Business planning financial feasibility and taking decision
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Business Planning - Financial Feasibility and Taking Decision. 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)

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Business Planning - Financial Feasibility and Taking Decision

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Business planning financial feasibility and taking decision

Business Planning

-

Financial Feasibility and Taking Decision


Business planning financial context

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


Business planning phases

Business Planning Phases


Financial analysis feasibility

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.


Scope of financial analysis

Scope of Financial Analysis


Steps to follow for financial feasibility

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


Project cost

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.


Sources of project finance

Sources of Project Finance

  • Who will finance the project cost

    • Supplier of money

  • Equity vs. Debt Financing

  • Debt and Equity mixture should be rationale.


Project cost and sources of finance

Project cost and Sources of Finance


Project loan schedule

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


Project life

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


Revenue

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.


Product cost

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


  • Cost of goods sold

    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


    Operating cost

    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.


    Working capital

    Working capital

    • Working capital -Current assets less current liabilities

    • Current assets

      • Inventories

      • Trade Debtors

      • Cash in hand

    • Current liabilities

      • Trade Creditors

      • Creditors for expenses


    Current assets

    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


    Current liabilities

    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 }


    Working capital loan

    Working capital loan

    • Working capital loan

      • Current assets on year to year basis

        Less

      • Current liabilities on year to year basis

        Less

      • Depreciation


    Interest expenses

    Interest expenses

    • Interest on project loan – obtained from loan schedule

      Plus

    • Interest on working capital loan

      • Working capital loan X Interest Rate


    Projected income statement

    Projected Income Statement


    Projected balance sheet

    Projected Balance Sheet


    Projected cash flow statement

    Projected Cash Flow Statement


    Key financial ratios

    Key Financial Ratios


    Sensitivity analysis

    Sensitivity Analysis


    Project evaluation criteria

    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.


    Decision making rules

    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.


    Business planning financial feasibility and taking decision

    Thank You

    29


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