Lecture 5 - Business Planning Part II I&E - BS & Cashflow

Course : 4.2 & 4.
1 Groups
Class: Bsc Civil Engineering & Bsc Civil
Engineering
Unit Title: Principles of
Entrepreneurship & Marketing
Unit Code: BCM2240
Facilitator: Dr. Rosemary Kagondu
1
Recap Of Lesson 4 and Solution To Exercise
Beta Ltd has the following records. Prepare a Trading, Profit and
Loss Account for the Company for the year ended 31st December
2019
 Net Sales 100,000
 Net Purchases 46,000
 Beginning inventory 8,000
 Ending inventory 9,000
 Expenses 48,000
 Other income 5,000
Required: Show the Cost of goods sold, the gross profit and net income
of Beta Ltd
Dedan Kimathi University of Technology

Better Life Through Technology 2
• Trading, Profit and Loss Account
Beta Limited
For the Period Ended 31st December 2019
Net sales 100,000

Net purchases 46,000
Beginning inventory 8,000
Ending inventory (9,000)
Cost of goods sold 45,000

Gross profit 55,000
Expenses 48,000
Net profit from trading activities 7000
Add: Other income 5000

Total income 12000

PRODUCTION COSTS

What Are Production Costs?
Production costs (TPC)refer to the costs a
company incurs from manufacturing a
product or providing a service that generates
revenue for the company.
They can include a variety of expenses, such
as labor, raw materials, consumable
manufacturing supplies & general overhead.
Total product costs can be determined by
adding together the total direct materials and
labor costs as well as the total manufacturing
overhead costs.
5
Better Life Through Technology
Taxes levied by the government are also
treated as production costs
Total product costs can be determined by
adding together the total direct materials
and labor costs as well as the total
manufacturing overhead costs.
 Data like the cost of production per unit or
the cost to produce one batch of product can
help a business set an appropriate sales
price for the finished item.

To arrive at the cost of production per unit
(COP/Unit) , production costs are divided
by the number of units manufactured in
the period covered by those costs.
PC/Unit = TPC/No. of units
To break even, the sales price must cover
the cost per unit. Prices that are greater
than the cost per unit result in profits,
whereas prices that are less than the cost
per unit result in losses

MANUFACTURING COSTS
Manufacturing costs are the costs incurred

during the production of a product.
These costs include the costs of
 Direct material,
direct labor, and
Manufacturing overhead

Direct material is the materials used in the
construction of a product.
Direct labor is that portion of the labor
cost of the production process that is
assigned to a unit of production.
Manufacturing overhead costs are applied
to units of production based on a variety
of possible allocation systems, such as by
direct labor hours or machine hours
incurred.

How Does Production Costs Differ From
Manufacturing Costs?
Production cost refers to all of the expenses

associated with a company conducting its
business while manufacturing cost
represents only the expenses necessary to
make the product.
Whereas production costs include both
direct and indirect costs of operating a
business, manufacturing costs reflect only
direct costs.
Examples of the types of costs that can be
included in manufacturing overhead include:
Salaries and wages for quality assurance,
industrial engineering, materials handling,
factory management and equipment
maintenance personnel
Equipment repair parts and supplies
Factory utilities
Depreciation on factory assets

Types of Production Costs
Production cost = Fixed costs + variable
costs.
Fixed costs (FC) for manufacturing bread
for example is rent which remains fixed as
production increases
Variable costs (VC) increase or decrease as
production volume changes. E.g. electricity
will increase as bread production increases

Example 1 -How to Calculate Production
Cost
• Company A produced 1,000 tables. To produce 1,000 tables,
the company incurred costs of:
• $12,000 on wood
• $2,000 on wages for carpenters and $500 on wages for
security guards to overlook the manufacturing facility
• $100 for a bag of nails to hold the tables together
• $500 for factory rent and utilities
• Total product costs: $12,000 (direct material) + $2,000
(direct labor) + $100 (indirect material) + $500 (indirect
labor) + $500 (other costs) = $15,100.
• As this is the cost to produce 1,000 tables, the company has
a per unit cost of $15.10 ($15,100 / 1,000 = $15.10).

