Professional Documents
Culture Documents
FINANCIAL
PLAN
2008 ISMAIL AB.WAHAB, MALAYSIAN ENTREPRENEURSHIP DEVELOPMENT CENTRE (MEDEC), UNIVERSITI TEKNOLOGI MA
PLAN
FinePlanner
FINANCIAL PLAN
Complimentary
Edition
2009 Ismail Ab.Wahab, Malaysian Entrepreneurship Development Centre (MEDEC), Universiti Teknologi MARA
Name of Business/Company
USER'S GUIDE
FORECASTING
Form of Business
English
Malay
Sole-Proprietorship/Others
Nature of Business
3 Years
Manufacturing
5 Years
Trading/Distribution
Service
FINANCIAL REPORTS
Pro-forma Cash Flow Statement
Pro-forma Income Statement
Pro-forma Balance Sheet
Financial Performance
Time to Break-Even
Paybak Period for Start-Up Fund
Internal Rate of Return
ANCIAL PLAN
USER'S GUIDE
FORECASTING
Capital Expenditure Projections
Pre-Operating and Working Capital Projections
Sales and Purchase Projections
Forecasted Project Cost and Financing
FINANCIAL REPORTS
Pro-forma Cash Flow Statement
Pro-forma Income Statement
Pro-forma Balance Sheet
Financial Performance
BRIEF REPORTS
Time to Break-Even
Paybak Period for Start-Up Fund
Internal Rate of Return
Complimentary
Edition
Administrative/Organisation
Land & Building
computer
3,000
Sales/Marketing
signboard
5,000
Operations/Technical
washing machine
12,000
Total
20,000
Depreciation method
Straight line
F
i
n
e
P
la
n
n
e
r
URE PROJECTION
6
5
5
5
8
5
5
5
5
5
5
5
Main Menu
Complimentary
Edition
Tax Rates
Year 1
Year 2
Year 3
F
i
n
e
P
l
a
n
n
e
r
RKING CAPITAL
RM
1,000
70
5,000
1,000
3,000
200
3,000
2,000
6,000
5,000
1,000
27,270
10%
10%
0%
0%
25%
25%
25%
25%
25%
Main Menu
2009 Ismail Ab.Wahab MEDEC UiTM
Complimentary
Edition
RM
January
2013
February
2013
March
2013
April
2013
May
2013
June
2013
July
2013
August
2013
September
2013
October
2013
November
2013
December
2013
Total 2013
Total 2014
Total 2015
Purchase Projections
20,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
350,000
380,000
400,000
Sales Collections
In the month of sales
One month after sales
Two months after sales
Ending Inventory of Raw Materials
End of 2013
End of 2014
January
2013
February
2013
March
2013
April
2013
May
2013
June
2013
July
2013
August
2013
September 2013
October
2013
November
2013
December
2013
Total 2013
Total 2014
Total 2015
Purchase Payments
100%
0%
0%
RM
5,000
5,000
End of 2013
End of 2014
End of 2015
Fi
n
e
Pl
a
n
n
er
6,000
End of 2015
RM
6,000
6,000
5,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
71,000
150,000
170,000
ts
100%
0%
0%
RM
3,000
5,000
6,000
Main Menu
Complimentary
Edition
PROJECT IMPLEMENTATION
COST
Kos Pelaksanaan Projek
Cost
Sources of Financing
0 Cash
computer
3,000 Cash
0 Cash
0 Cash
0 Cash
signboard
5,000 Cash
0 Cash
0 Cash
0 Cash
washing machine
12,000 Hire-purchase
0 Cash
0 Cash
0 Cash
Working Capital
months
9,600 Cash
15,000 Cash
33,000 Cash
7,070 Cash
1,000 Cash
10%
8,467 Cash
94,137
Main Menu
F
i
n
e
P
l
a
n
n
e
r
Complimentary
Edition
SOURCES
OF PROJECT FINANCING
Sumber Pembiayaan Projek
Own Contributions
