Financial Appraisal

Financial Appraisal

• Adequacy of rate of return– IRR

• Financing pattern– Debt equity ratio– Promoters contribution should be in the range of 30

to 50 %

Financial Appraisal

• Project Cost Estimation- It is the process of determining the total cost of the project which is supported by long term funds.– Land and site development– Building and civil works– Plant and machinery– Technical know how and engineering fees– Expenses on foreign and local technicians

Financial Appraisal

• Working Capital Requirement- It is the difference between current assets and current liabilities.– Raw material and components– Stocks of goods in process– Stocks of finished goods– Debtors– Operating expenses– Consumable stores

Financial Appraisal

• Sources of Funds– Share Capital- equity capital and preference capital– Term loans- Loans provided by the banks and financial

organization. (Rupee and Foreign currency loans)– Debenture capital- Capital produces by Debentures. (Non

convertible and Convertible)– Deferred Credits- Credit taken from suppliers.– Incentive Sources- Financial support provided by the

government agencies.– Miscellaneous sources- Public deposits, unsecured loans,

Leasing and hire purchase finance. ( Unsecured loan is given by promoters for maintain a connection between promoters and equity capital the promoter can promise)

Financial Appraisal

• Appropriate composition of Funds (Capital Budgeting)– Material Cost- Cost of raw materials, chemicals, components,

and consumable stores necessary for production.– Utilities- Utilities Cost include the cost incurred on power,

water and fuel.– Labour- Labour Cost is the cost of manpower employed in a

factory.– Factory overheads- It includes the repair and maintenance, rent

, taxes, insurance on factory assets.

Preparation for Project Financial Statement.

• All the financial activity via a series of numerical reports that is called, in general, financial statements.

• A Financial Statement includes balance sheet, an income statement, a statement of cash flows and an auditors report.

• It is a detailed description of the company operations and prospects for the upcoming year.

Projected Balance Sheet

• A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

• The balance sheet must follow the following formula:Assets = Liabilities + Shareholders' Equity

• Balance Sheet is the snap shot of financial strength of any company at any point of time.

Projected Balance SheetLiabilities

• A liability is an obligation, which legally binds an individual or an organization to pay off its debt.

• Liabilities in the balance sheet are the financial obligations of an organization, which it owes to other parties.

• Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the company defers the reporting of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits.


• Share Capital- It comprises of authorized capital, issued capital, subscribed capital, called up capital, paid up capital.– Authorized capital: It is the maximum amount of capital

which a company can collect or raise by selling it's shares to the general public. Authorized capital is known as nominal capital or registered capital.

– Issued capital: It is that part of the authorized capital which is actually issued to the general public.

– Unissued capital: It is that part of the authorized capital which is not being issued to the general public.

– Subscribed capital: It is that part of the issued capital which is actually subscribed by the general public


• Share Capital– Unsubscribed capital: It is that part of the issued capital which is not

subscribed by the general public.– Called up capital: It is that part of the subscribed capital which is

actually called up by the company.– Uncalled up capital: It is that part of the subscribed capital which is

not being called up by the company. It may be called up as and when the company need funds.

– Reserve capital: Reserve capital is that part of the uncalled capital which is reserved to be called up only at the time of winding up or liquidation of the company. It cannot be called during the life time of a company. It is to be used only for meeting extra- ordinary situation such as liquidation of the company. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company.


• Share Capital– Paid up capital: It is that part of the called up capital which

is actually paid up by the shareholders.– Unpaid up capital: It is that part of the called up capital

which is not being paid by the shareholders. Unpaid up capital is also known as Calls in Arrears.


• Reserves and Surplus- They are the accumulated retained earnings and consists of capital reserve, investment allowance reserve, share premium, general reserve and other reserve

• Reserve and Surplus are profits which have been retained in the firm. There are two types of reserves - revenue reserves and capital reserves.

• Revenue reserves represent accumulated retained earnings from the profits of normal business operations. These are held in various forms like general reserve, investment allowance reserve, dividend equalization reserve, etc.

