financial estimates and projections

Financial Estimates and Projections(Chapter 6)

Submitted To:

Rowshanara Islam

Assistant Professor

Department Of Finance

Jagannath University

Submitted By:

Riadh Mohammed Arif

From Group No- 02

Finance 6th Batch

Jagannath University

Group Members

No. Name ID

1 Md. Abul Kashem 115202

2 Md. Ismaile Hossain 115235

3 Mahmudul Hasan 115268

4 Mufty Anupama Parvin 115275

5 Mohmmad Mahabubur Rahaman B-110203019

6 Saidur Rahman Munna B-110203043

7 Riadh Mohammed Arif B-110203044

8 Md. Saleh Rabbi Monir B-110203054

9 Md. Kowshik Talukder B-110203089

10 Noor E Jannath B-110203119

Cost of Project

The cost of project represents the total of all items of outlay associated with

long-term fields.

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 Technicians Abroad

Miscellaneous Fixed Assets

Preliminary and Capital Issue Expenses

Pre-operative Expenses:

Provision for Contingencies:

Margin Money for Working Capital

Initial cash Losses

Cost of Project (Cont’d)

Balance Sheet

Projected Sales

Tax Factor

Working Capital

Needs

Depreciation

Means of

Finance and

Time Phasing

Interest and Loan

Repayment

Production Plan

Cost of

Production

Estimate of

Working Results

Working Capital

Advance (WCA)

Cash Flow

Statement

Interest on WCA

Cost of Project

and Time

Phasing

Exhibit 6.1 Financial Projections


1. Land and Site Development: The costs of land site development are-

- Cost of leveling and development

- Cost of compound wall and gates

- Cost of tube wells

2. Buildings and Civil Works: Building and civil works covers the following-

- Buildings for the main plants and equipments

- Godowns, warehouse and open yard facilities

- Garage

- Sewers, drainage

3. Plant and Machinery: The plant and machinery consists the following costs-

i) Cost of Imported Machinery: This is the sum of a) FOB Value

b) imported duty c) Clearing, loading and unloading charges.

ii) Cost of Indigenous Machinery: This consists of a) FOR (Free On Rail) cost b) Sales tax

and other taxes

iii) Cost of Stores and Spares:

Provision of Escalation = (Latest rate of annual inflation to the plant and machinery X (Length of

the delivery period)


4. Technical know-how and Engineering Fees: The technical know-how and engineering feesfor setting up the project is a component of the project cost which is taken into account ascost of capital.

5. Expenses on Foreign Technicians and Training of Technicians Abroad: Expenses onforeign technicians like traveling, boarding and lodging are considered as a cost of project.

6. Miscellaneous Fixed Assets: Fixed assets and machinery which are not part of the directmanufacturing process may be referred to as miscellaneous fixed assets. Like furniture,office machinery and equipment.

7. Preliminary and Capital Issue Expenses:

Preliminary expenses are-

- Identifying the project

- Market survey

- Articles of association

Capital Issue Expenses are-

- Underwriting commission

- Brokerage

- Stamp duty


8. Pre-operative Expenses: These types of expenses are the following-

i) Establishment expenses ii) Traveling expenses

iii) Insurance charges iv) Mortgage expenses

v) Miscellaneous expenses

9. Provision for Contingencies: There are 2 procedures that are followed

for provision for contingencies. These are-

i) Divide the cost items into 2 categories

- Firm cost items

- Non-firm cost items

ii) Set the provision for contingencies at 5% to 10%.

10. Margin Money for Working Capital: Margin money for working capital is an importantelement of the project cost which is provided by commercial banks and trade creditors.

11. Initial cash Losses: Most of the projects incur cash losses in the initial years. Failure to makea provision for such cash losses in the project cost affects the liquidity position and impairsthe operations.

Means of Finance

To meet the cost of the project, the following means of finance are available-

1. Share Capital: Two types of share capitals are-

i) Equity capital, represents the contribution made by the owner’s of the business

and equity shareholders.

ii) Preference capital, represents the contribution made by preference shareholders.

