Financial Planning

Presented byAngshuman Rudra

Power Mgt. 6th Batch

Introduction to Financial Planning

Wikipedia says-Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives.The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved.

The Planning Tasks• The Financial Planning activity involves the following

tasks;-• Assess the business environment• Confirm the business vision and objectives• Identify the types of resources needed to achieve

these objectives• Quantify the amount of resource (labor, equipment,

materials)• Calculate the total cost of each type of resource• Summarize the costs to create a budget• Identify any risks and issues with the budget set

The Importance

• Performing Financial Planning is critical to the success of any organization.

• It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view.

It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set.

The Crux

Basically, the financial plan section of the business plan consists of three financial statements,•the income statement•the cash flow projection•the balance sheetand a brief explanation/analysis of these three statements.

The Cash Outlaybusiness expenses as broken into two categories;•Start up expenses •Operating expensesStart up expenses may include:•business registration fees•business licensing and permits•starting inventory•rent deposits•down payments on property• down payments on equipment•utility set up fees

The Cash Outlay……..contd.Operating expenses may include:• salaries• rent or mortage payments• telecommunications• utlities• raw materials• storage• distribution• promotion• loan payments• office supplies• maintenance

The Working Capital

Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities

The Elements of working capital are as follows-

Current Assets

Current asset is an asset on the balance sheet which is expected to be sold or otherwise used up within one year.It usually includesCashBank balanceShort term investmentsTrade debtors (Receivables)Inventory

Current Liabilities

Current liabilities are considered liabilities of the business that are to be settled in cash within the fiscal year.It usually includesTrade Creditors (Payables)Bank overdraftShort term borrowingsProvision for taxesProvision for dividends

A Mini Case

Bhasmey Hydro Electric Power Bhasmey Hydro Electric Power Project Project Sikkim

By-M/S Gati Infrastructure&

Amrit Jal Private Investors

The Capital Expenditure

Capital Expenditure (INR Million)

Particulars AmountLand 38Civil Works 1,416Electro-mechanical 723Contingencies 163Preliminary & Pre-operative Expenses 277Interest During Construction 429Financing Cost 90Effective Capital Cost 3,136

Working CapitalWorking Capital

O & M Expenses (Months) 100%

Receivables (Months) 1

Spares (% of Historical Cost) 1%

Increase in Historical Cost 6%

Working Capital Margin 25%

O & M ExpensesO & M Expenses (% of Cap Ex) 1.50%Annual Increase in O & M Expenses 4.00%

(INR Million) Projected Working Capital

Year Ending 31st March 2012 2013 2014 2015 2016 2017

Year Counter 1 2 3 4 5 6

O & M Expenses 4 4 4 4 5 5

Maintenance Spares 31 33 35 37 40 42

Receivables 17 70 72 74 77 79

Total Working Capital 52 107 112 116 121 126

Working Capital Borrowings 39 81 84 87 91 94

The Income Statement

An Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement for companies that indicates how Revenue (money received from the sale of products and services before expenses are taken out) is transformed into net incomeThe purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.Income statements help investors and creditors to determine the past performance of the enterprise, predict future performance, and assess the capability of generating future cash flows.

Construction of Income Statement

1. Sales Revenue = Price (of product) X Quantity Sold

2. Gross profit = sales revenue – cost of sales and other direct costs

3. Operating profit = Gross profit – overheads and other indirect costs

4. Pre-tax profit or Net profit = operating profit - one off items and redundancy payments, staff restructuring – interest payable

5. Profit after tax = Pre-tax profit – tax

6. Retained or Net profit = Profit after tax – Dividends

(INR Million) Projected Profit and Loss Account

Year Ending 31st March 2009 2010 2011 2012 2013 2014 2015 2016

Year Counter       1 2 3 4 5

RevenuesPrimary Energy       178 732 754 777 800Secondary       27 110 113 116 120CER Revenue       35 139 139 139 139Total Revenue       239 980 1,006 1,032 1,059

ExpensesO & M Expenses       47 49 51 53 55Operating Profit or EBDITA       192 932 955 979 1,003Interest on Working Capital       5 10 10 10 11Interest on Term Loan       68 262 240 217 194PBDT       120 660 705 751 798Depreciation - Companies Act       176 176 176 176 176PBT (Companies Act)       -56 484 529 576 622Effective Tax         55 60 65 71PAT       -56 429 469 510 552EffectiveTax (%)         11% 11% 11% 11%

The Balance Sheet

In financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances.Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year.A balance sheet is often described as a snapshot of a company's financial condition.

(INR Million) Projected Balance Sheet

Year Ending 31st March 2009 2010 2011 2012 2013 2014 2015 2016

Year Counter       1 2 3 4 5Liabilities

Equity 157 549 549 784 784 784 784 784Reserves       -56 373 842 1,353 1,904Net Worth 157 549 549 728 1,157 1,626 2,137 2,689Debt   706 1,647 2,352 2,156 1,960 1,764 1,568Working Capital Loan       39 81 84 87 91Total Liabilities 157 1,255 2,196 3,119 3,394 3,671 3,988 4,347

AssetsLand       55 55 55 55 55Civil Works       1,972 1,904 1,836 1,768 1,699Electro-mechanical       934 826 719 611 503Total 157 1,255 2,196 2,961 2,785 2,609 2,433 2,257Cash Balance       107 502 950 1,439 1,969Current Assets       52 107 112 116 121Total Assets 157 1,255 2,196 3,119 3,394 3,671 3,988 4,347

The Cash Flow Statement

Cash flow statement or statement of cash flows is a financial statement that shows a company's flow of cash.The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.The statement shows how changes in balance sheet and income accounts affect cash and cash equivalents, and breaks the analysis down toOperatingInvestingand Financing activities.

(INR Million) Projected Cash Flow Statement

Year Ending 31st March 2009 2010 2011 2012 2013 2014 2015 2016

Year Counter       1 2 3 4 5

In-flow

Cash From Operations (PAT + Depreciation )       120 605 645 686 728

Equity 157 392  235       

Debt   706 941 706       

Increase in Working Capital Borrowings       39 41 3 3 3

Total Inflow 157 1,098 941 1,100 646 648 690 731

Out Flow

Assets (Equity+Debt) 157 1,098 941 941       

Repayment of Debt         196 196 196 196

Increase in Current Assets or Total Working Capial

      52 55 4 4 5

Opening Balance         107 502 950 1,439

Flow for the Year       107 395 448 489 530

Closing Balance       107 502 950 1,439 1,969

The Generalisation

The Financial plan section is the section The Financial plan section is the section of Business Plan that determines of Business Plan that determines whether or not your business idea is whether or not your business idea is viable, and is a key component in viable, and is a key component in determining whether or not your determining whether or not your business plan is going to be able to business plan is going to be able to attract any investment in your business attract any investment in your business idea.idea.

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