Chapter 6 Financial Estimates and Projections

© Centre for Financial Management, Bangalore

Financial Estimates and Projections


Outline

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


Balance Sheet

Cash Flow Statement

Means of Finance and Time Phasing

Interest and Loan Repayment

Estimate of Working Results

Working Capital Advance (WCA)

Cost of Project and Time Phasing

Interest on WCA

Tax Factor

Depreciation

Cost of Production

Working Capital Needs

Production Plan

Projected Sales

Financial Projections


Cost of ProjectThe 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


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


Project Financing Decision

The key business considerations relevant for the project

financing decisions are:

• Cost

• Risk

• Control

• Flexibility


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


(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. Installed capacity (qty per day per annum)

2. No. of working days

3. No. of shifts

4. Estimated production per day (qty)

5. Estimated annual production(qty)

6. Estimated output as % of plant capacity

7. Sales (qty) (after adjusting stocks)

8. Value of sales (in’000 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.

Estimates of Production and Sales


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


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.


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


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)


Sources of Funds

1. Share issue

2. Profit before taxation with interest added back

3. Depreciation provision for the year

4. Development rebate reserve

5. Increase in secured medium and long-term borrowings for the project

6. Other medium/long-term loans

7. Increase in unsecured loans and deposits

8. Increase in bank borrowings for working capital

9. 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)

Cash Flow Statement


Disposition of Funds

1. Capital expenditure for the project

2. Other normal capital expenditure

3. Increase in working capital*

4. Decrease in secured medium and long-term borrowings

- All India Institutions

- SFCs

- Banks

5. Decrease in unsecured loans and deposits

6. Decrease in bank borrowings for working capital

7. Decrease in liabilities for deferred payments (including interest) to machinery suppliers

8. Increase in investments in other companies

9. Interest on term loans


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)

Chapter 6 Financial Estimates and Projections

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Transcript of Chapter 6 Financial Estimates and Projections