Example -How to Calculate Production Cost
George wants to set up a cup
manufacturing unit.
Total cost of production
For the first month, he set a target of Number of cups 1000
1000 cups.
Cost of mold 1000
He purchased a mold for making cups
Clay @ 200 shs for 20cups 10000
of shs.1000.
Labour @ shs 5 per cup 5000
20 cups require 1 kg of clay, which
Painter @ 2 per cup 2000
costs shs.200.
Transport charges @500 500
Further, a worker charges labor shs.5 Total cost of production for 1000
for making one cup. cups 18500
The charge of baking is the same as
the charge of making. Cost of one cup in Ksh 18.5
Later a painter demands sh.2 for Add 60% profit margin per cup 29.6
painting each cup. After that, George Price per cup 29.6
spends sh.500 on petrol on his
motorcar for delivering the cups to the
market. Profit per cup 11.1
Total profit on 1000 cups 11100
Income statement for George
 Suppose he sells all the cups

 Pays rent for 500 in the town & security for 200 in a month
Income statement for George end of first month
Sales 29600
Opening stock Nil
Production cost 18500
Closing stock Nil
Cost of production 18500
Gross profit margin 11100
29600 29600
GP 11100
Rent 500
Security 200
Total 700
Net income 10400
11100 11100
BALANCE SHEET
 It is also known as the statement of financial position.

 It is a financial statement that shows the assets, liabilities
and owner’s equity of a business at a particular date.
 The main purpose of preparing a balance sheet is to
disclose the financial position of a business enterprise at a
given date.
 While the balance sheet can be prepared at any time, it is
mostly prepared at the end of the accounting period.

SECTIONS IN THE BALANCE SHEET
 A balance sheet is broadly divided into three sections

namely: Assets section, liabilities section and owners’
equity section.
 ASSETS SECTION
 In this section all the resources (i.e., assets) of the
business are listed.
 In balance sheet, assets having similar characteristics are
grouped together.
 The mostly adopted approach is to divide assets into
current assets and non- current assets.

 Current assets include cash and all assets that can be
converted into cash or are expected to be consumed
within a short period of time – usually one year.
Examples of current assets include
 cash,
 cash equivalents,
 accounts receivables,
 prepaid expenses or advance payments,
 short-term investments and inventories.
 All assets that are not listed as current assets are grouped
as non-current assets.

 All assets that are not listed as current assets are
grouped as non-current assets or fixed assets
 A common characteristic of such assets is that they
continue providing benefit for a long period of time –
usually more than one year.
 Examples of such assets include:
 long-term investments into treasury bonds of 25 years,
long term debentures etc.
 equipment,
 plant and machinery,
 land and buildings, and
 intangible assets.

LIABILITIES SECTION
 Liabilities are obligations to parties other than owners of

the business.
 They are grouped as :
-current liabilities and
-Long-term liabilities in the balance sheet.
 Current liabilities are the obligations that are expected to
be met within a period of one year by using current
assets of the business or by the provision of goods or
services.
 All liabilities that are not current liabilities are
considered long term liabilities.

OWNER’S EQUI TY
 Owner’s equity is the obligation of the business to its

owners.
 The term owners’ equity is mostly used in the
balance sheet of sole proprietorship and partnership
form of business.
 In a company’s balance sheet the term “owner’s equity”
is often replaced by the term “stockholders equity”.
 When balance sheet is prepared, the liabilities section is
presented first and owners’ equity section is presented
later.

FORMAT OF THE BALANCE SHEET
 In report format, the balance sheet elements are
presented vertically i.e., assets section is presented at the
top and liabilities and owners’ equity sections are
presented below the assets section.
 Example 1: Preparation of Balance Sheet – Horizontal

and Vertical Style:
 The following trial balance is prepared after preparation
of income statement for F. Green as at 31 March 2015.

