FINANCIAL PLAN

BUS304- BA 404 IDE

Chapter 2

1
 Financial Plan

 Business plan should the realistic

o Sales forecast
o Profit & loss
o cash flow
o balance sheet
 If you need investment make sure you
explain how you will use the funds you
ask for

2
 Financial Plan
• Projections of key financial variables to
determine economic feasibility, required
financial commitment, sources of finance
• Forecast sales and expenses for the first
three years
• Provide monthly projections for the first
year
• Cash flow projections for three years,
mthly figures for the first year.
• If debt used, projections must cover the
debt period

3
 Financial Plan
• Monthly cash flow projections for the first
year determine the demands on cash and
must be accurate in reflecting the timing of
cash out flows and inflows.
• Pro-forma (projected) balance sheet.
• Summarizes the business assets and
liabilities, the investment of the owner and
other investors, retained earnings,
cumulative losses,.

4
Financial plan
 Short term plans usually cover two years.
 Short term plan begins with sales forecast,

production plans are developed in order to

determine the lead times and estimates of
required raw material.
 Now the company may estimate the direct

labour requirements, factory overheads

outlayed and operating expenses.
Financial plan
 After making these estimates, an entity’s
statement of comprehensive and cash
budget can be prepared, current financial
position, the statement of financial position,
non current asset out can be prepared.
 Role of a financial plan
Provides the firm with a complete
picture of:
1.How much and when funds are
coming into the organization?
2.Where the funds are going?
3.How much cash is available?
4.The projected financial position of the
firm.
Role of a financial plan
5. Provides the basis for short-term
budgeting
6. Also helps to prevent problem of lack of
cash
7. It is in the financial plan that the
entrepreneur explains how s/he will meet
all financial obligations and maintain
liquidity
8. Investors usually use it to project the
financial statement of the firm
Role of a financial plan
9. Must prove beyond reasonable doubt that
the business has potential to operate
profitably
10. Must show the amount of money required
to start and operate the business on a
sustainable basis
11. Must identify the sources of finance
12. Must address all necessary financial
projections
Financial forecasting
 Financial planning provides and formulates
the guidelines on how the financial goals are
to be achieved.
 Financial processes can be broken down in

five steps:-
1. Projected financial statement
– used to analyze effects of operation plan on
projected profits and financial rations
Financial forecasting
2. Determine the funds needed to support the
five year plan.
◦ Includes funds for plant and equipment,
inventories, research and development and
marketing campaigns.
3. Forecast funds available for the next five years
◦ Estimating funds to be generated internally and
external sources.
Financial forecasting
4. Establish and maintain a system control.
◦ Is needed to govern the allocation and use of funds
within the entity to make sure that basic plan are
carried out properly.
5. Develop procedures for adjusting the basic
plans
◦ Plan need to be adjusted when the economic
forecasts are originally used as a basic plan
Financial forecasting
• Financial planning process are cash planning and
profit planning.
• Cash planning involves preparation of cash budget
while
• profit planning is done by means of pro forma
financial statements.
Financial forecasting
• Reasons for forecasting
1. Forecasting enhances the quality of planning-
it considers the future of business and provides
the course of action that will be taken by the
business. It helps the business to secure
external finances from financial institutions.
2. The control function – made easier as actual
results can be measured against planned
objectives
Financial forecasting
• Reasons for forecasting
3. Forecasting enhances the integration and
coordination of various options and needs in
order to strive and work towards the common goal of
the business.
4. The actual performance of the various
departments and personnel can be measured
against set targets ( objectives)
Financial forecasting
• The forecasting process begins with long term or
strategic financial plan that in turn guide the
formation of short term (operational) financial
plans;
• strategic financial plans involve panned long term
financial actions and their anticipated financial
impact.
• The short or operational financial plans involve
short term financial actions and their expected
financial effect.
Financial forecasting
• The focus in this course is a short term financial
plans which covers two years to prepare a business
plan.
• Entrepreneur will find helpful to have the following
in order to prepare business plan:-
1. An operating budget – commences
with sales forecast, leading
production plans, where input such
as labour, operating expenses,
material used, overheads must be
included.
Financial forecasting
• Entrepreneur will find helpful to
have the following in order to
prepare business plan:-
2. The projected cash budget.
3. Projected statement of Profit or
loss and other comprehensive
Income
4. Projected statement of financial
position
Pro forma Statement of cash flow
( Cash budget)
 Cash budget is defined as statement of
entity’s planned cash inflows ( money
physically coming into business) and
cash outflows ( money physically going out
of the business).
 Cashflow ( cash budget) is used to estimate

an entity’s short term cash requirements.