2. Term Loans: Term loans provided by financial institutions and commercial banks.

There are 2 types of term loans.

- Native Term Loans

- Foreign Currency Term Loans

3. Debenture Capital: There are 2 types of debenture capital. These are-

i) Non- convertible debentures, are straight debt instruments which maturity period

of 5 to 9 years.

ii) Convertible debentures, are debentures which are convertible wholly or partly

into equity shares.

Means of Finance (Cont’d)

4. Deferred Credit: The credit which is provided by suppliers (for plant and

machinery) as a deferred credit facility is deferred credit.

5. Incentive Source: Government provides different types of incentives for

financing. These are-

- Tax exemption

- Capital subsidy

6. Miscellaneous Sources: Miscellaneous sources are-

- Unsecured loans

- Public deposits

- Leasing and hire purchase finance

Planning the Means of Finance

We have described the various means of finance that can be tapped for a project.

These are included-

i) Norms of regulatory bodies and financial institutions

ii) Key business considerations: Key business considerations are-

- Risk (Business risk and Financial risk)

- Cost ( Lower than cost of equity)

- Control

- Flexibility

Estimates of Sales and Production

In estimating sales revenues, the following considerations should be kept in mind:

1. It is not advisable to assume a high capacity utilization level in the first year of

operation. It is sensible to assume that capacity utilization would be some what

low in the first year and rise there after gradually to reach the maximum level

inn the third or fourth year of operation.

2. It is not necessary to make adjustments for stocks of finished goods.

3. The selling price considered should be the price realizable by the company net

of excise duty.

4. The selling price used may b the present selling price- it is generally assumed

that changes in selling price will be matched by proportionate changes in cost of

production.

Estimates of Sales and Production (Cont’d)

Exhibit 6.2: Estimates of Production and Sales

(Details may be Furnished separately for each product and until plant reaches maximum capacity utilization)

Product

1st yr. 2nd yr. 3rd yr. 4th

yr.

Product

1st yr. 2nd yr. 3rd yr. 4th

yr.

1. Installed Capacity(qty. 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 Tk.)

Note: Production in the initial period should be assumed at a reasonable level of utilization of capacity

increasing gradually to attain full capacity in subsequent years.

Cost of Production

The major components of cost of production are :

Material cost

Utilities cost

Labor cost

Factory overhead cost

Materials : The most important element of cost , the material cost comprises of the

cost of raw materials, chemicals, components and consumable stores required for

production. It is a function of the quantities in which these materials are required and

the prices payable for them.

Cost of Production (Cont’d)

Utilities : Utilities consist of power , water , and fuel. The requirements of power ,

water, and fuel may be determined on the basis of norms specified by the

collaborators, consultants, etc or the consumption standards in the industry, whichever

is higher.

Labor : Labor cost is the cost of all manpower employed in the factory. labor cost

naturally is a function of the number of employees and the rate of remuneration.

Factory Overhead : The expenses on repairs and maintenance, rent, taxes,

insurance on factory assets , and so on are collectively referred as factory overhead.

Working Capital Requirement and Its Financing

In estimating the working capital requirement and planning for its financing, the

following pints have to be kept in mind:

1. The working capital requirement consists of the following: (i)raw materials

(ii)stocks of goods in process (iii) stocks of finished goods(iv) debtors

(v)operating expenses (vi)consumable stores

2. The principal sources of working capital finance are: (i)working capital

advances (ii)trade credit (iii)accruals and provisions (iv)long term sources of

financing.

3. The margin requirement varies with the type of current assets as follows:

Current Assets Margin

Raw materials 10-25 percent

Work-in-process 20-40 percent

Finished Goods 30-50 percent

Debtors 30-50 percent

Working Capital Requirement and Its Financing (Cont’d)

The following exhibit may be used to estimate the working capital requirement, the amount of likely bank

finance available, and the margin money for working capital to be provided from long term sources.