The following trial balance is prepared after preparation of
income statement for F. Green as at 31 March 2015.
Required: Prepare the balance
sheet for F. Green as at 31
March 2015 in both horizontal
and vertical style.
Note: In the absence of
information about the date of
repayment of a liability, then
it may be assumed that the
loan is a non-current liability
and a trade payable is a
current liability.

F. Green Balance Sheet
As at 31 March 2015.
Non -current assets Ksh Ksh Liabilities & Capital Ksh Ksh
Premises 30000 Capital 43500

Furniture 15000 Net profit 8500
Vehicles 4000 49000
52000
Drawings 7600
Total 49000 Total 44400
Current assests Non-current liabilities
Inventory 3400 Loan from ABC Bank 10000
Trade receivables 2000 Current liabilities
Bank 2300 7700 Trade payables 2300
Total 56700 Total 56700
As mentioned earlier that vertical style of balance sheet is in fact another way of expressing
accounting equation
This relationship is shown in the following
balance sheet
F.Green Balance Sheet
As at 31s t M arch 2015
Non -current assets Ksh Ksh
Premises 30000
Furniture 15000
Vehicles 4000 49000
Total 49000
Current assests
Inventory 3400
Trade receivables 2000
Bank 2300
Total CA 7700
Current liabilities
Trade payables 2300
Net Current Assets 5400
Total 54400
Less:Non-current liabilities 10000
44400
Capital 43500
Add: Net profit 8500
Total Capital 52000
Dedan
Less: Kimathi University
Drawings of Technology 7600 44400
CLASS ASSIGNMENT
PLEASE ATTEMPT THIS EXERCISE FOR DISCUSSION

The following balances are taken from the books of George Mwangi at the
end of his first year trading on 31 December 2014
The following additional

information is available:
Inventory at 31 December
2014 was valued at $4500.
Required:
(a) Prepare income
statement for the year
ended 31 December 2014.
(b) Prepare a balance sheet

as at 31 December 2014
In report and vertical
format

SOLUTION TO GEORGE
MWANGI QUESTION
I&E ACCOUNT
&
BALANCE SHEET

Income & expenditure Account &
Balance sheet
George Mwangi
Income & Expenditure Account
Ksh Kshs Ksh
Sales 40000
Less : cost of sales
Purchases 18500
Less : closing stock 4500 14000
Gross Profit 26000
Less operating expenses

Wages & salaries 5100
Repairs & maintenance 1300
Heating & lighting 900
General expenses 1200
Insurance 800 9300
Net profit 16700

George Mwangi
Balance sheet As at 31st December 2014
As at 31st December 2014
Ksh Ksh Ksh
Non-current assests
Premises 30000
Fixtures & fittings 10000
Motor vehicles 8000 48000
Current assets
Inventory 4500
Trade receivables 4100
Cash at bank 2200
Cash in hand 1300 12100
Less :Current liabilities

Trade payables 3400 8700
56700
Equity
Capital as at 1st jan 2014 52000

Add: Net profit 16700
Total equity 68700
Less: Drawings 12000 56700

CASH FLOW STATEMENTS

Cash flow statements
•Cash is king
Have you heard of •
this saying
• And it is true
This is a common because cash is the
phrase in the lifeblood of a
business world business

 DEFINITION: The cash flow statement is a
statement (report) of flows of cash - both in and
out of the business
 Without cash
 you can't pay bills
 you can't expand the business by purchasing
assets,
 you can't pay employees and
 As the business owner, you couldn't even pay
yourself!

A business could display most fantastic
performance according to its income
statement with huge profits appearing to
have been made yet it may be having
nothing remaining in the bank.
The question is "But how could that even
occur?“It could occur if all or most of your
sales have been made on credit (remember
• accrual concept of accounting)

and it could arise if additionally an
entrepreneur was not monitoring the cash
flows of the business
A cash flow statement is therefore a
regular financial statement telling you
how much cash you have on hand for a
specific period.

