Financial Plan
Maranatha University
College:
Entrepreneurship
Remy Puoru
Lecturer
FINANCIAL PLAN
Financial objectives are both the starting &
finishing point of a good business plan.
The Financial plan seeks to reflect the
financial implications of your marketing,
people and operational plans in the form of
profit-loss accounts/income statement, cash
flows, and balance sheets.
Basics in Finance:
1. Meaning of Financial Statements
2. Objectives of Financial Statement
3. Users of Financial Statements
4. Assumptions for preparing Financial Statements
5. Types of Financial Statement
- Balance Sheet
- Profit and Loss account
- Cash Flow Statement
6.Performance Ratios
Meaning of Financial Statement
A written report that summarizes a firm's
accounting data and indicate its financial
condition/position
Highlights the financial health of a firm
Form the basis of financial reporting by firms
Objectives for preparing Financial
Statement
Provides information about:
Financial position,
Performance and
Cash flows of an enterprise
to the various stakeholders to the Venture and public at large
Users of Financial Statements
1. Present and potential Investors
2. Employees
3. Lenders
4. Suppliers
5. Customers
6. Government
7. Public
8. Management of the Company
Assumptions underlying preparation of Financial
Statements
1. Accrual basis- Transactions are
recognized when they occur and not
when cash is paid or received
2. Going Concern- It is assumed that
enterprise will continue it's operations
3. Consistency of accounting policies
and standards used
Types of Financial Statements
1. Balance Sheet
2. Profit and Loss Account
3. Cash Flow Statement
BALANCE SHEET
The balance sheet presents a summary of a
firm’s financial position at a given point of
time.
It depicts what organizations owns (ASSETS)
and what it owes (LIABILITIES) to others.
Thus it provides a financial position of a
venture at a given point of time
Assets
Current Assets- Assets that are expected
to be converted into cash in 1 year or less
Fixed Assets- like Land, Building, Plant,
Equipment
Intangible Asset- that do not have
physical existence .E.g.- Goodwill, Brand
equity, Human Capital etc.
Liabilities
Current Liabilities- Liabilities that are payable
within one year
Long Term Liabilities
Owner’s Equity / Share Capital
Balance Sheet of XYZ Corporation as on
March 31, 2005
(¢) (¢)
Liabilities Assets
Current Liabilities Current Assets
Short Term Loan 10,000 Cash 20,000
Accounts payable 15,000 Accounts Receivable 30,000
Stock 10,000
Long Term Liabilities Fixed Assets
Bonds 2,00,000 Plant 1,50,000
Shareholders Equity Machinery 2,15,000
Equity Shares 2,00,000
4,25,000 4,25,000
Profit & Loss Account/
Income Statement
The income statement provides a financial summary of a
company’s operating results during a specified period.
Operating income (expenses) are those that are earned (spent)
in the normal course of business. In Income statement, Non-
operating Income (Expense) are also considered.
Although they are prepared annually for reporting purposes,
but are generally worked out on monthly basis (even
fortnightly in case of start ups) by management.
Income Statement for XYZ Ltd for the
year ended March 31st 2005
Particulars Amount (¢)
1. Sales 1,00,000
2 Less: Cost of Goods Sold 25,000
3 GROSS PROFIT 75,000
4 Less: Salary 20,000
5 Less: Depreciation 10,000
6 Add: Profit from sale of asset* 10,000
7 Less: Interest paid on debt 20,000
8 PROFIT BEFORE TAX 35,000
9 Less: Tax @ 30% 10,500
10 PROFIT AFTER TAX/ NET PROFIT 24,500
Entries that are transferred from Income
Statement to Balance Sheet
Profit that remains with the firm after
distribution of dividends is called RETAINED
EARNINGS and is transferred to the Balance
Sheet and is added to the capital account of
the owner
Statement of Cash Flows
The statement of cash flows provides a summary of the
cash flows, both inflows and outflows, over a period of
time.
This statement not only provides insight into a
company’s investment, financing and operating
activities, but also ties together the income statement
and previous and current balance sheets
Statement of Cash Flow for the year
ended March 31, 2005
Particulars Amount (¢)
1. Cash Flow from Operating Activities
Collection from Customers 35000
Payment to employees (20000)
Payment to suppliers (3200)
11,800
2. Cash Flow from Investing Activity
Investment in Computers (3000)
3. Cash Flow from Financing Activity
Cash Dividends paid (11,600)
4. Increase/ Decrease in Cash (2,800)
5. Cash balance as on March 31, 2004 4,000
6. Cash balance as on March 31, 2005 1,200
The relationship among the balance sheet, income
statement, and statement of cash flows:
Balance Sheet Balance
BalanceSheet
Sheet
March 31, March
March31,
31,
20X7 20X8
20X8
Income
IncomeStatement
Statement
Statement of Cash Flows
Performance Ratios
Sales: actual sales, to be used as the base figure for all
other calculations.
Cost of goods sold: expressed as a percentage of sales to
highlight any increase or decrease in this key area over the
period.
Total Expenditure: Expressed as a percentage of sales to
indicate how well these have been controlled over the
period.
Profit before Tax : expressed as the percent of sales to show
how well sales have been converted to bottom line profit.
Perhaps the key measure of operational performance.
Profit growth : expressed as a percentage year on year.
Net worth : this is actual investment in the business, i.e
share capital plus reserves, which on its own gives a
valuable measure of absolute growth.
Return on Net Worth : Also called Return on Investment
(ROI) and is the key measure of profitability used by
outsiders to compare your business with others. Its
calculated by taking your net profit (after tax and before
dividends) and dividing this by the average value of your
share capital and reserves.
Performance Ratios
Debt to equity : frequently referred to as ‘gearing’, this is
calculated by taking total borrowings (both long and short term)
divided by total capital and reserves (net worth) and expressing
the result as a percentage. This ratio is, however, a double-
edged sword in that, if your gearing is high (i.e if you are mainly
financed by borrowings), potential investors will see high
rewards, assuming your business performs well, but if you are
asking a bank or similar institution for interest bearing funds, it
will normally expect to see low gearing, to show a certain level
of your commitment, expressed as share capital, to reduce the
risk of it not being able to recover its loans.
Net Current assets : this is calculated by subtracting
current liabilities from current assets, thereby giving
creditors an indication of your liquidity or ability to meet
current liabilities when they fall due.
Current Ratio: this is calculated by dividing current
assets by current liabilities and expressing the result as
a ratio, thereby giving an indication of your ability to
meet short-term obligations as they become due. It is
often refined to include only those current assets
‘quickly’ convertible to cash (including stocks) and all
current liabilities repayable within 12 months. In this
form it is known as quick ratio.
