000

Term Loan
Hire-purchase Finance Total

45,000
20,000 137,500

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Example: Loan Amortization Schedule

Loan amount Loan period Interest rate Method Year 0 1 2 3 4 5 Interest 0 4,500 3,600 2,700 1,800 900 : RM45,000 : 5 years : 10% : Reducing balance (annually) Principal 0 9,000 9,000 9,000 9,000 9,000 Payment 0 13,500 12,600 11,700 10,800 9,900 Balance 45,000 36,000 27,000 18,000 9,000 0
To Cash Flow
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Example: Hire-purchase Repayment Schedule

Cost of asset : RM25,000 Down payment : RM 5,000 Loan amount : RM20,000 Loan period : 5 years Interest rate : 8% Method : Flat (annually) Year 0 1 2 3 4 5 Interest 0 1,600 1,600 1,600 1,600 1,600 Principal 0 4,000 4,000 4,000 4,000 4,000 Payment 0 5,600 5,600 5,600 5,600 5,600 Balance 20,000 16,000 12,000 8,000 4,000 0

To Cash Flow
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Cash-flow Projected Statements

It is projected statements of cash inflows and outflows throughout the planned period. Prepared for 3 years
Monthly 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)

Elements in Cash-flow Statement

Cash Inflows
Equity cash only Term-loan Cash 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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Sales of Assets
The disposal of the company's assets Not a common element of cash inflow More relevant to existing business selling off parts of its assets to finance a new business or project.

Elements in Cash-flow Statement

Cash Outflows

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Operational expenditure Marketing expenditure Administrative expenditure Loan repayment Hire-purchase repayment Purchase of fixed assets Pre-operational expenses Miscellaneous expenses
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Elements in Cash-flow 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

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Month A CASH INFLOWS Beginning cash balance Equity - Cash Term-loan Cash sales B Total Cash Inflows C CASH OUTFLOWS Operational Expenditure: Raw materials Direct labor Operational overheads Marketing Expenditure: Sales commission Entertainment allowance Adminstrative Expenditure: Salaries & Wages EPF & SOCSO Adminstrative overheads Loan Repayment: Principal Interest Hire-purchase repayment: Down payment Principal Interest Capital Expenditure: Machinery & Equipment Furniture & Fixtures Renovation Pre-operational Expenditure Deposits D Total Cash Outflows E Cash Surplus/(Deficit) F7/11/2012 cash balance Ending

Pre-Operation 0 27,500 45,000 72,500

Jan 30,000

Feb 30,909

Mac 31,818

Apr 32,727

May 33,636

June 34,545

July 35,454

Aug 36,363

20,000 50,000

20,000 50,909

20,000 51,818

20,000 52,727

20,000 53,636

20,000 54,545

20,000 55,454

20,000 56,363

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375 5,000 333 133 23,000 7,000 4,000 2,700 800 42,500 30,000 30,000

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

3,000 3,000 2,000 1,000 500 5,000 1,000 2,000 750 375

333 133

333 133

333 133

333 133

333 133

333 133

333 133

19,091 30,909 30,909

19,091 31,818 31,818

19,091 32,727 32,727

19,091 33,636 33,636

19,091 34,545 34,545

19,091 35,454 35,454

19,091 36,363 36,363

19,091 37,272 37,272 36

B C

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D E F

Year CASH INFLOWS Beginning cash balance Equity - Cash Term-loan Cash sales Total Cash Inflows CASH OUTFLOWS Operational Expenditure: Raw materials Direct labor Operational overheads Marketing Expenditure: Sales commission Entertainment allowance Adminstrative Expenditure: Salaries & Wages EPF & SOCSO Adminstrative overheads Loan Repayment: Principal Interest Hire-purchase repayment: Down payment Principal Interest Capital Expenditure: Machinery & Equipment Furniture & Fixtures Renovation Pre-operational Expenditure Deposits Total Cash Outflows Cash Surplus/(Deficit) Ending cash balance

Year 1 0 27,500 45,000 240,000 312,500

Year 2 40,900 0 0 276,000 316,900

Year 3 77,000 0 0 317,400 394,400

36,000 36,000 24,000 12,000 6,000 60,000 12,000 24,000 9,000 4,500 5,000 4,000 1,600 23,000 7,000 4,000 2,700 800 271,600 40,900 40,900

