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ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

FINANCIAL PLAN
FADER ABDULLAH
UiTM PERLIS

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

LEARNING OUTCOMES
At the end of the session, students should be able to:
Understand the importance of preparing a financial
plan
Understand the process of developing a financial plan
Identify the components of a financial plan
Analyse the financial position of the proposed business
Prepare a financial plan for a small business

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

INTRODUCTION
A financial plan incorporates all financial data derived from
the operating budgets i.e. the marketing, production (or
operations) and administration budgets. Financial
information from the operating budgets is then translated or
transformed into a financial budget.
Based on the financial data, projections are prepared via
the following pro forma statements:
Cash flow
Income (or profit and loss) statement
Balance sheet.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

THE IMPORTANCE OF A FINANCIAL PLAN


A financial plan is crucial to the overall business plan that is
developed for a particular business or project. Its importance
can be summarised as follows:
To determine the size of investment

To identify and propose the relevant sources of finance


To ensure that the initial capital is sufficient
To analyse the viability of the project before actual investment is
committed
To be used as a guideline for project implementation
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

THE PROCESS OF DEVELOPING A FINANCIAL PLAN


To develop a workable and meaningful financial plan, the
entrepreneur has to follow these steps:
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Step 6:
Step 7:

Gather all financial inputs


Determine the project implementation cost
Determine the sources of finance
Prepare the pro forma cash flow statement
Prepare the pro forma income statement
Prepare the pro forma balance sheets
Perform basic financial analysis

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 1: Gather the Financial Input (contd.)


The process of developing a financial plan for a specific
project begins with the accumulation of financial
information from the marketing, operations and
organizational plans.
The financial requirements for each plan are presented in
the form of budgets known as operating budgets (i.e.
marketing, operations and organisation budgets)

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 1: Gather the Financial Input

(contd.)

In addition, the monthly or annual sales forecast derived


earlier in the marketing plan is a very important input for
the financial plan.
After gathering all information the financial plan is
prepared in terms of financial budget.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Marketing Plan
Sales Forecast
Marketing Budget

Organizational Plan
Administrative Budget
Financial Plan
Project implementation cost
Sources of financing
Pro forma cash flow statement
Pro forma income statement
Pro forma balance sheet
Financial Analysis

Operations Plan
Operations Budget

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 2: Determine the Project Implementation Cost


A project implementation cost incorporates both longterm and short-term expenditure needed to start a
project.
Long-term expenditure refers to such expenditure as
the procurement of plant, machinery, equipment,
vehicles and other fixed assets needed by the new
business.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 2: Determine the Project Implementation Cost


(contd.)

Short-term expenditure, such as payments of utilities,


salaries and wages, factory overheads, purchase of raw
materials or inventories, represent the amount of initial
working capital required to finance the daily operation
until the business gets its first sale.
Components of project implementation cost:
Capital expenditure
Working capital
Other expenditure
Contingency cost
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 3: Determine the Sources of Finance


Sources of finance refers to the sources where funds
to finance a particular projects implementation costs
can be secured.
These can be categorised into internal and external
sources. The internal sources mainly come in the
form of equity contributions from the entrepreneurs.
These contributions can either be in the form of cash
or other assets.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 3: Determine the Sources of Finance

(contd.)

External sources of finance are mainly derived from


commercial banks, finance companies and
government agencies. It may come in the form of
term loans, hire purchase or grants.
The total amount of funds that has to be sourced
should equal the total project implementation cost
calculated earlier. This is to ensure that the project is
fully funded and to avoid the risks of under-financing.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 3: Determine the Sources of Finance


Components of sources of finance:
Internal sources
Equity contributions (cash and/or assets)
External sources
Term loan
Hire purchase
Others

Fader Abdullah

(contd.)

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 4: Prepare Pro Forma Cash Flow Statement


Pro forma cash flow statement refers to the projected
statement of cash inflow and outflow throughout the
planned period.
Under normal circumstances, the pro forma cash flow
statement is prepared for three consecutive years,
detailed by month for the first year and by year for the
second and third years. However, longer periods are
sometimes needed depending upon the projects
undertaken.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 4: Prepare Pro Forma Cash Flow Statement

(contd.)

The total amount of funds that has to be sourced should


equal the total project implementation cost calculated
earlier. This is to ensure that the project is fully funded as
well as to avoid the risks of under-financing.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 4: Prepare Pro Forma Cash Flow Statement

(contd.)

The pro forma cash flow statement must be able to show


the following information:

Cash inflows the projected amount of cash flowing


into the business.
Cash outflows the projected amount of cash flowing
out of the business.
Cash deficit or surplus the difference between cash
inflows and outflows.
Cash position the beginning and ending cash
balances for a particular period.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 4: Prepare Pro Forma Cash Flow Statement


Elements of cash inflows:

Equity contribution (cash)


Term loan
Cash sales
Collection of receivables
Others

Fader Abdullah

(contd.)