Exhibit 6.3 Margin Money for Working Capital

Items No. of Months Bank Margin Amount Amount of Margin Amount

Requirements Availability Bank Finance Money

(1) (2) (3) (4) (5) (6) (7)

1. Indigenous raw materials

Less: Trade Credits

Net Indigenous raw materials

2. Import raw materials

3. Consumable stores

Less: Trade Credit

Net consumable stores

4. Wages and Salaries

5. Cost of fuel, light and power, taxes, insurance, rent etc.

6. Cost of repairs and maintenance

7. Packaging and Sales expenses

8. Stock of Finished goods at cost excluding depreciation

9. Stock of goods in process

10. Outstanding Debtors

11. Other items of Working Capital, if any

Net Working Capital

Profitability Projections (Estimates of

working result)

The profitability projections or estimates of working results (as they are referred to by term-

lending financial institutions ) are 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 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 taxes

O. Profit after tax ( M-N)

Less, dividend on : preference capital & equity capital

P. Rental profit

Q. Net cash accrual ( P+I+L)

Profitability Projections ( Cont’d)

Cost of Production:

Represent the cost of materials , labor, utilities and factory overheads as calculated earlier.

Total Administrative Expenses:

Consist of Administrative salaries, remuneration to directors, professionals fees, light, postage,

telegrams and telephones and office supplies ( stationary , printing etc)

Total Sales Expense:

Consist of commission payable to dealers, packing and forwarding charges, salary of sales staff,

sales promotion and advertising expense and other miscellaneous expenses.

Royalty and Know-how Payable:

Rate is usually 2-5 % of sales and generally payable for a limited numbers f years i.e. 5 to 10

years


Total cost of production:

Gross profit before interest:

Cost of Production

Total administrative expense

Total sales expense

Royalty and know-

how payable

Total cost of production

Expected Sales

Total cost of production

Gross profit before interest


Total Financial Expense:

Consist of interest on term loans, interest on bank borrowings, commitment charge on term

loans and commission for bank guarantee.

In estimating the interest on term loans, two points should be borne in mind:

Interest on term loans is based on the present rate of interest charged by the term

lending financial institutions and commercial banks.

Interest amount would decrease according to repayment schedule of the term loan.

The interest on working capital borrowings from banks may be estimated as follows:

i. Determine the total requirement of the working capital

ii. Find out the quantum of bank borrowing that would be available against the total

working capital requirement

iii. Calculate the interest charge on the basis of the prevailing interest rates


Depreciation:An important item, particularly for capital-incentive projects. In figuring out the depreciation

charge, the following points should be borne in mind:

1. Contingency margin and pre-operative expenses provided in estimating the cost of project

should be added to the fixed assets proportionately to ascertain the value of fixed assets for

determining the depreciation charge.

2. Preliminary expenses in excess of 5.0% of the project cost is included under pre-operative

expenses which is subsequently allocated to fixed assets for determining the depreciation

charge.

3. The income tax specifies that the written down value method should be used for tax purpose.

If further specifies the rate of depreciation applicable to different kinds of assets.

4. For company law ( Financial reporting) purpose, the method of depreciation may be either

written down value ( WDV) or straight line (SL) method.

The depreciation charge for the nth year is:

Dn= I(1-d)^(n-1)*d


Other Income:Income arising from transactions is not part of the normal operations of the firm. i.e. sale of

machinery, disposal of scrap etc.

Write off Preliminary Expenses:5% of the cost of project or capital employed ,whichever is higher, can be amortized in five

equal annual installments.

Profit or Loss Before Taxation:

Operating profit

Other income

Write-off of

preliminary expenses

Profit or loss before taxation


Provision of Taxation:

Profit After Taxation:

A part of profit after tax usually paid out as dividend- dividend on preference capital and

dividend on equity capital.