Existing F. Assets
Cash
Cost
0
3,000
3,000
signboard
5,000
5,000
0
washing machine
Loan
12,000
Working Capital
Sales & Marketing Costs (monthly)
9,600
9,600
15,000
15,000
33,000
33,000
7,070
7,070
1,000
1,000
8,467
8,467
94,137
82,137
TOTAL
Interest rate
Loan tenure (years)
5%
8
Interest rate
Tenure (years)
5%
9
Main Menu
FinePlann
er
Hire-Purchase
12,000
12,000
Complimentary
Edition
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
0
5%
8
Annual Rest
Instalment Payments
Interest
Annual Payments
Principal
FinePlann
er
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
CHEDULE
Tahun
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
12,000
5%
9
Bayaran Ansuran
Faedah
Pokok
600
600
1,333
1,333
1,333
1,333
1,333
1,333
1,333
1,333
1,333
0
0
0
0
0
0
0
0
0
0
0
600
600
600
600
600
600
600
0
0
0
0
0
0
0
0
0
0
0
BayaranTahunan
1,933
1,933
1,933
1,933
1,933
1,933
1,933
1,933
1,933
-
HEDULES
EDULE
Baki Pokok
12,000
10,667
9,333
8,000
6,667
5,333
4,000
2,667
1,333
-
Main Menu
Complimentary
Edition
DEPRECIATION OF FIX
0
1
2
3
4
5
6
7
8
9
10
computer
3,000
Straight Line
6
Annual
Depreciation
Accumulated
Depreciation
500
500
500
500
500
500
0
0
0
0
Accumulated
Depreciation
0
1
2
3
3,000
2,500
2,000
1,500
1,000
500
-
0
0
Straight Line
5
Annual
Depreciation
0
1
2
3
4
5
6
7
8
9
10
500
1,000
1,500
2,000
2,500
3,000
0
0
0
0
Book Value
Book Value
signboard
5,000
Straight Line
8
Annual
Depreciation
Accumulated
Depreciation
625
625
625
625
1,250
1,875
Book Value
5,000
4,375
3,750
3,125
4
5
6
7
8
9
10
625
625
625
625
625
0
0
0
0
Annual
Depreciation
Accumulated
Depreciation
0
1
2
3
4
5
6
7
8
9
10
0
1
2
Book Value
washing machine
12,000
Straight Line
5
Annual
Accumulated
Depreciation
Depreciation
2,400
2,400
2,400
2,400
2,400
0
0
0
0
0
Book Value
2,400
4,800
7,200
9,600
12,000
0
0
0
0
0
2,500
1,875
1,250
625
-
0
0
Straight Line
5
0
1
2
3
4
5
6
7
8
9
10
Year
2,500
3,125
3,750
4,375
5,000
12,000
9,600
7,200
4,800
2,400
-
0
0
Straight Line
5
Annual
Accumulated
Depreciation
Depreciation
Book Value
3
4
5
6
7
8
9
10
FinePlan
N OF FIXED ASSETS
0
0
Straight Line
5
Annual
Depreciation
0
1
2
3
4
5
6
7
8
9
10
Accumulated
Depreciation
Accumulated
Depreciation
0
1
2
3
0
0
Straight Line
5
Annual
Depreciation
0
1
2
3
4
5
6
7
8
9
10
Book Value
Book Value
0
0
Straight Line
5
Annual
Depreciation
Accumulated
Depreciation
Book Value
4
5
6
7
8
9
10
Accumulated
Depreciation
0
1
2
0
0
Straight Line
5
Annual
Accumulated
Depreciation
Book Value
Depreciation
0
1
2
3
4
5
6
7
8
9
10
0
0
Straight Line
5
Annual
Depreciation
0
1
2
3
4
5
6
7
8
9
10
Book Value
0
0
Straight Line
5
Annual
Depreciation
Accumulated
Depreciation
Book Value
3
4
5
6
7
8
9
10
Main Menu
2009 Ismail Ab.Wahab MEDEC UiTM
PVIFA=
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
0.6768
6.4632127594
Int
-
annual paym
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Balance
-
Complimentary
Edition
MONTH Pre-Operations
January
February
CASH INFLOW
Capital (Cash)
Loan
Cash Sales