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 4: Prepare Pro Forma Cash Flow Statement


Elements of cash outflows:

Marketing expenditure
Operations expenditure
Administrative expenditure
Term loan repayment
Hire purchase repayment
Purchase of fixed assets
Pre-operating expenditure
Payments for deposits
Miscellaneous expenditure
Fader Abdullah

(contd.)

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN


Example: Pro Forma Cash Flow Statement

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN


Example: Pro Forma Cash Flow Statement (contd.)

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 5: Prepare Pro Forma Income Statement


The next step in developing a financial plan is to
prepare the pro forma income statement which shows
the expected profit or loss for the planned period,
usually for three consecutive years.
The pro forma income statement consists of the
following elements:

Sales
Gross Income
Net Income Before Tax
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 5: Prepare Pro Forma Income Statement

(contd.)

Net income before tax is derived as follows:


Sales - Cost of Sales = Gross Profit
Gross Profit - Operating Expenses = Net Income before tax

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Example: Pro Forma Income Statement


Sales
Cost of sales
Gross profit
Less: Operating Expenses
Marketing expenses
Administrative expenses
Depreciation charges
Miscellaneous
Operating income
Less: Financing expenses:
Interest on term loan
Interest on hire-purchase
Net profit before tax

Fader Abdullah

Year 1
240,000
94,600
145,400

Year 2
276,000
103,900
172,100

Year 3
317,400
108,940
208,460

18,000
96,000
7,200
2,700
123,900
21,500

18,900
100,800
7,200
600
127,500
44,600

19,845
105,840
7,200
600
133,485
74,975

4,500
1,600
6,100
15,400

3,600
1,600
5,200
39,400

2,700
1,600
4,300
70,675

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 6: Prepare Pro Forma Balance Sheet


While the pro forma income statement shows the
financial performance of the business for the planned
period, the pro forma balance sheet shows the financial
position of the business at a specific point in time in
terms of assets owned and how those assets are
financed.
The pro forma balance sheet is normally prepared for a
period of three years.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 6: Prepare Pro Forma Balance Sheet

(contd.)

The pro forma balance sheet consists of the following


elements:

Assets
Owners equity
Liabilities

The balance sheet shows the following equation:


Assets = Owners equity + Liabilities

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 6: Prepare Pro Forma Balance Sheet

(contd.)

Assets are the economic resources of a business that


are expected to be of benefit in the future. Assets
reported in the balance sheet are generally categorised
into two categories: non-current and current assets.
Non-current assets include fixed assets and other
assets that are owned and usually held to produce
products or services. These assets are not intended for
sale in the short term. Examples: property, plant,
machinery, equipment, vehicles, major renovations and
long-term investments. For fixed assets, the values
shown in the balance sheet are the book value i.e. the
original costFader
less
the accumulated depreciation.
Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 6: Prepare Pro Forma Balance Sheet

(contd.)

Current assets are short-term assets that can be


converted into cash within a year. Examples: cash,
inventories (raw materials, work-in-process and/or
finished goods), receivables and other short-term
investments.
Owners equity refers to capital contributions from the
owners or shareholders in terms of cash or assets plus
the accumulated amount of net income. However, if the
business suffers a loss, the amount of loss will be
deducted from the capital contributions.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 6: Prepare Pro Forma Balance Sheet

(contd.)

Liabilities are the amounts owed by the business to


outsiders. They are categorised as non-current (longterm) and current liabilities.
Non-current or long-term liabilities refer to the long-term
obligations of the business that mature in a period of
more than one year. They usually include long-term
loans as well as hire purchase.
Current liabilities refer to the short-term obligations of
the business that mature within a period of less than a
year. The most common forms of current liabilities are
accounts payable and accrued payments
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 6: Prepare Pro Forma Balance Sheet

(contd.)

Liabilities are the amounts owed by the business to


outsiders. They are categorised as non-current (longterm) and current liabilities.
Non-current or long-term liabilities refer to the long-term
obligations of the business that mature in a period of
more than one year. They usually include long-term
loans as well as hire purchase.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Example: Pro Forma Balance Sheet


Non-Current Assets (book value)
Land & building
Machinery & equipment
Furniture & fixtures
Renovation
Vehicles
Deposit
Current Assets
Inventory of raw materials
Inventory of finished goods
Cash
Total Assets
Owners Equity
Capital
Accumulated profit
Long-term Liabilities
Term loan
Hire-purchase
Total Owners Equity & Liabilities

