BUSINESS PLANNING

CHAPTER FIVE
FINANCIAL PLAN
In the financial plan you will deal with the financial aspects of your proposed business. To gauge
your future financial potential, you will prepare pro-forma balance sheets, pro-forma profit and loss
accounts and projected cash flow statement. You will also determine break-even level of sales and
calculate the expected profitability ratios of your business. Finally, you will indicate your
requirements and proposed capitalization.
Guidelines
 In this chapter you will present information in tables, you will also be required to
write sets of assumptions governing every projection.
 For every table indicate unit of currency i.e. Kshs.
 Indicate dates for balance sheets, and cash flow projections
 There should be minimal literature and mathematical workings in the tables just
provide worked figures (you may attach the calculations as appendices.
 All tables must be done completely.

5.1 PRE-OPERATIONAL COSTS

Identifying your pre-operational costs.

 What costs will you incur before you become operational? (Example professional fees,
installation costs, licenses, permits, deposits for water, electricity and telephones)

These are expenses that must be incurred before commencement of the business and they may
include but not limited to:

ITEM Cost Kshs

Transport
Market research
Assets(plant/properties)(from chapter four first table)
Consultation fess
Installations
Stationeries
Telephone
Licenses and Registrations
Rent deposit

TOTALS

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5.2 WORKING CAPITAL

Estimating your working capital requirements for the first three years of operation

 What working capital will you need over the first three years?
 State any assumptions that you have made in arriving at your figures
WORKING CAPITAL FOR THE FIRST THREE YEARS
Item Year I Year II Year II
Current Assets
Stock of raw materials xxxx xxxx xxxx
Work in progress xxxx xxxx xxxx
Stock of finished goods
Closing stock xxxx xxxx xxxx
Debtors. xxxx xxxx xxxx
Cash in hand
Cash at Bank xxxx xxxx xxxx
(A) xxxx xxxx xxxx
Less Current Liabilities
Creditors xxxx xxxx xxxx
Loan repayment (One Year)
Un paid expenses xxxx xxxx xxxx
(B)

xxxx xxxx xxxx

xxxx xxxx xxxx

xxxx xxxx xxxx

xxxx xxxx xxxx
Working capital = A-B xxxx xxxx xxxx
Working capital = current Assets – Liabilities
Do not be in a hurry to do this part, do it after you have completed the balance
sheet. Use only entries that are relevant to your business, e.g. if you are not
manufacturing work in progress is unnecessary. Import entries from Bal sheet.

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5.3(a) CASH FLOW PROJECTION FOR THE FIRST YEAR

Item Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Totals
Beginning Cash AC - - - - - - - - - - - AC
Cash Sales Y%
Debtors X%
Total cash TTLs
inflow(A) STT
Expenses
Purchases TTLs
SET
Rent OEB
Salaries/Wages OEB
Electricity bill OEB
Water bill OEB
Insurance OEB
Loan repayment OEB
Interest on loan OEB
Maintenance & OEB
Repair
Telephone OEB
Postage OEB
Stationery & OEB
Printing
Transportation OEB
Drawings OEB
Miscellaneous OEB
Total expenses
(B)
Net Cash=A-B
The beginning cash will be the total investment
Key AC- Approved Capital,Y%-Cash sales which should be >than X% where X% is the
proportion of goods sold on credit. Cash sales = TCI(A) – X% x TCI(A)
OEB-Operations Expense Budget (in chapter Two),

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Remember some of these expenses are variable i.e. change while others are fixed per month.
TTLsSTT -Totals Sales Target Table
TTLs SET-Totals Sales Estimate Table, all in chapter Two.Page layout for 5.3a is landscape.
5,3(b) CASH FLOW PROJECTION FOR THE FIRST THREE YEARS
Item Year I ( Kshs) Year II (Kshs) Year III (Kshs)
Beginning cash AC AC +NCY1 AC=NCY1+NCY2
Cash Sales
Debtors
Total Cash Inflow (A) 5% of Year I 10% of Year I
Expenses
Purchases
Rent
Salaries/Wages
Electricity bill
Water bill
Insurance
Loan repayment
Interest on loan
Maintenance & Repair
Telephone
Postage
Stationery & Printing
Transportation
Drawings
Miscellaneous
Total cash outflow (B)
Net cash = A-B NCY1 NCY2 NCY3
Assumptions
Some expenses my NOT increase, instead they may decrease e.g. loan. Others may
remain constant e.g. Rent, & Salary depending on the business location and strategy.
NCY1, 2, 3-Net Cash Years 1, 2, &3
(Page layout is portrait)