Collection of Accounts Receivable
82,137
0
20,000
0
30,000
0
20,000
30,000
3,200
3,200
5,000
5,000
11,000
11,000
82,137
CASH OUTFLOW
Pre-operating & Incorporation Expenditure
7,070
1,000
8,000
Hire-Purchase Repayment:
Principal
111
111
Interest
50
50
Principal
Interest
Tax Payable
Loan Repayment:
15,070
20,361
19,361
67,067
(361)
10,639
67,067
66,706
66,706
77,345
FinePl
an
67,067
PRO-FORM
April
May
June
July
30,000
0
30,000
0
30,000
0
30,000
0
30,000
0
30,000
30,000
30,000
30,000
30,000
3,200
3,200
3,200
3,200
3,200
5,000
5,000
5,000
5,000
5,000
10,000
11,000
11,000
11,000
11,000
111
111
111
111
111
50
50
50
50
50
18,361
19,361
19,361
19,361
19,361
11,639
10,639
10,639
10,639
10,639
77,345
88,984
99,623
110,261
120,900
88,984
99,623
110,261
120,900
131,539
W
August
September
October
November
December
30,000
0
30,000
0
30,000
0
30,000
0
30,000
0
30,000
30,000
30,000
30,000
30,000
3,200
3,200
3,200
3,200
3,200
5,000
5,000
5,000
5,000
5,000
11,000
11,000
11,000
11,000
11,000
111
111
111
111
111
50
50
50
50
50
19,361
19,361
19,361
19,361
19,361
10,639
10,639
10,639
10,639
10,639
131,539
142,178
152,817
163,456
174,095
142,178
152,817
163,456
174,095
184,734
ATEMENT
2013
2014
2015
82,137
350,000
0
380,000
0
400,000
0
432,137
380,000
400,000
38,400
42,240
46,464
60,000
66,000
72,600
131,000
216,000
242,600
1,000
1,100
1,210
1,333
1,333
1,333
600
600
600
7,070
8,000
247,403
327,273
364,807
184,734
52,727
35,193
184,734
237,460
184,734
237,460
272,653
Complimentary
Edition
2013
2014
2015
350,000
125,400
380,000
216,400
400,000
243,000
#VALUE!
#VALUE!
224,600
163,600
157,000
#VALUE!
#VALUE!
Less: Expenditure
Pre-Operating & Incorporation Expenditure
2,070
60,000
66,000
72,600
38,400
42,240
46,464
1,000
1,100
1,210
600
600
600
1,125
1,125
1,125
Total Expenditure
103,195
111,065
121,999
121,405
52,535
35,001
#VALUE!
#VALUE!
#VALUE!
#VALUE!
121,405
52,535
35,001
#VALUE!
#VALUE!
121,405
173,940
208,941
#VALUE!
#VALUE!
3,000
5,000
128,400
218,400
244,000
5,000
6,000
Other Expenditure
Interest on Hire-Purchase
Interest on Loan
Depreciation of Fixed Assets
Tax
Note 1
Cost of Sales
Opening Inventory of Finished Goods
Add: Total Production Cost (Note 2)
0
Less: Ending Inventory
3,000
125,400
216,400
243,000
#VALUE!
#VALUE!
Note 2
Raw Materials
Opening Inventory
5,000
5,000
71,000
150,000
170,000
5,000
5,000
6,000
Complimentary
Edition
2014
2015
Main Men
ASSETS
Pro-forma Income
Pro-forma Balanc
16,475
12,950
9,425
Financial Perfor
5,000
5,000
5,000
21,475
17,950
14,425
Other Assets
Deposit
Current Assets
SUMMARY
2013
5,000
5,000
6,000
2014
3,000
0
5,000
0
6,000
0
2015
184,734
237,460
272,653
192,734
247,460
284,653
214,209
265,410
299,078
82,137
82,137
82,137
121,405
173,940
208,941
#VALUE!
#VALUE!
203,542
256,077
291,078
#VALUE!
#VALUE!
Cash Balance
TOTAL ASSETS
Owners' Equity
Capital
Accumulated Income
Long-Term Liabilities
Loan Balance
2013
2012
2011
2010
2013
2012
2011
Hire-Purchase Balance
10,667
9,333
8,000
#VALUE!
#VALUE!