37,800 37,800 25,200 12,600 6,000 63,000 12,600 25,200 9,000 3,600 0 4,000 1,600 0 0 0 1,500 0 239,900 77,000 77,000

39,690 39,690 26,460 13,230 6,000 66,150 13,230 26,460 9,000 2,700 0 4,000 1,600 0 0 0 1,500 0 249,710 144,690 144,690

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Manufacturing, Trading, Profit & Loss Pro-forma Statements

It is a projected statement which shows the expected profit or loss throughout the planned period (3 consecutive years). For manufacturing companies, they should first prepare the manufacturing account. For trading companies, they should first prepare the trading account. For service companies, they can just prepare the profit and loss account.

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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 Beginning work-in-process Ending work-in-process
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Work-in-process
Add: Minus:
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Cost of Goods Manufactured

Cost of Goods Manufactured

a.k.a as production cost The total production cost involved in producing the finished goods.

Example: Manufacturing Account

Raw Materials Opening stock 1/1 Add: Purchases of raw materials Raw materials available Minus: Closing stock 31/12 Raw Materials Used Direct Labor Prime Costs Manufacturing Overheads Work in process Add: Work-in-process 1/1 Minus: Work-in-process 31/12
Cost of Goods Manufactured
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RM 0 36,000 36,000 3,000

RM

33,000 36,000 69,000 24,000

0 0

0 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 stock for 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 Less: Cost of Goods Sold Opening stock for finished goods Add: Cost of goods manufactured Goods available for sale Minus: Closing stock for finished goods Gross Profit 240,000 0 93,000 93,000 3,000

90,000 150,000

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Example: Trading Account for Trading Companies

Sales Less: Cost of Goods Sold Opening stock for finished goods Add: Purchase for the year Goods available for sale Minus: Closing stock for finished goods
Gross Profit

240,000
0 93,000 93,000 3,000

90,000 150,000

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Elements in A Profit & Loss Account

Manufacturing & 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

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Example: Profit & Loss Account For Manufacturing & Trading Companies
Sales Less: Cost of Goods Sold Gross Profit Less: Expenses Administrative 96,000 Marketing 18,000 Financial: Interest on term loan 4,500 Interest on hire-purchase 1,600 Depreciation charges 11,800 Pre-operational expenditure 2,700 Total Expenditure Net Profit Before Tax
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240,000 90,000 150,000

134,600 15,400
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Example: Profit & Loss Account For Service Companies

Sales Less: Expenses Administrative Marketing Operational Financial: Interest on term loan Interest on hire-purchase Depreciation charges Pre-operational expenditure Total Expenditure Net Profit
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240,000

96,000 18,000 96,000

4,500 1,600 11,800 2,700

230,600 9,400
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Balance Sheet Pro-forma Statements

It is a projected statement which shows the 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.

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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, account receivables, deposits etc.)

Equity
Equity contribution (cash + assets) plus net profit (accumulated)

Long-term Liabilities
Term-loan (year end balance) Hire-purchase (year end balance)
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Example: Balance Sheet for Manufacturing & Trading Companies

Fixed Assets Machinery & Equipment Furniture and Fixtures Renovation Van Current Assets Cash Closing stock for raw materials Closing stock for finished goods Deposits Total Assets Equity Capital Net profit Long-term Liabilities Term-loan Hire-purchase Total Equity & Liabilities
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18,400 5,600 3,200 20,000 40,900 3,000 3,000 800

47,200

47,700 94,900 42,900 52,000 94,900

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27,500 15,400
36,000 16,000

Example: Balance Sheet for Service Companies

Fixed Assets Machinery & Equipment Furniture and Fixtures Renovation Van Current Assets Cash Deposits Total Assets
Equity Capital Net profit Long-term Liabilities Term-loan Hire-purchase Total Equity & Liabilities
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18,400 5,600 3,200 20,000 40,900 800

47,200 41,700 88,900

27,500 9,400 36,000 16,000

36,900 52,000 88,900

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