Business Planning - Financial Feasibility and Taking Decision

1. Business Planning - Financial Feasibility and Taking Decision

2. Business Planning- Financial Context • Business • Employment of resources and operate them to create surplus. • Planning • Gathering data and information ( projected) to evaluate the business ( project) • Decide as to whether the business (project) should be taken or not • Mapping how to implement the project successfully. • Objective of Business Planning • The ultimate objective of Business planning is to take appropriate decision which resulted into creation of surplus

3. Business Planning Phases

4. Financial Analysis (Feasibility) Financial analysis Construct financial Bio-data (body) of the project. Produce information about the financial prospect of the business (project). Assist decision maker to take decision whether the project should be accepted or rejected.

5. Scope of Financial Analysis

6. Steps to follow for Financial Feasibility Step- 1.To determine the project cost. Step- 2.To determine the sources of fund. Step- 3.To prepare project loan schedule. Step- 4.To determine the life of the project. Step- 5.To Estimates sales revenue over the project life. Step- 6.To Calculate the product cost per unit Step- 7.To calculate cost of goods sold on year to year basis. Step- 8.To calculate administrative, selling, and distribution costs on year to year basis. Step- 9.To calculate Working capital requirements on year to year basis. Step- 10.To calculate Financing cost on year to year basis. Step- 11.To Prepare Income Statement Step- 12.To Prepare Balance sheet Step- 13.To Prepare Cash flow Statement Step- 14.To Calculate key ratios Step- 15.To Payback period, NPV and IRR of the Project. Step- 16.To carry out sensitivity analysis- if needed. Step- 17. To decide whether project should be taken or not

7. Project Cost Project cost Cost of resources required for implementing the project. This cost is usually incurred for fixed capital items. Items Land an and development Building Plant and Machinery Office Equipment IT Equipment Furniture and Fixture Electric Appliances Motor Vehicles etc.

8. Sources of Project Finance • Who will finance the project cost • Supplier of money • Equity vs. Debt Financing • Debt and Equity mixture should be rationale.

9. Project cost and Sources of Finance

10. Rate of Interest say 12.0% Construction Period say 3 Months Amount of Loan - Repayment Period say 5 Years Number of Installments say 5 Installment Opening Loan Closing Loan Installments Number Amount Amount Principal Interest Total 1st - - - - - 2nd - - - - - 3rd - - - - - 4th - - - - - 5th - - - - - Project Loan Schedule

11. Project Life • Project Life • 1st generation age of the project. • Project life is estimated based on the excepted service period of the project resources. • Project performance will be evaluated based on the Initial Life

12. Revenue • Sales volume • Product wise sales quantity during the entire project life • Determined based on the marketing analysis. • Sales value • Sales quantity X estimated sales price per unit. • Sum up the sales value of all products to obtain total project revenue.

13. Product cost • Product cost- Product wise • Raw Materials • Factory overhead excluding Depreciation • Depreciation • Factory overhead cost is to be allocated on product based on certain basis at the normal capacity level. • Production volume basis • % of Raw Material cost • Sales value basis • Labor hour basis • Machine hour basis

14. Cost of goods sold • Cost of goods sold • Product cost applicable to sales quantity i.e • Sales quantity X cost per unit • Sum the cost of goods sold of all products to determine the cost of goods sold of all products

15. Operating cost • Operating cost includes • Selling cost • Marketing cost • Distribution cost • Administrative cost • These costs should be determined as detailed as possible. • For bringing simplicity, these costs can be determined based on % of sales considering previous experience.

16. Working capital • Working capital -Current assets less current liabilities • Current assets • Inventories • Trade Debtors • Cash in hand • Current liabilities • Trade Creditors • Creditors for expenses

17. Current assets • Inventories • Raw and Packing materials = {( Consumption value per year / 360) X stock holding period in days} • Finished goods = {(Cost of goods sold per year / 360) X Stock holding period} • Trade Debtors {( Sales per year / 360) X Credit period in days} • Cash in hand- lump sum basis

18. Current liabilities • Trade creditors • {( RM /PM Consumption value per year / 360) X credit facility period in days} • Creditors for expenses • {( Operating cost per year / 360 days) X 15 days }

19. Working capital loan • Working capital loan • Current assets on year to year basis Less • Current liabilities on year to year basis Less • Depreciation

21. Interest expenses • Interest on project loan – obtained from loan schedule Plus • Interest on working capital loan • Working capital loan X Interest Rate

22. Projected Income Statement

23. Projected Balance Sheet

24. Projected Cash Flow Statement

25. Key Financial Ratios

26. Sensitivity Analysis

27. Project Evaluation Criteria • Pay back period Time to return the Investment back • NPV The difference between the cash outlay and present value of future operating cash inflow. • IRR The rate of return considering the time value of money.

28. Decision making rules • Pay back period- should be as shortage as possible • NPV- should be positive • IRR- should be more than the cost of capital.

29. Thank You 29