10,667
9,333
8,000
#VALUE!
#VALUE!
214,209
265,410
299,078
2010
Current Liabilities
Accounts Payable
TOTAL EQUITY & LIABILITIES
FinePlanner
2009
#VALUE!
#VALUE!
FINANCIAL P
Complimentary
Edition
2013
LIQUIDITY
Current Ratio
NA
NA
EFFICIENCY
Receivable Turnover
NA
Inventory Turnover
31
PROFITABILITY
Gross Profit Margin
64.17%
34.69%
Return on Assets
56.68%
Return on Equity
59.65%
SOLVENCY
Debt to Equity
5.24%
Debt to Assets
4.98%
#DIV/0!
Break-even Analysis
2013
125,400
224,600
64%
103,195
228,595
121,405
Break-even sales
160,811
350,000
46%
Current Ratio
10
9
8
7
Current Ratio
10
9
8
7
6
5
4
3
2
1
0
2013
2014
2015
2016
2017
Receivable Turnover
10
9
8
7
6
5
4
3
2
1
0
2013
2014
2015
2016
2017
2014
2015
2016
Return on Assets
60%
50%
40%
2017
Return on Assets
60%
50%
40%
30%
20%
10%
0%
2013
2014
2015
2016
2017
Debt to Equity
6%
5%
4%
3%
2%
1%
0%
2013
2014
2015
2016
2017
Time In
10
9
8
7
6
5
4
3
2
1
0
2013
FinePlan
ner
2014
NANCIAL PERFORMANCE
Prestasi Kewangan
2014
2015
2016
2017
Main Menu
Pro-forma Cash Flow Statement
NA
NA
#VALUE!
#VALUE!
NA
NA
#VALUE!
#VALUE!
NA
NA
#VALUE!
#VALUE!
43
41
#VALUE!
#VALUE!
43.05%
39.25%
#VALUE!
#VALUE!
13.83%
8.75%
#VALUE!
#VALUE!
19.79%
11.70%
#VALUE!
#VALUE!
20.52%
12.02%
#VALUE!
#VALUE!
3.64%
2.75%
#VALUE!
#VALUE!
3.52%
2.67%
#VALUE!
#VALUE!
#DIV/0!
#DIV/0!
#VALUE!
#VALUE!
INTERNAL RATE OF
RETURN (IRR)
2014
2015
380,000
400,000
216,400
163,600
43%
111,065
327,465
52,535
243,000
157,000
39%
121,999
364,999
35,001
257,975
310,825
68%
79%
#VALUE!
#VALUE!
#VALUE!
#VALUE!
78%
#VALUE!
#VALUE!
#VALUE!
#VALUE!
TIME TO BREAK-EVEN
Ratio
10
9
8
7
6
Ratio
10
9
8
7
6
5
4
3
2
1
0
2016
2013
2017
2014
2015
2016
2017
Inventory Turnover
Turnover
45
40
35
30
25
20
15
10
5
0
2016
2013
2017
2014
2015
2016
2017
t Margin
35%
30%
25%
20%
15%
10%
5%
0%
2016
2013
2017
2014
2015
2016
Return on Equity
Assets
60%
50%
40%
2017
Return on Equity
Assets
60%
50%
40%
30%
20%
10%
0%
2016
2013
2017
2014
2015
2016
2017
Debt to Assets
quity
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
2016
2013
2017
2014
2015
2016
2017
2014
2015
2016
2017
st)
2013
Current Ratio
NA
2014
NA
2013
Quick Ratio (Acid Test)
NA
2014
NA
2013
Receivable Turnover
NA
2014
NA
2013
2014
31
43
2013
2014
64%
43%
2013
2014
35%
14%
Return on Assets
2013
57%
2014
20%
Return on Equity
2013
60%
2014
21%
Inventory Turnover
st)
Debt to Equity
2013
5%
2014
4%
Debt to Assets
2013
5%
2014
4%
2013
#DIV/0!
2014
#DIV/0!
2017
2017
2017
2017
2015
NA
2016
2017
#VALUE! #VALUE!
2015
NA
2015
NA
2016
2017
#VALUE! #VALUE!
2016
2017
#VALUE! #VALUE!
