Financial Estimations and Projections

Financial Estimations and Projections 1

Financial Estimations and Projections

Sameer Khirpurikar,Ujjwal Goyal,NPTI-14th Batch


Project Analysis

Market Analysis

Technical Analysis

Financial Analysis

Economic

Analysis

Ecological

Analysis

5 facets of Project Analysis


Financial Analysis is the assessment of the viability, stability and profitability of a business, sub-business or project.

It seeks to ascertain the financially viability of a project

It assures weather the proposed project is financially viable or not

Financial Analysis


The aspects which have to be looked into while conducting financial analysis are:

• Project Cost & Investment Outlay

• Means of Financing

• Capital Cost

• Projected Profitability

• Level of Risk

• Break-Even Point

• Cash flows of the project

• Investment worthwhileness


Cost of ProjectThe cost of project represents the total of all items of outlay

associated with long-term fields.It is the sum of the outlays on the following:

• Land and Site Development• Buildings and Civil Works• Plant and Machinery• Technical know-how and Engineering Fees• Expenses on Foreign Technicians and Training of Technicians

Abroad• Miscellaneous Fixed Assets• Preliminary and Capital Issue Expenses• Pre-operative Expenses:• Provision for Contingencies:• Margin Money for Working Capital• Initial cash Losses


1. Land and Site Development: The costs of land site development are-

- Cost of development

- Cost of compound wall and gates

2. Buildings and Civil Works: Building and civil works covers the following-

- Buildings for the main plants and equipments

- Warehouse, Open yard facilities & Godowns - Garage - Sewers, drainage


3. Plant and Machinery: The plant and machinery consists the following costs-

i) Cost of Imported Machinery: This is the sum of a) FOB (Freight on Board) Value b) Imported dutyc) Clearing, loading and unloading charges.

ii) Cost of Indigenous Machinery: This consists of a) FOR (Free On Rail) cost b) Sales tax and other taxes

iii) Cost of Stores and Spares: Provision of Escalation = (Latest rate of annual inflation to the plant and machinery X (Length of the delivery period)

4. Technical and Engineering Fees: The technical know-how and engineering fees for setting up the project is a component of the project cost which is taken into account as cost of capital.


5. Expenses on Foreign Technicians and Training of Technicians Abroad: Expenses on foreign technicians like traveling, boarding and lodging are considered as a cost of project.

6. Miscellaneous Fixed Assets: Fixed assets and machinery which are not part of the direct manufacturing process may be referred to as miscellaneous fixed assets. Like furniture, office machinery and equipment.

7. Preliminary and Capital Issue Expenses: Preliminary expenses are- - Identifying the project - Market survey - Articles of association Capital Issue Expenses are- - Underwriting commission - Brokerage - Stamp duty


8. Pre-operative Expenses: These types of expenses are the following-

i) Establishment expenses ii) Traveling expenses iii) Insurance charges iv) Mortgage expenses v) Miscellaneous expenses

9. Provision for Contingencies: There are 2 procedures that are followed

for provision for contingencies. These are- i) Divide the cost items into 2 categories - Firm cost items - Non-firm cost items ii) Set the provision for contingencies at 5% to 10%.

10. Margin Money for Working Capital: Margin money for working capital is an important element of the project cost which is provided by commercial banks and trade creditors.

11. Initial cash Losses: Most of the projects incur cash losses in the initial years. Failure to make a provision for such cash losses in the project cost affects the liquidity position and impairs the operations.


Means of FinanceTo meet the project cost, following are the means of finance:

• Share Capital

• Term Loans

• Debenture Capital

• Deferred Credit

• Incentive Sources

• Miscellaneous Sources


To meet the cost of the project, the following means of finance are available-

1. Share Capital: Two types of share capitals are- i) Equity capital, represents the contribution made by the owner’s

of the business and equity shareholders. ii) Preference capital, represents the contribution made by

preference shareholders.

2. Term Loans: Term loans provided by financial institutions and commercial banks. There are 2 types of term loans.

- Native Term Loans - Foreign Currency Term Loans

3. Debenture Capital: There are 2 types of debenture capital. These are-

i) Non- convertible debentures, are straight debt instruments which maturity period of 5 to 9 years.

ii) Convertible debentures, are debentures which are convertible wholly or partly into equity shares.


4. Deferred Credit: The credit which is provided by suppliers (for plant and machinery) as a deferred credit facility is deferred credit.

5. Incentive Source: Government provides different types of incentives for

financing. These are- - Tax exemption - Capital subsidy

6. Miscellaneous Sources: Miscellaneous sources are- - Unsecured loans - Public deposits - Leasing and hire purchase finance


Estimates of Sales and Production

In estimating sales revenues, the following considerations should be kept in mind:

1. It is not advisable to assume a high capacity utilization level in the first year of operation. It is sensible to assume that capacity utilization would be some what low in the first year and rise there after gradually to reach the maximum level in the third or fourth year of operation.

2. It is not necessary to make adjustments for stocks of finished goods.

3. The selling price considered should be the price realizable by the company net of excise duty.

4. The selling price used may b the present selling price- it is generally assumed that changes in selling price will be matched by proportionate changes in cost of production.


Cost of Production

The major components of cost of production are :

• Material cost •Utilities cost

• Labor cost

• Factory overhead cost


Materials : The most important element of cost , the material cost comprises of the cost of raw materials, chemicals, components and consumable stores required for production. It is a function of the quantities in which these materials are required and the prices payable for them.

