PRESENTATIONON

FINANCIAL COMPONENT OF A

BUSINESS PLANBY

AHMeD Hussain Khan

2 Hadees Nabvi PBUH: That person is ruined whose today is not better than his yesterday.

PURPOSE OF FINANCIAL COMPONENT IN A NEW BUSINESS

PLAN

Profitability and performance of commercial and NPOs are measured in financial terms.

IN BUSINESS PLAN: workout the funds requirement Show a clear path of profitability justify the fund requirement Give reasons to lenders/investors on generally acceptable & verifiable basis.

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COMPONENTS OF FINANCIALS 4

Project cost or capital expenditure (Capex)

Financing structure

Projected financial Statements

Financial Analysis

PROJECT COST5

Project cost includes all expenditure incurred to setup a business – mainly: Land and building

Plant and machinery

Erection and installation costs

Fees and consultancies etc.

Briefly, every expenditure incurred before the start of commercial operations is part of project cost.

FINANCING STRUCTURE

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Financials in the business plan provides the funding requirements and the financing structure of the proposed project.

Financing structure includes the identification of different sources of finance and allocation of fund requirement to these sources considering the regulatory requirements and the strengths of the project and its sponsors.

ASSUMPTIONS

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Realistic – set the credibility – starting on the right foot.

Domestic factors

Industry/market norms

ASSUMPTIONS

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DOMESTIC FACTORS

Inflation

Escalation factor – over & above inflation e.g. petrol prices, sugar and any limiting factor.

Salaries & Wages – minimum rates + to attract and retain quality staff

Mark up rate

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INDUSTRY/MARKET NORMS Industry averages – you cant pick cherries Selling prices – capped my competition Sale curves – high and dry periods Input cost – high and dry periods Processing period – breakable & unbreakable floats Debtor collection period - Competitive environment Marketing vs. financial goals Credit & cash composition Creditors’ payments Depreciation Capacity utilization – gradual rise

ASSUMPTIONS

PROJECTED FINANCIAL STATEMENTS

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Projected Balance Sheet

Projected Profit & Loss Account

Projected Cash Flow

INVRESTMENT APPRAISAL

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Pay back period

Net present value

Internal Rate of Return

Economic Valuation Addition

PAY BACK PERIOD

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The length of time required to recover the cost of an investment. All other things being equal, the better investment is that who has shorter payback period.

There are two main problems with the payback period method:

1. It ignores any benefits that occur after the payback period.

2. It ignores the time value of money.

Because of these reasons, other methods of investment appraisal e.g. NPV, IRR or economic value addition are generally preferred.

NET PRESENT VALUE

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NPV is the difference between the present value of cash inflows and the present value of cash outflows.

NPV analysis is sensitive to the reliability of future cash flows that an investment or project will yield.

NPV compares the value of a investment today to the value of that same investment in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted.

INTERNAL RATE OF RETURN

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Internal Rate Of Return is the discount rate at which net present value of all cash flows from a particular project equal to zero. So, the higher a project's internal rate of return, the more desirable it is to undertake the project.

IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would be considered the best and undertaken first.

ECONOMIC VALUE ADDITION (EVA)

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Economic value added (EVA) expresses a company’s true profit, once taxes and the cost of supporting capital have been taken into account.

It helps to identify whether a business (or project) is earning more or less than the capital originally invested in it.

If it’s earning more, it is adding value—which is good for the shareholders. If it’s earning less, they probably would have been better off putting their money elsewhere.

ANALYSIS TOOLS

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Breakeven analysis - safety margin

Sensitivity analysis – what if

Ratios – particularly profitability

BREAK EVEN ANALYSIS

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Break even Point is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC).

A break-even point is calculated in order to determine minimum sales targets, safety margin and decision making under marginal costing.

Break even analysis is very useful to analyze the potential profitability of an expenditure in a sales-based business.

SENSITIVITY ANALYSIS

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It is a technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.

This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in sales price will have on the overall returns of the project.

Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key predictions.

RATIO ANALYSIS

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It’s a tool used by to conduct a quantitative analysis of information in a company's financial statements.

Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. 

Ratio analysis is predominately used by proponents of fundamental analysis.

Ratios are broadly categorized as Profitability ratios, Liquidity Ratios, Return on Investment Ratios and Capital Structure Ratios.

PAY BACK PERIOD

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The length of time required to recover the cost of an investment. All other things being equal, the better investment is the one with the shorter payback period.There are two main problems with the payback period method:

1. It ignores any benefits that occur after the payback period.

2. It ignores the time value of money.

Because of these reasons, other methods of investment appraisal e.g. NPV, IRR or economic value addition are generally preferred.

Q & A

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Thank you

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