 While income statements are excellent for showing
you how much money you’ve spent and earned,
they don’t necessarily tell you how much cash you
have on hand for a specific period of time.
 A cash flow statement is a listing of cash flows
that occurred during the past accounting
period.
 A projection of future flows of cash is called
a cash flow budget. A cash flow budget as a
projection of the future deposits and
withdrawals to your cash/bank account.

A cash flow statement is not only
concerned with the amount of the cash
flows but also the timing of the flows.
Many cash flows are constructed with
multiple time periods. For example, it may
list monthly cash inflows and outflows
over a year’s time.
It not only projects the cash balance
remaining at the end of the year but also
the cash balance for each month.

 Working capital is an important part of a cash
flow analysis. It is defined as the amount of money
needed to facilitate business operations and
transactions, and is calculated as current assets (cash
or near cash assets) less current liabilities (liabilities
due during the upcoming accounting period).
 Computing the amount of working capital gives
you a quick analysis of the liquidity of the
business over the future accounting period.

• EXAMPLE:
 Depreciation is recorded as a monthly
expense. It allocates the cost of an assest over
its useful life
 However, you’ve already paid cash for the
asset you’re depreciating.
 Depreciation however does not result in cash
literally leaving your bank account every
month.The cash flow statement takes that
monthly expense and reverses it—so you see
how much cash you have on hand in reality,
not how much you’ve spent in theory.

Cash Flow is not Profitability
People often mistakenly believe that a cash

flow statement will show the profitability of
a business or project.
Although closely related, cash flow and
profitability are different.
A cash flow statement lists cash inflows and
cash outflows while the income statement
lists income and expenses.
A cash flow statement shows liquidity while
an income statement shows profitability.
A business could display most fantastic
performance according to its income
statement with huge profits appearing to
have been made yet it may be having
• nothing remaining in the bank.
While income statements are excellent for
showing you how much money you’ve
spent and earned, they don’t necessarily
tell you how much cash you have on hand
for a specific period of time.

WHY DO YOU NEED CASH FLOW
STATEMENTS (CFS)?
EXTERNAL USES OF CFS
 To assess the ability of a firm to manage cash flows
 To assess the ability of a firm to generate cash
through its operations
 To assess the company’s ability to meet its
obligations and its dividend policy
 To provide information about the effectiveness of
the firm to convert its revenues to cash
 To provide information to estimate or anticipate
the company’s need for additional financing

INTERNAL USES OF CFS
 Along side with cash budget CFS is used:
 To assess liquidity
 Determine if short-term financing is

necessary
 To determine dividend policy

 Decide to distribute; or increase or decrease
 To evaluate the investment and financing

decisions

CASHFLOW PREPARATION
To prepare a cash flow statement, many of

the same figures used for a profit and loss
forecast are applied
The main difference is that you'll include all
cash inflows and outflows, not just sales
revenue and business expenses.
E.g. You'll include loans, loan payments, and
transfers of personal money into and out of
the business, taxes, and other money that
isn't earned or spent as part of your core
business operation.
Also, in your cash flow statement, you'll
record costs in the month that you expect
to incur them, rather than spreading
annual amounts equally over 12 months.
This is important because it's easy to
show a monthly profit on a spreadsheet
but go into a cash crunch from lack of
cash if you can't pay your bills on time.

 For example, if you have a $4,000 workers' bonus
premium and a $3,000 liability insurance premium due
each July 1, you'll need to find a way to come up with
real cash then to pay off not later
 If you make sales to some customers on credit (for
example, if you are a painter who invoices customers
after you have done the job rather than requiring full
payment up front), your cash flow analysis should
account for the fact that you won't get paid right away,
as well as the fact that you might risk not collecting
some of the credit sales you have made at all.

