TREND

PROJECTION
METHOD
LEAST SQUARE METHOD
EXPONENTIAL SOOTHING METHOD
MOVING AVERAGE METHOD

LEAST SQUARE METHOD

LINEAR RELATIONSHIP : Yt = a + b t
Where t is the time variable
Yt is the demand for the year t
Intercept : a
Slope : b

b= TY n (mean T) (mean Y)
T2 n (mean T) 2
a = (mean Y) b (mean T)

Other Relationships
Exponential Relationship: Y = a ebt
Polynomial Relationship
Cobb Douglas relationship : Y = a t b
Logarithmic relationship : log Y = log a + b

log t

Exponential Soothing Method

Forecasts are made in the light of observed

errors
If the forecast value for year t is F t
If the actual value for year t is S t
If Ft < St , Ft+1is set higher that Ft
If Ft > St , Ft+1is set lower that Ft
Ft+1 = Ft + (St - Ft )

T
1

St
28

Ft
29

St-Ft
-1

Ft+1
F2= 29 + 0.2 (-1) = 28.8

2 29
28.8 0.2 F3 = 28.8 +
0.2(0.2)=28.84

MOVING AVERAGE
METHOD
FORECAST FOR THE NEXT PERIOD IS EQUAL

TO THE AVERAGE OF THE SALES FOR SEVERAL

PRECEDING PERIODS
Ft+1is the forecast for the next period
St is the sales for the current period
n is the period over which averaging is done

PRICE ELASTICITY OF
DEMAND
IT MEASURES THE RESPONSIVENESS OF

DEMAND TO VARIATIONS IN PRICE

EP = Q2 Q1 X (P1 + P2)

P2 P1
Q2 + Q1
If P1 = Rs. 600 Q1= 10000 P2 = 800 Q2=
9000
Then E = (9000 10000) x (600 + 800) =
-0.37
800 600
9000 + 10000

INCOME ELASTICITY OF DEMAND

RESPONSIVENESS OF DEMAND TO

VARIATIONS IN INCOME
EI = Q2 Q1
X I1 + I2
I2 I1
Q2 + Q1
IF Q1 = 30 Q2=55 I1 = 1000
THEN Ei = 4.81

I2 = 1020

Financial estimates and projections

BOOK T 2

CHAPTER 6

FINANCIAL ANALYSIS
COST OF THE PROJECT
MEANS OF FINANCE
ESTIMATES OF SALES AND PRODUCTION
WORKING CAPITAL REQUIREMENT
PROFITABILITY PROJECTIONS
CASH FLOW STATEMENT AND BALANCE SHEET

COST OF THE PROJECT

LAND AND SITE DEVELOPMENT
BUILDING AND SITE DEVELOPMENT
PLANT AND MACHINERY
TECHNICAL KNOW-HOW AND ENGINEERING FEES
EXPENSES ON FOREIGN TECHNICIANS AND TRAINING
MISC. FIXED ASSETS
PRELIMINARY AND CAPITAL ISSUE EXPENSES
PRE-OPERATIVE EXPENSES
MARGIN MONEY FOR WORKING CAPITAL MGMT.
INITIAL CASH LOSSES

LAND AND SITE

DEVELOPMENT
BASIC COST OF LAND
PREMIUM PAYABLE ON LEASEHOLD
COST OF LEVELLING AND DEVELOPMENT
COST OF LAYING APPROACH ROAD AND

INTERNAL ROADS
COST OF COMPOUND WALL AND GATES
COST OF TUBE WELLS

BUILDINGS AND CIVIL

WORKS
BUILDINGS

FOR

THE

MAIN

PLANT

AND

EQUIPMENT
BUILDING FOR AUXILIARY SERVICES
GODOWN, WAREHOUSES, OPEN YARD FACILITIES
NON-FACTORY BUILDINGS LIKE CANTEEN, GUEST
HOUSES, TIME OFFICE ETC,
QUARTERS FOR ESSENTIAL STAFF
SILOS, TANKS, WELLS, BASINS ETC.
GARAGES, SEWAGES. DRAINAGE
OTHER CIVIL ENGINEERING WORKS

PLANT AND MACHINERY

COST OF IMPORTED MACHINERY
COST OF INDIGENOUS MACHINERY
COST OF SPARES
COST OF STORES
FOUNDATION AND INSTALLATION CHARGES