Retained Profit:

Also called ploughed back earnings

Net Cash Accrual:

Profit after tax

Dividend payment

Retained Profit

Retained profit

Depreciation

Write off of preliminary

expenses

Other non cash charge

Net cash accrual

Projected Cash Flow Statement

The cash flow statement shows the movement of cash into and out of the firm and its net impact

on the cash balance within the firm. A format for preparing the cash flow statement which is

really a cash flow budget.

Cash Flow Statement

Sources of fund

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 to machinery suppliers

10. Sale of fixed assets

11. Sale of investments

12. Other income (indicate details)

Total (A) (contd.)

Projected Cash Flow Statement (Cont’d)

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 Bangladesh 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 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

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

Projected Balance Sheet

The balance sheet, showing the balances in various asset and liability accounts,

reflects the financial condition of the firm at a given point of time. The horizontal

format of balance sheet as prescribed by the Companies Act is given in Exhibit 6.7.

Exhibit 6.7 Format of Balance Sheet

AssetsLiabilities

Share capital

Reserved and surplus

Secured loans

Unsecured loans

Current liabilities and provisions

Fixed assets

Investments

Current assets, loans, and advances

Miscellaneous expenditures and losses

Projected Balance Sheet (Cont’d)

Liabilities side of the balance sheet represents the following:

Share capital consists of paid-up equity and preferences capital.

Reserves and surplus represent mainly the accumulated retained earnings like debenture

redemption reserve, dividend equalization reserve, and the general reserve.

Secured loans represent the borrowings of the firm against which security has been provided.

The important components are debentures, term loans from financial institutions, and loans from

commercial banks.

Unsecured loans represent borrowings against which no specific security has been provided.

Examples; fixed deposits from public and unsecured loans from promoters.

Current liabilities are obligations which mature in the near future, usually within a year.

Payables from acquiring materials and supplies used in production, provision for provident fund,

provision for pension and gratuity, and provision for proposed dividends.


The assets side of the balance sheet shows how funds have been used in the business.

The major asset components may be described briefly.

Fixed assets are tangible long-lived resources ordinarily used for producing goods

and services. They are shown at original cost less accumulated depreciation.

Investments represent financial securities owned by the firm.

Current assets, loans, and advances consist of cash, debtors, inventories of

different kinds, and loans and advances made by the firm.

Miscellaneous expenditures and losses represent outlays not covered by the

previously described asset accounts and accumulated losses, if any.


For preparing the projected balance sheet at the end of year n+1, we need information

about following:

o the balance sheet at the end of year n;

o the projected income statement and the distribution of earnings for year n+1;

o the sources of external financing proposed to be tapped in year n+1;

o the proposed repayment of debt capital (long-term, intermediate term, and short-

term) during year n+1;

o the outlays and the disposal of fixed assets during year n+1;

o the changes in the level of current assets during year n+1;

o the changes in other assets and certain outlays like preoperative and preliminary

expenses (which are capitalized) during year n+1;

o the cash balance at the end of year n+1;

Multi-Year Projections

Having learnt the basics of projection ,we shall now look at illustration where in

financial projections are made over a longer frame.

A new firm ABC limited is being set up to manufacture alloy steel . The expected

outlays and proposed financing during construction and the first two operating years

are shown:

1st Operating year 2nd Operating year

Outlays

Preliminary and preoperative expenses 2 - -

Fixed assets 20 20 10

Current assets - 20 10

Financing

Share capital 10 15 -

Term Loan 15 15 7.5

Short-term bank borrowing - 12 6

Construction

period

Rs. in millions

Projected Profit and Loss Statements

1st Operating year 2nd Operating year

Sales 30 60

Cost of sales 30 40

Interest 4.8 6.4

Depreciation 2 2.8

Losses -- 6.8

Profit before tax (6.8) 4

Tax -- 2.4

Profit after Tax (6.8) 1.6

Thank You for being with us…

financial estimates and projections

Economy & Finance

project cost

cost of capital

development cost

cost of imported machinery

gates cost

cost of stores

cost of indigenous machinery

preliminary expenses