2015
2016
2017
41 #VALUE! #VALUE!
2015
2016
2017
2016
2017
9% #VALUE! #VALUE!
2015
2016
2017
12% #VALUE! #VALUE!
2015
2016
2017
12% #VALUE! #VALUE!
2015
2016
2017
3% #VALUE! #VALUE!
2015
2016
2017
3% #VALUE! #VALUE!
2015
2016
2017
#DIV/0! #VALUE! #VALUE!
BRIEF REPORT
TIME TO BREAK-EVEN
BRIEF REPORT
BRIEF REPORT
79%
Back to Main Menu
BRIEF REPORT
RM
Back to Main Menu
BRIEF REPORT
94,137
Back to Main Menu
BRIEF REPORT
SOURCES OF FINANCING
Cash
Existing F. Assets
Loan
Hire-Purchase
Total
Back to Main Menu
BRIEF REPORT
SOURCES OF FINANCING
RM82,137
RM0
RM0
RM12,000
RM94,137
Back to Main Menu
BRIEF REPORT
CASH BALANCE
2013
2014
2015
RM
RM
RM
BRIEF REPORT
CASH BALANCE
184,734
52,727
35,193
BRIEF REPORT
2013
2014
2015
RM
RM
RM
BRIEF REPORT
121,405
52,535
35,001
BRIEF REPORT
2013
2014
2015
RM
RM
RM
BRIEF REPORT
203,542
256,077
291,078
BRIEF REPORT
2013
2014
2015
RM
RM
RM
BRIEF REPORT
214,209
265,410
299,078
LIABILITIES
RM 10,667
RM 9,333
RM 8,000
BRIEF REPORT
RM 0
Back to Main Menu
BRIEF REPORT
per month
BRIEF REPORT
RM
Back to Main Menu
BRIEF REPORT
161
per month
FinePlan
FINANCIAL PLANNING PACKAGE FOR SMALL AND MEDIUM BUSINESSES
PROF. MADYA DR. ISMAIL AB.WAHAB, MALAYSIAN ENTREPRENEURSHIP DEVELOPMENT CENTRE (MEDEC),
FACULTY OF BUSINESS MANAGEMENT, UNIVERSITI TEKNOLOGI MARA, SHAH ALAM, SELANGO R
Objective
FinePlanner is a tool that can assist small and medium-sized entrepreneurs in the
preparation of professional, comprehensive and presentable financial projections for
business start-up and expansion.
Novelty
Dual language: English and Malay Generate comprehensive and presentable financial
projection up to five years
Suitable for businesses engaged in manufacturing, trading or services
Suitable for incorporated or unincorporated businesses
Suitable for all levels of existing and potential entrepreneurs: students & graduates
entrepreneurs, corporate entrepreneurs, rural entrepreneurs, agro entrepreneurs, etc.
Getting Started
Before you start the planning process, select the language by clicking English or Malay buttons planning peri
vSelect the planning period (3 or 5 years).
vChoose first year of planning period and first month of planning period.
vSelect the legal form of business (private limited company or sole-proprietorship and others)
vSelect nature of business (manufacturing, trading/distribution or service)
Financial Forecasting
vClick Capital expenditure projections menu for entering the projected cost of each fixed assets required
business. Please key in the cost of new fixed assets and/or the market value for existing fixed assets (i
Determine the number of years of economic or productive life for each asset (except land & building). The eco
life of an asset refers to the period (normally expressed in number of years) whereby the asset can be econo
used i.e. without much maintenance or breakdowns.
v Next, select the depreciation method for all assets. The recommended method for calculating deprecia
either straight-line or declining balance. The simplest and most commonly used is straight line method. It is calc
by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total pro
years the asset can be reasonably expected to benefit the company [called useful life in accounting jargo
planning purposes, the salvage value can be zero. The declining method of depreciation accelerates depre
faster than the straight-line method because it bases each year's depreciation on the assets previous-year ne
value.
vGo back to the main menu.
v First, determine the pre-operating and incorporation costs. The pre-operating cost can includes bu
registration and licences, legal fees , stamp duties etc.
