3.

The Financial aspect of the feasibility study

Financial Aspect projects how much start-up capital is needed, sources of capital,

returns on investment, and other financial considerations. It looks at how much cash is

needed, where it will come from, and how it will be spent. It involves the capability of the

proposed business to raise the appropriate funds needed to implement it. To determine

whether the proposed business will remain profitable through the existence of competitors

and unfavorable economic condition, the proponents have to project a five-year financial

statement.

A financial feasibility study is an assessment of the financial aspects of something.

If this case, for starting and running a business. It considers many things including start-

up capital, expenses, revenues, and investor income and disbursements. Other portions

of a complete feasibility study will also contribute data to your basic financial study. A

financial feasibility study can focus on one particular project or area, or on a group of

projects (such as advertising campaigns). However, for the purpose of establishing a

business or attracting investors, you should include at least three key things in your

comprehensive financial feasibility study: (a) Start-Up Capital Requirements, (b) Start-Up

Capital Sources, and (c) Potential Returns for Investors.

A. Start-Up Capital Requirements

Start-up capital is how much cash you need to start your business and keep it

running until it is self-sustaining. You should include enough capital funds (cash, or

access to cash) to run the business for one to two years. You can calculate the capital

requirements by adding founding expenses, investments and start-up costs together.

B. Start-Up Capital Sources

Putting all your eggs in one basket is never a good business strategy. This is

especially true when it comes to financing your new business. Not only will diversifying

your sources of financing allow your start-up to better weather potential downturns, but it
will also improve your chances of getting the appropriate financing to meet your specific

needs. Keep in mind that bankers don't see themselves as your sole source of funds. And

showing that you've sought or used various financing alternatives demonstrates to

lenders that you're a proactive entrepreneur. Whether you opt for a bank loan, an angel

investor, a government grant or a business incubator, each of these sources of financing

has specific advantages and disadvantages as well as criteria they will use to evaluate

your business.

C. Potential Returns for Investors

Investors can be a friends, family members, professional associates, client,

partners, shareholders, or investment institutions. Any business or individual willing to

give you cash can be a potential investor. Investors give you money with the

understanding that they will receive "returns" on their investment, that is, in addition to the

amount that is invested they will get a percentage of profits. In order to entice investors,

you need to show how your business will make profits, when it will begin to make profits,

how much profit it will make, and what investors will gain from their investments.

The investment return section should offer both a description of how investors
will be involved and discuss different variables that will affect the profitability of your
business, offering more than one scenario.

Parts of Financial Aspect of the Feasibility study

A. Capitalization
Capitalization has two meanings in accounting and finance. In accounting,

capitalization is an accounting rule used to recognize a cash outlay as an asset on the

balance sheet, rather than an expense on the income statement. In finance, capitalization

is a quantitative assessment of a firm's capital structure. Here it refers to the cost of capital

in the form of a corporation's stock, long-term debt, and retained earnings. In addition,

market capitalization refers to the number of outstanding shares multiplied by the share

price.
B. Sources of Funds
Here's an overview of seven typical sources of financing for start-ups:

1. Personal investment
When starting a business, your first investor should be yourself—either with your

own cash or with collateral on your assets. This proves to investors and bankers that you

have a long-term commitment to your project and that you are ready to take risks.

2. Love money
This is money loaned by a spouse, parents, family or friends. Investors and bankers

considers this as "patient capital", which is money that will be repaid later as your

business profits increase. When borrowing love money, you should be aware that:

• Family and friends rarely have much capital

• They may want to have equity in your business
• A business relationship with family or friends should never be taken lightly

3. Venture capital
The first thing to keep in mind is that venture capital is not necessarily for all

entrepreneurs. Right from the start, you should be aware that venture capitalists are

looking for technology-driven businesses and companies with high-growth potential in

sectors such as information technology, communications and biotechnology. Venture

capitalists take an equity position in the company to help it carry out a promising but

higher risk project. This involves giving up some ownership or equity in your business to

an external party. Venture capitalists also expect a healthy return on their investment,

often generated when the business starts selling shares to the public. Be sure to look for

investors who bring relevant experience and knowledge to your business. BDC has a

venture capital team that supports leading- edge companies strategically positioned in a

promising market. Like most other venture capital companies, it gets involved in start-ups

with high-growth potential, preferring to focus on major interventions when a company

needs a large amount of financing to get established in its market.

