Faculty of Business / Faculty of Management

(FOB / FOM)

PBU0035
Introduction to Business Plan

Foundation in Management

NOTES

Topic 5: Financial Analysis and Projection

Topic 6: Financial Request

FOSEE, MULTIMEDIA UNIVERSITY (436821-T)

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Melaka Campus, Jalan Ayer Keroh Lama, 75450 Melaka.
PBU0035 Introduction to Business Plan Topic 5 and 6

Topic 5: Financial Analysis and Projections

From “Preparing Effective Business Plans” by Bruce R. Barringer

1) Financial Plan
 The final section of a business plan presents a firm’s pro forma (or projected)
financial projections
 There are three things to be particularly mindful of:
i) Potential investors reading your plan will be primarily interested in the size of
the returns and how quickly a company can grow, whereas bankers are more
interested in the predictability and stability of a company’s financial results
and how it will minimize risk
ii) Your financial statements show whether your business can get up and running
successfully; many businesses represent viable ongoing concerns, but the trick
is getting them started and through the early period when most start-ups will
lose money

2) Source and Use of Funds Statement

 The source and use of funds statement is a document that lays out specifically
how much money a firm needs (if the intention of the business plan is to raise
money), where the money will come from, and what the money will be used for
 The items from the source and use of funds statement normally become the initial
assets and liabilities on a firm’s balance sheet
 If any of the funds you will be receiving come from an unusual source, you
should substantiate the source of funding

3) Pro Forma Financial Statements

 The pro forma financial statements are the heart of the financial section of a
business plan
 If your plan has been built in the manner described in this book, most of the hard
work, such as projecting sales and creating a marketing budget, has already been
done
 A firm’s pro forma financial statements are similar to historical statements except
they look forward rather than track the past
 Most experts recommend three to five years of statements, with the first two years
for the income statement and the cash flow statement completed on a monthly
basis
 If the company you’re writing your plan for already exists, include three years of
historic financial statements

a) Pro Forma Income Statement

 The pro forma income statement reflects the projected results of the
operations for a firm for a given period of time

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 It is often referred to as a “profit and loss” because the pro forma income
statement records all projected sales and expenses for a given period and
shows whether the firm will be making a profit or experiencing a loss
 There are three numbers that receive the most attention when evaluating
an income statement: net sales, cost of goods sold, and operating expenses
 In demonstrating anticipated year-to-year increases in expenses, you can
use the constant ratio method, where general expense items are expected
to increase at the same rate as sales if the actual numbers are not known
 One ratio of particular importance in evaluating a firm’s pro forma income
statements is a firm’s projected profit margins, or return on sales (ROS),
computed by dividing net income by net sales
 Pro forma income statements don’t provide an indication of a firm’s cash
position; a firm can show excellent sales numbers and still run out of cash
despite glowing income statements

b) Balance Sheet
 A pro forma balance sheet is a projection of a firm’s assets, liabilities, and
owner’s equity at a specific point in time
 Assets are listed in order of their “liquidity,” or the length of time it takes
to convert them to cash
 Liabilities are listed in the order in which they must be paid
 A balance sheet must always “balance,” meaning a firm’s assets must
always equal its liabilities plus owner’s equity
 The major categories of assets listed on a pro forma balance sheet include
current assets, fixed assets, current liabilities, long-term liabilities, and
owner’s equity
 Balance sheets are somewhat deceiving in that firms spend money on
many things that never show up on their balance sheets, intangible assets
are not recognized on the balance sheet, and property must be valued at
the purchase price instead of the current value
 When evaluating a pro forma balance sheet, the two primary questions are
whether a firm will have sufficient short-term assets to cover its short-term
debts and whether it is financially sound overall
 Overall financial soundness is assessed by computing a firm’s overall debt
ratio
 Debt ratio is computed by dividing total debt by total assets

c) Cash Flow
 Many readers of your business plan will consider your pro forma cash
flows to be the most valuable of your financial statements
 The cash flow statements provide an indication of whether a firm will be
able to maintain a sufficient cash balance to get up and running
successfully
 To capture items in an organized manner, the cash flow statement is
divided into three activities: operating activities, investing activities, and
finance activities

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 It’s important that all of a firm’s pro forma financial statements be

prepared as accurately and realistically as possible
 Another financial instrument that is often used is the break-even analysis

4) Ratio Analysis
 The most practical way to interpret a firm’s historical or pro forma financial
statements is through ratio analysis
 Your readers will instantly recognize the general picture that a particular ratio
conveys
 A valuable use of a firm’s ratios is to compare them to industry norms
 The three most common categories of financial ratios are profitability ratios,
liquidity ratios, and overall financial stability ratios

Topic 6: Financial Request

1) Sources of Funds
a) company makes profit by selling a product for more than it costs to produce. This
is the most basic source of funds for any company and hopefully the method that
brings in the most money.
b) Like individuals, companies can borrow money. This can be done privately
through friends/family members, bank loans, or it can be done publicly through a
debt issue. The drawback of borrowing money is the interest that must be paid to
the lender.
c) A company can generate money by selling part of itself in the form of shares to
investors, which is known as equity funding. The benefit of this is that investors
do not require interest payments like bondholders do. The drawback is that further
profits are divided among all shareholders.

2) Fundings for Small and Medium Enterprises (SMEs)

 SMEs can obtain financing from various types of financial institutions, including
banking institutions, development financial institutions, leasing and factoring
companies, as well as venture capital companies.
 To complement the financial institutions, the Government has also established
special funds for SMEs.
 The main provider of funds for SMEs is the banking institutions.
 Thedvelopment financial institutions (DFIs) that provide financing to SMEs
include the SME Bank, EXIM Bank, MIDF, Bank Pertanian and Bank
Pembangunan.

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