5.

0 Financial plan
The main reason of preparing a business plan is to receive funds. The financial plan comprises
analyzing financial requirements or business and developing financial plans

Objectives of financial plan

(i) Maintaining a healthy liquidly position throughout the trading period

(ii) Maintain return on owners’ equity for example at 25%
(iii) Realize a steady growth on income throughout the period
(iv) Maintain and control expensed
(v) Maintain an effective accounting system

Financial assumptions

(i) The expenses are expected to rise by for example 5% as business operations
expands
(ii) Creditors are to increase by a certain percentage per year
(iii) Debtors are to increase by a certain percentage per year
(iv) Net profit is expected to increase by a certain percentage per annum
(v) Net realized would be ploughed to the business to expand the business

5.1. Pre-operational cost

Pre-operational means the cost incurred before the start of the business

ITEMS COST

Research/travelling xxxx
Designing xxxx
Licenses xxxx
Advertisement xxxx
Recruitment xxxx
Professional fee xxxx
Installation xxxx
Rent deposit xxxx
Utility bills xxxx
Total amount xxxx

5.2 Pro-forma Balance sheet

A balance sheet is a financial statement that shows the financial position of the business for a
certain period of time (usually one year)
Balance sheet as at 31 Dec 2011

Assets (fixed)
Building at cost xxxx
Land xxxx
Motor vehicle xxxx
Less depreciation xxxx
Furniture $ fittings xxxx
Current assets
Stock xxxx
Cash at bank xxxx
Cash at hand xxxx
Debtors’ xxxx
Pre-payments xxxx
Less current liabilities
Creditors xxxx
Accruals xxxx
Bank overdraft xxxx
Working capital xxxx
Financed by:
Opening capital xxxx
Add net profit xxxx
Less drawings xxxx
Closing capital xxxx
Loans xxxx

5.3 Working capital

Working capital is the current assets - current liabilities
I.e. WC = CA - CL

Current Assets
Cash at hand xxxx
Cash at Bank xxxx
Debtors xxxx
Stock xxxx
Less current Liabilities
Creditors xxxx
Bank overdraft xxxx
Accruals xxxx
Working capital xxxx
5.4 Cash flow projection

It is the financial statement that shows cash in and cash out of the business

Transactions that generate cash in a business include: sales, payments from debtors, discount
received, rent received, loan received.

Transactions that may reduce cash in a business include: purchases, salaries/wages, rent
payment, payment to creditors, standing orders, discount allowed etc.

5.4.1 Cash flow projections for the year 2012

Receipts Jan Feb march…………………………………………..Dec

Loan 50,000 - -
Sales 30,000 70,000 80,000
Debtors 20,000 20,000 35,000
Discount received 5.000 5,000 4,000
105,000 95,000 119,000

Payments
Purchases 30,000 40,000 45,000
Salaries/wages 10,000 10,000 15,000
Creditors 30,000 30,000 34,000
Discount allowed 10,000 10,000 8,000
80,000 90,000 102,000

Cash flow 25,000 5,000 17,000

Balance b/d --- 25,000 30,000
Balance c/d 25,000 30,000 47,000

5.5 Pro-forma income statement (trading, Profit and loss Account)

Item year 1 year 2 year 3
Sales xxxx xxxx xxxx
Cost of sales xxxx xxxx xxxx
Gross profit c/d xxxx xxxx xxxx
Gross profit d/d xxxx xxxx xxxx
Add any income

Expenses
Salaries xxxx xxxx xxxx
Rent Water xxxx xxxx xxxx
Telephone xxxx xxxx xxxx
Postage xxxx xxxx xxxx
Transport xxxx xxxx xxxx
Total expenses xxxx xxxx xxxx
Net profit before
Tax xxxx xxxx xxxx
Taxation (%) ( xxxx) (xxxx) (xxxx)
Net profit after
Tax xxxx xxxx xxxx

5.6 Break even Analysis

Break even analysis is where the total revenue is equal to the total costs. The firm is earning
normal profit or zero profit. If total revenue- total cost, the firm makes abnormal profits or
supernormal profit. If total revenue-total cost, the firm will make losses. Break even analysis is
also known as cost volume analysis.