TECHNICAL KNOW-HOW AND

ENGINEERING FEES
CONSULTANCY FEES
PREPARATION OF PROJECT REPORTS
CHOICE OF TECHNOLOGY
SELECTION OF PLANT AND MACHINERY
DETAILED ENGINEERING
PAYMENT OF ROYALTY FEES AS A PERCENTAGE

OF SALES

EXPENSES OF FOREIGN
TECHNICIANS AND TRAININGS
FOREIGN TECHNICIANS ARE REQUIRED FOR

SETTING UP OF PLANT AND SUPERVISION

EXPENSES
ON
TRAINING
TO
INDIAN
TECHNICIANS

MISC. FIXED ASSETS

FURNITURE
OFFICE MACHINERY AND EQUIPMENT
TOOLS
VEHICLES
RAILWAY SIDING
DIESEL GENERATING SETS
EFFLUENT TREATMENT PLANTS
FIRE FIGHTING EQUIPMENT

PRELIMINARY CAPITAL ISSUE

EXPENSES
IDENTIFYING THE PROJECT
CONDUCTING MARKET SURVEY
PREPARING FEASIBILITY REPORT
INCORPORATING THE COMPANY
RAISING
CAPITAL
FROM
THE

PUBLIC:
COMMISSION,
BROKERAGE,
FEES
TO
MANAGERS AND REGISTRARS, PRINITING AND
POSTAGE, ADVERTISING ETC.

PRE-OPERATIVE
EXPENSES
EXPENSES

INCURRED
TILL
THE
COMMENCEMENT OF PRODUCTION
ESTABLISHMENT EXPENSES
RENT, TAXES
TRAVELLING EXPENSES
INTEREST AND COMMITMENT CHARGES ON
BORROWING
INSURANCE CHARGES
MORTGAGE EXPENSES
START UP EXPENSES

PROVISION FOR CONTINGENCIES

FIRM COST: THOSE WHICH HAVE ALREADY

BEEN ACQUIRED OR FOR WHICH DEFINITE

ARRANGEMENTS HAVE BEEN MADE
NON FIRM COST : 10 %
OVERALL : 10 % FOR ALL ITEMS

Margin money for working

capital
WORKING

CAPITAL
IS
PROVIDED
BY
COMMERCIAL BANKS AND TRADE CREDITORS
SOME PORTION NEED TO BE MET OUT FROM
LONG TERM FINANCE
MARGIN MONEY IS UTILIZED FOR MEETING
OVERRUNS IN CAPITAL COST
FINANCIAL INSTITUTIONS BLOCK A PORTION
OF LOAN EQUAL TO MARGIN MONEY WHICH IS
RELEASED WHEN THE PROJECT IS COMPLETED

INITIAL CASH LOSSES

MANY OF THE PROJECTS INCUR CASH LOSSES

IN THE INITIAL YEARS

PROVISION IS MADE FOR SUCH LOSSES TO
AVOID LIQUIDITY PRESSURES

MEANS OF FINANCE
SHARE CAPITAL
TERM LOANS
DEBENTURE CAPITAL
DEFERRED CREDIT
INCENTIVE SOURCES
MISC. SOURCES

SHARE CAPITAL
EQUITY CAPITAL: CONTRIBUTIONS MADE BY

THE OWNERS OF THE BUSINESS, EQUITY

SHAREHOLDERS.
IT CARRIES NO FIXED RATE OF DIVIDEND

PREFERENCE CAPITAL: CONTRIBUTION MADE

BY PREFERENCE SHAREHOLDERS
IT CARRIES FIXED RATE OF DIVIDEND

TERM LOANS
PROVIDED BY FINANCIAL INSTITUTIONS AND

COMMERCIAL BANKS
SECURED BORROWINGS FOR FINANCING NEW
PROJECTS, EXPANSION, MODERNISATION,
RENOVATION ETC.
RUPEE TERM LOAN
FOREIGN CURRENCY TERM LOAN

DEBENTURE CAPITAL
FOR RAISING DEBT CAPITAL
CONVERTIBLE
DEBENTURE:

DEBENTURES
WHICH ARE CONVERTIBLE TO EQUITY SHARES
EITHER PARTLY OR WHOLLY
NON-CONVERTIBLE DEBENTURE: STRAIGHT
DEBT INSTRUMENTS, CARRY FIXED RATE OF
INTEREST AND MATURITY PERIOD : 5-9 YEARS

DEFERRED CREDIT
PAYMENT FOR PLANT AND MACHINERY CAN BE

DELAYED OVER A PERIOD OF TIME

INCENTIVE

SOURCES: GOVERNMENT AND ITS

AGENCIES PROVIDE FINANCIAL SUPPORT AS AN
INCENTIVE TO PROMOTERS
seed capital assistance : low interest rate
Deferment or exemption : tax holidays for limited

period

MISC.