 In cash bush budget the, entrepreneur

works with actual cash received or paid out.

Pro forma Statement of cash flow
( Cash budget)
 For instance when goods are purchased on
credit and payment are processed after 3
days, the payment are recorded on the date
the payment was actual made not before as in
the case of proforma profit or loss.
 The same principles applies with Accounts

receivables where by the cash actual received

is recorded not the accruals.
 Cash budget ignore accrual concepts which

recognizes an income expense as it occurred,

whether the money has been received or paid
is not an issue.
Pro forma Statement of cash flow
(Cash budget
February March 2019 April 2016 Total
2019
E E E E

Opening balance 120,000 72,400 49,600

Cash inflows(Income):-
Acc/ Rec 15,000 23,000 28,000 66,000
Collection
Sales and receipts 7,500 12,000 14,000 33,500
Total cash inflows 22,500 35,000 42,000 99,500
Available cash 134,000 142,400 91,600
balance
Cash outflows (Expenses) :-
 Pro forma Statement of cash flow
( Cash budget
February March 2019 April 2019 Total
2019
E E E E

Cash outflows (Expenses) :-

Fuel 2,000 2,000 2,000 6,000

Insurance 15,000 23,000 28,000 66,000
Rent salaries 60,000 60,000 60,000 180,000
Water 1,000 1,000 1,000 3,000
Electricity 2,500 2,500 2,500 7,500
Total Cash outflows 85,800 92,800 98,800 277,400

Net Cash flow 72,400 49,600 -7,200

Pro forma Statement of cash flow
( Cash budget
 Cash Inflows ( Cash receipts) – cash sales,
collections of accounts receivables and other
cash receipts.
 Cash out flow ( cash disbursements) – cash
outlays of cash during a given financial
period. Most common cash disbarments are
payments of salaries, electricity, water, rent,
payment of accounts payables ( creditors).
 Is a statement used to anticipate whether an
entity will be making a profit or loss during
the year.
The Pro forma Comprehensive
Income Statement
 It takes into account income that is to be
received and all expenses that have been
paid.
 Income statement reflects the accrual

concepts.
The Pro forma Comprehensive
Income Statement
 accrual concepts – means income or expense
is recognized when it is incurred during the
financial period, whether or not the money is
received or paid.
 Steps to be followed when preparing the

Comprehensive Income Statement:-

The Pro forma Comprehensive
Income Statement
◦ Compile a sales or fees –received projections to
determine the projected income that will be earned
through the core activity
◦ Compile an operating schedule to determine the
amounts that will be spent on use of materials,
labour costs and other overheads directly related to
the core activity of the venture. Then gross profit
can determine by subtracting sales from core
operating activities.
The Pro forma Comprehensive
Income Statement
◦ Determine any expenses that will be incurred
during the normal operations of the business;
◦ Calculate the projected profit for the profit.
◦ New Business venture can use the percentage of
sales in developing profoma statement of profit or
loss together with fixed and variable cost
• Variable costs/expenses – cost that varies,
in total, or in direct proportion to changes
in the level activity. Activity can be units
produced, beds occupied in a hotel, hours
worked, etc. Variable costs are commission
based salaries, electricity for
manufacturing, fuel used in production and
any direct cost to core activity.
 5-29

The Pro forma Comprehensive

Income Statement
• Fixed Cost/ Expenses – cost that remain
constant, in total, regardless of changes in
the level of activity. They are not affected by
changes in activity. It remain constant
unless affected by the outside forces .e.g
increasing of rent if there is inflation.
• The variable costs varies with number of
units to be sold. When u increase the units
to be produced expect variable unit costs to
increase as well.

29
 5-30

Basics of Cost-Volume-Profit Analysis

The contribution income statement is helpful to managers
in judging the impact on profits of changes in selling price,
cost, or volume. The emphasis is on cost behavior.
Bicycle Company
Contribution Income Statement
For the Month of June
Sales (500 bicycles) R 250 000.00
Less: Variable expenses 150 000
Contribution margin 100 000
Less: Fixed expenses 80 000
Net operating income R 20 000.00

Contribution Margin (CM) is the amount remaining from

sales revenue after variable expenses have been deducted.
30
 5-31

Basics of Cost-Volume-Profit Analysis

CM is used first to cover fixed expenses.
Any remaining CM contributes to net operating income.

