BTMW 4012

ENTREPRENEURSHIP
TECHNOLOGY

LECTURE 6:
FINANCIAL PLAN

FPTT - UTeM
 INTRODUCTION

In business, do not blame others. Do not blame

CUSTOMERS, MARKETS, COMPETITORS and kind.
We need the tools and knowledge to weather the storm in
the business world
There are factors that we can control and some are
beyond our control
 INTRODUCTION

The financial plan is the most crucial aspect of

the business plan and involves determining the
total project costs, choice of resources of
financing.
Preparation of financial projections in terms of
pro forma statements:
Cash flow
Income statement
Balance sheet
The financial plan should be supported by
depreciation schedules for every fixed asset
owned as well as amortization schedules for
loan and hire purchase repayments.

FPTT- UTeM
 WHAT IS A FINANCIAL
PLAN?
A financial plan incorporates all financial data
derived from operating budgets:
Marketing
Production (or operation)
Administration budgets

FPTT - UTeM
 THE RELATIONSHIP BETWEEN
OPERATING AND FINANCIAL BUDGET
Marketing Budget
Sales forecast
Cost of distribution
Promotional Cost
Entertainment allowances
Sales Commission, etc.

Production/Operation Budget
Plant, machinery
and equipment cost
Direct labor
Direct materials
Operations overheads, etc.
Financial Budget
Project implementation costs
Source of financing
Cash flow statement
Income statement
Balance sheet

Administration Budget
Furniture, fixtures and fittings
Office equipment
Payroll
Other administration costs
FPTT - UTeM
 THE IMPORTANCE OF A
FINANCIAL PLAN
1. To determine the size of investment i.e.
the project implementation cost.
2. To identify and propose the relevant
sources of finance.
3. To ensure that the initial capital is
sufficient.
4. To appraise the viability of the project
before actual investment is committed.
5. To be used as a guidance for
implementation.

FPTT - UTeM
 PROCESS OF DEVELOPING
A FINANCIAL PLAN
1. Gather all financial input
2. Prepare the project implementation cost
schedule
3. Prepare the sources of finance schedule
4. Prepare the pro forma cash flow statement
5. Prepare the pro forma income statement
6. Prepare the pro forma balance sheet
7. Perform financial analysis based on the
above pro forma statements.

FPTT - UTeM
 COMPONENTS OF PROJECT
IMPLEMENTATION COST
Capital expenditure
Working capital requirement
Monthly operating cost x length of time to generate the
first sales
Other expenditure
One-off cost to be paid annually
Contingency cost

FPTT - UTeM
 DEPRECIATION SCHEDULES
FOR FIXED ASSETS
Annual depreciation charges:

Annual dep. (vehicle) = Original Cost of Asset Scrap Value

Assets Economic Life

E.g.: A/D (vehicle) = (RM25,000 RM0) / 5 years = RM5,000

*Notes: Scrap Value is the estimated residual value of an

asset at the end of its economic life. For planning
purpose, the scrap value can be zero

FPTT - UTeM
 SOURCES OF CAPITAL

Internal
Savings
Owners asset refinancing
From the trade/market/industry (supplier, customers)
External
Credit card
3 Fs
Kootu
Crowd funding
Banks
 AMORTIZATION
SCHEDULES
Term Loan
Long-term financing offered by banks
Bases on current Interest Rate
Normally require collateral or those without collateral is
guaranteed by Credit Guarantee Corporation of
Malaysia

Hire Purchase
Use to finance transportation vehicles, business
premises, machineries, equipments as listed in the Hire
Purchase Act
No cash is involved in a hire purchase
The interest rate is normally based on a flat rate

FPTT - UTeM
 Pro Forma Cash
Statement

FPTT - UTeM
 1) CASH INFLOW

Equity contribution (entrepreneurs, partners,

shareholders)
Cash, shares fully subscribed
Term Loan
Cash Sales
Sales forecast (monthly/annual basis), credit sales
as collection of receivables
Collection of Receivables
Sales of Assets
Disposal of companys assets to finance new project