SOURCES: UNSECURED LOANS, PUBLIC

DEPOSITS, LEASING AND HIRE PURCHASE FINANCE

ESTIMATES FOR SALES AND

PRODUCTION
CONSIDERATIONS FOR ESTIMATING SALES

REVENUE:
REASONABLE ASSUMPTION WITH RESPECT TO

CAPACITY UTILIZATION
ASSUME PRODUCTION EQUAL TO SALES
SELLING PRICE REALISABLE BY THE COMPANY
NET OF EXCISE DUTY, DEALERS COMMISSION
CHANGES IN SELLING PRICE MATCHED BY
PROPORTIONATE
CHANGE
IN
COST
OF
PRODUCTION

COST OF PRODUCTION
MATERIAL COST
UTILITIES COST
LABOUR COST
FACTORY OVERHEAD COST

WORKING CAPITAL REQUIREMENT

RAW MATERIALS AND COMPONENTS
WORK IN PROGRESS
FINISHED GOODS
DEBTORS
OPERATING EXPENSES
CONSUMABLE ITEMS
MAXIMUM PERMISSIBLE AMOUNT OF BANK FINANCE FOR

WORKING CAPITAL = CURRENT ASSETS NON BANK

CURRENT LIABILITIES (LIKE TRADE CREDIT AND PROVISIONS)
25% OF CURRENT ASSESTS MUST BE SUPPORTED BY LONG

TERM SOURCES OF FINANCE

CURRENT ASSETS

RAW MATERIALS
WORK IN PROCESS
FINISHED GOODS
DEBTORS

MARGIN
10-15%
20-40%
30-50%
3050%

PROFITABILITY
PROJECTIONS
A. COST OF PRODUCTION
B. TOTAL ADMINISTRATIVE EXPENSES
C. TOTAL SALES EXPENSES
D. ROYALTY AND KNOW-HOW PAYABLE
E. TOTAL COST OF PRODUCTION (SUM OF ABOVE)
F. EXPECTED SALES
G. GROSS PROFIT BEFORE INTEREST
H.TOTAL FINANCIAL EXPENSES (INTEREST PAYMENTS)
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 Preferential capital, equity capital

P. RETAINED PROFIT
Q. NET CASH ACCRUAL (P+I+L)

PROJECTED CASH FLOW STATEMENT

MOVEMENT OF CASH INTO AND OUT OF THE FIRM

AND ITS NET IMPACT ON THE CASH BALANCE

WITHIN THE FIRM
SOURCES OF FUNDS
SHARE ISSUE
PROFIT BEFORE TAXATION WITH INTEREST ADDED
DEPRECIATION PROVISION FOR THE YEAR
DEVELOPMENT REBATE RESERVE
INCREASE IN SECURED, MEDIUM AND LONG TERM
BORROWINGS FOR THE PROJECT

OTHER MEDIUM AND LONG TERM LOANS

INCREASE IN UNSECURED LOANS AND DEPOSITS
INCREASE IN BANK BORROWINGS FOR WORKING

CAPITAL
INCREASE IN LIABILITIES FOR DEFERRED
PAYMENTS TO MACHINERY SUPPLIERS
SALE OF FIXED ASSETS
SALE OF INVESTMENTS
OTHER INCOME
TOTAL (A)

DISPOSITION OF FUNDS
CAPITAL EXPENDITURE FOR THE PROJECT
OTHER NORMAL CAPITAL EXPENDITURE
INCREASE IN WORKING CAPITAL
DECREASE IN SECURED MEDIUM AND LONG TERM

BORROWINGS
DECREASE IN UNSECURED LOANS AND DEPOSITS
DECREASE IN BANK BORROWINGS FOR WORKING
CAPITAL
DECREASE IN LIABILITIES FOR DEFERRED PAYMENTS
TO MACHINERY SUPPLIERS
INCREASE IN INVESTMENTS IN OTHER COMPANIES

INTEREST ON TERM LOANS

INTEREST ON BANK BORROWINGS

WORKING CAPITAL
TAXATION
DIVIDENDS : EQUITY, PREFERENTIAL
OTHER EXPENDITURE
TOTAL (B)