Assumption of break-even point analysis

1. Fixed cast will remain constant. It means that the fixed cost not changes as the output
changes

2. Cost and revenues behave in a linear fashion or linear manner .it means if output increases
then revenues will increase proportionally

3. That the only factors affecting cost and revenue is volume (turnover)

4. Technology, production methods and efficiency does not change

5. For graphical methods the analysis relates to one product or to a constant product mix

6. The closing stock is valued at marginal coast only

Usefulness of break- even point analysis

As a management tool, it has the following benefits

(i) Helps to find specific level of output

(ii) Shows behavior trend of cost and sales
(iii) Information can be used to make proper decisions
(iv) The analysis shows the safety level of a particular level of activity. Safety level means
the quantity which it is safer to produce

Limitation to break -even point analysis

(i) Only done within specific levels of activity

(ii) Fixed cost may change at different levels of activity especially in the long run
(iii) The relevant time factor can affect break even analysis
-Formula of break -even point (B.EP)

a) B.E.P in units = fixed costs

Contribution/unit

b).B.E.P in value (Shs) =fixed cost x selling price/unit

Contribution/unit
c.) Contribution/ sales ratio contribution/unit x 100
Selling price
d). Number of units for target profit=fixed cost + target profit
Contribution/unit
e).Sales for target profit = fixed cost + target profits (selling price)
Contribution/unit

A company makes a single product with a price of shs 10 and a marginal cost of shs 6 and the
fixed cost of shs 60,000 p.a. Calculate:

a) Number of units to break even

b) Contribution per sales ration
c) What number of units would need to be sold in order to achieve a profit of 20,000 p.a?
d) Which level of sales will achieve a profit of 20,000

Solution:

a) Number of units to break- even point (B.E.P)

B.E.P in (units) = Fixed cost

Contribution/unit
Contribution = selling price- marginal/variable cost
=10-6
=4
B.E.P in units 60,000 =15,000 units
4
b) Break- even point in (sh) value= fixed cost x selling price/unit
Contribution/unit
=60,000x10 =150,000(value)
4
c) Contribution per sales ration = 4x100 =40%
10

d) Target profit= 60,000+20,000 = 80,000 =20,000

4 4

e) Sales for target profit= 60,000+20,000x (10) =200.000value

4
5.7 Desired financing

Items Amount
Pre-operational cost xxxx
Working capital xxxx
Fixed assets xxxx

5.8 Capitalization
Item Amount
Owner’s contribution xxxx
Borrowed funds xxxx
Total investment xxxx

5.9 Profitability ratios

i) Gross profit ratio = G.P X 100

Sales

ii) Net profit ratio = N.P X100

Sales

iii). Return on equity = N.P X 100

Owner’s equity
Owners’ equity = (opening capital + net profit) less withdrawing

iv). Asset turnover = sales revenue (total sales)

Assets (CA+FA)

V). Quick ratio = current assets-stock (closing stock)

Current liabilities
vi) Liquidity ratios = current assets
Current liabilities

6.0 Risk management

-It is important for the entrepreneur to make an assessment of risk. He/she should indicate
the potential risks of the new business and go on to describe what might happen to the
 business if these risks become a reality. The entrepreneurs should then discuss the
strategy(s) to prevent, minimize or respond to these risks. Some of the risks could arise
from:
i) Economy
ii) Political
iii) Ecological
iv) Social cultural
v) Economical
vi) Legal
vii) Industry
viii) Financial

Appendix

-This consists of support documents/back up material. This is material not included in the text
of the document, It could include:

i) Map

ii).Questionnaire

iii). Certificates of the business registration

iv).Bank loan forms

v).Curriculum Vitae