• Capital reserves arise out of gains which are not related to normal business operations. For example, premium on issue of shares or gain on revaluation of assets.


• Types Of Reserves– Capital reserves When the assets of a company are revalued

to a higher value than the present net book value, the difference between them is a notional gain and shown as Revaluation Reserve. Revaluation Reserve is a capital reserve. A company is prohibited to pay dividends from the capital reserve.

– Share Premium Account When the shares of a profitable company are offered to public, the company may decide to offer the shares at a price higher than par value. Also at times the shares maybe issued at discount. The shares when offered at premium, the amount of premium collected is shown in a 'Premium Account'. Dividend cannot be paid from this reserve.


• Types Of Reserves– General Reserve The total earnings of a company after

deducting dividends paid out and any losses suffered, is called retained earnings. Retained earnings can be appropriated to create reserves for such things as future declines in inventory value, future plant expansion. Sinking fund reserve or the retained earnings not transferred to any specific reserve account is appropriated to general reserve. In other words, undistributed profit not required to be transferred to any specific reserve account is usually accumulated in the General Reserve Account.


• Secured loan- A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower.

• Unsecured loan- An unsecured loan means the lender relies on your promise to pay it back. They're taking a bigger risk than with a secured loan, so interest rates for unsecured loans tend to be higher. You normally have set payments over an agreed period and penalties may apply if you want to repay the loan early. Unsecured loans are often more expensive and less flexible than secured loans, but suitable if you want a short-term loan (one to five years).


• Current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer.

• A more complete definition is that current liabilities are obligations that will be settled by current assets or by the creation of new current liabilities.

• For example, accounts payable for goods, services or supplies that were purchased for use in the operation of the business and payable within a normal period of time would be current liabilities.


• Provision made for known or specified liabilities which may occur in future is provision for liabilities.

• Contingent liability is provision made for unknown liabilities which may or may not occur in future.

Projected Balance SheetAssets

• Anything of value. Assets can be in the form of money, such as cash at the bank or amounts owed to you; they can be fixed assets such as property or equipment; or they can be intangibles such as your company's goodwill or brand-names.

• Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.


• Types of assets– Fixed Assets- A long-term tangible piece of property that a

firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year's time.

– A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.( also called property, plant, and equipment (PP&E)).


• Types of assets– Investment- In finance, the purchase of a financial product or

other item of value with an expectation of favourable future returns. In general terms, investment means, the use money in the hope of making more money.

– An investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

– Investments include the purchase of bonds, stocks or real estate property.


• Types of assets– Current asset - A current asset is an asset on the balance

sheet which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory and the portion of prepaid liabilities which will be paid within a year.

– A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business.


Current asseto Cash and Equivalents- Legal tender or coins that can be used in

exchange goods, debt, or services. Sometimes also including the value of assets that can be converted into cash immediately, as reported by a company.

o Short-Term Investment- Investment that matures in, or is held for, 12 months or less.

o Prepaid Expense- A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future. While prepaid expenses are initially recorded as assets, their value is expensed over time, as the benefit is received onto the income statement, because unlike conventional expenses, the business will receive something of value in the near future.


Current asseto Stock in trade- Goods held by a business for sale.o Accounts Receivable (A/R)- Money which is owed to a company by

a customer for products and services provided on credit. A specific sale is generally only treated as an account receivable after the customer is sent an invoice.


Miscellaneous Expenditure- Miscellaneous expenses are those expenses which are very minor/small in nature. Any expense which cannot be debited to any expense account is debited to misc exp a/c.

These items can be debited to any particular a/c as well. But if they are too small then they are debited to misc exp a/c. The control over this account becomes easier if all such expenses are consolidated into one account. Else if all these expenses are debited to different accounts then one will need to put a lot of efforts to ascertain how much expense really has occurred under which head.

They may be carried forward to the next year if they are unpaid or paid in advance.


Debit Balance of Profit and loss- If there is net loss in an organisation and general reserve is given, net loss will be deducted from it, But if there is no such reserve, then the loss will be shown under this category/head.

Financial Appraisal

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