Financial Estimates and Projections

Centre for Financial Management, Bangalore

Outline
Cost of project Means of financing Estimates of sales and production Cost of production Working capital requirement and its financing Profitability projections

Centre for Financial Management, Bangalore

Financial Projections
Balance Sheet Cash Flow Statement Cost of Project and Time Phasing Means of Finance and Time Phasing Interest and Loan Repayment Depreciation Cost of Production Working Capital Needs Production Plan Projected Sales
Centre for Financial Management, Bangalore

Estimate of Working Results Working Capital Advance (WCA)

Interest on WCA
Tax Factor

Cost of Project
The cost of project represents the total of all items of outlay associated with a project which are supported by long-term funds. 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 Indian technicians

abroad
Miscellaneous fixed assets Preliminary and capital issue expenses Pre-operative expenses Margin money for working capital Initial cash losses
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Means of Finance
To meet the cost of the project the following means of finance are

available:
Share capital Term loans Debenture capital Deferred credit

Incentive sources
Miscellaneous sources

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Project Financing Decision

The key business considerations relevant for the project
financing decisions are:

Cost
Risk Control

Flexibility

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Estimates of Sales and Production

In estimating sales and production, assume that: The capacity utilisation would be at 40-50 percent of the installed capacity in the first year, 50-80 percent in the second year, and 80-90 percent from the third year onwards Production and sales will be equal
The selling price used may be the present selling price

Centre for Financial Management, Bangalore

Estimates of Production and Sales

(Details may be furnished separately for each product and until the plant reaches maximum capacity utilisation)
Product 1st 2nd 3rd 4th yr yr yr yr Product 1st 2nd 3rd 4th yr yr yr yr

1.
2. 3. 4. 5. 6. 7. 8.

Installed capacity (qty per day per annum)

No. of working days No. of shifts Estimated production per day (qty) Estimated annual production(qty) Estimated output as % of plant capacity Sales (qty) (after adjusting stocks) Value of sales (in000 of Rs) Product (i) (ii) (iii)

Note : Production in the initial period should be assumed at a reasonable level of utilisation of capacity increasing gradually to attain full capacity in subsequent years. Centre for Financial Management, Bangalore

Cost of Production

Given the estimated production, the cost of production may be

worked out. The major components of cost of production are:

Material cost
Utilities cost Labour cost

Factory overhead cost

Centre for Financial Management, Bangalore

Working Capital Requirement and Its Financing

In estimating the working capital requirements and planning for its financing, bear in mind the following:
The working capital requirement consists of raw materials and components, work-in-process, finished goods, consumable stores, debtors, and operating expenses. The principal sources of working capital finance are working capital advances provided by commercial banks, trade credit, accruals and provisions, and long-term sources of financing. There are limits to obtaining working capital advances from commercial banks. They relate to the maximum permissible bank finance for working capital and the amounts that can be raised against each individual current asset.

Centre for Financial Management, Bangalore

Profitability Projections ( or Estimates of Working Results)

Given the estimates of sales revenues and cost of production, the next step is to prepare the profitability projections or estimates of working results (as

they are referred to by term-lending financial institutions in India). The

estimates of working results may be prepared along the following lines: A Cost of Production B Total administrative expenses C Total sales expenses D Royalty and know-how payable E Total cost of production (A+B+C+D) F Expected sales G Gross profit before interest

H Total financial expenses

I Depreciation
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J Operating Profit (G - H - I)
K Other income L Preliminary expenses written off M Profit/loss before taxation (J+K - L) N Provision for taxation O Profit after tax (M - N) Less Dividend on - Preference capital - Equity capital P Retained profit

Q Net cash accrual (P+I+L)

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Cash Flow Statement

Sources of Funds
1. 2. 3. Share issue Profit before taxation with interest added back Depreciation provision for the year

4.
5. 6. 7. 8. 9.

Development rebate reserve

Increase in secured medium and long-term borrowings for the project Other medium/long-term loans Increase in unsecured loans and deposits Increase in bank borrowings for working capital Increase in liabilities for deferred payment (including interest) to machinery suppliers

10. Sale of fixed assets 11. Sale of investments 12. Other income (indicate details) Total (A)
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Disposition of Funds

1.
2. 3. 4.

Capital expenditure for the project

Other normal capital expenditure Increase in working capital* Decrease in secured medium and long-term borrowings - All India Institutions - SFCs - Banks

5.
6. 7.

Decrease in unsecured loans and deposits

Decrease in bank borrowings for working capital Decrease in liabilities for deferred payments (including interest) to machinery suppliers

8.
9.

Increase in investments in other companies

Interest on term loans

Centre for Financial Management, Bangalore

10. Interest on bank borrowings for working capital

11. Taxation 12. Dividends - Equity

- Preference
13. Other expenditure (indicate details) 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 * Working capital here is defined as: (Current assets other than cash )(Current liabilities other than bank borrowings)

Centre for Financial Management, Bangalore