STEPS TO FOLLOW TO CREATE A CASH FLOW
STATEMENT
Step 1. Enter Your Beginning Balance
For the first month, start your projection with the
actual amount of cash your business will have in
your bank account.
Step 2. Estimate Cash Coming In
Fill in all amounts you expect to take in during the
month. Include sales revenue that will actually be in
hand, collections of previous sales made on credit,
transfers of personal money into the business, and
any loans coming into the business—basically, every
dollar that will flow into your business
account.
Step 3. Estimate Cash Going Out
Enter all your projected payments for the month.
Include your variable costs (cost of goods), your fixed
costs such as rent, tax payments, and any loan
payments. Add them to get your monthly total.
Step 4. Subtract Outlays from Income
Finally, subtract your total monthly cash-outs from
your total monthly income; the result will be your
cash left at the end of the month. That figure is also
your beginning cash balance at the start of the next
month. Copy this amount to the top of the next
month's column and go through the whole process
over again
HOW TO PREPARE CASHFLOW BUDGET
Step 1: Prepare your sales forecast
Step 2: Project all cash inflows for the
period
Step 3: Project all cash outflows for the
period
Step 4: Combine these figures into a
spreadsheet

HOW TO PREPARE CASHFLOW BUDGET

Illustration of Cups entrepreneur
Suppose sales increase by 30 % in
February and by 55% from March ,
security increases to 400 in march and
rent increases to 1000 in march
Production remains at 1000 cups –
How will cash balances look like

George Cash flow projection
George Cash flow projection for 4 months
January February March April
Cash inflows 10400 29680 61728
Cash balance
beginning of
Sales from cups 29600 38480 51948 70129.8
Total cash inflow 29600 48880 81628 131858
cash outflows
mold 1000 1000 1000 1000
Clay 10000 10000 10000 10000
Labour 5000 5000 5000 5000
Painter 2000 2000 2000 2000
Transport 500 500 500 500
Rent 500 500 1000 1000
Security 200 200 400 400
Total cash
outflow 19200 19200 19900 19900
Cash balance 10400 29680 61728 111958

George buys a scooter for 30000

He buys a scooter worth 30,000 in May , cash flow looks like

January February March April
Cash inflows 10400 29680 61728 111957.8
Cash balance beginning of month
Sales from cups 29600 38480 51948 70129.8 84155.76
Total cash inflow 29600 48880 81628 131858 196113.6
cash outflows
mold 1000 1000 1000 1000 1000
Clay 10000 10000 10000 10000 10000
Labour 5000 5000 5000 5000 5000
Painter 2000 2000 2000 2000 2000
Transport 500 500 500 500 500
Rent 500 500 1000 1000 1000
Security 200 200 400 400 400
Scooter 30000
Total cash outflow 19200 19200 19900 19900 49900
Cash balance 10400 29680 61728 111958 146214

January February March April May June
Cash inflows 10400 29680 61728 111958 146214
Cash balance beginning of month
Sales from cups 29600 38480 51948 70129.8 84155.8 92571.34
Loan 100,000
Total cash inflow 29600 48880 81628 131858 196114 338,785
cash outflows
mold 1000 1000 1000 1000 1000 1000
Clay 10000 10000 10000 10000 10000 10000
Labour 5000 5000 5000 5000 5000 5000
Painter 2000 2000 2000 2000 2000 2000
Transport 500 500 500 500 500 500
Rent 500 500 1000 1000 1000 1000
Security 200 200 400 400 400 400
Scooter 30000
Intrest payment 85
Total cash outflow 19200 19200 19900 19900 49900 19985
Cash balance 10400 29680 61728 111958 146214 318,800

“When you do the things in the present
that you can see, you are shaping the
future that you are yet to see.”
Idowu Koyenikan,