Racing Bicycle Company

Contribution Income Statement
For the Month of June
Sales (500 bicycles) R 250 000.00
Less: Variable expenses 150 000
Contribution margin 100 000

31
 5-32

The Contribution Approach

Sales, variable expenses, and contribution margin
can also be expressed on a per unit basis. If Racing
sells an additional bicycle, $200 additional CM will
be generated to cover fixed expenses and profit.

Racing Bicycle Company

Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bicycles) R 250 000.00 R 500.00
Less: Variable expenses 150 000 300
Contribution margin 100 000 R 200.00
Less: Fixed expenses 80 000
Net operating income R 20 000.00
32
 5-33

The Contribution Approach

Each month, RBC must generate at least
$80,000 in total contribution margin to break-
even (which is the level of sales at which profit
is zero).
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bicycles) R 250 000 500
Less: Variable expenses 150 000 300
Contribution margin 100 000 R 200
Less: Fixed expenses 80 000
Net operating income R 20 000
33
 5-34

The Contribution Approach

If RBC sells 400 units in a month, it will be
operating at the break-even point.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (400 bicycles) R 200 000 R 500.00
Less: Variable expenses 120 000 300
Contribution margin 80 000 R 200
Less: Fixed expenses 80 000
Net operating income R -

34
 5-35

The Contribution Approach

If RBC sells one more bike (401 bikes), net
operating income will increase by $200.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (401 bicycles) R 200 500 R 500
Less: Variable expenses 120 300 300
Contribution margin 80 200 R 200
Less: Fixed expenses 80 000
Net operating income R 200

35
 5-36

CVP Relationships in Graphic Form

The relationships among revenue, cost, profit, and volume can
be expressed graphically by preparing a CVP graph. Racing
Bicycle developed contribution margin income statements at
0, 200, 400, and 600 units sold. We will use this information to
prepare the CVP graph.
Units Sold
0 200 400 600
Sales $ - $ 100,000 $ 200,000 $ 300,000
Total variable expenses - 60,000 120,000 180,000
Contribution margin - 40,000 80,000 120,000
Fixed expenses 80,000 80,000 80,000 80,000
Net operating income (loss) $ (80,000) $ (40,000) $ - $ 40,000

36
The Pro forma Comprehensive
Income Statement
• Revenue – first item on the pro forma
Comprehensive Income statement is revenue. This
reflect total revenue that will be received from cash
as well as credit sales
• When invoice issued to customer and that is
considered as income incurred.
• Cost of goods sold- includes all expenses incurred
to purchase and store the inventory and to place it
in the hands of the buyer
The Pro forma Comprehensive
Income Statement
• Gross profit – represents the difference between the
sales and costs of sales.
• Operating expenses – refer to all expenses that are
necessary to pay for operating the business. These
include water, electricity, water, delivery costs,
salaries, wages, stationery consumed and so on.
• Operating profit – operating expenses are deducted
from Gross profit. This the operating profit before
interest and tax.
The Pro forma Comprehensive
Income Statement
• Interest –financing cost incurred when
money was borrowed for the business
purposes.
• Retained earnings – money that can be
retained by the business to be used by
business for instance for expansion
purposes.
• Operating expenses – refer to all expenses
that are necessary to pay for operating the
business. These include water, electricity,
water, delivery costs, salaries, wages,
stationery consumed and so on.
The Pro forma Comprehensive
Income Statement
• Operating profit – operating expenses are
deducted from Gross profit. This the operating
profit before interest and tax.
• Interest –financing cost incurred when money was
borrowed for the business purposes.
• Retained earnings – money that can be retained
by the business to be used by business for instance
for expansion purposes.
The Pro forma Comprehensive
Income Statement
ITEM EMALANGENI EMALANGENI

Revenue:-
Gross Sales 2 575 250
Less: Sales Returns and allowances 30 250
Net Sales 2 545 000
Cost of goods sold:
Beginning Inventory 1 000 000
Add Purchases 800 000
Freight in 200 000
Goods available for sale 2 000 000
Less Ending Inventory 1 200 000
The Pro forma Comprehensive
Income Statement
ITEM EMALANGENI EMALANGENI