Fader Abdullah

Year 1

Year 2

Year3

45,000
18,400
5,600
3,200
20,000
800
93,000

45,000
13,800
4,200
2,400
15,000
81,200

45,000
9,200
2,800
1,600
10,000
69,400

3,000
3,000
40,900
46,900
139,900

3,500
4,000
77,600
85,100
166,300

4,000
5,000
145,575
154,575
223,975

72,500
15,400
87,900

72,500
54,800
127,300

72,500
125,475
197,975

36,000
16,000
52,000
139.900

27,000
12,000
39,000
166,300

18,000
8,000
26,000
223,975

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis


Financial analysis is a technique of examining financial
statements to help the entrepreneur analyse the
financial position and performance of the business.
Financial analysis involves two basic steps: generating
the information from the financial statements and
interpreting the results.
The most common form of financial analysis is ratio
analysis.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Financial ratios are normally used to compare figures


from the financial statement with other figures, so that
the true meaning of financial pictures can be obtained.
There are various financial ratios that the entrepreneur
can look at. However, the most commonly considered
ratios in small business decision-making fall into four
categories: liquidity, efficiency, profitability and solvency.
For illustrative purposes, financial data presented in pro
forma financial statements in the next slides will be
used.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Pro Forma Income Statement


Sales
Cost of sales
Gross profit
Less: Operating Expenses
Marketing expenses
Administrative expenses
Depreciation charges
Other operating expenses
Operating income
Less: Financing expenses:
Interest on term loan
Net income before tax

Fader Abdullah

Year 1
576,000
227,000
349,000

Year 2
662,400
254,600
407,800

Year 3
794,880
278,460
516,420

56,500
226,000
21,000
5,000
308,500
40,500

62,150
248,600
21,000
4,000
335,750
72,050

68,365
273,460
21,000
4,000
366,825
149,595

16,500
24,000

13,200
58,850

9,900
139,695

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Pro Forma Balance Sheet


Non-Current Assets (book value)
Land & building
Motor vehicles
Office equipment
Renovation
Machinery
Other assets (deposits)
Current Assets
Inventory of raw materials
Inventory of finished goods
Cash
Total Assets
Owners Equity
Capital
Accumulated profit
Long-term Liabilities
Term loan
Current Liabilities
Accounts payable
Total Owners Equity & Liabilities

Fader Abdullah

Year 1

Year 2

Year3

100,000
64,000
5,600
16,000
32,000
1,000
217,000

100,000
48,000
3,000
12,000
24,000
1,000
188,000

100,000
32,000
2,000
8,000
16,000
1,000
159,000

2,000
5,000
46,500
53,500
270,500

3,000
6,000
105,350
114,350
302,350

4,000
8,000
244,645
256,645
415,645

105,500
24,000
129,500

105,500
82,850
188,350

105,500
222,545
328,045

132,000

99,000

66,000

9,000

15,000

21,600

270.500

302,350

425,645

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Liquidity Ratios

The term liquidity refers to the availability of liquid


assets to meet short-term obligations. Thus,
liquidity ratios measure the ability of the business
to pay its monthly bills.

The most widely used liquidity ratios are current


ratio and quick ratio.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Current ratio can be determined by dividing total


current assets by total current liabilities. Generally,
this ratio shows the business ability to generate cash
to meet its short-term obligations.
Current ratio = Total current assets
Total current liabilities
Year 1

Year 2

Year 3

Current assets

RM53,500

RM114,350

RM256,645

Curent liabilities

RM 9,000

RM15,000

RM 21,600

5.94

7.62

11.88

Current Ratio

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

If the business current ratio falls below 1, it means


that the business is in a serious liquidity situation. In
most cases, the comfortable current ratio for most
businesses is 2.

Quick ratio, also known as the acid test ratio,


measures the extent to which current liabilities are
covered by liquid assets.

To determine quick ratio, the calculation of liquid


assets does not take into account inventrories since
it is sometimes difficult to convert them into cash
quickly.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis


Quick ratio =

Total current assets-inventories


Total current liabilities
Year 1

Year 2

Year 3

Current assets

RM53,500

RM114,350

RM256,645

Inventories

RM 7,000

RM 9,000

RM 12,000

Current liabilities

RM 9,000

RM15,000

RM 21,600

5.17

7.02

11.33

Quick Ratio

(contd.)

In most cases, the comfortable quick ratio is 1.

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Efficiency Ratios

The efficiency ratios measure how efficient the


business uses its assets to generate sales.

The most widely used efficiency ratio for planning


purposes is inventory turnover ratio.

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Inventory turnover (or stock turnover) measures the


number of times inventories have been converted into
sales and indicates how liquid the inventory is. All
other things being equal, the higher the turnover
figure, the more liquid the business is.