v Next, estimate the sales and marketing costs, general and administrative costs, and operation
technical costs. These costs are incurred every month and are generally known as working capital. Other costs
are not paid monthly but are incurred every year can be included under other expenditure (annually) categor
as payment of road tax and insurance for motor vehicles, licences etc.
vEstimate the increment rate for working capital expenditure (if any). Next, choose the current and estimated r
corporate taxation from the list. The system will only calculate the amount of tax for private limited company.
vGo back to the main menu.
vFill in the sales projections table. Sales (or revenues) refers to the sales forecast derived from
marketing plan. It is the total of forecasted cash and credit sales for each year throughout the planne
period. Sales are to be forested monthly (first planning year) and annually (after first year).
vThe amount of monthly purchases in the purchase Projections table should be equal to the amo
purchases that have been projected in the working capital section under operations and technical
category.
vIf there some credit sales or purchases, choose the percentage of credit sales collections and c
purchase payments in the columns provided.
vNext, estimate the ending inventory of raw materials and finished goods (for manufacturing
businesses only). For trading and distribution businesses, the ending inventory figures are to be ente
the ending inventory of finished goods column only. It is assumed that there is no ending inventor
businesses involved in service industry. If your businesses are involved in both trading and service
activities, please select trading/distribution category under nature of business in the main menu.
vGo back to the main menu.
vThe project cost is the total cost of implementation of the proposed project. The project cost sch
incorporates both long and short terms expenditure needed to start the business. The components o
schedule include capital expenditure, working capital, pre-operating and incorporation costs, other
expenditure and provision for contingency.
vThe sources of financing schedule shows various sources of finance available to fund the busin
These could be internal and external sources of finance. The internal sources of finance include equ
contributions in cash and/or existing assets. External sources may include term loan and hire purcha
For planning purposes, other sources such as grants and money borrowed from individuals should b
considered as own cash contributions. For each asset and working capital required, p lease choose
type of financing from the list provided in the sources of financing column.
vThe amount of working capital is dependent upon the period until the business can generate en
sales to cover its short-term expenditure. Therefore, the amount of working capital needed could be
range of one to six months. Please select the number of months from the list provided in relevant co
vThe final component of the project cost is provision for contingency. This cost is added to the total cost
other four components based on a certain percentage (usually between 5 to 10 percent). The reason for in
contingency cost in the project implementation cost schedule is to take care of any variance of the actual fro
budgeted expenditure. For example, if the cost of materials increases during the planned period, the firm can
this fund to cover the extra cost without having to search for new funding.
SUMMARY AND SCHEDULES
This section presents the supporting schedules relating to the information that have been provid
the forecasting section. The schedules are project cost and sources of funds summary,
assets and depreciation schedules, and loan amortization schedule.
REPORTS AND ANALYSIS
This section presents the pro-forma financial statements and analysis of the financial performanc
position of the proposed project.
Pro-forma cash flow statement
v Pro forma cash flow statement refers to the projected statement of cash inflows and ou
throughout the planned period. Under normal circumstances, the pro forma cash flow statem
prepared between three to five consecutive years, with monthly details for the first year. The pro
cash flow statement shows the following information:
Cash inflows the projected amount of cash flowing into the company.
Cash outflows the projected amount of cash flowing out of the company.
Cash deficit or surplus the difference between cash inflows and cash outflow
Cash position the beginning and ending cash balances for a particular perio
Pro-forma Income Statement
vThe pro forma income statement shows the expected profit for the planned period
statement shows the following information:
Gross profit
Net profit
vGross profit is the gross margin realised after deducting the cost of goods sold from
sales. It represents the amount of profit before deducting other operating expenditure su
as administration expenditure, marketing expenditure, operations expenditure (for a tra
entity), interest charges, depreciation charges on fixed assets (except for a manufacturi
concern) and other miscellaneous expenditure incurred throughout the year in order to o
the net profit before tax.