Operation Expenses:-
Advertising 12 000
Bad Debts ( Impairments) 10 000
Bank Charges 12 000
Depreciation 120 000
Insurance 50 000
Interest 100 000
Payroll tax 117 000
Property tax 60 000
Fuel 50 000
Salaries and wages 300 000
The Pro forma Statement of
financial position
• The statement of financial position is a planned
financial statement on a certain date to determine
the financial position of entity with respect to its
capital generated and the application of capital.
• Entrepreneurs anticipate the future assets,
liabilities and net worth of entity.
• Preparation of profoma financial statement of
financial position are more judgmental approach
which means that the values are estimated based
on market value of assets;
The Pro forma Statement of
financial position
• External finances such as loan are used as balancing
figure and it should recorded as long or short term
liabilities.
• Positive value of external financing required to
support the entity’s forecast level of operation, it
must raise funds externally using Debt and Equity
financing.
• If the value for external financing required is
negative, it means that funds are available for use in
repaying debt, repurchasing stock or increasing
dividends.
The Pro forma Statement of
financial position
• These financial statement are nor published as
they are estimates and they are only usage for
internal purposes
• They are used so that entrepreneurs and
management can plan and establish financial
position of the venture.
• As result this financial statements will not
necessarily correspond with General Accepted
Accounting Practice or International Financial
Reporting Standards (IFRS).
The Pro forma Statement of
financial position ( Template)
ASSETS Emalangeni Emalangeni Emalangeni
Current Assets:
cash 200 000
Accounts Receivable 300 000
Less reserves from 30 000 270 000
Impairments (Bad Debts)
Ending stock ( Inventory) 500 000
Prepaid Expenses 10 000
Total current assets 980 000
Non Current Assets:
Vehicles 300 000
Less Accumulated 10 000 290 000
 The Pro forma Statement of
financial position ( Template)
ASSETS Emalangeni Emalangeni Emalangeni
Non Current Assets:
Equipment 200 000
Less Accumulated depreciated 20 000 180 000
Buildings 500 000
Less Accumulated depreciated 10 000 490 000
Land 1 000 000
Total non current assets 2 055 000
TOTAL ASSETS 3 035 000
LIABILITIES AND CAPITAL
Current Liabilities:
Accounts Payable 200 000
Sales Tax payable 140 000
 The Pro forma Statement of
financial position ( Template)

Emalangeni Emalangeni Emalangeni

Non Current Liabilities:
Mortgage payable 875 000
Total Long term Liabilities 875 000
Total Liabilities 1 285 000
Equity:
Owner’s Capital 500 000
Profit 1 250 000
Total Equity 1 750 000
Total Liabilities and Capital 3 035 000
Activity 2: Business plan for Lukhozi
Construction Company
• NB : Assume the TLB is hired for 9
hours per day in 15 days per month and
truck deliver 40 loads of river sand and
40 load of plaster per month.

• Required
• Prepare a brief business plan not more
than two pages Mr Madlopha he can
present to the standard bank
management. He must able to
49
Activity 2: Business plan for Lukhozi
Construction Company
• a) Present brief his executive summary ( be last

• b) Problem of the target customer and solution

• c) Target market and competition

• d) Marketing and sales plan

• e) Business operations

• f) Millstones and metrics

• g) Assumption and risk

• h) Team and company overview

• i) Financial plan

50
Activity 2: Business plan for Lukhozi
Construction Company
• Mr Madlopha is the small business owner
of Lukhozi Construction. The company
started its operation in 2018. He incurring
loses ever since the business started. He
want to raise a loan of E1million from
Standard to purchase a TLB for usage and
rental, a truck and a car. The monthly
loan repayment including interest for
motor vehicles and plant would be E25,
335 per month for a period of ten years
using straight line method.
51
Activity 2: Business plan for Lukhozi
Construction Company
• Mr Madlopha intends to use truck and TLB for
rentals, delivery of plaster and sand around
Matsapha.
• Revenue
 The hourly rate for renting the TLB is E600.
 River sand per load E2,300
 Plaster sand E2,500
 Crush stones 3,000

52
Activity 2: Business plan for Lukhozi
Construction Company
• Estimated Expenses
 Loan repayment and interest 25,335 per month
 LTB driver 3,000 per month
 Fuel for truck15,000 per month
 Fuel for TLB 23,000 per month
 Fuel for the van E6,000 per month
 Insurances for the plant = 2,500 per month
 Communication cost = 3,000
 Site rental – E5,000

53
The end

54