This ratio divides the cost of sales (or cost of goods


sold) by the average value of inventory. The average
value of inventory is derived by adding the opening
and closing balance of and dividing the total by two.
Inventory turnover = Cost of sales
Average inventory
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Year 1

Year 2

Year 3

Cost of sales

RM227,000

RM254,600

RM278,460

Average inventory

RM 7,000

RM8,000

RM 10,500

Inventory turnover

32.42 times

31.83 times

26.5 times

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Profitability Ratios

Profitability ratios are important indicators of the


business financial performance. Investors will
particularly be interested in these ratios since they
measure the performance and growth potential of
the business.

Some of the commonly used profitability ratios are


gross profit margin, net profit margin, return on
assets and return on equity.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Gross profit margin give a good indication of financial


health of the business. Without an adequate gross
margin, the business will be unable to pay its
operating and other expenses.

Gross profit margin is calculated by dividing the


business gross income by sales.
Gross profit margin = Gross profit
Sales

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis


Year 1

Year 2

Year 3

Gross profit

RM349,000

RM407,800

RM516,420

Sales

RM576,000

RM662,400

RM794,880

60.59%

61.56%

64.97%

Gross profit margin

(contd.)

Net profit margin is an indication of how effective the


business is at cost control. The higher the net profit
margin, the more effective the business is at
converting sales into actual profit.

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Net profit margin is calculated by dividing the


business net income by sales.
Net profit margin = Net profit
Sales
Year 1

Year 2

Year 3

Net profit

RM 24,000

RM 58,850

RM139,695

Sales

RM576,000

RM662,400

RM794,880

4.16%

8.88%

17.57%

Net profit margin

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Return of assets measures the overall return that the


business is able to make on its assets.

This ratio is derived by dividing the business net profit


by total assets.
Return on assets = Net profit
Total assets
Year 1

Year 2

Year 3

Net profit

RM 24,000

RM 58,850

RM139,695

Total assets

RM270,000

RM302,350

RM415,645

8.89%

19.46%

33.61%

Return on assets

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Return of equity shows what the business has earned


on its owners investment in the business.

This ratio is derived by dividing the business net profit


by total equity.
Return on equity = Net profit
Total equity
Year 1

Year 2

Year 3

Net profit

RM 24,000

RM 58,850

RM139,695

Total equity

RM129,500

RM188,350

RM328,045

18.53%

31.25%

42.58%

Return on equity
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Solvency Ratios

This final category of ratios is designed to help the


entrepreneur measure the degree of financial risk
that his business faces. By referring to this ratio,
the entrepreneur can assess his level of debt and
decide whether it is appropriate for the business.

The most commonly used solvency ratios are total


debt (liabilities) to equity (also known as leverage
or gearing), total debt to total assets, and times
interest earned (also known as interest coverage).
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

The total debt to equity ratio indicates what proportion


of equity and debt that the company is using to
finance its assets.

This ratio is calculated by dividing the the total debt by


total equity.
Debt to equity ratio = Total debt
Total equity
Year 1

Year 2

Year 3

Total debt

RM141,000

RM114,000

RM 87,600

Total equity

RM129,500

RM188,350

RM328,045

1.09 : 1

0.61 : 1

0.27 : 1

Debt to equity ratio


Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

The debt to asset ratio measures the percentage of


the business assets financed by creditors relative to
the percentage financed by the entrepreneur.

This ratio is calculated by dividing the total debts by


total assets.
Debt to equity ratio = Total debts
Total assets
Year 1

Year 2

Year 3

Total debts

RM141,000

RM114,000

RM87,600

Total assets

RM270,500

RM302,350

RM415,645

52.13%

37.70%

21.08%

Debt to total assets ratio


Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

Step 7: Perform Basic Financial Analysis

(contd.)

Times interest earned ratio measures the number of


times interest expense can be covered by profit
before interest and tax.

This ratio is calculated by dividing total interest


expense by profit before interest and tax.
Time interest earned = Profit before interest & tax
Interest expense
Year 1

Year 2

Year 3

Profit before interest

RM40,500

RM72,050

RM149,595

Interest expense

RM16,500

RM13,200

RM9,900

Time interest earned

2.45 times

5.46 times

15.11 times

Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

SUMMARY
The financial plan is an important part of the business
plan. It incorporates all financial data derived from the
operating budgets, i.e. marketing, operations and
administrative budgets.
Based on this financial data, several financial
projection tools are prepared to provide the
entrepreneur with a clear picture of the amount of
money needed to start a business, sources of finance,
the amount of cash available and the financial
performance and position of the business.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

SUMMARY (contd.)
The output of a financial plan covers project
implementation cost schedule, sources of financing
schedule, pro forma cash flow statement, pro forma
income statement , and pro forma balance sheet.
The business financial data gathered in the financial
statements are analysed in order to obtain an overall
financial picture of the business. The financial ratios are
used to analyse the financial performance of the
business.
Fader Abdullah

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

THE FINANCIAL PLAN

END OF MODULE 11

Fader Abdullah

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