Pro-forma Balance Sheet
vWhile the pro forma income statement shows the financial performance of the
company for the planned period, the pro forma balance sheet shows the financial positio
the company at a specific point in time in terms of assets owned and how those assets a
financed. The pro forma balance sheet is prepared for a period of three years.
vThe general elements of the pro forma balance sheet include:
assets
owners equity
liabilities
vAssets are the economic resources of a business that are expected to be of benefit i
future. Assets reported in the balance sheet are generally categorised into two categorie
non-current and current assets.
vNon-current assets include fixed assets and other assets that are owned and u
held to produce products or services. These assets are not intended for sale in the short
Examples: property, plant, machinery, equipment, vehicles, major renovations and long
investments. For fixed assets, the values shown in the balance sheet are the book value
the original cost less the accumulated depreciation.
vCurrent assets are short-term assets that can be converted into cash within a year.
Examples: cash, inventories (raw materials, work-in-process and/or finished goods),
receivables and other short-term investments.
that mature in a period of more than one year. They usually include long-term loans as w
as hire purchase.
vCurrent liabilities refer to the short-term obligations of the business that mature wi
period of less than a year. The most common forms of current liabilities are accounts pa
and accrued payments
Financial Analysis
vFinancial analysis is a technique of examining financial statements to help the
entrepreneur analyse the financial position and performance of the business.
vFinancial analysis involves two basic steps: generating the information from the finan
statements and interpreting the results.
vThe most common form of financial analysis is ratio analysis.
vFinancial ratios are normally used to compare figures from the financial statement wit
other figures, so that the true meaning of financial pictures can be obtained.
vThere are various financial ratios that the entrepreneur can look at. However, the mo
commonly considered ratios in small business decision-making fall into four categories:
liquidity, efficiency, profitability and solvency.
v Liquidity Ratio: The term liquidity refers to the availability of liquid assets to meet shor
obligations. Thus, liquidity ratios measure the ability of the business to pay its monthly bills.The
widely used liquidity ratios are current ratio and quick ratio. Current ratio can be determin
dividing total current assets by total current liabilities. Generally, this ratio shows the business abi
generate cash to meet its short-term obligations. Quick ratio, also known as the acid test
measures the extent to which current liabilities are covered by liquid assets. To determine quick
the calculation of liquid assets does not take into account inventrories since it is sometimes diffic
convert them into cash quickly.
v The efficiency ratios measure how efficient the business uses its assets to generate sales
most widely used efficiency ratio for planning purposes is inventory turnover ratio. Inventory turn
(or stock turnover) measures the number of times inventories have been converted into sale
indicates how liquid the inventory is. All other things being equal, the higher the turnover figur
more liquid the business is. This ratio divides the cost of sales (or cost of goods sold) by the av
value of inventory. The average value of inventory is derived by adding the opening and closing ba
of and dividing the total by two.
v Profitability ratios are important indicators of the business financial performance. Investo
particularly be interested in these ratios since they measure the performance and growth poten
the business. Some of the commonly used profitability ratios are gross profit margin, net profit m
return on assets and return on equity. Gross profit margin give a good indication of financial hea
the business. Without an adequate gross margin, the business will be unable to pay its operatin
other expenses. Gross profit margin is calculated by dividing the business gross income by sales
profit margin is an indication of how effective the business is at cost control. The higher the net
margin, the more effective the business is at converting sales into actual profit. Net profit mar
calculated by dividing the business net income by sales. Return of assets measures the overall
that the business is able to make on its assets. This ratio is derived by dividing the business net
by total assets. Return of equity shows what the business has earned on its owners investment
business. This ratio is derived by dividing the business net profit by total equity.
This final category of ratios i.e. Solvency Ratios, is designed to help the entrepreneur measure th
degree of financial risk that his business faces. By referring to this ratio, the entrepreneur can asse
level of debt and decide whether it is appropriate for the business. The most commonly used solve
ratios are total debt (liabilities) to equity (also known as leverage or gearing), total debt to total as
and times interest earned (also known as interest coverage). The total debt to equity ratio mea
the percentage of the business assets financed by creditors relative to the percentage financed by
owners. This ratio is calculated by dividing the the total debt by total equity. The debt to asset
measures the percentage of the business assets financed by creditors relative to the percentage
financed by the entrepreneur. This ratio is calculated by dividing the total debts by total assets. Ti
interest earned ratio measures the number of times interest expense can be covered by profit b
interest and tax. This ratio is calculated by dividing total inte
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