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5.4 PROFORMA INCOME STATEMENT AS AT 31ST DECEMBER YEAR I

Item Year I Year II Year III
Sales TCI(A) 5.3b TCI(A) 5.3b(1.05) TCI(A) 5.3b(1.1)
(Less purchase of stock)
Gross profit (A)
Expenses
Rent
Salaries/Wages
Electricity bill
Water bill
Insurance
Loan repayment
Interest on loan
Maintenance & Repair
Telephone
Postage
Stationery & Printing
Transportation
Drawings
Miscellaneous
Total expenses (B)
Profit before Tax
Provision for Tax
Net profit after Tax

Notes
The Proforma income statement is a summary of income and expenditure for the year
in Kshs.
The sales and purchases figures are the totals for the year
Net profit before Tax =Gross profit – Total expenses
Provision for Tax should be given at the current taxation rates and subjected to the
profit before Tax. (Page layout is portrait)

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5.5 PROFORMA BALANCE SHEET FOR THE FIRST YEAR

Proforma balance sheet As 31st As at 31st De As at 31st Dec
Year III
Dec Year I Year II
Fixed assets (Kshs) (Kshs) (Kshs)
Motor Vehicle xxxxx xxxxx xxxxx
Machinery & Equipment xxxxx xxxxx xxxxx
Furniture & Fittings Xxxxx Xxxxx Xxxxx
Accumulated depreciation (%) xxxxx xxxxx
Current assets
Debtors xxxxx xxxxx xxxxx
Rates prepayments xxxxx xxxxx xxxxx
Insurance prepayments xxxxx xxxxx xxxxx
Cash @ Bank xxxxx xxxxx xxxxx
Cash @ hand xxxxx xxxxx xxxxx
Closing stock xxxxx xxxxx xxxxx
Current liabilities
Creditors xxxxx xxxxx xxxxx
Sundry xxxxx xxxxx xxxxx
Net assets xxxxx xxxxx xxxxx
Financed by
Capital xxxxx xxxxx xxxxx
Net Profit xxxxx xxxxx xxxxx
Less Drawings (xxxxx) (xxxxx) (xxxxx)
xxxxx xxxxx xxxxx

Notes (Page layout is portrait)

Assets =Capital + Liabilities
The machines and other assets should be depreciated at the rate of 5-10% per year. To test the
balance sheet, assets must be equal to liabilities. The totals of the balance sheets at the beginning of
the year should be equal to the total investments.

Caution: under Fixed Assets, use only entries that are relevant to
your business plan, extracted from table of facilities in chapter four.
Exported relevant entries to 5.2 once the balance sheet is complete.

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5.6 CALCULATION OF BREAK EVEN POINT

Calculating the expected breakeven level for your business.
Fixed costs Amount Kshs
-
-
-
Total fixed costs
Variable cost Amount Kshs
-
-
-
Total variable cost

Notes
Fixed costs are constant expenses for a defined period of time say one year e.g. Rent,
Licenses, salaries, Goodwill, insurance, depreciation, loan repayment etc.
Variable expenses are those that fluctuate within a specified period of time e.g. water
bills, allowances, recruitment costs, advertising costs, electricity bills, water bills
miscellaneous etc.
To obtain the breakeven point (level), you have to calculate the contribution margin
thus
Contribution Margin = Total sales – Total variables x100
Total Sales
Breakeven Level = Fixed Cost
Contribution margin %

5.7 CALCULATIONS OF PROFITABILITY RATIOS

(a) Gross profit percentage = Gross profit x100

Sales
(b) Return on Equity = Net profit after Tax x 100
Owners’ contribution

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(c) Return on investment = Net profit Tax x 100

Total investment
5.8 DESIRED FINANCING

DESCRIPTION AMOUNT IN (KSHS)

Pre operational costs 5.1
Initial working capital AC - Pre Operational costs)
TOTAL AC

5.9 PROPOSED CAPITALIZATION

ITEM AMOUNT IN KSHS

Equity (own contributions, relatives etc)
Bank loan
Total AC

REFERENCES
Stokes and Wilson: Small Business Management and Entrepreneurship, 7th Edition (2010) south
western
Salemi: Entrepreneurship-Simplified: 6th Edition
Nickels and McHugh: Understanding Business: 4th Edition (2004) IWRIN

LECTURER MR.I.M.IMBISI © 2020

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