FOR

OPENING BALANCE OF CASH IN HAND AND AT

BANK
NET SURPLUS / DEFICIT (A B)
CLOSING BALANCE OF CASH IN HAND AND AT
BANK

EXAMPLE
LIABILITIES
1. SHARE CAPITAL
2. RESERVE AND SURPLUS
3. SECURED LOANS
4. UNSECURED LOANS
5. CURRENT LIABILITIES
6. PROVISIONS

: 100
: 20
: 80
: 50
: 90
: 20

ASSETS

1.FIXED ASSETS
2. INVESTMENTS
3. CURRENT ASSETS
CASH
20
RECEIVABLES
80
INVENTORIES
80

180
0
180

PROJECTED INCOME STATEMENT

AND DISTRIBUTION OF EARNINGS
SALES : 400
COST OF GOODS SOLD : 300
DEPRECIATION :
20
PROFIT BEFORE INTEREST AND TAXES:
INTEREST :
20
PROFIT BEFORE TAX :
60
TAX :
30
PROFIT AFTER TAX :
30
DIVIDENDS :
10
RETAINED EARNINGS :
20

80

COMPANY PLANS
RAISE SECURED TERM LOAN OF 20
REPAY PREVIOUS TERM LOAN OF 5
INCREASE UNSECURED LOANS BY 10
CURRENT LIABILITIES AND PROVISIONS ARE

EXPECTED TO REMAIN UNCHANGED

ACQUIRE FIXED ASSESTS WORTH 30
INCREASE IN INVENTORIES BY 10
RECEIVABLES ARE EXPECTED TO INCREASE BY 15
OTHER ASSEST WOULD REMAIN UNCHANGED
DIVIDEND PAYMENT : 10

PROJECTED CASH FLOW STATEMENT

FOR ABOVE PROBLEM
SOURCES OF FUNDS
PROFIT BEFORE TAX AND INTEREST:
DEPRECIATION
20
INCREASE IN SECURED LOAN 20-5 15
INCREASE IN UNSECURED LOAN 10

TOTAL

125

DISPOSITION OF FUNDS
CAPITAL EXPENDITURE
30
INCREASE IN WORKING CAPITAL
INTEREST
20
TAXATION
30
DIVIDEND EQUITY

TOTAL

80

115

25

10

OPENING BALANCE OF CASH IN HAND AND AT

BANK : 20
NET SURPLUS : 125 115 = 10
CLOSING BALANCE OF CASH IN HAND AND AT
BANK : 20 + 10 = 30

PROJECTED BALANCE
SHEET
BALANCE SHEET SHOWS THE BALANCES IN VARIOUS ASSETS AND

LIABILITY ACCOUNTS
IT REFLECTS THE FINANCIAL CONDITION OF THE FIRM AT A GIVEN
POINT OF TIME
LIABILITIES

ASSESTS

SHARE CAPITAL
FIXED ASSETS
RESERVES AND SURPLUS
INVESTMENTS
SECURED LOANS
CURRENT ASSETS
LOANS AND ADVANCES
UNSECURED LOANS
MISC. EXPENDITURE AND LOSSES
CURRENT LIABILITIES
AND PROVISIONS

LIABILITIES: SHOWS SOURCES OF FINANCE EMPLOYED

BY THE BUSINESS
SHARE CAPITAL: CONSISTS OF PAID-UP EQUITY AND
PREFERENCE CAPITAL
RESERVES AND SURPLUS: ACCUMULATED EARNINGS
AS
SHOWN
IN
DIFFERENT
ACCOUNTS
LIKE
DEBENTURE
REDEMPTION
RESERVE,
GENERAL
RESERVE
SECURED LOANS: BORROWINGS OF THE FIRM
AGAINST WHICH SECURITY HAS BEEN PROVIDED.
INCLUDES DEBENTURES, TERM LOANS, LOANS FROM
COMMERCIAL BANKS

UNSECURED

LOANS: BORROWINGS AGAINST

WHICH NO SPECIFIC SECURITY HAS BEEN
PROVIDED. INCLUDES PUBLIC DEPOSITS, LOANS
FROM PROMOTERS
CURRENT
LIABILITIES:
PAYABLES
FROM
ACQUIRING MATERIALS AND SUPPLIES USED IN
PRODUCTION,
ACCRUALS
FROM
WAGES,
SALARIES AND RENTALS
PROVISIONS: TAX PROVISION, PROVISION FOR
PROVIDENT FUND, PROVISION FOR PENSION AND
GRATUITY, PROVISION FOR PROPOSED DIVIDENDS

