VCE SUMMER INTERNSHIP PROGRAM 2020

(PROJECT FINANCE-Modelling and Analysis)

Module 2: Smart task 02

SUBMITTED TO
Vardhan Consulting Engineers

SUBMITTED BY
Sapna Joshi
Summer Intern at VCE
(MBA 1st year, GHPIBM)
1. While preparing a financial model what are the assumptions we need to
take. Please list down the list of assumptions with the values, assuming
the project will be set up in India.

 The assumptions are unique to each business and include relevant topics of the business
such as
 revenues (e.g., growth rate)
 costs (e.g., salaries),
 Capital (e.g., interest rate).

 The assumptions should be serious and reasonable numbers and thus should be a product
of proper research (e.g., industry averages, expert opinions) but also critical thinking. For
instance, a new start-up has increased needs in marketing and thus should not blindly use
the average spending of a few big, mature companies in the sector. In order to keep the
list tidy, it would be better to have assumptions based upon the actual needs of the model
and not just an infinite, difficult-to-use list. When building a financial model finding
evidence, defining benchmarks and creating ranges regarding certain assumptions is also
a recommended approach in order to reach robust conclusions. Lastly, we can add some
supporting schedules, as part of the assumptions or as separate tabs. For instance, if the
business has debt, there should be an amortization schedule showing the repayments,
interest payments, and the progress of the loan.

 Assumption examples:
1. Inflation -4%
2. DDT -0%
3. Tax rate -25%
4. Debt rate -10%
5. Depreciation -7%
6. Discount -10%
7. MAT -18.5%
8. Rent growth -5%
9. Interest on rental deposit -8%
2. Explain the function of revenue, cost and debt sheet of the financial
model.

 The income statement shows the revenues and the costs of a company and indicates if it
has profits or losses. It is divided into two parts: operating and non-operating. If for
instance a software company sells a property, the revenues for the transaction are non-
operating, because real estate does not constitute its core business. An income statement
is quite straightforward, so why it is so useful? Well, an investor (as well as the
entrepreneur) can check the forecast growth, the margin evolution, and the costs and their
relative weight to the revenues.

 Revenue: It implies that there are 2 cash inflows. One is rental and another is
interest earned on the deposits paid by tenants. This total is the revenue earned.

 Cost: It covers all the cost incurred during setting up of the project. It includes all the
hard costs as rent, interior decoration, furniture, etc. As well as maintenance costs
such as broker fee, stamp duty, CSR, Training, etc.

 A debt schedule: It lays out all of the debt a business has in a schedule based on its
maturity. It is typically used by businesses to construct a cash flow analysis. As
shown in the graphic below, interest expense in the debt schedule flows into
the income statement, the closing debt balance flows onto the balance sheet, and
principal repayments flow through the cash flow statement (financing activities). The
debt schedule report can be used as an instrument to negotiate a new line of credit for
the company. Lenders will use the report and consider the risk/reward before granting
new credit.
3. Explain in detail the various steps involved (with the importance) in the
fin flows sheet. Why and what the bank needs to check before financing
the project.

 The four steps required to prepare the statement of cash flows are as follows:
Step 1: Prepare the operating activities section by converting net income from an
accrual basis to a cash basis.
This step starts with net income on an accrual basis (from the income statement) and
makes adjustments related to changes in current assets, current liabilities, and other
items to find net income on a cash basis. The resulting cash basis net income is
called cash provided by operating activities.
Step 2: Prepare the investing activities section by presenting cash activity for
noncurrent assets.
This step focuses on the effect changes in noncurrent assets have on cash.
Step 3: Prepare the financing activities section by presenting cash activity for
noncurrent liabilities and owners’ equity.
This step focuses on the effect changes in noncurrent liabilities and owners’ equity
have on cash.
Step 4: Reconcile the change in cash.
Each section of the statement of cash flows described in steps 1, 2, and 3 will show the
total cash provided by or used by each activity. Step 4 confirms that the net of these
changes equates to the change in cash derived from the balance sheet

 When applying for business finance, it’s important to present a professional cash flow
forecast that demonstrates your ability run profitably.
Why does the bank need a cash flow forecast?

 Lenders offer a number of business loan facilities including equipment finance, trade

finance, overdrafts and lines of credit. However, banks are very particular about the types
of business owners they lend money to. They want to know that they are lending money
to someone who can run a profitable operation and pay their loan back with interest.
Because of this, the bank would like to see a business plan and a cash flow projection.
This shows that you’ve estimated your potential income and expenses over a period of
time. The forecast can be based on your historical financials or, if you’re just starting out,
the profit forecasts for a similar-sized business in your industry. The main question the
bank will be asking is whether your application and situation makes sense. Good cash
flow management means you can run your business smoothly so you need to explain in
your application why getting finance will help you continue to do this. Of course, it may
not be a matter of needing finance for the next few pay cycles – you may be looking to
expand the business. The bank will be comparing your cash flow forecasts with industry
benchmarks so be realistic with how your business stacks up. Your accountant can help
you do this but we actually know the benchmarks that some banks use when considering
your cash flow forecast. Even if your projection doesn’t meet these benchmarks, we may
be able to find a lender that can help.