Sample projected Cash flow/budget

EXAMPLE: Other expenses include:
Monthly payment for inventory $ 4500
On January 2 (as a New Year's resolution),
Emme starts work on a cash flow projection for Rent ……………………………. $ 1500
the next 12 months. Wages ………………………….. $3000
S h e starts by putting the $5,000 she has in her Ads……………………………… $ 200
business bank account in the "Cash at Start of Accounting …………………….. $ 130
Month" column for January. Other miscellaneous expenses:
Cash sales are $ 7500 for the first six months In march $ 600
and $ 8500 for the remaining of the year. In June ... $ 80
In September $ 400
Credit sales are $ 2000 for the first six months
and $ 3000 for the remaining six months In December $ 200
Finally she adds two monthly bills for utilities $ 100
Emma is also expecting $ 200 stimulus cheque and telephone calls at $ 30 .
every other month from the government In her "Cash coming in" section, she includes her
starting from February
cash collected from credit sales of about 75% of her
In the cash going out section, Emme includes credit sales) for the first six months and about 80%
her variable and fixed costs and she puts the of her credit sales for the next six months because
annual insurance premium of $ 1200 she is to
pay in the January column instead of spreading some percentage of her credit customers always
it over 12 months take longer than 30 days to pay.
Required
Prepare Emme’s projected cashflow budget for the
12months to December

Solution
January February March April May June July Aug September October November December
Cash at Start of Month 5,000 3,210 3,065 2,414 2,386 2,364 2,263 4,176 6,402 8,440 10,479 12,519
Cash Coming In
Cash sales 7,500 7,500 7,500 7,500 7,500 7,500 8,500 8,500 8,500 8,500 8,500 8,500
Collections of Credit Sales 1,500 1,875 1,969 1,992 1,998 2,000 2,933 2,986 2,998 2,999 3,000 3,000
Government stimulus 200 200 200 200 200 200 200 200 200 200 200
Loans & transfers 0 0 0 0 0 0 0 0 0 0 0 0
Total Cash In 9,000 9,575 9,669 9,692 9,698 9,700 11,633 11,686 11,498 11499.2 11500 11500
Total Cash Available 14,000 12,785 12,734 12,106 12,084 12,063 13,896 15,862 17,900 19,939 21,979 24,019
Februar
January y March April May June July Aug September October November December
Cash Going Out
Inventory 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500
Rent 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500
Wages 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Ads 200 200 200 200 200 200 200 200 200 200 200 200
Accounting 130 130 130 130 130 130 130 130 130 130 130 130
Utilities 200 200 200 200 200 200 200 200 200 200 200 200
Telephone 60 60 60 60 60 60 60 60 60 60 60 60
Annual insurance premium 1,200 130 130 130 130 130 130 130 130 130 130 130
Miscellaneous expenses 0 0 600 0 0 80 0 0 400 0 0 200
Total Cash Out 10,790 9,720 10,320 9,720 9,720 9,800 9,720 9,460 9,460 9,460 9,460 9,660
Cash Balance available 3,210 3,065 2,414 2,386 2,364 2,263 4,176 6,402 8,440 10,479 12,519 14,359

Emme with a loan : ASSIGNMENT
 Realizing that she doesn't have a realistic chance of
selling that much inventory, Emme goes looking for a
loan for $8,000 in the month of January payable from
February
 This will allow her to dip into it as needed to tide her
over. Loan payable at a flat rate of 750 for the 1st 9
months and 625 for last 2 months. Interest is at a fixed
rate at 160 per month
 She gets to work on a clever marketing plan to boost
sales until she makes profit to pay off the loan.
 Required : Show the projections of her cash flow budget
with the loan being repaid from March for 8 months
 TO BE WORKED OUT IN THE NEXT CLASS
Assignment Question •Marketing - £500 per month
•Legal and accounting costs - £1,250 (month 1)
Wairimu and Faith, longtime friends, decided to •Project materials – £1,500 per project (i.e.
go into business together. They enter into a £3,000 per month).
partnership, with each of them investing £5,000
into the business. Their product" is a home- It is assumed that suppliers will allow Wairimu
makeover service, modeled on the popular and Faith 30 days to pay for these costs
daytime television programmes where ordinary •Sub-contracted labour (other tradesmen) -
households are transformed through small £4,000 per month. These will be paid in the
building work and decoration. month incurred.
Revenues: •Wairimu and Faith will pay themselves a
Wairimu and Faith expect to gain 2 projects per salary of £1,000 each per month whilst the
month for the first 6 months of trading; each business is established.
project will generate £5,000 of sales. •Other sundry costs of £500 per month have
Customers will be expected to pay 25% of the been assumed
price as a deposit with the balance on
completion. Required: Putting these assumptions into
Each project is expected to last one month. perspective, prepare a cash flow statement
The main costs associated with the start-up are: for Wairimu and Faith. Please use excel sheet
Equipment - £2,500 (in month 1) & to provide your answer
£2,500 in month 4), a total investment of
£5,000