FPTT - UTeM
 2) CASH OUTFLOW

Operating Expenditure
Overheads: direct materials, inventories, direct labour;
Fixed assets: plant, machineries, equipment
Marketing Expenditure
Promotional, entertainment, sales commission, delivery
van, signboards
Administration Expenditure
Salaries, office rentals, utilities, office supplies, frniture,
fittings, fixtures, office equipments
Term Loan Repayment
Repayment: amortisation schedule
Hire Purchase Repayment
Repayment: amortisation schedule

FPTT - UTeM
 (CONTD)

Purchase of Fixed Assets

The original cost of assets purchased
Pre-operating Expenditure
One-off: licences, legal fees, road tax, insurance, stamp
duties
Payments for Deposits
Claimable one-off payment
Miscellaneous Expenditure
Postage, taxi fares, other petty expenditure

FPTT - UTeM
 3) CASH DEFICIT OR
SURPLUS
The difference between cash inflows and cash
outflows.

FPTT - UTeM
 4) CASH POSITION

It is the ending cash flow position of a company.

Ending cash balance

= Beginning cash balance +
Surplus or (-Deficit)

FPTT - UTeM
 PRO FORMA INCOME
STATEMENT
Manufacturing company

Trading company

Service company

FPTT - UTeM
 PRO FORMA BALANCE
SHEET
Elements of the Pro Forma Balance Sheet:
Assets
Fixed assets, current assets, deposits
Owners Equity
Capital, accumulated profits
Liabilities
Current liabilities, long-term liabilities

TOTAL ASSETS = TOTAL EQUILIT &

LIABILITIES

FPTT - UTeM
 BREAK EVEN ANALYSIS

Break Even = Total Revenue (TR) = Total Cost (TC)

TR = Selling Price (SP) x Quantity (Q)

TC= Total Fixed Cost (TFC) + Total Variable

Cost (TVC)

TVC = Variable cost per unit (VC/Q) X Q

FPTT- UTeM
 BREAK EVEN POINT
SP x Q = TFC + TVC
= TFC + (VC/Unit x Q)

(SP x Q) (VC/Unit x Q) = TFC

Q (SP VC/Unit) = TFC
Q = TFC
SP VC/Unit

IPTK - UTeM
 BREAK EVEN POINT
Example 1:
Assume that company has fixed costs of RM49,000, variable cost per unit
of RM30.00, and selling price of RM100 per unit

Break Even Point = TFC

SP- VC/Unit

= RM49,000.00
RM100.00 RM 30.00
= 700 units
As sales exceed 700 unit, the business earns a profit of RM70.00 per unit
As sales of less than 700 units will produce a loss to the business

IPTK - UTeM
 Example 2: BREAK EVEN
Break Even Point = TFC
POINT
Contribution Margin Ratio

Contribution margin = Sales Variable cost

Contribution margin ratio = Sales- Variable cost

Sales

Assume that the company forecasts an annual sales revenue of RM2,000,000

total variable cost of RM1,040.00 and total fixed costs of RM300,000.

Breakeven point (ringgit) = RM300,000

Contribution Margin Ratio

Contribution margin ratio = RM2,000,000 RM1,040,000

RM2,000,000

= 0.48

Breakeven point (ringgit) = RM300,000

0.48

= RM625,000
IPTK - UTeM
 BREAKEVEN CHART
Revenue
rea
Line fit A
Breakeven Point Pro
Sales = $682,212 Total Expense
RM 625,000 Line
Income and Expenses

Area
s s
Lo Fixed Expense
Line

0 RM625,000 Sales Volume

 ANALYZING FINANCIAL
STATEMENTS
Financial analysis is a technique of examining
financial statements to help the entrepreneur
analyze the financial position and performance of
the business.