4. Angels
Angels are generally wealthy individuals or retired company executives who invest

directly in small firms owned by others. They are often leader’s in their own field who not

only contribute their experience and network of contacts but also their technical and/or

management knowledge. Angels tend to finance the early stages of the business with

investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer

larger investments, in the order of $1,000,000. In exchange for risking their money, they

reserve the right to supervise the company's management practices. In concrete terms,

this often involves a seat on the board of directors and an assurance of transparency.

Angels tend to keep a low profile. To meet them, you have to contact specialized

associations or search websites on angels.

5. Business incubators
Business incubators (or "accelerators") generally focus on the high- tech sector by

providing support for new businesses in various stages of development. However, there

are also local economic development incubators, which are focused on areas such as job

creation, revitalization and hosting and sharing services. Commonly, incubators will invite

future businesses and other fledgling companies to share their premises, as well as their

administrative, logistical and technical resources. For example, an incubator might share

the use of its laboratories so that a new business can develop and test its products more

cheaply before beginning production. Generally, the incubation phase can last up to two

years. Once the product is ready, the business usually leaves the incubator's premises to

enter its industrial production phase and is on its own. Businesses that receive this kind

of support often operate within state- of-the-art sectors such as biotechnology, information

technology, multimedia, or industrial technology.

6. Government grants and subsidies
Government agencies provide financing such as grants and subsidies that may be

available to your business.

C. Total Sales
Total sales or gross sales is the grand total of all sales revenues a business

generates from normal activities. This is a vital number for any business because money

has to go into the cash register before it can be used to pay bills and provide profit for

investors. When you calculate total sales, it is also the starting point for determining a

firm's net income or net profit. Strictly speaking, "total sales" is not a formal accounting

term. You usually see this quantity referred to as gross sales or gross revenues.

D. Total expenses
Business expenses are costs incurred in the ordinary course of business. They

can apply to small entities or large corporations. Business expenses are part of the

income statement. On the income statement, business expenses are subtracted from

revenue to arrive at a company’s taxable net income. Business expenses may also be

referred to as deductions. In general, companies have some limitations and special

considerations for business expense deductions. They are generally divided into capital

expenditures and operational expenditures.

E. Income Statement (5 years projected)

An income statement is a financial statement that shows you the company's

income and expenditures. It also shows whether a company is making profit or loss for a

given period. The income statement, along with balance sheet and cash flow statement,

helps you understand the financial health of your business.

F. Balance Sheet (5 years projected)
A balance sheet is a financial statement that reports a company's assets, liabilities

and shareholders' equity at a specific point in time, and provides a basis for computing

rates of return and evaluating its capital structure.

G. Cash Flow Statement (5 years projected)

A cash flow statement is a financial statement that summarizes the amount of cash

and cash equivalents entering and leaving a company. The cash flow statement

measures how well a company manages its cash position, meaning how well the

company generates cash to pay its debt obligations and fund its operating expenses. The

primary purpose of the statement of cash flows is to provide information about cash

receipts, cash payments, and the net change in cash resulting from the operating,

investing, and financing activities of a company during the period.

H. Return on Investment
Return on investment (ROI) is a performance measure used to evaluate the

efficiency or profitability of an investment or compare the efficiency of a number of

different investments. ROI tries to directly measure the amount of return on a particular

investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of

an investment is divided by the cost of the investment. The result is expressed as a

percentage or a ratio.

I. Ratio Analysis

Ratio analysis is a quantitative method of gaining insight into a company's liquidity,

operational efficiency, and profitability by studying its financial statements such as the

balance sheet and income statement. Ratio analysis is a cornerstone of fundamental

equity analysis.
ACTIVITIES

Direction: Write the Financial Aspect of your feasibility study with the following

information:

1. Capitalization
2. Sources of fund
3. Total sales
4. Total expenses
5. Income Statement (for 5 years)
6. Balance Sheet (for 5 years)
7. Cash Flow Statement (for 5 years)
8. Return on Investment