HOW TO CREATE FINANCIAL PROJECTIONS
 The process of creating financial projections is the same

whether you’re drafting a business plan or creating
forecasts for an existing business.
 The primary difference is whether you’ll draw on your
own research and expertise (a new business or startup
business) or use historical data (existing businesses).
 For example, your sales forecast might change once
you prepare your cash-flow statement.
 The best approach is to view each statement as both its
own piece of the financial projection puzzle and a
reference for the others; this will help ensure you can
assemble comprehensive and clear financial
projections.

START WITH A SALES PROJECTION
 A sales forecast is the first step in creating your income
statement.
 You can start with a 1 year , 3 or 5 ear projection, but
bear in mind that, without historical financial data,
accuracy may decrease over time.
 It’s best to start with monthly income statements until
you reach your projected break-even, which is the point at
which revenue exceeds total operating expenses and you
show a profit.
 Once you hit the break-even, you can transition to
annual income statements.

 Consider factors outside of sales; market conditions,
global environmental, political, and health concerns,
sourcing challenges (including pricing changes and
increased variable costs) and other business disruptors
can put your carefully constructed forecasts into
question and make them unreliable if you leave them
out of your considerations.
 Start with a reasonable estimate of the units sold for the

forecast period, and multiply them by the price per
unit. This value is your total sales for the period.

 Next, estimate the total cost of producing these units (i.e.,
the cost of goods sold or COGS; sometimes called cost of
sales) by multiplying the per-unit cost by the number of
units produced.
 Deducting your COGS from your estimated sales yields
your gross profit margin.
 From the gross margin, subtract expenses such as wages,
marketing costs, rent, and other operating expenses.
 The result is your projected operating income, or net
income


Lecture 5 - Business Planning Part II I&E - BS & Cashflow

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Lecture 5 - Business Planning Part II I&E - BS & Cashflow

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Course : 4.2 & 4.

Facilitator: Dr. Rosemary Kagondu

Dedan Kimathi University of Technology

Net sales 100,000

Cost of goods sold 45,000

Add: Other income 5000

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Manufacturing costs are the costs incurred

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Production cost refers to all of the expenses

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

 Suppose he sells all the cups

 It is also known as the statement of financial position.

Dedan Kimathi University of Technology

 A balance sheet is broadly divided into three sections

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

 Liabilities are obligations to parties other than owners of

Dedan Kimathi University of Technology

 Owner’s equity is the obligation of the business to its

Dedan Kimathi University of Technology

 Example 1: Preparation of Balance Sheet – Horizontal

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Premises 30000 Capital 43500

Non -current assets Ksh Ksh

PLEASE ATTEMPT THIS EXERCISE FOR DISCUSSION

Dedan Kimathi University of Technology

The following additional

(b) Prepare a balance sheet

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Less operating expenses

Dedan Kimathi University of Technology

Less :Current liabilities

Capital as at 1st jan 2014 52000

Less: Drawings 12000 56700

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

People often mistakenly believe that a cash

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology

 Determine if short-term financing is

 To determine dividend policy

 To evaluate the investment and financing

Dedan Kimathi University of Technology

To prepare a cash flow statement, many of

Dedan Kimathi University of Technology

Dedan Kimathi University of Technology