ASSET SIDE OF BALANCE SHEET: SHOWS HOW

FUNDS ARE USED IN THE BUSINESS

FIXED
ASSETS:
TANGIBLE
LONG
FIXED
RESOURCES USED FOR PRODUCING GOODS AND
SERVICES. 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,
LOANS AND ADVANCES MADE BY THE FIRM

MISCELLENEOUS

EXPENDITURES

LOSSES:
OUTLAYS
NOT
COVERED
ACCUMULATED LOSSES

ABOVE

AND
AND

PROJECTED BALANCE SHEET FOR

ABOVE PROBLEM
CATEGORY
O.B CHANGES C.B.
LIABILITIES
SHARE CAPITAL
100
100
RESERVES & SURPLUS 20
+ 20
40
SECURED LOANS
80 + 20-5
95
UNSECURED LOANS
50 + 10
60
CURRENT LAIBILITIES 90
90
PROVISIONS
20
20
TOTAL
405

ASSETS
FIXED ASSEST 180
+ 30 20
INVESTMENTS
0
CURRENT ASSETS
CASH
20
INVENTORIES
80
+ 10
RECEIVABLES
80
+ 15
TOTAL

190
0
30
90
95
405

BALANCE SHEET OF SWARAJ LTD.

LIABILITIES
SHARE CAPITAL
: 5
RESERVES & SURPLUS
: 4
SECURED LOANS
: 4
UNSECURED LOANS
: 3
CURRENT LIABILITIES
: 6
PROVISIONS
: 1
TOTAL
: 23

ASSETS
FIXED ASSETS
INVESTMENTS
CURRENT ASSETS

: 11
: 0.5
: 11.5

CASH
:1
RECEIVABLES : 4
INVENTORIES : 6.5

TOTAL

: 23

PROJECTED INCOME STATEMENT

AND DISTRIBUTION OF EARNINGS
SALES : 25
COST OF GOODS SOLD : 19
DEPRECIATION : 1.5
PROFIT BEFORE INT. & TAX : 4.5
INTEREST : 1.2
PROFIT BEFORE TAX : 3.3
TAX : 1.8
PROFIT AFTER TAX : 1.5
DIVIDENDS : 1.0
RETAINED EARNINGS : 0.5

PLANS FOR NEXT YEAR

INCREASE IN SECURED LOANS
:1
REPAY PREVIOUS TERM LOAN
: 0.5
INCREASE IN CURRENT LIABILITIES

AND PROVISIONS: 5% (6 + 1)

: 0.35

ACQUIRE FIXED ASSETS

: 1.5
INCREASE INVENTORIES
: 0.5
INCREASE IN RECEIVABLES 5% (4) : 0.2

PROJECTED CASH FLOW STATEMENT

SOURCES OF FUND
PROFIT AFTER TAX AND INTEREST : 4.5
DEPRECIATION
: 1.5
INCREASE IN SECURED LOAN (1-0.5) : 0.5
INCREASE IN CURRENT LIABILITY
AND PROVISIONS
: 0.35
TOTAL
: 6.85

DISPOSITION OF FUNDS
CAPITAL EXPENDITURE : 1.5
INCREASE IN WORKING CAPITAL (INVENTORIES &
RECEIVABLES : 0.7
INTEREST : 1.2
TAXES
: 1.8
DIVIDEND : 1.0
TOTAL : 6.2
OPENING BALANCE OF CASH IN HAND AND AT BANK: :
1.0
NET SURPLUS (6.85 6.2 = 0.65)
: 0.65
CLOSING BALANCE
: 1.65

PROJECTED BALANCE
SHEET
LIABILITIES
O.B
CHANGE
C.B.
SHARE CAPITAL
5
5
RESERVES & SURPLUS 4
0.5
4.5
SECURED LOANS
4
1 0.5=0.5
4.5
UNSECURED LOANS
3
3
CURRENT LIABILITIES 6
5% (0.3)
6.3
PROVISIONS
1
5% (0.05)

ASSETS

O.B.

CHANGE

C.B
FIXED ASSETS

11

11
INVESTMENTS
0.5
0.5
CURRENT ASSETS 11.5
12.85
CASH
1.65
RECEIVABLES
4.2
INVENTORIES

1.5 1.5 =0
-

4
6.5

+5% of 4 = 0.2
+ 0.5