FPTT - UTeM
 FINANCIAL RATIO
ANALYSIS
Liquidity Ratios
Available liquid assets to meet short term
obligations
Current ratios, quick ratios
Efficiency Ratios
Effectiveness of how business uses its
assets to generate sales
ROI, ROE
Profitability Ratios
Solvency Ratios

FPTT - UTeM
 EFFICIENCY RATIOS

Measure how efficient the business uses

its assets to generate sales.
Stock turnover
Measures number of times stock per year have been
converted into sales and indicates how liquid the
stock is. The higher, the more liquid the stock is.
Receivables (debtors) turnovers
Measures business liquidity by dividing the sales that
the entrepreneur makes on credit by the accounts
receivable.
Average collection period
Measures the average number of days it takes the
company to collect trade debts.

FPTT - UTeM
 Example : EFFICIENCY RATIOS
Stock turnover = Costs of good sold
Average Stocks
Average stock = 6,760 + 4,200
2
= 5,480

Stock turnover = 32,842

5.480
= 6 times
The ratio means that the company turns over its stock (inventories)
six times per year.

Receivables (debtors) turnover = Credit sales

Debtors
= 58,370
4,846
= 12 times
The ratio means that company turns over its receivable 12 times per years.

Average collection period = Trade debtors x 365 days

Credit sales
= 4,846 X 365 days = 30 days
58,370
The calculation shows an average collection of 30 days

FPTT - UTeM
 PROFITABILITY RATIOS

Profitability ratios are important indicators of the

business financial performance.

Measures the performance and growth potential of

the business.

FPTT - UTeM
 PROFITABILITY RATIOS

Gross profit margin

Net profit margin
Return on investment
Return on equity
This ratios shows what the business has earned on its
investment in the business.

FPTT - UTeM
 EXAMPLE:
PROFITABILITY RATIOS
Gross profit margin = Gross profit
Sales
= 25,528
58,370
= 44%

This ratio of 44 percent indicates that for each RM1.00 of sales

revenue generated, the company earns 44 cent gross profit
Net profit margin = Net profit
Sales
= 7,725
58,370
= 30%
This ratio of 30 percent indicates that for each RM1.00 of sales
revenue generated, the company earn 30 cents net profit

FPTT - UTeM
 EXAMPLE: PROFITABILITY
RATIOS
Return on investment = Net profit
Total assets
= 7,725
95,469
= 8.1%
Return on investment of 8.1 percent indicates that for every RM 1.00 invested, the
company earns 8.1 cents return.
Return on equity = Net profit
Equity

= 7,725
36,635
= 21%
Return on equity of 21% indicates that for each RM1.00
invested, the owner earns 21 cents return
FPTT - UTeM
 SOLVENCY RATIOS

This ratio is designed to help

entrepreneurs measure the degree of
financial risk that the business faces.
Debt to Equity Ratio
Debt to Total Assets
Measures the percentage of the business assets
financed by creditors relative to the percentage
financed by the entrepreneur.
Times Interest Earned
Measures the number of times interest expense is
covered by profit before interest and tax.

FPTT - UTeM
 Example: SOLVENCY
RATIOS
Debt to equity = long term liabilities
owners equity
= 50,000
36,635
= 1.37 :1 or 1.4 times
The company has a debt-to equity ratio of 1.4 This indicates for every
RM1.00 invested
by owner, the company has RM1.4 debt financing

Debt to total assets = Total debt

Total assets
= 8,834 + 50,000
95,469
= 61.6% or 62%
The calculation shows that 62 percent of the total assets is financed
by external sourves
FPTT - UTeM and 38 percent is financed by owners equity (internal financing)
 SOLVENCY RATIOS
Example:

Times interest earned = Profit before interest and taxes

interest expense

= 7,725 + 1,568
1,568

= 5.9 times

Times interest earned ratio of 5.9 indicates that the companys profit
can
cover its interest expense 5.9 times

FPTT - UTeM
THANK YOU
FOR YOUR ATTENTION