Utilities : Utilities consist of power , water , and fuel. The requirements of power , water, and fuel may be determined on the basis of norms specified by the collaborators, consultants, etc or the consumption standards in the industry, whichever is higher.

Labor : Labor cost is the cost of all manpower employed in the factory. labor cost naturally is a function of the number of employees and the rate of remuneration.

Factory Overhead : The expenses on repairs and maintenance, rent, taxes, insurance on factory assets , and so on are collectively referred as factory overhead.


Working Capital Requirement and Its

FinancingIn estimating the working capital requirement and planning for its financing, the following pints have to be kept in mind:

• The working capital requirement consists of the following:

(i) Raw materials(ii) Stocks of goods in process(iii) Stocks of finished goods(iv) Debtors (v) Operating expenses (vi) Consumable stores


• The principal sources of working capital finance are:

(i) Working Capital Advances (ii) Trade Credit (iii) Accruals and Provisions (iv) Long term Sources of Financing

The margin requirement varies with the type of current assets as follows:

Current Assets Margin

Raw materials 10-25 percent

Work-in-process 20-40 percent

Finished Goods 30-50 percent

Debtors 30-50 percent


Profitability Projections (Estimates of Working Results)

The Profitability Projection or Estimates of Working Results are prepared along the following lines:-

A. Cost of ProductionB. Total administrative expensesC. Total sales expensesD. Royalty and know-how payableE. Total cost of production (A + B + C + D)F. Expected salesG. Gross profit before interestH. Total financial expensesI. DepreciationJ. Operating Profit (G – H –I)K. Other incomeL. Preliminary expenses written offM. Profit /Loss before taxation (J + K – L)N. Provision for taxationO. Profit after tax (M – N) Less Dividend on Preference capital or Equity capitalP. Retained profitQ. Net Cash accrual (P + I + L)


Profitability Projection ( Continued…)

Cost of Production:Represent the cost of materials, labor, utilities and factory overheads.

Total Administrative Expenses:Consist of Administrative salaries, remuneration to directors, professionals fees, light,postage, telegrams and telephones and office supplies ( stationary , printing etc)

Total Sales Expense:Consist of commission payable to dealers, packing and forwarding charges, salary of sales staff, sales promotion and advertising expense and other miscellaneous expenses.

Royalty and Know-how Payable:Rate is usually 2-5 % of sales and generally payable for a limited numbers of years i.e. 5 to 10 years


Profitability Projection (Continued..)

Total cost of production:

Gross Profit before interest:

Cost of producti

on

Total Admin. expense

s

Total sales

expenses

Royalty & know

how payable

Total cost of

production

Expected Sales

Total Cost of

Production

Gross before interest


Profitability Projection (Continued…)

Total Financial Expenses:-It consist of interest on term loans, interest on bank borrowings, commitment chargeson term loans, and commission for bank guarantees etc.

Depreciation:-It is an important factor, particularly for capital intensive projects. For financial reporting purpose, the method of depreciation may be either the Written down value (WDV) method or straight line method.

Other Income:Income arising from transactions is not part of the normal operations of the firm. i.e. sale of machinery, disposal of scrap etc.

Write off Preliminary Expenses:5% of the cost of project or capital employed ,whichever is higher, can be amortized in five equal annual installments.


Profitability Projection (Continued…)

Provision for Taxation:Profit After Taxation:A part of profit after tax usually paid out as dividend.

Retained Profit:

Net Cash Accrual:

Profit after tax

Dividend

payment

Retained

Profit

Retained profit

Depreciation

Write off of preliminary

expensesOther non

cash charge Net cash accrual


Projected Cash Flow Statement

The cash flow statement shows the movement of cash into and out of the firm and its net impact on the cash balance within the firm.Cash Flow StatementSources of fund1. Share issue2. Profit before taxation with interest added back3. Depreciation provision for the year4. Development rebate reserve5. Increase in secured medium and long-term borrowings for the project6. Other medium/long–term loans7. Increase in unsecured loans and deposits8. Increase in bank borrowings for working capital9. Increase in liabilities for deferred payment to machinery suppliers10. Sale of fixed assets11. Sale of investments12. Other income (Total A)


Projected Cash Flow Statement (Continued..)

Disposition of Funds1. CAPEX for the project2. Other normal CAPEX3. Increase in Working capital4. Decrease in secured medium long-term borrowings5. Decrease in unsecured loans and deposits6. Decrease in bank borrowings for working capital7. Decrease in liabilities for deferred payments to machinery suppliers8. Increase in investment in other companies9. Interest on term loans10. Interest on bank borrowings for working capital11. Taxation12. Dividends ( Equity/ Preference)13. Other expenditure ( Total B)• Opening balance of cash in hand and at bank• Net surplus/deficit (A – B)• Closing balance of cash in hand and at bank.


Projected Balance Sheet

The balance sheet, showing the balances in various asset and liability accounts, reflects the financial condition of the firm at a given point of time. The format of balance sheet as prescribed by the Companies Act is as given below :-

Liabilities Assets

Share Capital Fixed assets

Reserves and surplus Investment

Secured loans Current assets, loans and advances

Unsecured loans Miscellaneous expenditure and losses

Current liabilities and provisions


Multi-Year Projections

• It is a process wherein the financial projections are made over a longer time frame.

• The Multi Year projection consist of projection about:-

1. Proposed Outlays and Financing.

2. Projected Revenues and costs.

3. Projected profit and loss statements.

4. Projected cash flow statements.

5. Projected Balance Sheets.

Date post:	11-Jan-2017
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Financial Estimations and Projections

Economy & Finance