Financial Estimates and Projections

Centre for Financial Management, Bangalore

Outline

Cost of project
Means of financing
Estimates of sales and production
Cost of production
Working capital requirement and its financing
Profitability projections

Centre for Financial Management, Bangalore

Financial Projections
Balance Sheet
Cash Flow
Statement
Cost of Project and
Time Phasing

Means of Finance
and Time Phasing
Interest and Loan
Repayment

Depreciation
Cost of Production

Estimate of
Working Results

Working Capital
Needs

Working Capital
Advance (WCA)

Production Plan
Projected Sales
Centre for Financial Management, Bangalore

Interest on WCA
Tax Factor

Cost of Project
The cost of project represents the total of all items of outlay
associated with a project which are supported by long-term funds.
It is the sum of the outlays on the following:
Land and site development
Buildings and civil works
Plant and machinery
Technical know-how and engineering fees
Expenses on foreign technicians and training of Indian technicians
abroad
Miscellaneous fixed assets
Preliminary and capital issue expenses
Pre-operative expenses
Margin money for working capital
Initial cash losses

Centre for Financial Management, Bangalore

Means of Finance
To meet the cost of the project the following means of finance are
available: Share capital
Term loans
Debenture capital
Deferred credit
Incentive sources
Miscellaneous sources

Centre for Financial Management, Bangalore

Project Financing Decision

The key business considerations relevant for the project
financing decisions are:
Cost
Risk
Control
Flexibility

Centre for Financial Management, Bangalore

Estimates of Sales and Production

In estimating sales and production, assume that:
The capacity utilisation would be at 40-50 percent of
the installed capacity in the first year, 50-80 percent in
the second year, and 80-90 percent from the third year
onwards
Production and sales will be equal
The selling price used may be the present selling price

Centre for Financial Management, Bangalore

Estimates of Production and Sales

(Details may be furnished separately for each product and until the plant reaches
maximum capacity utilisation)
Product
1st 2nd 3rd
yr yr yr
1.

Installed capacity (qty per day per annum)

2.

No. of working days

3.

No. of shifts

4.

Estimated production per day (qty)

5.

Estimated annual production(qty)

6.

Estimated output as % of plant capacity

7.

Sales (qty) (after adjusting stocks)

8.

Value of sales (in000 of Rs)

Product
4th
yr

1st 2nd 3rd 4th

yr yr yr yr

Product
(i)
(ii)
(iii)
Note : Production in the initial period should be assumed at a reasonable level of utilisation of
capacity increasing gradually to attain full capacity in subsequent years.
Centre for Financial Management, Bangalore

Cost of Production
Given the estimated production, the cost of production may be
worked out. The major components of cost of production are:
Material cost
Utilities cost
Labour cost
Factory overhead cost

Centre for Financial Management, Bangalore

Working Capital Requirement and Its Financing

In estimating the working capital requirements and planning for
its financing, bear in mind the following:
The working capital requirement consists of raw materials and
components, work-in-process, finished goods, consumable stores,
debtors, and operating expenses.
The principal sources of working capital finance are working capital
advances provided by commercial banks, trade credit, accruals and
provisions, and long-term sources of financing.
There are limits to obtaining working capital advances from
commercial banks. They relate to the maximum permissible bank
finance for working capital and the amounts that can be raised
against each individual current asset.
Centre for Financial Management, Bangalore

Profitability Projections ( or Estimates of Working Results)

Given the estimates of sales revenues and cost of production, the next step
is to prepare the profitability projections or estimates of working results (as
they are referred to by term-lending financial institutions in India). The
estimates of working results may be prepared along the following lines:
A Cost of Production
B Total administrative expenses
C Total sales expenses
D Royalty and know-how payable
E Total cost of production (A+B+C+D)
F Expected sales
G Gross profit before interest
H Total financial expenses
I Depreciation
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J Operating Profit (G - H - I)
K Other income
L Preliminary expenses written off
M Profit/loss before taxation (J+K - L)
N Provision for taxation
O Profit after tax (M - N)
Less Dividend on
- Preference capital
- Equity capital
P Retained profit
Q Net cash accrual (P+I+L)

Centre for Financial Management, Bangalore

Cash Flow Statement

Sources of Funds
1.

Share issue

2.

Profit before taxation with interest added back

3.

Depreciation provision for the year

4.

Development rebate reserve

5.

Increase in secured medium and long-term borrowings for the project

6.

Other medium/long-term loans

7.

Increase in unsecured loans and deposits

8.

Increase in bank borrowings for working capital

9.

Increase in liabilities for deferred payment (including interest) to machinery

suppliers

10. Sale of fixed assets

11. Sale of investments
12. Other income (indicate details)
Total (A)
Centre for Financial Management, Bangalore

Disposition of Funds
1.

Capital expenditure for the project

2.

Other normal capital expenditure

3.

Increase in working capital*

4.

Decrease in secured medium and long-term borrowings

- All India Institutions
- SFCs
- Banks

5.

Decrease in unsecured loans and deposits

6.

Decrease in bank borrowings for working capital

7.

Decrease in liabilities for deferred payments (including interest) to machinery

suppliers

8.

Increase in investments in other companies

9.

Interest on term loans

Centre for Financial Management, Bangalore

10. Interest on bank borrowings for working capital

11. Taxation
12. Dividends
- Equity
- Preference
13. Other expenditure (indicate details)
Total (B)
- Opening balance of cash in hand and at bank
- Net surplus/deficit (A-B)
- Closing balance of cash in hand and at bank
* Working capital here is defined as: (Current assets other than cash )(Current liabilities other than bank borrowings)

Centre for Financial Management, Bangalore