Chapter 8

❖ Financial plan is the final step in the preparation of a business

plan.

❖ Financial plan is the task of determining how a business will

afford to achieve its strategic goals & objectives.

Financial Plan = incorporates all financial data

derived from the operating budgets i.e. mktg
budget, production@operation &
administrative budget.

❖ The financial plan should begin with an explanation of the

funding that will be needed by the business during the next
three to five years along with an explanation of how the
funds will be used.

❖ This information is called a sources and uses of funds

statement.
n Common mistake among business owners:
Failing to collect and analyze basic financial
data.
n One-third of entrepreneurs run their companies
without any kind of financial plan.
n Only 11 percent of business owners analyze their
companies’ financial statements as part of the
managerial planning process.
n Financial planning is essential to running a
successful business and is not that difficult!
 Operating Budget Financial Budget

Marketing Budget
• Sales forecast
• Cost of distribution
• Promotional Costs
• Entertainment Allowance
• Sales Commission

Production/Operations Budget Financial Budget

• Plant, machinery and equipment • Project Implementation Costs
cost • Source of Financing
• Direct Labour • Cash Flow Statement
• Direct Materials • Income Statement
• Operations overheads, etc • Balance Sheet

Administrative Budget
• Furniture, Fixtures and Fittings
• Office Equipment
• Payroll
• Other administration Costs
 GOOD FINANCIAL PLAN – should be able to
determine :-

•Total project implementation costs

•Total amount of financing required and the proposed
sources of finance
•Capital structure of the new firm
•Amount of depreciation on fixed assets
•Amount of loan and hire purchase repayments
•Cash inflow and outflow for the planned period
•Profit and loss at the end of the planned period
•Financial position at the end of the planned period
•Financial viability of the proposed project
 The Importance of a Financial Plan

1. To determine the size of investment – financial plan should be able

to determine the size of investment needed to start a new business
or project. By knowing the size of investment required, the
entrepreneur can seek sources to finance the project.

2. To identify and propose the relevant sources of finance – a

financial plan should include the proposals on how the project
implementation cost is to be financed. By doing so, the entrepreneur
will know exactly where the sources of finance are and the amount of
investments well before the project is implemented.

3. To ensure that the initial capital is sufficient – to make sure that

the initial capital is sufficient for the project to take off. An under-
capitalised project will pose too much risk in implementing process
as the project will run out of cash before it reach its stabilization
stage.
 The Importance of a Financial Plan

4. To appraise the viability of the project before actual investment

is committed – Financial plan help the entrepreneur to appraise the
proposed business in terms of financial viability before the actual
investment is committed. Financial viability can determined by
performing several analysis on the projected financial statements such
as the financial ratio analysis

5. To be used as a guideline for implementation – to identify any

mistake, improvement or if the project is on the right track or not.
PROCESS OF DEVELOPING A FINANCIAL
PLAN

The component in the Project Capital Expenditure

Implementation Cost

Contingency Cost

Working Capital
Other Expenditure
Requirements
PROCESS OF DEVELOPING A FINANCIAL
PLAN
cash inflow : The projected amount of cash flowing
into the company :
example are equity contributions in cash. Term loan,
cash sales and sales of assets.
cash outflow : the projected amount of cash flowing
out of the company :
Operation expenditure, marketing expenditure, hire
purchase repayment, term loan repayment & etc
PROCESS OF DEVELOPING A FINANCIAL
PLAN
Cost of good Manufactured
The cost of goods manufactured is a calculation of the production
costs of the goods that were completed. It also known as production cost.
This calculation takes into account all expenses related to the
manufacturing of inventory including direct materials, factory overhead
and labor expense
Gross profit
Gross profit is defined as net sales minus the cost of goods sold.
Gross profit is sometimes referred to as gross margin.

Net profit
is defined as the difference between gross profit and operating expenses
for the planned period
 Analyzing financial Statements

Financial Analysis :

❖ The purpose of financial statement analysis is to examine

past and current financial data so that a company's
performance and financial position can be evaluated and
future risks and potential can be estimated

❖ Financial analysis is important to pinpoint the strength and

weaknesses of a business.
 Analyzing financial Statements
Financial Ratio Liquidity Ratio : A liquidity ratio is a financial
Analysis ratio that indicates whether a company's current
assets will be sufficient to meet the company's
obligations when they become due.

Efficiency Ratio : measure a company's ability to

use its assets and manage its liabilities
effectively in the current period or in the short-
term and to generate sales

Solvency Ratio : measure an enterprise’s ability

to meet its long-term debt obligations .

Breakeven Analysis: A break-even analysis is a

useful tool for determining at what point your
company, or a new product or service, will be
profitable.
END Q&A